SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): March 15, 1996
TMS, INC.
(Exact name of registrant as specified in its charter)
Oklahoma 0-18250 91-1098155
(State or other (Commission (I.R.S. Employer
jurisdiction of File Number) Identification No.)
incorporation or
organization)
206 West Sixth Avenue
P.O. Box 1358
Stillwater, Oklahoma 74074
(Address of Principal Executive Offices) (Zip Code)
(405) 377-0880
(Registrant's telephone number, including area code)
<PAGE>
Item 2. Acquisition or Disposition of Assets.
On March 15, 1996, the registrant, TMS, Inc. (the "Registrant"), completed
the merger (the "Merger") of its wholly-owned subsidiary SCC Acquisition Corp.,
an Oklahoma corporation ("SAC") with and into Sequoia Computer Corporation, a
California corporation ("Sequoia"). The Merger was effected pursuant to the
terms of an Amended Plan of Reorganization and Agreement of Merger by and among
the Registrant, Sequoia, SAC and Dana R. Allen dated November 7, 1995. In the
Merger each share of Sequoia's common stock (the "Sequoia Stock") issued and
outstanding immediately prior to March 15, 1996, the effective date of the
Merger (the "Effective Date"), was converted into the right to receive 2.837
shares of the Registrant's common stock, par value $.05 per share (the "TMS
Common Stock"). At the Closing of the Merger, the Registrant issued 3,643,220
shares of TMS Common Stock in exchange for all 1,284,180 shares of Sequoia Stock
issued and outstanding. Upon the Effective Date, options to purchase 588,656
shares of Sequoia Stock (the "Sequoia Options") were also converted entitling
the holders thereof to purchase 2.837 shares of TMS Common Stock for each share
of Sequoia Stock (an aggregate of 1,670,018 shares of TMS Common Stock)
purchasable under such options at an exercise price equal to 35.24% of the
exercise price thereunder. As a consequence of the Merger, the former Sequoia
shareholders own approximately 30.1% of the issued and outstanding shares of TMS
Common Stock (without giving effect to the possible exercise of outstanding
Sequoia Options).
The Merger was accounted for as a "pooling of interests" for accounting and
financial reporting purposes.
Prior to the Merger, there were no material relationships between Sequoia
and its shareholders, and the Registrant, or any of its affiliates, directors or
officers or any associates of such directors or officers.
Item 7. Financial Statements and Exhibits.
(a) Financial statements of businesses acquired.
The following financial statements of Sequoia are submitted herewith:
1. Independent Auditors' Report
2. Balance Sheets as of November 30, 1995 (Unaudited), and August
31, 1995 and 1994
3. Statements of Earnings, Three Months ended November 30, 1995 and
1994 (Unaudited), and Years ended August 31, 1995 and 1994
4. Statements of Shareholders' Equity, Three Months ended November
30, 1995 (Unaudited), and Years ended August 31, 1995 and 1994
5. Statements of Cash Flows, Three Months ended November 30, 1995
and 1994 (Unaudited), and Years ended August 31, 1995 and 1994
6. Notes to Financial Statements
(b) Pro forma financial information.
The following pro forma financial statements are submitted herewith:
1. Unaudited Pro Forma Combined Balance Sheet as of November 30,
1995.
2. Unaudited Pro Forma Combined Statement of Operations for the
Three Months ended November 30, 1995.
3. Unaudited Pro Forma Combined Statement of Operations for the Year
Ended August 31, 1995.
4. Unaudited Pro Forma Combined Statement of Operations for the Year
ended August 31, 1994.
5. Unaudited Pro Forma Combined Statement of Operations for the Year
Ended August 31, 1993.
6. Notes to Unaudited Pro Forma Combined Financial Statements.
<PAGE>
(c) Exhibits.
The following exhibits are filed with this report:
Exhibit No. Name of Exhibit
2.1 Plan of Reorganization and Agreement of Merger (the "Merger
Agreement") dated November 7, 1995, by and among TMS, Inc., SCC
Acquisition Corp., Sequoia Computer Corporation and Dana R. Allen
(incorporated herein by reference to Exhibit 2.1 to the
Registrant's Form S-4 Registration Statement No. 33-64649 (the
"Form S-4")).
2.2 Amendment No. 1 to the Merger Agreement (incorporated herein by
reference to Exhibit 2.2 to the Form S-4).
