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, 1997
Commission File Number: 0-18250
TMS, Inc.
(Exact name of registrant as specified in its charter)
Oklahoma 91-1098155
(State or other jurisdiction (I.R.S. Employer
of 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 $5,665,185
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Aggregate market value of voting stock held by nonaffiliates as of
October 20, 1997: $5,738,719
----------
Number of shares outstanding of each of the Registrant's classes of
common stock, as of October 20, 1997:
Common Stock, $.05 par value: 13,283,906
----------
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 23, 1998 is incorporated by
reference in Part III, Items 9, 10, 11, and 12.
Transitional Small Business Disclosure Format: YES___ NO_X_
TMS, Inc. (dba TMSSequoia)
FORM 10-KSB
For the fiscal year ended August 31, 1997
TABLE OF CONTENTS
PAGE
PART I 1
Item 1. Business 1
Item 2. Properties 9
Item 3. Legal Proceedings 10
Item 4. Submission of Matters to a Vote of Security Holders 10
PART II 10
Item 5. Market for Common Equity and Related Stockholder
Matters 10
Item 6. Management's Discussion and Analysis of Financial
Condition and Results of Operations 11
Item 7. Financial Statements 13
Item 8. Changes In and Disagreements With Accountants on
Accounting and Financial Disclosure 13
PART III 13
Item 13. Exhibits and Reports on Form 8-K 14
Signatures 15
Index to 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 I
ITEM 1. BUSINESS
General Development of Business
TMS, Inc., doing business as TMSSequoia (the "Company") is an Oklahoma
corporation which has been engaged in the computer software business since
1981.
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 9 to the 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 qualified as a tax-free
reorganization and was accounted for as a pooling of interests. Accordingly,
the Company's 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 and the subsidiary was dissolved.
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
toolkits and complete applications. Toolkits offer customers the core
technology necessary for developing new software applications or customizing
existing applications. Applications are complete versions of the toolkit
technology, and do not require additional programming or expertise.
Customers find toolkits desirable because they are easy to adapt to changing
user needs. As the marketplace has expanded, a shift has emerged from tool
level product demand to more complete application demand. As a result, the
Company is using its toolkits to build its own lines of software applications
to meet the demand for complete applications, thus expanding its product
offerings.
The Company's services include software development and consulting
including forms processing, document imaging and database applications. The
Company also provides document conversion services for the conversion of
paper documents for use in electronic publishing environments. The Company
emphasizes the development of software for customers desiring new or custom
software applications, and document conversion services for customers
desiring to convert paper and other media to electronic form.
Some toolkit customers contract for the Company's custom software
development 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.
<PAGE> 2
Document Image Viewing Products. The Company's principal electronic
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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.
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 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;
(3) the ViewDirector end-user viewing applications, LegalView and RasterView,
provide simple image viewing applications for specific vertical markets such
as the legal industry or military organizations; and (4) two Intranet/
Internet imaging viewing products include the ViewDirector Prizm Plug-In,
which allows customers to view and manage document images on corporate
intranets using Internet browsers such as Netscape Navigator or Microsoft
Internet Explorer, and the Prizm Plug-In, Personal Edition, which allows
household consumers to view common Internet images using
the Netscape Navigator browser.
The ViewDirector technology 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 technology's competitive advantage. Several
enhancements were made to the ViewDirector technology during 1997 as well
as creating new forms of the technology to enter new markets.
VIEWDIRECTOR DEVELOPER'S TOOLKIT. During 1997, product enhancements of
the ViewDirector toolkit were released for several UNIX platforms. 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, faster image display speeds, and
improved compression. 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 was
released for HP, Solaris, Sun OS, AIX, Silicon Graphics, DECAlpha and
it is also available for Microsoft Windows 95, Microsoft Windows NT and
Microsoft Windows 3.1.
In a network 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.
<PAGE> 3
VIEWDIRECTOR ACTIVEX CONTROL. The Company released the ViewDirector
ActiveX Control in 1997 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 use Microsoft Internet
Explorer. The ActiveX 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 is a foundation for the Company's development of other ActiveX
Controls. Also during 1997 the Company bundled the ViewDirector ActiveX
Control with the ScanDirector and ScanFix ActiveX Controls to begin
marketing a suite of ActiveX tools.
VIEWDIRECTOR END-USER APPLICATIONS. The Company has two end-user
applications marketed toward vertical markets, LegalView and RasterView.
The products are derivatives of the ViewDirector product but are stand-
alone image viewing products rather than toolkits.
