SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the fiscal year ended August 31, 1996
Commission File Number: 0-18250
TMS, Inc.
(Exact name of registrant as specified in its charter)
Oklahoma 91-1098155
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
206 West 6th Avenue
P.O. Box 1358
Stillwater, Oklahoma, 74076 405/377-0880
(Address of Principal Executive Offices) (Registrant's Telephone Number)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
None
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Common Stock, $.05 par value
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 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 at least the past 90 days.
YES_X_ NO___
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-B is not contained herein, and will not be
contained, to the best of the registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III
of this Form 10-KSB or any amendment to this Form 10-KSB.
YES___ NO_X_
The issuer's revenues for its most recent fiscal year were $5,612,576
Aggregate market value of voting stock held by nonaffiliates as of October 22,
1996: $7,765,828
Number of shares outstanding of each of the Registrant's classes of common
stock, as of October 22, 1996:
Common Stock, $.05 par value: 13,297,604
Documents Incorporated By Reference
Following is a list of documents incorporated by reference and the Part of the
Form 10-KSB into which the document is incorporated:
The Company's Proxy Statement in connection with its Annual Meeting of
Shareholders to be held on January 17, 1997 is incorporated by reference in
Part III, Items 9, 10, 11, and 12.
Transitional Small Business Disclosure Format: YES___ NO _X_
TMS, Inc. and Subsidiary (dba TMSSequoia)
FORM 10-KSB
For the fiscal year ended August 31, 1996
TABLE OF CONTENTS
PAGE
PART I 1
Item 1. Business 1
Item 2. Properties 8
Item 3. Legal Proceedings 8
Item 4. Submission of Matters to a Vote of
Security Holders 8
PART II 8
Item 5. Market for Registrant's Common Equity
and Related Stockholder Matters 8
Item 6. Management's Discussion and Analysis
of Financial Condition and Results
of Operations 9
Item 7. Consolidated Financial Statements 11
Item 8. Changes In and Disagreements With
Accountants on Accounting and
Financial Disclosure 12
PART III 12
Item 13. Exhibits and Reports on Form 8-K 12
Signatures 13
Index to Consolidated Financial Statements and Financial
Statement Schedule F-1
Companies and products named in this document may be trademarks
of the respective companies with which they are associated.
<PAGE> 1
PART 1
ITEM 1. BUSINESS
GENERAL DEVELOPMENT OF BUSINESS
On March 15, 1996, the Company's board of directors and the board of
directors and shareholders of Sequoia Computer Corporation ("Sequoia"), a
California corporation, approved the merger of a subsidiary of the Company
with and into Sequoia which resulted in Sequoia becoming a wholly-owned
subsidiary of the Company. See "Merger" in Note 2 to the Consolidated
Financial Statements. Sequoia, founded in 1987, developed and marketed
innovative software products in the document image processing, image
enhancement, forms processing, and data entry industries. The merger
qualifies as a tax-free reorganization and was accounted for as a pooling of
interests. Accordingly, the Company's consolidated financial statements have
been restated to include the results of Sequoia for all periods presented. On
September 1, 1996, Sequoia merged with and into the Company.
The Company licenses computer software products and provides software
development and document conversion services to enable information delivery
through electronic publishing and electronic image management.
PRODUCTS AND SERVICES
The Company's operations include developing and marketing software
products and services to corporations, governments and large institutions.
The Company receives service fees, license fees and royalties from its
customers. The Company's products are primarily document image viewing,
document image capture and enhancement, and document image processing
"software toolkits". These toolkits offer customers the core technology
necessary for developing new software applications or customizing existing
applications. Customers find toolkits desirable because they are easy to adapt
to changing user needs. As more companies become technically adept by
employing their own technical staff of programmers, toolkits will provide an
attractive alternative for in-house development and maintenance of electronic
information systems. In addition, the Company offers off-the-shelf products
for customers that do not have software development resources.
Some toolkit customers contract for the Company's custom programming or
design services. The Company benefits by selling its services as well as its
products. Furthermore, customers that do not have in- house technical staff
may desire to purchase ongoing maintenance services from the Company.
DOCUMENT IMAGE VIEWING PRODUCTS. The Company's principal electronic
document image viewing product is ViewDirector. ViewDirector is a software
technology for adding document image viewing and management capabilities to
new or existing applications. It allows a customer to display digitized images
such as engineering drawings, legal or financial transaction documents,
reference or regulatory documents, and photographs on many kinds of computer
workstations or personal computers, local area networks (LANs), intranets, or
the Internet. Users may transmit the images to other computers or facsimile
machines, share the images with other users, and manipulate, modify or print
the images.
<PAGE> 2
The ViewDirector technology is provided to customers in several forms
to reach customers with varying skills and needs: (1) the ViewDirector
developer's toolkit allows of highly-skilled customers to develop custom
software applications using ViewDirector's full suite of features; (2) the
ViewDirector ActiveX Control allows the larger market of highly-to-moderately
skilled customers to easily develop custom software applications and; (3) the
ViewDirectorPro Imaging Plug-in allows customers to view and manage document
images on corporate intranets or on the Internet using Internet browsers such
as Netscape Navigator or Microsoft Internet Explorer.
ViewDirector continues to be competitive due to its combination of
performance, supported feature set, and ease of integration. The Company also
believes that detailed and thorough customer service, as well as timely and
successful implementation of the customer's objectives have also contributed
to the product's competitive advantage. Several enhancements were made to the
ViewDirector technology during 1996 as well as creating new forms of the
technology to enter new markets.
VIEWDIRECTOR DEVELOPER'S TOOLKIT. During 1996, product enhancement of
the ViewDirector toolkit included the release of a significant new version of
the product for the Microsoft Windows environment. The new release included
the addition of support for vector images, raster/vector image overlay
capabilities, support of more color raster image file formats, better memory
management, and faster image display speeds. Historically, a strength of
ViewDirector has been its ability to work effectively with large bitonal
raster images often used in engineering drawings. With the addition of support
for some major vector image formats, the product can now support a broader
range of customer needs. The new version of the ViewDirector toolkit is
compatible with Microsoft Windows 95, Microsoft Windows NT and Microsoft
Windows 3.1. The Company expects to release the new version for the UNIX
environment during fiscal 1997.
In a networked environment or for a mission critical corporate
application, customers commonly need to provide imaging capabilities
compatible with a variety of different computer systems connected to a host
system. ViewDirector's support for a variety of computer systems or platforms
makes product development or integration faster and easier for the customer,
and makes the customer's product support, training and maintenance less
demanding. ViewDirector is available for the most popular system platforms
including Microsoft Windows 3.1, Microsoft Windows 95, Microsoft Windows NT,
Apple Macintosh, SunOS 4.1.X, Solaris 2.3, HP 9000, OS/2, and IBM RS/6000; it
is also available as a class library for Informix- NewEra.
The Company licenses ViewDirector to value added resellers ("VARs"),
system integrators, software developers and government agencies, as well as
companies who use the software internally. See "Marketing". The Company
receives a royalty for each computer workstation utilizing the product.
VIEWDIRECTOR ACTIVEX CONTROL. The Company began developing the
ViewDirector ActiveX Control in 1996 to meet the document imaging needs of
two types of customers: those who need a developer's toolkit requiring less
extensive programming expertise, and those who will be using Microsoft
Internet Explorer. The Control adheres to Microsoft's precepts for OLE
(Object Linking & Embedding) and is fully suitable for downloading along with
HTML documents (pages displayed by Internet browsers) which reference the
Control. The product is the next generation of the currently available
ViewDirector VBX product, and is significant because it will be a foundation
for the Company's development of other ActiveX Controls. ViewDirector ActiveX
Control is expected to be released in the first quarter of fiscal 1997.
VIEWDIRECTOR PRO IMAGING PLUG-IN FOR THE INTERNET. During 1996 the
Company created the ViewDirectorPro Imaging Plug-in for the Internet. The
Plug-in product was developed to allow customers to view and manage images on
corporate intranets or on the Internet using Internet browsers such as
Netscape Navigator or Microsoft Internet Explorer. Large corporations use
intranets for intra-company communication. They create Web pages or internal
documents that are similar to pages found on the public Internet; users
access the secure corporate pages using Internet browsers. These pages often
contain images; ViewDirectorPro Imaging Plug-in allows users to view the
images quickly. Corporate intranet users often need to view engineering
drawings, technical manuals, financial documents, human resource information
and many other documents commonly shared within a company. The Company sells a
unit of the product for each individual corporate user accessing the
documents. The Plug-in was developed for the Windows 3.1x, Windows 95, and
Windows NT environments. The Company expects to release a second version of
the product in the first quarter of fiscal 1997, and also develop versions for
the Macintosh and UNIX environments in future periods.
<PAGE> 3
ViewDirectorPro is competitive due to its fast image display, wide
assortment of display tools such as scale-to-gray, color smoothing,
magnifying glasses, and its support for annotations that allow users to add
electronic "sticky notes" and share them with others at locations around the
world.
RASTERVIEW APPLICATION. The Company completed development of an off-
the-shelf document image viewer, RasterView, in the first quarter of fiscal
1996. The new product is based upon the ViewDirector toolkit and is designed
as a low cost, simple high-performance image viewer for Windows users. It
allows customers without software programming knowledge to easily add imaging
capabilities to databases or other Windows applications.