<PAGE>
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: March 29, 1996 By: /s/ Maxwell Steinhardt
--------------------------
Maxwell Steinhardt, President
<PAGE>
INDEX TO FINANCIAL STATEMENTS
Sequoia Computer Corporation (dba Sequoia Data Corporation):
Independent Auditors' Report
Balance Sheets as of November 30, 1995 (Unaudited),
and August 31, 1995 and 1994
Statements of Earnings, Three Months ended
November 30, 1995 and 1994 (Unaudited), and Years
ended August 31, 1995 and 1994
Statements of Shareholders' Equity, Three Months ended
November 30, 1995 (Unaudited), and Years ended August
31, 1995 and 1994
Statements of Cash Flows, Three Months ended
November 30, 1995 and 1994 (Unaudited), and Years
ended August 31, 1995 and 1994
Notes to Financial Statements
<PAGE>
Independent Auditors' Report
The Board of Directors
Sequoia Computer Corporation:
We have audited the accompanying balance sheets of Sequoia Computer Corporation
(the Company), dba Sequoia Data Corporation, as of August 31, 1995 and 1994, and
the related statements of earnings, shareholders' equity, and cash flows for the
years then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements 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.
As discussed in Note 12 to these financial statements, the Company is expected
to merge with TMS, Inc., a publicly held computer software company, early in the
Company's fiscal 1996, subject to negotiation and execution of a definitive
agreement between the two companies.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Sequoia Computer Corporation as
of August 31, 1995 and 1994, and the results of its operations and its cash
flows for the years then ended in conformity with generally accepted accounting
principles.
As discussed in Notes 3 and 9 to the financial statements, in 1994 the Company
adopted the provisions of Statement of Financial Accounting Standards No. 109,
Accounting for Income Taxes.
KPMG Peat Marwick LLP
San Jose, California
October 6, 1995
<PAGE>
SEQUOIA COMPUTER CORPORATION
(dba Sequoia Data Corporation)
Balance Sheets
November 30, 1995, and August 31, 1995 and 1994
<TABLE>
<CAPTION>
November 30, August 31,
1995 1995 1994
Assets ------------ ------ -----
------ (Unaudited)
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents $ 376,347 290,049 45,075
Short-term investments 4,673 4,673 84,673
Trade accounts receivable, net of allowance for
returns and doubtful accounts of $32,359 at
November 30, 1995, and $35,133 and $64,799
at August 31, 1995 and 1994, respectively 199,941 230,979 85,590
Other receivables - 1,073 8,102
Prepaid expenses 11,401 7,953 -
Deferred income taxes 18,512 27,623 134,704
-------- -------- -------
Total current assets 610,874 562,350 358,144
Property and equipment, net 38,412 36,333 29,045
Capitalized software development costs, net 160,417 134,578 48,336
Patent costs 17,814 17,569 9,766
-------- -------- -------
$ 827,517 750,830 445,291
======== ======== =======
Liabilities and Shareholders' Equity
------------------------------------
Current liabilities:
Accounts payable $ 55,574 29,292 9,852
Commissions payable 28,153 22,461 17,938
Other accrued liabilities 29,562 12,217 1,587
-------- -------- -------
Total current liabilities 113,289 63,970 29,377
-------- -------- -------
Deferred income taxes 68,204 63,204 25,783
-------- -------- -------
Shareholders' equity:
Series A preferred stock, no par value; 10,000,000
shares authorized; no shares issued and outstanding
as of November 30, 1995, and 70,000 shares issued and
outstanding as of August 31, 1995 and 1994 - 105,000 105,000
Common stock, no par value; 20,000,000 shares
authorized; 1,284,180 issued and outstanding
as of November 30, 1995, and 1,214,180 and
1,200,180 shares issued and outstanding as of
August 31, 1995 and 1994, respectively 632,086 527,086 506,086
Accumulated earnings (deficit) 13,938 (8,430) (220,955)
-------- -------- --------
Total shareholders' equity 646,024 623,656 390,131
Commitments and contingencies (note 10) -------- -------- -------
$ 827,517 750,830 445,291
======== ======= =======
</TABLE>
See accompanying notes to financial statements.
<PAGE>
SEQUOIA COMPUTER CORPORATION
(dba Sequoia Data Corporation)
Statements of Earnings
Three Months ended November 30, 1995 and 1994,
and Years ended August 31, 1995 and 1994
<TABLE>
<CAPTION>
Three Months ended Years ended
November 30, August 31,
------------- -----------
1995 1994 1995 1994
---- ---- ---- ----
(Unaudited)
<S> <C> <C> <C> <C>
Net sales $ 303,140 206,239 988,949 535,323
Cost of sales 26,931 9,343 54,828 52,639
-------- -------- -------- --------
Gross profit 276,209 196,896 934,121 482,684
------- -------- -------- --------
Operating expenses:
General and administrative 130,698 51,452 278,728 207,603
Sales and marketing 112,770 60,784 306,753 160,469
------- -------- ------- -------
Operating expenses 243,468 112,236 585,481 368,072
------- -------- ------- -------
Earnings from operations 32,741 84,660 348,640 114,612
-------- -------- ------- -------
Other income (expense) 370 1,032 (384) 2,733
Interest income 4,168 1,595 9,570 2,140
-------- -------- -------- --------
Total other income 4,538 2,627 9,186 4,873
-------- -------- -------- --------
Earnings before income tax
provision and cumulative
effect of change in accounting
principle 37,279 87,287 357,826 119,485
Provision for income taxes 14,911 35,445 145,301 49,591
-------- -------- ------- -------
Earnings before cumulative effect
of change in accounting
principle 22,368 51,842 212,525 69,894
Cumulative effect of change in accounting
principle - - - 157,768
--------- --------- -------- -------
Net earnings $ 22,368 51,842 212,525 227,662
========= ========= ======== =======
</TABLE>
See accompanying notes to financial statements.