The Company completed development of the LegalView off-the-shelf
document image viewer in fiscal 1997. The new product is based upon
the ViewDirector toolkit and is designed as a low cost, simple, high-
performance image viewer and presentation software for Windows users in
the legal profession. It allows attorneys to display scanned trial
documents and exhibits in court. It was originally created by the Company
for the U.S. Attorney's Office in Kansas City. The product is also
compatible with Microsoft database products for linking images to
databases.
The RasterView product was developed in fiscal 1996 as the first end-user
derivative of ViewDirector. This is also a simple off-the-shelf image
viewer which allows customers to easily add imaging capabilities to
databases or other Windows applications. It is marketed to a wide variety
of customers, and is especially applicable for military organizations
requiring viewing capabilities for very large engineering drawings.
INTRANET/INTERNET IMAGE VIEWING PRODUCTS. During 1997 the Company
released a second version of the ViewDirector Prizm Plug-In for Windows
and also developed versions for the Macintosh and UNIX environments. The
Plug-In product was developed to allow customers to view and manage
images on corporate intranets 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 reference images and the ViewDirector
Prizm Plug-In allows users to view these 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. In many cases the
documents may reside in existing document management systems, document
imaging systems or engineering drawing databases; companies may also be
creating new systems requiring parallel delivery of images through
intranet and non-intranet systems. The Prizm Plug-In product offers
browser-based image display that is comparable to the existing non-
browser display and manipulation, which is critical to the success of
the intranet image viewing system. The Company sells a unit of the
product for each individual corporate user accessing the documents. The
Prizm Plug-In was developed for the Windows 3.1x, Windows 95, Windows NT,
and Macintosh environments, plus several commonly- used UNIX platforms
including Sun Solaris, HP-UX, Silicon Graphics, and DEC Alpha.
Development of the Personal Edition of the Prizm Plug-In began in fiscal
1997 with expected release in the first quarter of fiscal 1998. The
Personal Edition will be marketed for use at home or in small businesses
and will be sold in retail outlets and through online Internet-based
stores. It is appropriate for viewing images for real estate, people,
maps, autos, boats, etc., and has a more limited feature set than the
corporate intranet product.
The Prizm Plug-In products are competitive due to their fast image
display, wide assortment of display tools such as scale-to-gray, color
smoothing, magnifying glasses, and their support for annotations that
allow users to add electronic "sticky notes" and share them with others
at locations around the world.
<PAGE> 4
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 Handprint 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 patents were awarded for
technology methods incorporated in the ScanFix product in fiscal 1997 and two
have achieved approved status. 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 IBM, Ricoh, Caere, Xerox,
and Minolta as well as corporate customers and government organizations.
SCANDIRECTOR ACTIVE X 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. 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
1997. The toolkit is available for the most popular system platforms
including Microsoft Windows 3.1, Microsoft Windows 95, Microsoft Windows
NT, SunOS, Solaris, HP 9000, OS/2, IBM RS/6000, Silicon Graphics, 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 released a new version of the
ScanFix product during fiscal 1997, which includes several performance
enhancements and a completely redesigned end-user interface. The ScanFix
end-user application is available for Windows 3.1, Windows 95, Windows
NT, MS-DOS, Wordscan Pro and Lite, Caere Millenium Series, and JAVA. The
Company and Caere signed an agreement in fiscal 1997 to both OEM and co-
market ScanFix inside Caere's OmniPage Pro product.
SCANFIX ACTIVEX CONTROL. The ScanFix ActiveX Control 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. GrayFix provides dynamic grayscale thresholding for removing
gray or shaded areas from documents. It obtains optimal black and white
images from scanned grayscale images that have shaded areas or light type
on documents. It is available as a developer's toolkit.
<PAGE> 5
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. An enhanced version of the FormFix product
was released in fiscal 1997. 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,
form type recognition, field extraction, and intelligent document logic
to find objects on documents by characteristic not location (i.e.,
stamps, signatures). FormFix is available for Microsoft Windows 3.1,
Microsoft Windows 95, Microsoft Windows NT, SunOS, Solaris, and HP 9000.
The competitive strengths of FormFix are its availability as a software-
only solution, its ability to identify and register a form image with no
anchor points (i.e., allows use of all forms, not just pre-designed forms
for processing), its ability to identify damaged forms, 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.
Document Image Management Product. The Company released its first
----------------------------------
document image management product in fiscal 1997. The Scan & Store product
provides the ability for customers to scan paper documents, improve the
scanned image quality, index and store the images, then retrieve and display
them. The Company's Software Development Services division created the
product using the Company's ScanDirector, ScanFix and ViewDirector
technologies under contract for Oklahoma's Council on Law Enforcement
Education and Training. The product is subsequently being marketed to
nationwide law enforcement organizations as well as other broader markets
through VAR channels and end-users.