DOCUMENT IMAGE CAPTURE AND ENHANCEMENT PRODUCTS. The Company's
document image capture and enhancement product line includes ScanDirector,
ScanFix and GrayFix. ScanDirector provides a value- added programming
interface to raster scanning devices and is used as a fundamental component in
building image capture applications. ScanFix and GrayFix are used in forms
intensive businesses such as insurance and health care to improve the speed
and efficiency of data processing. The products are primarily used to enhance
or clean up electronic images and thus improve the accuracy of data obtained
from the images which are processed with OCR (Optical Character Recognition)
and ICR (Intelligent Character Recognition) systems. In addition to improving
the visual appearance and processing of images, the technology also reduces
the size of the resulting images, which reduces the requirements for physical
data storage and network or Internet transfer times. Six technology methods
incorporated in the ScanFix product received patent approvals in 1996 or have
pending patent applications. See "Copyrights, Patents, Proprietary
Information, Trademarks and Licenses". ScanDirector, ScanFix and GrayFix
products are sold as end-user applications or toolkits which are licensed to
original equipment manufacturers ("OEMs") such as Ricoh, Caere, Fujitsu, and
Hewlett-Packard as well as corporate customers, and government organizations.
SCANDIRECTOR ACTIVEX CONTROL. ScanDirector provides scanning support
for creating Windows 95 and Windows NT custom scanning applications. The
software supports scanners sold by Hewlett-Packard, Fujitsu, Bell & Howell,
Ricoh and Panasonic, and provides a TWAIN interface. As a competitive
advantage, the ScanDirector toolkit includes the Company's CompressDirector
product to offer customers an industry standard compression alternative.
SCANFIX DEVELOPER'S TOOLKIT. ScanFix is an image enhancement toolkit
that cleans and enhances electronic images. It removes specks, straightens,
removes lines, and removes shaded areas which results in improved accuracy of
future data capture and processing systems. The Company provided product
enhancements to the developer's toolkit during 1996. The toolkit is available
for the most popular system platforms including Microsoft Windows 3.1,
Microsoft Windows 95, Microsoft Windows NT, SunOS 4.1.X, Solaris 2.3, HP
9000, OS/2, and IBM RS/6000, Silicon Graphics, DEC Alpha NT, and MS-DOS.
The Company licenses ScanFix to VARs, OEMs, system integrators,
software developers and government agencies, as well as companies which use
the software internally. See "Marketing". The Company receives a royalty for
each computer workstation utilizing the product.
SCANFIX END-USER APPLICATION. The Company began developing a new
version of the ScanFix product during fiscal 1996 and released beta copies of
it during the last quarter. The new version, which includes several
performance enhancements and a completely redesigned end-user interface, is
expected to be released in early fiscal 1997. The ScanFix end-user
application is available for Windows 3.1, Windows 95, Windows NT, MS-DOS,
ISIS, Keyfile, Wordscan Pro and Lite, and Millenium Series Pro.
SCANFIX ACTIVEX CONTROL. The Company developed and released an initial
ScanFix ActiveX Control during 1996. The product provides the full range of
image clean-up and enhancement capabilities of the toolkit, but is packaged
in the "developer-friendly" structure of an ActiveX Control.
GRAYFIX. The Company often markets the GrayFix product in conjunction
with ScanFix. GrayFix provides dynamic grayscale thresholding for removing
gray or shaded areas from documents. It is available as a developer's
toolkit.
<PAGE> 4
DOCUMENT IMAGE PROCESSING PRODUCT. The Company's document image
processing product, FormFix, is sold as a developer's toolkit to highly
skilled customers developing custom applications for high volume data capture
systems.
FORMFIX DEVELOPER'S TOOLKIT. FormFix is an image and forms processing
toolkit which provides a number of capabilities to recognize and process the
information content of images and forms. FormFix can automatically identify a
specific form and extract just the typed or handwritten text. This data can
then be read by OCR systems and converted for use in relational databases,
billing systems, and other high volume data storage and retrieval systems.
Examples include tax forms, medical administration/billing, financial
transactions and insurance claims. The FormFix product contains a number of
processing modules which may be sold separately or bundled. These include
image clean-up and enhancement, fundamental image object recognition, form
recognition, field extraction, and forms removal among others. Enhanced
versions of the product were released in fiscal 1996 with additional
enhancements expected in fiscal 1997. FormFix is available for Microsoft
Windows 3.1, Microsoft Windows 95, Microsoft Windows NT, SunOS 4.1.X, Solaris
2.3, and HP 9000.
The competitive strengths of FormFix are its combination of
capabilities supporting multiple levels of usage, its adaptability to address
multiple forms processing problems, and its leveraging of the underlying
ScanFix technology, which allows cleaner images and provides smaller image
file sizes resulting in reduced storage capacity requirements.
The Company licenses FormFix to VARs, system integrators, software
developers and government agencies, as well as companies which use the
software internally. See "Marketing". The Company receives a royalty for each
computer workstation utilizing the FormFix product.
TEXT PRODUCTS. The Company primarily uses its MasterView technology in
offering the Company's custom development services for designing and
developing electronic publishing applications. The technology has been
successfully applied for large customers such as Learjet, who desire
sophisticated text and image retrieval systems for technical manuals, service
and repair bulletins, and other large reference documents.
Due to price erosion and increased competition, the Company has shifted
its strategic direction with the technology from being product oriented to
service oriented. The Company will continue to sell and receive royalties from
the product,although it expects the product revenue will decline in the future.
Future technology enhancements will be integrated into custom solutions from
customer contracts and revenue will be reported as software development
service revenue.
CUSTOM DEVELOPMENT SERVICES, CONSULTING AND DOCUMENT CONVERSION
SERVICES. The Company offers custom software development services, consulting,
and document conversion services to help customers develop complete
applications, augment projects, and bolster internal resources. The Company
charges for projects on a time and materials basis as well as a flat fee
basis. The Company's expertise and experience provide many software
engineering and custom programming opportunities. Customers who do not have
in-house technical staff or expertise in a particular area seek services as a
cost-efficient way to meet their needs.
The types of services the Company provides are determined by the
customer's capabilities and the project requirements. Some customers seek the
Company's services initially, then eventually assume responsibility for their
projects based upon the foundation technology the Company has provided.
However, there are a number of customers which continue to contract for
maintenance and document conversion services on a long-term basis.
<PAGE> 5
The Company specializes in automated forms processing, document
imaging, database applications, CD- ROM product application development,
intranet and Internet product customization, and document conversion
services. The Company is also certified as a Microsoft Solution Provider with
the ability to market products and services for Microsoft's suite of Office
and BackOffice products. This certification enables the Company to reach a
wider market by utilizing referrals from Microsoft Corporation.
AUTOMATED FORMS PROCESSING. Many business transactions are form-based
and customers seek methods for automating this process to reduce costs and
improve efficiency. The Company offers services to assist in design and
implementation of forms processing systems including electronic forms
identification, automatic forms removal and data extraction, electronic
document enhancement, and custom forms application development.
DOCUMENT IMAGING. The Company offers a variety of services for
document imaging including requirements analysis, application design and
specification including graphical user interface development, image-enabling
of relational database products, image capture and clean-up, and image
retrieval integration for document management, workflow, intranet or other
applications.
DATABASE APPLICATIONS. Services related to database applications
include requirements analysis, application design and specification including
graphical user interface development, creation of relational database
management systems and intranet applications such as order entry, workflow,
litigation support, claims processing, engineering document management
systems, product catalogs, human resource records and image retrieval
integration of new or existing databases.
INTERNET/INTRANET AND CD-ROM APPLICATION CUSTOMIZATION. The growing
number of corporations using intranets to publish information offers both
product and service opportunities for the Company. Services include HTML page
markup and Web page design, hypertext linking and consulting. The Company also
continues to offer its services for CD-ROM product application design for
publishing textual documentation and complex images. The knowledge and
experience to effectively apply full-text indexing and searching technology
has been a traditional strength of the Company and continues to be a strength
in the services area.
DOCUMENT CONVERSION SERVICES. The Company provides in-house data
processing for the conversion of legacy data and new data into formats
acceptable for electronic delivery. Typical document conversion services
include image enhancement, data capture through OCR and ICR, raster scanning,
SGML markup and DTD creation. Customers who need document conversion services
often have the Company build custom retrieval software or license retrieval
and/or imaging software from the Company. The Company believes that its
extensive experience in providing information retrieval solutions, which
offers customers the ability to map conversion to retrieval applications, is
a competitive advantage.
MARKETS
The primary market for the Company's products and services are VARs,
OEMs, system integrators, large corporations and branches of the federal
government desiring to convert large databases and other printed materials to
an electronically retrievable form. Customers generally are financial
institutions, law firms, pharmaceutical companies, transportation and
aerospace companies, insurance companies, software companies, private and
public utilities, manufacturers, engineering firms and defense agencies. The
increasing use of the World Wide Web and the Internet also offers marketing
opportunities to these customers who often have little or no expertise with
the Internet or corporate intranet development.