<PAGE>
SEQUOIA COMPUTER CORPORATION
(dba Sequoia Data Corporation)
Statements of Shareholders' Equity
Three Months ended November 30, 1995, and
Years ended August 31, 1995 and 1994
<TABLE>
<CAPTION>
Years ended August 31,
Three Months ended ------------------------
November 30, 1995 1995 1994
------------------- ---- ----
Shares Amount Shares Amount Shares Amount
------ ------ ------ ------ ------ ------
(Unaudited)
<S> <C> <C> <C> <C> <C> <C>
Preferred stock:
Balance, beginning of period 70,000 $ 105,000 70,000 $ 105,000 70,000 $ 105,000
Conversion of preferred shares to
common shares (70,000) (105,000) - - - -
----------- --------- --------- ---------- --------- --------
Balance, end of period - - 70,000 105,000 70,000 105,000
=========== --------- ========= ---------- ========= --------
Common stock:
Balance, beginning of period 1,214,180 527,086 1,200,180 506,086 1,198,780 505,142
Exercise of stock options - - 14,000 21,000 1,400 944
Conversion of preferred shares to
common shares 70,000 105,000 - - - -
----------- --------- --------- --------- ---------- --------
Balance, end of period 1,284,180 632,086 1,214,180 527,086 1,200,180 506,086
=========== --------- ========= --------- ========= --------
Accumulated earnings (deficit):
Balance, beginning of period (8,430) (220,955) (448,617)
Net earnings 22,368 212,525 227,662
--------- --------- --------
Balance, end of period 13,938 (8,430) (220,955)
--------- --------- --------
Total shareholders' equity $ 646,024 $ 623,656 $ 390,131
========= ========= ========
</TABLE>
See accompanying notes to financial statements.
<PAGE>
SEQUOIA COMPUTER CORPORATION
(dba Sequoia Data Corporation)
Statements of Cash Flows
Three Months ended November 30, 1995 and 1994,
and Years ended August 31, 1995 and 1994
<TABLE>
<CAPTION>
Three Months ended Years ended
November 30, August, 31
-------------- -----------
1995 1994 1995 1994
---- ---- ---- ----
(Unaudited)
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net earnings $ 22,368 51,842 212,525 227,662
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Depreciation and amortization 14,315 5,328 37,611 15,712
Realized loss from sale of short-term investments - - 1,957 -
Cumulative effect of change in accounting
principle - - - (157,768)
Deferred income taxes 14,111 35,445 144,501 48,791
Issuance of common stock under options in
exchange for services rendered - - 9,000 -
Changes in operating assets and liabilities:
Trade accounts receivable, net 31,038 (72,553) (145,389) 4,326
Other receivables 1,073 (4,057) 7,028 (1,219)
Prepaid expenses and other current assets (3,448) - (7,953) 2,043
Accounts payable 26,282 (3,485) 19,440 (1,907)
Commissions payable 5,692 3,773 4,523 7,719
Deferred revenue - - - (23,900)
Other accrued liabilities 17,345 (1,098) 10,630 (12,829)
-------- -------- --------- ---------
Net cash provided by operating activities 128,776 15,195 293,873 108,630
-------- -------- -------- --------
Cash flows from investing activities:
Capital expenditures (8,374) (1,179) (18,352) (11,969)
Proceeds from sale of property and equipment 3,635 - - -
Purchase of short-term investments - - - (84,673)
Proceeds from the sale of short-term investments - - 78,043 -
Additions to software development costs (37,494) (39,889) (112,787) (52,606)
Additions to patent costs (245) - (7,803) -
-------- --------- -------- --------
Net cash used in investing activities (42,478) (41,068) (60,899) (149,248)
-------- -------- -------- --------
Cash flows provided by financing activities - proceeds
from issuance of common stock - - 12,000 944
-------- -------- -------- --------
Net increase (decrease) in cash and cash equivalents 86,298 (25,873) 244,974 (39,674)
Cash and cash equivalents at beginning of period 290,049 45,075 45,075 84,749
-------- -------- -------- --------
Cash and cash equivalents at end of period $ 376,347 19,202 290,049 45,075
======== ======== ======== ========
Supplemental disclosure of cash flow information:
Cash paid during the period for income taxes $ 800 800 1,268 800
======== ======== ======== ========
</TABLE>
See accompanying notes to financial statements.