Text Products. The Company primarily uses its MasterView technology in
--------------
offering the Company's software 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 increased competition and resulting price pressures for MasterView
technology, 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 text product group,
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.
Software Development Services. The Company offers custom software
------------------------------
development services and consulting 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.
<PAGE> 6
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 service on a long-term basis.
The Company specializes in automated forms processing, document imaging
and database applications. 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.
Document Conversion Services. The Company provides services for
-----------------------------
converting legacy data and new data into formats acceptable for electronic
access and delivery. These services may be accomplished in-house or provided
as a temporary or permanent outsourced resource at a customer's location.
Typical document conversion services include data capture and data markup.
The Company is generally engaged in competitive bidding and charges for its
services on a per piece basis. It markets its services regionally and through
relationships with VARs.
Customers who need document conversion services often require retrieval
software or imaging software. The Document Conversion Services division
leverages the Company's extensive suite of imaging products. This asset, in
combination with its extensive experience in providing retrieval and imaging
solutions to customers, provides a competitive advantage.
IMAGE CAPTURE. Legacy and active data may reside in a variety of formats
including paper, microfiche or aperture cards. Methods of capturing and
converting data into an electronic format are based upon the originating
format. The Company uses high speed scanners to capture images of the
data. Data capture may also include Optical Character Recognition (OCR),
Intelligent Character Recognition (ICR), color or gray scale image
scanning, forms identification, forms removal, data extraction using
Intelligent Document Logic, and keyboarding or data entry services.
DATA MARKUP. Successful retrieval and the usefulness of electronic data
depends a great deal upon the ability to create appropriate data
relationships. The Company provides expertise in the use of hyperlinking
technology for navigating complex sets of information. Data markup
services necessary for establishing the data relationships include
hypertext links, indexing, SGML, and HTML markup. The growing number of
corporations using intranets to publish information offers service
opportunities including HTML page markup and Web page design, hypertext
linking and consulting.
<PAGE> 7
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 Toolkit, ViewDirector VBX, ViewDirector ActiveX,
Prizm Plug-In, RasterView, ScanFix Application, ScanFix Toolkit, FormFix
Toolkit, ScanDirector ActiveX, BlackTIE, and MasterView 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 also has its training services listed on the
GSA contract schedule.
Currently, the Company employs eighteen (18) people in the marketing and
sales of its products. The Company has marketing and sales offices in
Stillwater and Tulsa, Oklahoma; Burlingame, California; Groton, Connecticut;
and Sudbury, Massachusetts. The Company intends to employ additional sales
and marketing personnel as resources and circumstances warrant.
Distribution Methods
The Company distributes its products through a direct sales force,
domestic and international resellers, online Internet-based stores, and firms
creating and selling turnkey solutions.
Competition
The computer software 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,
FormWare, 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.
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.
<PAGE> 8
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 awarding six patents for the following
technology areas: detection of scanned page skew, a method of deskewing
(incremental digital image rotation), document registration, dot shaded
removal, image despecking, horizontal and vertical line removal, line
intersection repair, automatic correction of inverted (white) text, and
general methods of image manipulation. The Patent Office also issued a Notice
of Allowance, with formal patent award pending for technology related to two
other general OCR pre-processing methods. The patents cover most of the key
elements of the ScanFix product line. 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, ViewDirector Prizm Plug-In,
Prizm Plug-In, Scan & Store, 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 toolkit 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.
Research and Development
The Company recognizes the need to continually develop new and improved
products. Current plans include efforts to develop consumer level products
for the Internet, to further the Company's support for JAVA technology, to
expand the applicability of image enhancement technology to a wider variety
of image types, and transition focus from the imaging toolkits to more
application-based complete imaging products. Pursuing these efforts will
necessitate further improvements in the Company's core technologies. The
Company also experiences new product development through its Software
Development Services projects. Customers bring conceptual ideas for products
to the Company for development, thus supplementing the Company's own research
and development.