As a Microsoft Solutions Provider, the Company receives referrals from
Microsoft Corporation to provide services for its customers using Microsoft
Office and BackOffice products. In addition, the Company has partner
relationships with Fulcrum Technologies, Inc., Informix Software, Inc., and
Oracle Corporation.
The Company's marketing efforts are conducted primarily through
exhibits at trade shows and conventions, print advertising, Internet
advertising, seminars, direct mail, telemarketing, and making field sales
calls with demonstrations.
InnerView, ViewDirector, BlackTIE, TMSFAX, ScanDirector, MasterView and
RasterView are listed in the General Services Administration ("GSA") contract
schedule, to enable all agencies and branches of the federal government to
purchase products directly from the Company. The Company will be applying for
GSA listing for ScanFix, FormFix and ViewDirectorPro in fiscal year 1997.
Currently, the Company employs fourteen (14) people in the marketing
and sales of its products. The Company has marketing and sales offices in
Stillwater, Oklahoma; Burlingame, California; Groton, Connecticut; and
Sudbury, Massachusetts. The Company intends to employ additional marketing
personnel as resources and circumstances warrant.
<PAGE> 6
DISTRIBUTION METHODS
The Company distributes is products through a direct sales force,
domestic and international resellers, and firms creating and selling turnkey
solutions.
COMPETITION
The computer software development field is highly competitive with many
companies in the industry, and a great number of the companies with which the
Company competes have greater financial, technical and marketing resources.
The Company has competitors in each of the imaging marketplace arenas
in which it supplies products. These companies, including AccuSoft, Pixel
Translations, Wang, Lead Technologies, Seaport Imaging, Visionshape, and TIS,
are selling products aimed at the Company's customer base. Additionally, Wang
markets a basic imaging capability to purchasers of the Microsoft Windows 95
product. This Wang/Microsoft product represents significant increased
competition to the Company's imaging products.
The Company believes that the primary competitive factors with respect
to its products and services are the features of its products, the technical
capabilities of the Company's personnel, quality of service, and price. The
Company believes that it can compete favorably with respect to all of these
factors.
COPYRIGHTS,PATENTS, PROPRIETARY INFORMATION, TRADEMARKS AND LICENSES
The copyright laws permit the Company to copyright many aspects of its
software. The Company has obtained copyright registrations for its software
products and expects to apply for additional registrations in the future as
appropriate. Patent applications relating to the Company's ScanFix product
were filed in the United States Patent and Trademark Office. These
applications have resulted to date in the Patent Office issuing a Notice of
Allowance, with formal patent award pending. The patents cover the following
technology areas: general processing of images, reduction of skew, horizontal
line removal, document registration, unshading dot shaded matter, and reverse
invert text. The scope and extent of patent rights respecting computer
software is evolving; therefore, the Company cannot be assured that the
issuance of such patents will be upheld as valid or will prevent the
development of competing products. The Company is not aware of any claims
of infringement of patents or other intellectual property belonging to others.
The Company treats as proprietary any software it develops, and
protects its software through licensing and distribution agreements. In
addition, the Company requires written undertakings of confidentiality from
all of its employees as well as in all customer agreements, including license
agreements, which prohibit unauthorized duplication.
The Company has developed, through use, common law trademark rights in
the marks ViewDirector, MasterView, ScanDirector, ViewDirectorPro, GrayFix,
CD-VU, ShowFax, TIFF Utilities, BlackTIE, RasterView, and CompressDirector as
used in connection with the Company's software products. The Company has
registered trademarks on the ScanFix and FormFix products.
The Company grants its customers a non-exclusive, non-transferable
license for the ViewDirector, ScanFix, FormFix, ScanDirector, GrayFix and
MasterView products for use on computers used by personnel or customers of
licensees. The Company typically receives an initial license fee for the
toolkit and offers an optional annual maintenance fee for such products.
Licenses of the Company's toolkits entitle licensees to develop custom
applications using the toolkits, then distribute the software to users inside
their organization, or to their end customers, and the Company receives a
royalty for each computer workstation on which the software is used.
<PAGE> 7
RESEARCH AND DEVELOPMENT
The Company recognizes the need to continually develop new and improved
products. Current plans include efforts to develop products for the
intranet/Internet marketplace, to further the Company's support for ActiveX
Control technology, and extend its capabilities in image and forms processing.
Pursuing these efforts will necessitate further improvements in the Company's
core technologies. The Company also experiences new product development
through its Custom Development Services projects. Customers bring conceptual
ideas for products to the Company for development, thus supplementing the
Company's own research and development.
During fiscal 1996, the Company's research and development program
concentrated on the development of new products, particularly imaging
products. Resources were also devoted to improving and enhancing the
Company's existing products. In fiscal years 1996 and 1995, the Company
capitalized development costs of $345,050 and $321,849, respectively, related
to new products and product enhancements, and expensed $85,615 and $103,760,
respectively, on research and development. The Company intends to maintain the
level of expenditures for research and development; however, the extent to
which such levels can be maintained will be dependent upon available working
capital. With the Company's growth in service work requiring a greater use of
the engineering staff's available time, the Company may have to add personnel
to maintain the current level of research and development.
EMPLOYEES
At August 31, 1996, the Company had 74 full-time employees and 27 part-
time employees. All of the part-time employees are employed in the Document
Conversion Services division. The Company's business is dependent in large
part on its ability to attract and retain qualified technical, marketing and
management personnel, and the Company must compete with larger and more
established companies for such persons.
CUSTOMERS
POWERCOM-2000, Inc. ("POWERCOM"), a wholly-owned subsidiary of Briggs &
Stratton, accounted for approximately $607,000 or 11% of the Company's total
revenue in fiscal 1996. During fiscal 1996, the Company continued to perform
document conversion services for POWERCOM, principally the conversion of
parts and maintenance manuals for lawn and garden products into an electronic
format. Document conversion services accounted for approximately $482,000 or
79% of the total POWERCOM revenue in 1996. As reported in fiscal year 1995,
the Company expected a decline in future revenue from POWERCOM. In fiscal
1996, service revenue from POWERCOM approximated $110,000 compared to
$621,000 in fiscal 1995. Although this customer has ongoing service
requirements, primarily for document conversion, management cannot project
the level of revenue that could result from this customer in fiscal 1997. In
fiscal 1995, POWERCOM accounted for 22% of the Company's total revenue, the
only customer to account for 10% or more of total revenues for that year. To
offset the expected decline in POWERCOM revenues, the Company has continued to
develop strategic relationships with large firms to produce revenue
opportunities for both products and services.
SALES TO FOREIGN CUSTOMERS
Approximately 12% and 15% of total revenues for fiscal 1996 and 1995,
respectively, are attributable to sales to foreign customers. See Note 8 to
Consolidated Financial Statements.
BACKLOG
As of August 31, 1996, there was a backlog of software development
services amounting to approximately $741,000 as compared to approximately
$450,000 as of August 31, 1995.
<PAGE> 8
ITEM 2. PROPERTIES
The Company's headquarters consist of approximately 14,655 square feet
of office space located at 206 West Sixth Avenue in Stillwater, Oklahoma. The
Company purchased the building in fiscal year 1994 and occupied the space in
fiscal year 1995 after renovation was complete.
The Company leases approximately 7,000 square feet of space located at
110 West Third Street in Stillwater, Oklahoma. The lease expires on June 1,
1997, with monthly aggregate rental payments of $1,750 per month. This space
is occupied by the Document Conversion Services division.
The Company has offices in Burlingame, California; Sudbury,
Massachusetts; and Groton, Connecticut. Collectively these offices amount to
approximately 1,200 square feet and monthly rentals approximate $3,800.
ITEM 3. LEGAL PROCEEDINGS
The Company is not a party to any legal proceeding which, if decided
adversely to the Company, would have a material impact on the Company's
business or financial condition.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
The Company's Common Stock is traded in the over-the-counter market,
and prices are quoted by the National Quotation Bureau, Incorporated ("NQB")
on the "pink sheets," and the NASD Non-NASDAQ OTC Bulletin Board. The
following table sets forth the quarterly range of high and low bid prices of
the Company's Common Stock for fiscal years 1996 and 1995. The quotations are
inter-dealer prices without retail mark-ups, markdowns, or commissions and
may not represent actual transactions. The source of such quotations is the
NQB.
<TABLE>
<CAPTION>
_________________________________________
Bid Prices
Fiscal 1996 High Low
_________________________________________
<S> <C> <C>
First Quarter $1 5/32 3/8
Second Quarter 1 1/2 5/8
Third Quarter 1 3/8 15/32
Fourth Quarter 7/8 5/8
Fiscal 1995 High Low
_________________________________________
First Quarter $ 1/4 1/8
Second Quarter 5/16 1/8
Third Quarter 1 1/8
Fourth Quarter 1 5/16
_________________________________________
</TABLE>
The Company has not declared nor paid any cash dividends since its
incorporation, nor does it anticipate that it will pay dividends in the
foreseeable future. Any earnings realized by the Company are expected to be
reinvested in the Company's business; however, the declaration and payment of
dividends in the future will be determined by the board of directors in light
of conditions then existing, including, among others, the Company's earnings,
its financial condition and capital requirements (including working capital
needs), and any arrangements restricting the payment of dividends.