<PAGE>
SEQUOIA COMPUTER CORPORATION
(dba Sequoia Data Corporation)
Notes to Financial Statements
November 30, 1995 and 1994 (Unaudited), and
August 31, 1995 and 1994
(1) Description of Company
Sequoia Computer Corporation (the Company), dba Sequoia Data Corporation,
was incorporated in the state of California in 1987. The Company develops
and markets innovative software products in the document image processing,
image enhancement, forms processing, and data entry industries. The
Company's products include ScanFix, FormFix, and GrayFix software tool
kits.
(2) Unaudited Financial Information
The unaudited interim financial statements as of November 30, 1995, and for
the three-month periods ended November 30, 1995 and 1994, reflect all
adjustments which are, in the opinion of management, necessary for a fair
presentation of financial position, results of operations and cash flows.
All adjustments are normal and recurring. The financial information for the
interim periods may not necessarily be indicative of the results expected
for the year.
(3) Summary of Significant Accounting Policies
Revenue Recognition
Revenue is recognized at the time of shipment, net of allowances for
estimated future product returns. The Company's obligations after the point
of sale are insignificant. Costs relating to any post sale obligations are
therefore expensed as incurred.
Cash and Cash Equivalents
Cash and cash equivalents consist primarily of highly liquid money market
accounts carried at cost plus accrued interest, which approximates market
value. All cash equivalents have maturities of less than three months at
the time of purchase.
Short-Term Investments
The Company has adopted Statement of Financial Accounting Standards (SFAS)
No. 115, Accounting for Certain Investments in Debt and Equity Securities,
for investments held as of September 1, 1994. Under the provisions of SFAS
No. 115, the Company has classified its investments as
"available-for-sale." Such investments are recorded at fair value and
unrealized gains and losses, if material, are reported as a separate
component of equity until realized. The cost of securities sold is based
upon the specific identification method. There was no cumulative effect on
earnings as a result of the adoption of SFAS No. 115.
Property and Equipment
Property and equipment are stated at cost. Depreciation is computed using
the straight-line method over the estimated useful lives of the respective
assets, which range from three to seven years.
<PAGE>
Capitalized Software Development Costs
The Company capitalizes software development costs after the technological
feasibility of the product has been established in accordance with SFAS No.
86, Accounting for the Cost of Computer Software to be Sold, Leased, or
Otherwise Marketed. Such costs are amortized using the straight-line method
over the estimated economic life of the product, which is generally two
years from the date of product release. The amortization expense was
$11,655 and $2,562 for each of the three months ended November 30, 1995 and
1994, respectively, and $26,545 and $4,270 for each of the years ended
August 31, 1995 and 1994, respectively. This amortization approximates or
is greater than that which would be determined using the ratio of current
product revenue to the total anticipated product revenue. The Company
periodically evaluates unamortized capitalized software costs to determine
that such costs are recoverable.
Income Taxes
Effective September 1, 1993, the Company adopted the provisions of SFAS No.
109, Accounting for Income Taxes, and has reported the cumulative effect of
that change in the method of accounting for income taxes in the
accompanying 1994 statement of earnings. SFAS No. 109 prescribes an asset
and liability approach that results in the recognition of deferred tax
assets and liabilities for the expected future tax consequences of events
that have been recognized in the Company's financial statements or tax
returns. In estimating future tax consequences, SFAS No. 109 generally
considers all expected future events other than future enactment's of
changes in tax laws or rates.
Patent Costs
Patent costs are comprised of capitalized costs associated with obtaining
patent rights for certain software products. Such costs will be amortized
over the useful life of the patents on the straight-line method once the
patents have been obtained.
(4) Property and Equipment
Property and equipment consisted of the following as of November 30 and
August 31:
<TABLE>
<CAPTION>
August 31,
November 30, ----------------
1995 1995 1994
---- ---- ----
(Unaudited)
<S> <C> <C> <C>
Furniture and fixtures $ 39,170 39,170 35,333
Computer equipment and software 97,521 89,147 74,631
Motor vehicles - 10,386 10,386
------- ------- -------
136,691 138,703 120,350
Less accumulated depreciation 98,279 102,370 91,305
------- ------- -------
$ 38,412 36,333 29,045
======= ======= =======
</TABLE>
(5) Short-Term Investments
Short-term investments consisted of the following as of November 30 and
August 31:
<TABLE>
<CAPTION>
August 31,
November 30, ----------------
1995 1995 1994
---- ---- ----
(Unaudited)
<S> <C> <C> <C>
Corporate bond $4,673 4,673 4,673
Government bond mutual fund -- -- 80,000
----- ----- ------
$4,673 4,673 84,673
===== ===== ======
</TABLE>
The values of the short-term investments included in the accompanying
balance sheets as of November 30, 1995, and August 31, 1995 and 1994 are at
cost and approximate fair value. During December 1994, the Company sold its
investment in a government bond mutual fund for a realized loss of $1,957.