<PAGE> 9
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
This analysis of the Company's results of operations and financial
condition should be read in conjunction with the consolidated financial
statements, description of the Company's business and other information
included elsewhere herein. Except for the historical information contained
herein, this Form 10-KSB contains certain forward-looking statements
regarding the Company's business and prospects that are based upon numerous
assumptions about future conditions which may ultimately prove to be
inaccurate and actual events and results may materially differ from
anticipated results described in such statements. The Company's ability to
achieve such results is subject to certain risks and uncertainties, such as
those inherent generally in the retail and computer software industries and
the impact of competition, pricing and changing market conditions. The
Company disclaims, however, any intent or obligation to update these forward-
looking statements. As a result, the reader is cautioned not to place
reliance on these forward-looking statements.
RESULTS OF OPERATIONS
The Company realized growth in total revenue for the fiscal year ended
August 31, 1996 as compared to fiscal year 1995. Revenue growth was more than
offset by increased operating costs and expenses, which contributed to the
decline in net income for fiscal year 1996. Operating costs and expenses for
fiscal year 1996 increased over fiscal year 1995 primarily because of
increases in the number of personnel, selling and marketing activities, and
non-recurring costs related to the merger with Sequoia Computer Corporation.
See "Merger" in Note 2 to the Consolidated Financial Statements. Net income
for fiscal years 1996 and 1995 was also impacted by recognition of a deferred
tax benefit related to the reduction in the Company's valuation allowance
provided against deferred tax assets. The deferred tax benefits in both years
are a positive indication that the Company will, more likely than not, utilize
a portion of the net operating loss carryforwards to offset future taxable
income, and accordingly, will not pay significant amounts of income taxes in
the forseeable future.
REVENUE. Total revenue for fiscal year 1996 was $5,612,576 compared to
$5,210,069 for fiscal year 1995, an increase of $402,507 or 8%. Licensing and
royalties revenue increased $310,573, or 9% in fiscal year 1996. The growth
in licensing and royalties is attributable to increased revenue from the
Company's imaging products. Revenue from the Company's imaging products was
$3,216,330 for fiscal year 1996, an increase of 13%, or $376,336, from the
$2,839,994 reported for fiscal year 1995. Increased unit sales resulting from
recent releases of new or enhanced imaging 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, are the primary factors
which contributed to increased revenue from imaging products in fiscal year
1996. Revenue from the Company's text products in fiscal year 1996 decreased
14%, or $65,763, when compared to fiscal year 1995. Increased competition and
the Company's emphasis on imaging technology are the primary factors which
have contributed to the decline in text revenue. The Company expects that
licensing revenue from text products will continue to decline because future
development of this technology will occur on a customer contract basis and be
reported as software development service revenue.
Software development and document conversion service revenue for fiscal
year 1996 was $1,981,606 compared to $1,889,672 for fiscal year 1995, an
increase of $91,934 or 5%. Software development service revenue of $1,014,261
for fiscal year 1996 declined 27%, or $366,126, from the $1,380,387 reported
for fiscal year 1995. The decrease in software development service revenue
was due to the successful delivery of product to POWERCOM near the end of
fiscal year 1995. As reported in fiscal 1995, the Company expected a decline
in fiscal year 1996 software development service revenue from POWERCOM. In
fiscal year 1996, POWERCOM accounted for approximately 11%, or $110,000 of
software development service revenue as compared to 45%, or $621,000 of
software development service revenue reported in fiscal 1995. During the first
three quarters of fiscal year 1996, negotiations were under way with potential
customers to replace software development service revenues previously
generated by POWERCOM. During the third and fourth quarters of fiscal year
1996, significant contracts for software development services were secured and
at August 31, 1996, the Company had a software development service revenue
backlog of approximately $741,000. The Company continues to market and
negotiate software development service contracts, but there can be no
assurance that the Company will continue to secure enough new contracts to
consistently maintain the level of backlog reported at August 31, 1996.
<PAGE> 10
Document conversion service revenue of $967,345 increased 90%, or
$458,060, over the $509,285 reported for fiscal year 1995. The increase in
document conversion service revenue is attributable to The Toro Company
("Toro") contract that began in the fourth quarter of fiscal year 1995 and
continued into the third quarter of fiscal year 1996. Revenue from the Toro
contract amounted to approximately $406,000, or 42%, of fiscal year 1996
document conversion service revenue. Services under the Toro contract were
substantially completed during March of 1996. Management increased document
conversion marketing activities during the current fiscal year in an effort
to obtain new service opportunities. Although certain document conversion
contracts have been secured, they will not replace the level of revenue that
was recognized for Toro and there can be no assurance as to when additional
document conversion service contracts will be secured, or if revenues from
any new contracts will replace the level of revenue recognized for Toro.
Management is prepared to take the appropriate cost cutting measures to offset
any future significant declines in document conversion service revenue.
OPERATING COSTS AND EXPENSES. Total operating costs and expenses for
fiscal year 1996 were $5,440,649 compared to $4,425,632 in fiscal year 1995,
an increase of $1,015,017 or 23%. Personnel and non-recurring costs related
to the merger with Sequoia accounted for approximately 57% and 23% of the
total increase, respectively. At August 31, 1996 the Company employed 74 full-
time employees and 27 part- time employees compared to 65 full-time and 14
part-time employees at August 31, 1995. The part-time employee count reached
55 for several months during fiscal year 1996 because of the additional
resources needed to support the growth in document conversion services. Non-
recurring costs primarily included legal and accounting costs incurred to
complete the merger with Sequoia. See "Merger" in Note 2 to the Consolidated
Financial Statements.
The cost of licensing and royalties for fiscal year 1996 increased
$203,523 or 28% over costs reported for fiscal year 1995. The gross profit
margins for licensing and royalties were 74% and 78% for fiscal years 1996
and 1995, respectively. Competitive pressures have affected pricing structures
downward which contributed to lower margins. Additionally, fluctuations in
gross profit margins result from the mix of product versus royalty revenue
reported, as royalties essentially result in little or no cost to the
Company.
The cost of software development and document conversion services
increased primarily because of the additional resources necessary to satisfy
requirements under document conversion contracts. The combined software
development and document conversion gross profit margin for fiscal year 1996
was 32% compared to 50% reported for fiscal year 1995. This decline in gross
profit margin primarily reflects the change in the mix of software
development versus document conversion service revenue. The gross profit
margin related to document conversion service revenue was 23% for fiscal year
1996 compared to 31% for fiscal year 1995. The decrease in document
conversion gross profit margin primarily resulted from additional personnel,
facilities and equipment depreciation costs incurred to support the Toro
contract. The gross profit margin related to software development services
was 41% for fiscal year 1996 compared to 57% for fiscal year 1995. The cost
of software development services approximated $600,000 for both fiscal years
1996 and 1995, thus, the decline in software development service gross profit
margins resulted entirely from the decrease in software development service
revenue.
Selling, general and administrative expenses for fiscal year 1996
increased $432,795 or 16% when compared to fiscal year 1995. Non-recurring
costs associated with the Sequoia merger accounted for $234,000 or
approximately 54% of the increase. The balance of the increase in selling,
general and administrative expense for fiscal year 1996 was attributable to
increased costs of facilities, advertising, investor relations and increased
operating expenses related to the higher number of employees and increased
sales activity.
Research and development costs for both fiscal years 1996 and 1995 were
minimal as the Company continued to focus its resources on new products and
significant enhancements to existing products that were capitalized for
financial accounting and reporting purposes. The Company capitalized software
development costs of $345,050 and $321,849, in fiscal years 1996 and 1995,
respectively.
<PAGE> 11
INCOME TAX BENEFIT. The Company's effective income tax benefit rate
was 81% for fiscal year 1996 compared to 21% for fiscal year 1995. The
effective income tax benefit rates for both fiscal years 1996 and 1995 differ
from the "expected" Federal tax expense rate of 34%, primarily because of the
deferred tax benefits recorded to reduce the valuation allowance provided
against the Company's deferred tax assets. These deferred tax benefits and
related deferred tax assets are an 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. For further discussion of
income taxes, see "Income Taxes" in Note 4 to the Consolidated Financial
Statements.
NET INCOME. Net income for fiscal year 1996 was $383,153 compared to
$984,006 for fiscal year 1995, a decrease of $600,853 or 61%. The non-
recurring merger costs, lower software development and document conversion
service gross profit margins, and the lower deferred tax benefit recognized in
fiscal 1996 were the primary factors that caused a decline in net income when
compared to fiscal year 1995.
FINANCIAL CONDITION
Working capital at August 31, 1996 was $1,838,180 with a current ratio
of 3.9:1 compared to $1,325,320, with a current ratio of 3.4:1, at August 31,
1995. Net cash provided by operating activities for fiscal year 1996 was
$389,585 compared to $916,024 for fiscal year 1995. The overall decrease in
the Company's profitability for fiscal year 1996 was the primary factor that
caused operating cash flow to decline. Net cash used in investing activities
for fiscal year 1996 was $603,126 compared to $1,303,166 for fiscal year
1995. During fiscal year 1995 construction was under way to renovate the
Company's headquarters facilities, which was the primary reason for the
higher expenditures in fiscal year 1995.
During fiscal year 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 end of the second quarter. During the fourth quarter of fiscal
year 1996, the Company generated approximately $325,000 in cash from the
issuance of common stock to former Sequoia shareholders exercising their
options to purchase the Company's stock.
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 line of
credit expires on November 3, 1996. The Company anticipates the line of credit
will be increased to $800,000 and extended when it matures. 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. The net
operating cash flow and the Company's existing line of credit are expected to
be adequate to provide sufficient resources for operations in future periods.
IMPACT OF RECENTLY ISSUES ACCOUNTING STANDARDS
In 1995, the Financial Accounting Standard Board issued Statement of
Financial Accounting Standards No. 123 (SFAS 123), "Accounting for Stock-Based
Compensation". SFAS 123 provides companies with the option of expensing the
"fair value" of stock options granted. With regard to the Company's stock
options, no accounting is made until such time as the options are exercised
unless the option price is less than the fair value of Company stock on the
grant date. The Company does not intend to change its current accounting
method regarding stock options. Therefore, SFAS 123 will not impact future
operating results. The Company will adopt the expanded stock option
disclosure requirements of SFAS 123 in its 1997 fiscal year.
No other recently issued accounting standards are expected to have a
material impact on the Company's financial position or future results of
operations.
ITEM 7. CONSOLIDATED FINANCIAL STATEMENTS
The financial statements required by this Item are set forth beginning on
page F-l hereof.
<PAGE> 12
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
In accordance with General Instruction E(3), a presentation of
information required in response to Items 9-12 shall appear in the Company's
definitive proxy statement to be filed pursuant to Regulation 14A within 120
days of the fiscal year end covered hereby, and shall be incorporated herein
by reference when filed.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS. The following exhibits are included with this report;
all employment contracts and compensatory plans are marked with an asterisk
(*):
Exhibit No. Name of Exhibit
2.1 Amended Plan of Reorganization and Agreement of Merger (the
"Merger Agreement") dated November 7, 1995, incorporated
herein by reference to Exhibit No. 2.1 to Amendment No. 2 to
Form S-4 as filed with the Securities and Exchange Commission
on February 6, 1996.
2.2 Amendment No. 1 to the Merger Agreement, dated December 6,
1995, incorporated herein by reference to Exhibit No. 2.2 to
Amendment No. 2 to Form S-4 as filed with the Commission on
February 6, 1996.
3.1 Certificate of Incorporation of the Registrant, as amended,
incorporated herein by reference to Exhibit No. 3.1 to the
Registrant's Form 10-K for the fiscal year ended August 31,
1995.
3.2 Bylaws of the Registrant, as amended, incorporated herein by
reference to Exhibit No. 3.1 to the Registrant's Form 8-K
Current Report dated June 4, 1993.
10.1* Employee Stock Option Plan, incorporated herein by reference
to Exhibit No. 10.1 to the Registrant's Form 10 Registration
Statement, filed with the Commission on January 15, 1990 (the
"Form 10").
10.2* Senior Employee Stock Option Plan, incorporated herein by
reference to Exhibit No. 10.2 to the Registrant's Form 10.
10.3* Employee Incentive Stock Option Plan, incorporated herein by
reference to Exhibit No. 10.3 to the Registrant's Form 10.
10.4 Form of Engineering Services Agreement between the Registrant
and The ToroCompany, incorporated herein by reference to
Exhibit No. 10.4 to the Registrant's Form 10-K for the fiscal
year ended August 31, 1995.
10.5 Form of Engineering Services Agreement between the Registrant
and POWERCOM-2000, Inc. ("POWERCOM"), incorporated herein by
reference to Exhibit No. 10.7 to the Registrant's Form
10-K for the fiscal year ended August 31, 1994.
10.6 Form of Value Added Reseller Agreement/Software Product
License Agreement between the Registrant and POWERCOM,
incorporated herein by reference to Exhibit No. 10.8 to the
Registrant's Form 10-K for the fiscal year ended August 31,
1994.
10.7 Form of Engineering Services Agreement (Document Conversion)
between the Registrant and POWERCOM, incorporated herein by
reference to Exhibit No. 10.9 to the Registrant's Form 10-K
for the fiscal year ended August 31, 1994.
10.10* TMS, Inc. 1996 Stock Option Plan, incorporated herein by
reference to Exhibit No. 99 to the Registrant's Form S-8 as
filed with the Commission on May 16, 1996.
23.1 Consent of KPMG Peat Marwick LLP
27.0 Financial Data Schedule
(b) REPORTS ON FORM 8-K. No Form 8-K Current Reports were filed by
the Company during the last quarter of fiscal year 1996.
<PAGE> 13
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
REGISTRANT:
TMS, INC.
Date: 10/31/96 By: /s/ Maxwell Steinhardt
___________________________________________
Maxwell Steinhardt, Chief Executive Officer
Date: 10/31/96 By: /s/ Deborah D. Mosier
__________________________________________
Deborah D. Mosier, Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Date: 10/31/96 By: /s/ Maxwell Steinhardt
______________________________________________
Maxwell Steinhardt, Chairman of the Board and
Chief Executive Officer
Date: 10/31/96 By: /s/ Dana R. Allen
_____________________________________________
Dana R. Allen, Executive Vice President and
Director
Date: 10/31/96 By: /s/ Marshall C. Wicker
_____________________________________________
Marshall C. Wicker, Director
Date: 10/31/96 By: /s/ Doyle E. Cherry
_____________________________________________
Doyle E. Cherry, Director
Date: 10/31/96 By: /s/ James R. Rau, M.D.
____________________________________________
James R. Rau, M.D., Director
<PAGE> F-1
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND
FINANCIAL STATEMENT SCHEDULE
TMS, Inc. and Subsidiary (dba TMSSequoia)
PAGE
Independent Auditors' Report F-2
Financial Statements:
Consolidated Balance Sheets - August 31, 1996 and 1995 F-3 and F-4
Consolidated Statements of Operations - Years Ended
August 31, 1996 and 1995 F-5
Consolidated Statements of Shareholders' Equity - Years
Ended August 31, 1996 and 1995 F-6
Consolidated Statements of Cash Flows - Years Ended
August 31, 1996 and 1995 F-7
Notes to Consolidated Financial Statements -
August 31, 1996 and 1995 F-8 through F-14
Financial Statement Schedule:
Schedule II - Valuation and Qualifying Accounts -
Years Ended August 31, 1996 and 1995 F-15
All other schedules are omitted as they are inapplicable or not required, or
the required information is included in the Consolidated Financial Statements
or Notes to Consolidated Financial Statements.
<PAGE> F-2
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
TMS, Inc.:
We have audited the consolidated financial statements of TMS, Inc. (dba
TMSSequoia) and its subsidiary as listed in the accompanying index. In
connection with our audits of the consolidated financial statements, we also
have audited the financial statement schedule as listed in the accompanying
index. These consolidated financial statements and financial statement
schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements and financial statement schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of TMS, Inc.
and its subsidiary as of August 31, 1996 and 1995, and the results of their
operations and their cash flows for the years then ended in conformity with
generally accepted accounting principles. Also in our opinion, the related
financial statement schedule, when considered in relation to the basic
consolidated financial statements taken as a whole, presents fairly, in all
material respects, the information set forth therein.
KPMG Peat Marwick LLP
Oklahoma City, Oklahoma
October 4, 1996
<PAGE> F-3
TMS, Inc. and Subsidiary (dba TMSSequoia)
Consolidated Balance Sheets
August 31, 1996 and 1995
<TABLE>
<CAPTION>
______________________________________________________________________________
1996 1995
______________________________________________________________________________
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 542,072 404,238
Trade accounts receivable, net of
allowance for doubtful accounts of
$100,000 in 1996 and $99,318 in
1995 1,370,367 1,143,537
Contract service work in process 209,583 87,187
Deferred income taxes 265,938 207,623
Prepaid expenses and other current assets 92,603 45,750
______________________________________________________________________________
Total current assets 2,480,563 1,888,335
______________________________________________________________________________
Property and equipment:
Land 111,000 111,000
Building 739,744 701,850
Computer equipment 1,207,510 1,012,288
Furniture and fixtures 326,012 324,835
______________________________________________________________________________
2,384,266 2,149,973
Less accumulated depreciation 901,927 666,866
______________________________________________________________________________
Net property and equipment 1,482,339 1,483,107
______________________________________________________________________________
Other assets:
Capitalized software development costs,
net of accumulated amortization of
$168,657 in 1996 and $168,346
in 1995 509,867 339,562
Deferred income taxes 190,223 76,796
Deposits 45,393 31,563
______________________________________________________________________________
Total other assets 745,483 447,921
______________________________________________________________________________
Total assets $4,708,385 3,819,363
==============================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE> F-4
______________________________________________________________________________
1996 1995
______________________________________________________________________________
<TABLE>
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY
<S> <C> <C>
Current liabilities:
Note payable $ - 75,000
Current installments of long-term debt 20,825 17,846
Accounts payable 186,634 103,663
Accrued payroll expenses 272,623 253,952
Deferred revenue 147,360 93,013
Other liabilities 14,941 19,541
______________________________________________________________________________
Total current liabilities 642,383 563,015
______________________________________________________________________________
Long-term debt, net of current installments 355,801 378,265
______________________________________________________________________________
Total liabilities 998,184 941,280
______________________________________________________________________________
Shareholders' equity:
Preferred stock, $.01 par value.