<PAGE>
The cost and estimated fair value of available-for-sale investments as of
November 30, 1995, and August 31, 1995, by contractual maturity, was as
follows:
<TABLE>
<CAPTION>
Estimated
Cost Fair Value
---- ----------
<S> <C> <C>
Corporate bond maturing in 2005 $4,673 4,673
===== =====
</TABLE>
(6) Shareholders' Equity
At the discretion of the Board of Directors, the Company grants incentive
options to employees, including officers and directors, and warrants to
nonemployees (collectively referred to as options). Options become
exercisable at such times and under such conditions as determined by the
Board of Directors at the date of grant. To date, all options have been
issued with an exercise price no less than the fair value at the date of
grant. The fair value of the Company's stock is determined by the Board of
Directors. As of November 30, 1995, and August 31, 1995, 578,656 options
were outstanding of which 444,656 were vested, and as of August 31, 1994,
564,020 options were outstanding of which 499,020 were vested.
Activity associated with the Company's stock options for the years ended
August 31, 1995 and 1994 is as follows:
<TABLE>
<CAPTION>
Options Price
outstanding per share
----------- ---------
<S> <C> <C>
Balance as of August 31, 1993 437,670 $.15 -- 1.50
Options granted 136,750 1.50
Options exercised (1,400) .67
Options expired or canceled (9,000) 1.25
-------- ------------
Balance as of August 31, 1994 564,020 .15 -- 1.50
Options granted 122,480 1.50
Options exercised (14,000) 1.50
Options expired or canceled (93,844) .90 -- 1.25
-------- ------------
Balance as of August 31, 1995, and
November 30, 1995 578,656 .15 -- 1.50
========
</TABLE>
There was no activity for the three months ended November 30, 1995.
(7) Preferred Stock
Each share of Series A preferred stock is convertible at the option of the
shareholder at a rate of one share of common stock for one share of Series
A preferred stock. Preferred stock would be automatically converted by the
Company to common stock on the occurrence of any major event.
In addition, preferred stock shareholders have preference over common stock
shareholders in a liquidation, and would receive the first 15 cents per
share of any dividend announced by the Company, on a noncumulative basis.
To date, no dividends have been announced by the Company.
During the three months ended November 30, 1995, the preferred stock was
converted to common stock.
(8) Retirement Savings Plan
The Company has established a retirement savings plan that is available to
all employees with a minimum of five years of service. Employees may elect
to contribute up to 15% of their annual salary, subject to special
limitations imposed by the Internal Revenue Service. The Company made no
contributions to the plan for the three months ended November 30, 1995 and
1994, or for the years ended August 31, 1995 and 1994.
(9) Income Taxes
As discussed in Note 3, the Company adopted SFAS No. 109 as of September 1,
1993. The cumulative effect of this change in accounting for income taxes
of $157,768 was determined as of September 1, 1993, and is reported
separately in the accompanying statement of earnings for the year ended
August 31, 1994.
<PAGE>
Income tax expense for the years ended August 31, 1995 and 1994 consisted
of:
<TABLE>
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
Current:
Federal $ -- --
State 800 800
-------- ------
800 800
Deferred:
Federal 110,892 37,600
State 33,609 11,191
-------- ------
144,501 48,791
-------- ------
$ 145,301 49,591
======== ======
</TABLE>
As of August 31, 1995, the Company has federal net operating loss
carryforwards of approximately $273,000, which expire in the years 2005
through 2008.
The state of California allows 50% of net operating losses incurred to be
carried forward for five years. Accordingly, the Company has a net
operating loss carryforward for state tax purposes of approximately $32,000
as of August 31, 1995. The carryforward expires in the year 1998.
The Internal Revenue Code of 1986 and the California Conformity Act of 1987
substantially restrict the ability of a corporation to utilize existing net
operating losses in the event of an "ownership change" of the Company, as
defined.
The tax effect of differences that give rise to significant portions of
deferred tax assets and liabilities are presented below:
<TABLE>
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
Deferred asset:
Deferred state taxes $ 9,552 --
Net operating loss carryover 95,864 162,566
--------- -------
105,416 162,566
Less valuation allowance -- --
--------- -------
Net deferred asset 105,416 162,566
--------- -------
Deferred tax liability:
Cash method of accounting employed for tax purposes (77,792) (25,986)
Software development expenses capitalized for book purposes (63,204) (25,783)
Deferred state taxes -- --
-------- -------
Net deferred liability (140,996) (53,645)
------- -------
Net deferred asset (liability) $ (35,580) 108,921
========= =======
</TABLE>
<PAGE>
The Company believes that it is more likely than not that the results of
future operations will generate significant taxable earnings to realize the
deferred tax asset, thus, no valuation allowance has been provided.