Authorized 1,000,000 shares;
none issued - -
Common stock, $.05 par value. Authorized
50,000,000 shares; issued and
outstanding 13,213,837 shares in
1996 and 12,048,167 shares
in 1995 660,692 602,408
Additional paid-in capital 11,416,680 10,996,839
Unamortized deferred compensation (32,970) (3,810)
Accumulated deficit (8,334,201) (8,717,354)
______________________________________________________________________________
Total shareholders' equity 3,710,201 2,878,083
______________________________________________________________________________
Commitments (Notes 3 and 7)
______________________________________________________________________________
Total liabilities and shareholders' equity $ 4,708,385 3,819,363
==============================================================================
</TABLE>
<PAGE> F-5
TMS, Inc. and Subsidiary (dba TMSSequoia)
Consolidated Statements of Operations
Years Ended August 31, 1996 and 1995
<TABLE>
<CAPTION>
______________________________________________________________________________
1996 1995
______________________________________________________________________________
<S> <C> <C>
Revenue:
Licensing and royalties $ 3,630,970 3,320,397
Software development and
document conversion services 1,981,606 1,889,672
______________________________________________________________________________
5,612,576 5,210,069
______________________________________________________________________________
Operating costs and expenses:
Cost of licensing and royalties 934,979 731,456
Software development and
document conversion services 1,345,036 948,192
Selling, general and administrative 3,075,019 2,642,224
Research and development 85,615 103,760
______________________________________________________________________________
5,440,649 4,425,632
______________________________________________________________________________
Operating income 171,927 784,437
Other income (expense):
Interest income 15,584 14,407
Interest expense (30,867) (11,305)
Other, net 55,567 25,928
______________________________________________________________________________
Income before income taxes 212,211 813,467
Income tax benefit 170,942 170,539
______________________________________________________________________________
Net income $ 383,153 984,006
==============================================================================
Net income per common
and common equivalent share $ 0.03 0.08
==============================================================================
Weighted average common and
common equivalent shares 14,015,948 13,091,519
==============================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE> F-6
TMS, Inc. and Subsidiary (dba TMSSequoia)
Consolidated Statements of Shareholders' Equity
Years Ended August 31, 1996 and 1995
<TABLE>
<CAPTION>
______________________________________________________________________________
Additional Unamortized Accumu-
Common Stock Paid-in Deferred lated Total
Shares Amount Capital Compensation Deficit Equity
______________________________________________________________________________
<S> <C> <C> <C> <C> <C> <C>
Balance at August
31, 1994 11,822,764 $591,138 10,963,899 (6,963) (9,701,360) 1,846,714
Exercise of
stock options 225,403 11,270 32,940 - - 44,210
Amortization of
deferred
compensation - - - 3,153 - 3,153
Net income - - - - 984,006 984,006
______________________________________________________________________________
Balance at August
31, 1995 12,048,167 602,408 10,996,839 (3,810) (8,717,354) 2,878,083
Exercise of
stock options 1,165,670 58,284 387,576 - - 445,860
Capital contri-
bution from
granting of
employee stock
options - - 32,265 - - 32,265
Less: deferred
compensation
expense - - - (32,265) - (32,265)
Amortization of
deferred
compensation - - - 3,105 - 3,105
Net income - - - - 383,153 383,153
______________________________________________________________________________
Balance at August
31, 1996 13,213,837 $660,692 11,416,680(32,970) (8,334,201) 3,710,201
==============================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE> F-7
TMS, Inc. and Subsidiary (dba TMSSequoia)
Consolidated Statements of Cash Flows
Years Ended August 31, 1996 and 1995
<TABLE>
<CAPTION>
______________________________________________________________________________
1996 1995
______________________________________________________________________________
<S> <C> <C>
Cash flows from operating activities:
Net income $ 383,153 984,006
Adjustments to reconcile net income
to net cash provided by
operating activities:
Depreciation and amortization 418,450 283,763
Deferred income tax benefit (171,742) (175,499)
Employee compensation-stock options 3,105 3,153
Provision for returns and doubtful
accounts 142,535 109,268
(Gain) loss on sale of equipment (346) 2,624
Realized loss of sale of short-term
investments - 1,957
(Increase) decrease in:
Trade accounts receivable (369,365) (324,077)
Contract service work in process (122,396) (87,187)
Prepaid expenses and other assets (45,198) 3,650
Increase (decrease) in:
Accounts payable 82,971 13,283
Accrued payroll expenses 18,671 88,306
Other liabilities (4,600) 13,975
Deferred revenue 54,347 (1,198)
______________________________________________________________________________
Net cash provided by operating activities 389,585 916,024
______________________________________________________________________________
Cash flows from investing activities:
Purchases of property and equipment (248,248) (1,053,057)
Capitalized software development costs (345,050) (321,849)
Proceeds from sale of equipment 5,955 1,500
Proceeds from sale of short-term
investments - 78,043
Patent costs (15,783) (7,803)
______________________________________________________________________________
Net cash used in investing activities (603,126) (1,303,166)
______________________________________________________________________________
Cash flows from financing activities:
Proceeds from long-term debt - 407,017
Repayment of long-term debt (19,485) (10,906)
Proceeds from short-term note payable 468,000 175,000
Payments on short-term note payble (543,000) (100,000)
Issuance of common stock 445,860 35,210
______________________________________________________________________________
Net cash provided by financing activities 351,375 506,321
______________________________________________________________________________
Net increase in cash and cash equivalents 137,834 119,179
Cash and cash equivalents at beginning of year 404,238 285,059
______________________________________________________________________________
Cash and cash equivalents at end of year $ 542,072 404,238
==============================================================================
Supplemental Cash Flow Information:
Cash paid for interest $ 30,867 11,305
Cash paid for income taxes $ 800 2,768
==============================================================================
Noncash increase in additional paid-in
capital and unamortized deferred
compensation for granting of
stock options $ 32,265 -
==============================================================================
</TABLE>
See accompanying notes to consolidated financial statements
<PAGE> F-8
TMS, Inc. and Subsidiary (dba TMSSequoia)
Notes to Consolidated Financial Statements
August 31, 1996 and 1995
(1) Summary of Significant Accounting Policies
ORGANIZATION
The accompanying consolidated financial statements include the accounts of
TMS, Inc. (TMS) and its wholly-owned subsidiary Sequoia Computer Corporation
(Sequoia) (collectively, the Company). The Company is currently doing
business as TMSSequoia. All material intercompany transactions have been
eliminated in consolidation. On March 15, 1996, Sequoia was merged with and
into a subsidiary of TMS which resulted in Sequoia becoming a wholly-owned
subsidiary of TMS (see Note 2). On September 1, 1996, Sequoia merged with and
into TMS.
The Company is involved in the research, design, development, and marketing of
software tools and applications for document capture, image enhancement, image
viewing, forms processing, CD-ROM, intranets and the Internet. The Company
also provides software development and document conversion services to
corporations and government organizations worldwide to assist them in
migrating from paper to electronic information systems.
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date
of the consolidated financial statements, and the reported amounts of revenues
and expenses during the reporting period. Actual amounts could differ from
those estimates.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents consist primarily of highly liquid money market
accounts with an original maturity of three months or less carried at cost
plus accrued interest, which approximates market.
COMPUTER SOFTWARE COSTS
Statement of Financial Accounting Standards No. 86, "Accounting for the Costs
of Computer Software to be Sold, Leased, or Otherwise Marketed" (SFAS No. 86),
requires capitalization of software development costs incurred subsequent to
establishment of technological feasibility and prior to the availability of
the product for general release to customers. The Company capitalized
$345,050 and $321,849 of software development costs, which primarily includes
personnel costs, in 1996 and 1995, respectively.
Systematic amortization of capitalized costs begins when a product is
available for general release to customers and is computed on a product-by-
product basis at a rate not less than straight-line over the product's
remaining estimated economic life. The Company amortized $174,745 and $86,228
of software development costs in 1996 and 1995, respectively. The Company
compares the unamortized capitalized software development costs to the
estimated net realizable values of its products on a periodic basis. If the
estimated net realizable values fall below the unamortized costs, the excess
costs are charged directly to income.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation on the building is
calculated using the straight-line method over thirty-nine years. Depreciation
on computer equipment, furniture and fixtures is calculated using the
straight-line method over periods ranging from three to ten years.
<PAGE> F-9
PATENT COSTS
Included in other assets at August 31, 1996 and 1995, are $33,352 and $17,569,
respectively, of capitalized costs associated with obtaining patent rights for
certain software products. The patents were approved at the end of fiscal
1996 and the capitalized costs will be amortized using the straight-line
method over the 17 year life of the patents.
REVENUE
Revenue is recognized on an accrual basis and pursuant to various contractual
terms. Revenue under non-refundable fixed fee contracts for software products
is recognized after the software has been delivered, all significant
obligations of the Company have been fulfilled, and all significant
uncertainties regarding customer acceptance have expired. The portion of the
fixed fee revenue related to customer support is unbundled, deferred, and
recognized ratably over the contract period. At August 31, 1996 and 1995,
deferred customer support revenue pursuant to non- refundable fixed fee
contracts was $30,125 and $24,667, respectively. The Company also contracts
with customers for maintenance. Revenue pursuant to maintenance contracts is
deferred and recognized ratably over the contract period. Deferred revenue
under maintenance contracts at August 31, 1996 and 1995 totaled $17,210 and
$33,546, respectively.
Licensing and royalties revenue is recognized as additional copies or
workstations are utilized by customers, or as the related software product is
sold to third parties. Revenue for software development services and document
conversion services is recognized as the services are performed using the
percentage-of-completion method and is deferred to the extent that customer
billings or payments exceed the percentage complete. Deferred revenue under
service contracts was $100,025 and $34,800 at August 31, 1996 and 1995,
respectively.
NET INCOME PER COMMON AND COMMON EQUIVALENT SHARE
Net income per common and common equivalent (common stock options) share was
determined by dividing net income by the weighted average number of shares of
common stock and common stock equivalents outstanding during the period,
determined by the treasury stock method.
EMPLOYEE COMPENSATION - STOCK OPTIONS
In connection with stock options issued under employee stock option plans, The
Company has recorded expense in an amount equal to the excess of the quoted
market price on the grant date over the option price. Such expense is
recognized at the grant date for options fully vested. For options requiring
a vesting period, the expense is deferred and recognized over the vesting
period. The amount of expense recognized in 1996 and 1995 related to employee
stock options was $3,105 and $3,153, respectively.
INCOME TAXES
The Company accounts for income taxes using the asset and liability method in
accordance with Statement of Financial Accounting Standards No. 109 (SFAS No.
109). Under the asset and liability method, deferred tax assets and
liabilities are recognized at the enacted tax rates for the future tax
consequences 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.
ALLOWANCE FOR DOUBTFUL TRADE ACCOUNTS RECEIVABLE
The Company extends credit to customers in accordance with normal industry
standards and terms. Credit risk arises as customers default on trade accounts
receivable owed to the Company. The Company has established an allowance for
doubtful accounts based on known factors surrounding the credit risk of
specific customers, historical trends and other information. Under certain
circumstances, the Company requires that a portion of the estimated billings
be paid prior to delivering products or performing services. In addition, the
Company may revoke customer contracts if outstanding amounts are not paid.
<PAGE> F-10
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying value of cash and cash equivalents, trade accounts receivable,
contract service work in process, accounts payable, accrued expenses and other
liabilities approximate fair value because of the short maturity of these
financial instruments. The carrying value of notes payable and long-term debt
approximates fair value because the current rates approximate market rates
available on similar instruments.
RECLASSIFICATIONS
Certain 1995 amounts have been reclassified to conform with the 1996 financial
statement presentation.
(2) Merger
On March 15, 1996, the TMS board of directors and the Sequoia Computer
Corporation board of directors and shareholders approved the merger of a
subsidiary of TMS with and into Sequoia which resulted in Sequoia becoming a
wholly-owned subsidiary of TMS. Sequoia, founded in 1987, develops and
markets innovative software products in the document image processing, image
enhancement, forms processing, and data entry industries. Under the terms of
the agreement, Sequoia shareholders received 2.837 shares of TMS common stock
for each Sequoia share. Accordingly, TMS issued 3,643,220 shares of its
common stock for all of the outstanding shares of Sequoia common stock.
Additionally, outstanding options and warrants to acquire Sequoia common stock
were converted to options to acquire 1,641,651 shares of TMS common stock.
The merger qualifies as a tax-free reorganization and was accounted for as a
pooling of interests. Accordingly, the Company's consolidated financial
statements have been restated to include the results of Sequoia for all
periods presented. Combined and separate results of TMS and Sequoia during
the periods preceding the merger were as follows:
<TABLE>
<CAPTION>
______________________________________________________________________________
TMS Sequoia Eliminations Consolidated
______________________________________________________________________________
Six months ended
February 29, 1996
(unaudited)
<S> <C> <C> <C> <C>
Net revenue $2,478,660 590,976 (23,365) 3,046,271
Net income 418,896 56,712 - 475,608
Fiscal year ended
August 31, 1995
Net revenue $4,221,120 988,949 - 5,210,069
Net income 771,481 212,525 - 984,006
______________________________________________________________________________
</TABLE>
The combined financial results presented above include reclassification
adjustments made to conform the accounting policies of the two companies.
There were no adjustments that impacted net income. All material intercompany
transactions were eliminated in consolidation.
In connection with the merger, the Company expensed non-recurring transaction
costs of approximately $234,000 in the second and third quarters of fiscal
1996. These transaction costs primarily include legal and accounting fees.
<PAGE> F-11
(3) Note Payable and Long-Term Debt
At August 31, 1996, the Company had a $600,000 operating line of credit with a
bank which bears interest at 1.0% above prime and expires on November 3, 1996.
At August 31, 1996, there was no balance outstanding against the line of
credit. The Company had a note payable of $75,000 outstanding against the
line of credit at August 31, 1995. The Company anticipates the line of credit
will be increased to $800,000 and extended when it matures.
At August 31, 1996 and 1995, the Company had $376,626 and $396,111
outstanding under a long-term note payable to a bank. The note bears interest
at 6.25% and is due January 1, 2009. The interest rate is based on an
Oklahoma small business program and may be adjusted at the end of each two
year period, beginning on June 30, 1996. The aggregate maturities of long-
term debt for each of the five years subsequent to August 31, 1996, and
thereafter, are as follows: 1997, $20,825; 1998, $22,184; 1999, $23,631;
2000, $25,119; 2001, $26,822; thereafter, $258,045.
The line of credit and long-term note are secured by all accounts, equipment,
furniture and fixtures, and real property of the Company.
(4) Income Taxes
Income tax benefit for fiscal year 1996 was $170,942. The significant
components of the 1996 benefit include: deferred tax expense, $163,910;
decrease in the beginning-of-the-year balance in the valuation allowance for
deferred tax assets, $335,652; and state income tax, $800. Income tax benefit
for fiscal year 1995 was $170,539. The significant components of the 1995
benefit include: deferred tax expense, $319,501; decrease in the beginning-
of-the-year balance in the valuation allowance for deferred tax assets,
$495,000; state income tax, $800; and Federal alternative minimum tax,
$4,160. Income tax benefit (expense) for 1996 and 1995 differed from the
amounts computed by applying the U.S. Federal income tax rate of 34% to pretax
income from operations as a result of the following:
<TABLE>
<CAPTION>
_______________________________________________________________________
1996 1995
_______________________________________________________________________
<S> <C> <C>
Computed "expected" tax expense (34.0%) (34.0%)
Change in the beginning-of-the-year
deferred tax assets valuation allowance 158.0% 61.0%
Merger costs not deductible (40.0%) -
State income tax, net of Federal income
tax benefit (4.0%) (4.0%)
Other 1.0% (2.0%)
_______________________________________________________________________
Effective income tax benefit rate 81.0% 21.0%
=======================================================================
</TABLE>
<PAGE> F-12
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and liabilities at August 31, 1996 and
1995 are presented in the following table.
<TABLE>
<CAPTION>
_______________________________________________________________________
1996 1995
_______________________________________________________________________
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards $1,777,671 1,855,864
Tax credit carryforwards 417,000 417,000
Employee stock options 134,496 62,501
Other 47,502 58,552
_______________________________________________________________________
Total gross deferred tax assets 2,376,669 2,393,917
Less valuation allowance 1,545,469 1,864,000
_______________________________________________________________________
Net deferred tax assets 831,200 529,917
Deferred tax liabilities:
Property and equipment (55,670) (68,502)
Capitalized software costs (193,546) (99,204)
Cash method of accounting for Sequoia's
income tax (125,823) (77,792)
_______________________________________________________________________
Net deferred tax asset (liability) $ 456,161 284,419
=======================================================================
</TABLE>
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 had recognized a net deferred tax asset of $456,161 at August 31,
1996. The ultimate realization of this deferred tax asset is dependent upon
the Company's ability to generate future taxable income during the periods in
which those temporary differences become deductible. Management considered the
scheduled reversal of deferred tax liabilities, projected future taxable
income, past earnings history, sales backlog, net operating loss, and tax
credit carryforward expiration dates in determining the amount of deferred
tax asset to recognize. In order to fully realize the deferred tax asset, the
Company will need to generate future taxable income of approximately
$1,200,000 prior to the expiration of the net operating loss and tax credit
carryforwards. Taxable income for the years ended August 31, 1996 and 1995
approximated $214,000 and $478,000, respectively.
The $1,545,649 valuation allowance provides for net operating loss and tax
credit carryforwards that, as of August 31, 1996, are not expected to be
realized prior to expiration. At August 31, 1996 the Company's net operating
loss carryforwards, investment tax credit carryforwards, and research and
experimental tax credit carryforwards approximated $5,000,000, $47,000 and
$370,000, respectively. These carryforwards expire during the years 1998
through 2004. The benefits from these carryforwards could also be limited
under Internal Revenue Service Code Section 382 due to changes in ownership.