The difference between the effective income tax rate and the federal
statutory rate of 34% is as follows:
<TABLE>
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
Statutory federal income tax rate $121,661 40,625
State tax, net of federal benefit 22,710 7,914
Other 930 1,052
------- ------
$145,301 49,591
======= ======
</TABLE>
(10) Commitments and Contingencies
The Company leases office space for its headquarters facility. The lease
term expires on June 1, 1996 with an option to renew for an additional 25
months. The minimum future commitment under this lease is approximately
$17,000. Rental expense amounted to approximately $8,347 and $4,620 for the
three months ended November 30, 1995 and 1994, respectively, and $22,266
and $18,840 for the years ended August 31, 1995 and 1994, respectively.
In the normal course of business, the Company is from time to time involved
in various asserted and unasserted claims. In the opinion of management,
the ultimate disposition of such matters will not have a material effect on
the Company's financial position or future results of operations.
(11) Export Sales
Information regarding the Company's operations by geographic area as of and
for the years ended August 31, 1995 and 1994, follows:
<TABLE>
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
Revenues:
United States $ 778,227 444,441
Europe (export sales) 135,456 35,201
Asia/austrialia (export sales) 39,624 31,470
Other (export sales) 35,642 24,211
------- -------
$ 988,949 535,323
======= =======
Accounts receivable (gross):
United States 221,453 129,748
Europe 26,032 8,286
Asia/Australia 4,151 4,400
Other 14,476 7,955
------- -------
$ 266,112 150,389
======= =======
</TABLE>
(12) Subsequent Events
On September 6, 1995, the Company entered into a Letter of Intent for a
plan of merger with TMS, Inc. (TMS), a publicly held computer software
company. On September 21, 1995, the Company and TMS agreed to amend the
Letter of Intent for changes in the number of TMS shares to be issued for
all of the issued and outstanding shares of the Company's common stock.
Under the amended Letter of Initent, TMS will issue a maximum of 5,000,000
shares of its common stock in exchange for all outstanding shares of the
Company's common stock. In addition, holders of the Company's common stock
options at the time of the merger will receive TMS common stock options of
corresponding value. The Company anticipates that the merger will be
consummated during the first quarter of the Company's fiscal 1996 and will
be accounted for using the pooling-of-interests method. Consummation of the
merger is subject to several conditions, including negotiation and
execution of a definitive agreement.
In addition, in anticipation of the merger, the holders of all of the
preferred stock converted their holdings to common stock in October at the
rate of one share of common stock for one share of preferred stock, as
outlined in Note 7.
<PAGE>
UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION
Set forth on the following pages is certain unaudited pro forma combined
financial information with respect to the Merger, including an unaudited pro
forma combined balance sheet as of November 30, 1995 and unaudited pro forma
combined statements of operations for the three months ended November 30, 1995
and for the years ended August 31, 1995, 1994 and 1993. The pro forma combined
balance sheet has been prepared on the basis that the Merger occurred on
November 30, 1995. The pro forma combined statements of operations have been
prepared on the basis that the Merger occurred at the beginning of the earliest
period presented. The Merger is expected to qualify as a "pooling-of-interests"
for accounting and financial reporting, and has been structured to qualify as a
tax free reorganization. The unaudited pro forma combined financial statements
should be read in conjunction with the notes thereto. The pro forma combined
results of operations are not necessarily indicative of future operations of TMS
or results that actually would have occurred had the Merger been effected on the
dates indicated.
<PAGE>
<TABLE>
<CAPTION>
TMS, INC.
UNAUDITED PRO FORMA
COMBINED BALANCE SHEET
NOVEMBER 30, 1995
TMS/Sequoia
TMS Sequoia Pro Forma Merger
Assets Historical Historical Adjustments Pro Forma
------ ---------- ---------- ----------- ----------
<S> <C> <C> <C> <C>
Current Assets:
Cash and cash equivalents $140,915 376,347 --- 517,262
Short-term investments --- 4,673 --- 4,673
Trade accounts receivable 1,027,431 232,300 --- 1,259,731
Allowance for returns and doubtful accounts (65,370) (32,359) --- (97,729)
Contract service work in process 112,495 --- --- 112,495
Deferred income taxes 180,000 18,512 --- 198,512
Prepaid expenses and other current assets 79,774 11,401 --- 91,175
---------- -------- --------- ----------
Total current assets 1,475,245 610,874 --- 2,086,119
---------- -------- --------- ----------
Property and equipment 2,034,552 136,690 --- 2,171,242
Less accumulated depreciation
and amortization (621,603) (98,278) --- (719,881)
---------- -------- --------- ----------
Net property and equipment 1,412,949 38,412 --- 1,451,361
---------- -------- --------- ----------
Other assets:
Capitalized software development costs, net 259,827 160,417 --- 420,244
Deferred income taxes 140,000 --- (68,204) /(2)/ 71,796
Other assets 13,259 17,814 --- 31,073
---------- -------- --------- ----------
Total other assets 413,086 178,231 (68,204) 523,113
---------- -------- --------- ----------
Total assets $3,301,280 827,517 (68,204) 4,060,593
========== ======== ======== ==========
Liabilities and Shareholders' Equity
------------------------------------
Current liabilities:
Current installments of long-term debt 18,294 --- --- 18,294
Accounts payable 190,418 55,574 50,000 /(3)/ 295,992
Accrued payroll and commissions 215,341 45,257 --- 260,598
Other liabilities 15,250 12,458 --- 27,708
Deferred revenue 69,559 --- --- 69,559
---------- -------- ---------- ----------
Total current liabilities 508,862 113,289 50,000 672,151
Long-term debt, net of current installments 371,528 --- --- 371,528
Deferred income taxes --- 68,204 (68,204) /(2)/ ---
----------- -------- -------- ----------
Total liabilities 880,390 181,493 (18,204) 1,043,679
---------- -------- -------- ----------
Shareholders' Equity
Common stock 423,925 632,086 (449,924) /(1)/ 606,087
Additional paid-in capital 10,554,932 --- 449,924 /(1)/ 11,004,856
Unamortized deferred compensation (3,034) --- --- (3,034)
Accumulated (deficit) earnings (8,554,933) 13,938 (50,000) /(3)/ (8,590,995)
---------- -------- -------- ----------
Total shareholders' equity 2,420,890 646,024 (50,000) 3,016,914
$3,301,280 827,517 (68,204) 4,060,593
========== ======== ======== ==========
</TABLE>
See accompanying notes to the unaudited pro forma combined financial statements.