(5) Stock Options
In 1985, the Company's board of directors approved an employee incentive stock
option plan ("1985 Plan"). Options to purchase 1,000,000 shares of the
Company's common stock at a price of $.125 per share were granted under this
plan. The options are exercisable after one year of continued employment with
the Company following the grant date, and expire ten years after the grant
date.
In 1989, the Company adopted an employee stock option plan and a senior
employee stock option plan. Options to purchase 1,150,000 shares of the
Company's common stock at $.125 per share were granted under the employee
stock option plan and options to purchase 850,000 shares of the Company's
common stock at $.125 per share were granted under the senior employee stock
option plan. The options become exercisable over a five year period,
beginning one year after the grant date. During fiscal year 1996, 27,000
previously-expired options were re-granted to employees at an exercise price
of $.125 per share. The market price on the grant date was $1.30 per share.
<PAGE> F-13
Pursuant to the merger with Sequoia (see Note 2), the Company adopted a 1996
stock option plan ("1996 Plan") for all Sequoia employee, officer and director
options (Sequoia options) in effect at the time of the merger to be converted
into options for the right to purchase 1,164,651 shares of TMS common stock.
The Sequoia options were converted to TMS options at a rate of 2.837:1 and a
price of 35.24% of the original Sequoia option price. The conversion factors
resulted in Sequoia option holders receiving TMS common stock options of
corresponding value at the time of the plan of merger. The following table
includes the effect of the 1996 Plan as if it was adopted at the beginning of
the earliest period presented.
Pursuant to resolutions by the board of directors, options to purchase the
Company's common stock have been issued to certain directors of the Company.
Such options are generally exercisable at a price equal to or greater than
the market price of the stock at the date of the grant.
The following is a summary of stock option transactions:
<TABLE>
<CAPTION>
___________________________________________________________________________
Shares Price/Share
___________________________________________________________________________
Shares under option:
<S> <C> <C>
At August 31, 1994 3,209,527 $.125-$.75
Options granted 347,476 $.53
Options exercised (225,403) $.53
Options cancelled (285,235) $.32-$.44
___________________________________________________________________________
At August 31, 1995 3,046,365 $.125-$.75
Options granted 27,000 $.125
Options exercised (1,165,670) $.125-$.53
Options cancelled (149,021) $.125-$.53
___________________________________________________________________________
At August 31, 1996 1,758,674 $.125-$.75
===========================================================================
</TABLE>
<TABLE>
<CAPTION>
Options exercisable (cumulative)
<S> <C> <C>
1995 2,577,869 $.125-$.75
1996 1,580,210 $.125-$.75
</TABLE>
<TABLE>
<CAPTION>
Options becoming exercisable
during the years ending August 31:
<S> <C> <C>
1997 146,864 $.125-.53
1998 15,400 $.125
1999 5,400 $.125
2000 5,400 $.125
2001 5,400 $.125
</TABLE>
In 1995, the Financial Accounting Standard Board issued Statement of Financial
Accounting Standards No. 123 (SFAS 123), "Accounting for Stock-Based
Compensation". SFAS 123 provides companies with the option of expensing the
"fair value" of stock options granted. With regard to the Company's stock
options, no accounting is made until such time as the options are exercised
unless the option price is less than the fair value of Company stock on the
grant date. The Company does not intend to change its current accounting
method regarding stock options. Therefore, SFAS 123 will not impact future
operating results. The Company will adopt the expanded stock option
disclosure requirements of SFAS 123 in its 1997 fiscal year.
<PAGE> F-14
(6) Capital Stock
Of the Company's 13,213,837 shares of common stock outstanding at August 31,
1996, approximately 2,947,844 shares are restricted securities as defined by
Rule 144 under the Securities Act of 1933, as amended.
(7) Operating Leases
The Company leases office space and various equipment under operating leases.
Rent expense was approximately $76,000 and $78,000, for 1996 and 1995,
respectively. Operating leases for office space expire during fiscal year
1997.
(8) Business and Credit Concentrations
In 1996 and 1995, one customer, POWERCOM-2000, Inc., a wholly-owned subsidiary
of Briggs & Stratton, accounted for 11% and 22% of the Company's total
revenue, respectively. POWERCOM-2000 also accounted for 8% and 13% of net
trade accounts receivable at August 31, 1996 and 1995, respectively.
Information regarding the Company's operations by geographic area as, of and
for the years ended August 31, 1996 and 1995, follows:
<TABLE>
<CAPTION>
_______________________________________________________________
Revenue: 1996 1995
_______________________________________________________________
<S> <C> <C>
United States $4,915,612 4,443,472
Europe/Asia (export sales) 494,082 403,957
Australia (export sales) 120,516 242,754
Canada (export sales) 32,266 65,381
Other (export sales) 50,100 54,505
_______________________________________________________________
$5,612,576 5,210,069
===============================================================
_______________________________________________________________
Accounts receivable (gross) 1996 1995
_______________________________________________________________
United States $1,364,951 1,038,675
Europe/Asia 68,526 89,520
Australia 28,400 91,395
Canada 7,490 8,790
Other 1,000 14,475
_______________________________________________________________
$1,470,367 1,242,855
===============================================================
</TABLE>
<PAGE> F-15
Schedule II
TMS, Inc. and Subsidiary (dba TMSSequoia)
Valuation and Qualifying Accounts
<TABLE>
<CAPTION>
______________________________________________________________________________
Balance at Additions Charged To Deductions- Balance at
Beginning Costs & Other Write-off End
Classification of Period Expenses Accounts of Accounts of Period
______________________________________________________________________________
<S> <C> <C> <C> <C> <C>
Year ended August
31, 1996:
Allowance for
doubtful
accounts $ 99,318 142,535 - 141,853 100,000
Year ended August
31, 1995:
Allowance for
doubtful
accounts $ 115,299 109,268 - 125,249 99,318
______________________________________________________________________________
</TABLE>
<PAGE> F-16
Exhibit 23.1
Independent Auditor's Consent
The Board of Directors
TMS, Inc.:
We consent to incorporation by reference in the Registration Statement on Form
S-8 filed by the Company on May 16, 1996, of TMS, Inc. of our report dated
October 4, 1996, relating to the consolidated balance sheets of TMS, Inc. and
subsidiary as of August 31, 1996 and 1995, and the related consolidated
statements of operations, shareholders' equity, and cash flows for the years
then ended, which report appears in the August 31, 1996, annual report on
Form 10-KSB of TMS, Inc.
KPMG Peat Marwick LLP
Oklahoma City, Oklahoma
October 28,1996
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Company's 10-QSB's and 10-KSB for the fiscal year ending August 31, 1996 and is
qualified in its entirety by reference to such financial statements.
</LEGEND>
<RESTATED>
<S> <C> <C> <C>
<PERIOD-TYPE> 3-MOS 6-MOS 12-MOS
<FISCAL-YEAR-END> AUG-31-1996 AUG-31-1996 AUG-31-1996
<PERIOD-END> NOV-30-1996<F1> FEB-29-1996<F1> AUG-31-1996
<CASH> 517,262 480,568 542,072
<SECURITIES> 0 0 0
<RECEIVABLES> 1,289,633 1,258,987 1,470,367
<ALLOWANCES> 127,631 144,402 100,000
<INVENTORY> 0 0 0
<CURRENT-ASSETS> 2,086,119 2,108,338 2,480,563
<PP&E> 2,274,658 2,332,804 2,384,266
<DEPRECIATION> 823,297 884,315 666,866
<TOTAL-ASSETS> 4,060,593 4,266,048 4,708,385
<CURRENT-LIABILITIES> 622,151 527,550 642,383
<BONDS> 0 0 0
0 0 0
0 0 0
<COMMON> 606,087 608,080 660,692
<OTHER-SE> 2,460,827 2,764,133 3,049,509
<TOTAL-LIABILITY-AND-EQUITY> 4,060,593 4,266,048 4,708,385
<SALES> 1,603,448 3,046,270 5,612,576
<TOTAL-REVENUES> 1,603,448 3,046,270 5,612,576
<CGS> 597,245 1,177,890 2,280,015
<TOTAL-COSTS> 597,245 1,177,890 2,280,015
<OTHER-EXPENSES> 837,782 1,597,715 3,160,634
<LOSS-PROVISION> 38,155 68,541 142,535
<INTEREST-EXPENSE> 9,888 18,653 30,867
<INCOME-PRETAX> 212,888 324,795 212,211
<INCOME-TAX> 36,530 (150,812) (170,942)
<INCOME-CONTINUING> 176,358 475,607 383,153
<DISCONTINUED> 0 0 0
<EXTRAORDINARY> 0 0 0
<CHANGES> 0 0 0
<NET-INCOME> 176,358 475,607 383,153
<EPS-PRIMARY> .01 .03 .03
<EPS-DILUTED> .01 .03 .03
<FN>
<F1>Restated amounts are submitted pursuant to the Company's merger on
March 15, 1996 with Sequoia Computer Corporation accounted for using the
pooling of interests method.
</FN>
</TABLE>