<PAGE>
<TABLE>
<CAPTION>
TMS, INC.
UNAUDITED PRO FORMA COMBINED
STATEMENT OF OPERATIONS
THREE MONTHS ENDED NOVEMBER 30, 1995
TMS/Sequoia
TMS Sequoia ProForma Merger
Historical Historical Adjustments Pro Forma
---------- ---------- ----------- ----------
<S> <C> <C> <C> <C>
Revenue:
Software development and document
conversion services $486,504 --- --- 486,504
Licensing and royalties 813,804 303,140 --- 1,116,944
--------- --------- --------------- ----------
1,300,308 303,140 --- 1,603,448
--------- --------- --------------- ----------
Operating costs and expenses:
Software development and document
conversion services 375,056 --- --- 375,056
Selling, general and administrative 651,423 270,399 --- 921,822
Research and development 138,149 --- --- 138,149
--------- --------- --------------- ----------
1,164,628 270,399 --- 1,435,027
---------- --------- --------------- ----------
Operating income 135,680 32,741 --- 168,421
Other income (expense):
Interest income 3,063 4,168 --- 7,231
Interest expense (9,887) --- --- (9,887)
Other, net 25,134 370 --- 25,504
---------- --------- --------------- ----------
Income before income taxes 153,990 37,279 --- 191,269
Income tax expense --- (14,911) --- (14,911)
---------- --------- --------------- ----------
Net income $153,990 22,368 --- 176,358
========== ========= =============== ==========
Net income per common and common
equivalent share $0.02 0.02 0.01
========== ========= ==========
Weighted average common and common
equivalent shares 9,384,300 1,342,056 13,673,727 /(5)/
========== ========= ==========
</TABLE>
See accompanying notes to the unaudited pro forma combined financial statements.
<PAGE>
<TABLE>
<CAPTION>
TMS, INC.
UNAUDITED PRO FORMA COMBINED
STATEMENT OF OPERATIONS
YEAR ENDED AUGUST 31, 1995
1995
TMS/Sequoia
TMS Sequoia Pro Forma Merger
Historical Historical Adjustments Pro Forma
---------- ---------- ----------- ----------
<S> <C> <C> <C> <C>
Revenue:
Software development and document
conversion services $1,889,672 --- --- 1,889,672
Licensing and royalties 2,331,448 988,949 --- 3,320,397
--------- ------- ------- -----------
4,221,120 988,949 --- 5,210,069
--------- ------- ------- -----------
Operating costs and expenses:
Software development and document
conversion services 1,109,253 --- --- 1,109,253
Selling, general and administrative 2,205,511 640,309 --- 2,845,820
Research and development 470,559 --- --- 470,559
--------- -------- ------- -----------
3,785,323 640,309 --- 4,425,632
--------- -------- ------- -----------
Operating income 435,797 348,640 --- 784,437
Other income (expense):
Interest income 4,837 9,570 --- 14,407
Interest expense (11,305) --- --- (11,305)
Other, net 26,312 (384) --- 25,928
--------- -------- ------- -----------
Income before income taxes 455,641 357,826 --- 813,467
Income tax benefit (expense) 315,840 (145,301) --- 170,539
--------- -------- ------- -----------
Net income $ 771,481 212,525 --- 984,006
========= ======== ======== ===========
Net income per common and common
equivalent share $ 0.08 0.16 0.08
========= ======== ===========
Weighted average common and common
equivalent shares 9,188,351 1,343,739 13,105,194 /(5)/
========= ========= ===========
</TABLE>
See accompanying notes to the unaudited pro forma combined financial statements.
<PAGE>
<TABLE>
<CAPTION>
TMS, INC.
UNAUDITED PRO FORMA COMBINED
STATEMENT OF OPERATIONS
YEAR ENDED AUGUST 31, 1994
1994
TMS/Sequoia
TMS Sequoia Pro Forma Merger
Historical Historical Adjustments Pro Forma
---------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
Revenue:
Software development and document
conversion services $ 1,216,935 --- --- 1,216,935
Licensing and royalties 2,219,826 535,323 --- 2,755,149
--------- ------- -------- ---------
3,436,761 535,323 --- 3,972,084
--------- ------- -------- ---------
Operating costs and expenses:
Software development and document
conversion services 721,826 --- --- 721,826
Selling, general and administrative 1,903,706 420,711 --- 2,324,417
Research and development 471,462 --- --- 471,462
--------- ------- -------- ---------
3,096,994 420,711 --- 3,517,705
--------- ------- -------- ---------
Operating income 339,767 114,612 --- 454,379
Other income (expense):
Interest income 4,424 2,140 --- 6,564
Interest expense (1,075) --- --- (1,075)
Other, net 9,205 2,733 --- 11,938
--------- -------- -------- ---------
Income before income taxes 352,321 119,485 --- 471,806
Income tax expense (1,700) (49,591) --- (51,291)
--------- --------- -------- ---------
Net income $ 350,621 69,894 /(4)/ --- 420,515
========= ========= ======== =========
Net income per common and
common equivalent share $ 0.04 0.05 0.03
========= ======== ===========
Weighted average common and common
equivalent shares 9,012,191 1,347,652 12,768,824 /(5)/
========= ========= ==========
</TABLE>
See accompanying notes to the unaudited pro forma combined financial statements.
<PAGE>
<TABLE>
<CAPTION>
TMS, INC.
UNAUDITED PRO FORMA COMBINED
STATEMENT OF OPERATIONS
YEAR ENDED AUGUST 31, 1993
1993
TMS/Sequoia
TMS Sequoia Pro Forma Merger
Historical Historical Adjustments Pro Forma
---------- ---------- ----------- ---------
<S> <C> <C> <C> <C>
Revenue:
Software development and document
conversion services $ 422,815 --- --- 422,815
Licensing and royalties 2,378,050 300,621 --- 2,678,671
--------- ------- ------- ----------
2,800,865 300,621 --- 3,101,486
--------- ------- ------- ----------
Operating costs and expenses:
Software development and document
conversion services 277,624 --- --- 277,624
Selling, general and administrative 1,570,134 313,180 --- 1,883,314
Research and development 513,597 --- --- 513,597
--------- ------- ------- ---------
2,361,355 313,180 --- 2,674,535
--------- ------- ------- ----------
Operating income (loss) 439,510 (12,559) --- 426,951
Other income (expense):
Interest income 6,452 978 --- 7,430
Interest expense (22,339) --- --- (22,339)
Other, net 10,430 1,182 --- 11,612
--------- -------- ------- ---------
Income (loss) before income taxes 434,053 (10,399) --- 423,654
Income tax (expense) benefit (4,000) 4,160 --- 160
--------- -------- ------- ---------
Net income (loss) $ 430,053 (6,239) --- 423,814
========= ======== ======= =========
Net income (loss) per common and
common equivalent share $ 0.05 (0.01) 0.03
========= ========= =========
Weighted average common and common
equivalent shares 9,093,162 1,198,780 13,409,459 /(5)/
========= ========= ==========
</TABLE>
See accompanying notes to the unaudited pro forma combined financial statements.
<PAGE>
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
(1) Adjustment reflects the exchange of Sequoia common shares at November 30,
1995 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, par
value, $.05. On November 30, 1995, TMS and Sequoia had 8,478,511 and
1,284,180 common shares outstanding, respectively.
(2) Adjustment reflects offset of TMS' non-current deferred tax asset by the
amount of Sequoia's non-current deferred tax liability.
(3) Merger costs incurred of approximately $120,000 have been recognized in the
pro forma combined statement of operations for the three months ended
November 30, 1995. Additional merger costs estimated at approximately
$30,000 to $50,000 will be charged to operations as incurred. The pro forma
combined balance sheet gives effect to $50,000 of such expenses as if they
had been incurred as of November 30, 1995.
(4) Sequoia adopted Statement of Financial Accounting Standards No. 109 (SFAS
No. 109), Accounting for Income Taxes, as of September 1, 1993, and
recorded the cumulative effect of the accounting change in its 1994
Statement of Operations. The cumulative effect of the accounting change
($157,768) has been excluded from the 1994 unaudited pro forma combined
statement of operations.
(5) In calculating the pro forma weighted average common and common equivalent
shares, the 2.837 exchange ratio was applied to the Sequoia stock options
and the exercise price was adjusted to 35.24% of the Sequoia exercise
price. Dilutive effect of Sequoia stock options was determined by reference
to market prices of TMS Common Stock.