<PAGE> 9
During fiscal 1997, the Company's research and development program
concentrated on the development of new products, particularly imaging
products for corporate intranets. Resources were also devoted to improving
and enhancing the Company's existing products. In fiscal years 1997 and 1996,
the Company capitalized software development costs of $332,895 and $345,050,
respectively, related to new products and product enhancements. 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, 1997, the Company had 75 full-time employees, 27 hourly
employees and 6 part-time employees. All of the hourly 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
No customer accounted for 10% or more of the Company's total revenue in
fiscal 1997. 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 1997, 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. POWERCOM accounted for approximately $330,000, or
43%, of document conversion service revenue in fiscal 1997 compared to
approximately $482,000, or 50%, of document conversion service revenue in
fiscal 1996. As reported in fiscal 1996, the Company expected a decline in
fiscal 1997 revenue from POWERCOM. Although this customer has ongoing
document conversion service requirements, management cannot project the level
of revenue that could result from this customer in fiscal 1998. To offset
the expected continued 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 18% and 12% of total revenues for fiscal 1997 and 1996,
respectively, are attributable to sales to foreign customers. See Note 8 to
the Financial Statements.
Backlog
As of August 31, 1997, there was a backlog of software development and
document conversion services amounting to approximately $1,433,000 compared
to approximately $741,000 as of August 31, 1996.
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.
<PAGE> 10
The Company leases approximately 7,000 square feet of space located at
110 West Third Street in Stillwater, Oklahoma. The lease has 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; Groton, Connecticut; and Tulsa, Oklahoma. Collectively these
offices amount to approximately 3,500 square feet and monthly rentals
approximate $7,800.
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 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 1997 and 1996. The quotations
are inter-dealer prices without retail markups, markdowns, or commissions
and may not represent actual transactions. The source of such quotations is
the NQB.
<TABLE>
<CAPTION>
----------------------------------
Bid Prices
Fiscal 1997 High Low
----------------------------------
<S> <C> <C>
First Quarter $ 7/8 9/16
Second Quarter 11/16 9/16
Third Quarter 11/16 17/32
Fourth Quarter 9/16 15/32
Fiscal 1996 High Low
----------------------------------
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
----------------------------------
</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.
The Company has approximately 1,675 shareholders.
<PAGE> 11
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 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 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
Revenue. Total revenue for fiscal year 1997 was $5,665,185 compared to
$5,612,576 for fiscal year 1996, an increase of $52,609 or 1%. Licensing and
royalties revenue decreased $77,454, or 2% in fiscal year 1997. Revenue
from text products decreased $107,820, or 26%, from the prior year, while
imaging and image enhancement product revenue was flat at approximately
$3,200,000 for both years. As reported in fiscal 1996, the Company expected
that licensing revenue from text products would decline because future
development of this technology will only occur on a customer contract basis
and be reported as software development service revenue. The flat performance
for imaging and image enhancement products may be attributed to competition,
price erosion and late releases of the Company's ViewDirector Prizm Plug-In
and FormFix products, which significantly hindered revenue growth early in
1997.
Software development service revenue for fiscal year 1997 was $1,348,190
compared to $1,014,264 for fiscal year 1996, an increase of $333,926, or 33%.
The increase is primarily attributed to the software services group operating
at, or near, full capacity for a greater period of time in fiscal 1997 than
fiscal 1996. At August 31, 1997, the software services group had an
approximate revenue backlog of $855,000. 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, 1997.
Document conversion service revenue of $763,479 decreased 21%, or
$203,863, from the $967,342 reported for fiscal year 1996. The decrease in
document conversion service revenue is attributable to substantial completion
of The Toro Company ("Toro") contract during the third quarter of fiscal year
1996. Revenue from the Toro contract amounted to approximately $123,000, or
16%, of fiscal year 1997 document conversion service revenue, compared to
approximately $406,000, or 42%, of fiscal year 1996 document conversion
service revenue. Management increased document conversion marketing
activities during the current fiscal year in an effort to obtain new service
opportunities. New contracts were secured near the end of fiscal year 1997,
and at August 31, 1997, the document conversion group had an approximate
revenue backlog of approximately $578,000. Although new document conversion
service contracts have been secured, 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, 1997.
<PAGE> 12
Operating Costs and Expenses. Total operating costs and expenses for
fiscal year 1997 were $5,630,251 compared to $5,440,649 in fiscal year 1996,
an increase of $189,602, or 3%. Personnel salary adjustments and improvements
in employee benefit offerings (e.g. 401(k) matching) were the primary reasons
for the increased costs, and were deemed necessary to retain and attract
competent technical and sales/marketing staff. Management expects the
employment environment will continue to remain competitive, particularly for
recruitment and retention of the technical staff, which may adversely impact
future earnings through increased costs.
The cost of licensing and royalties for fiscal year 1997 decreased
$3,006, or .3% from costs reported for fiscal year 1996. The gross profit
margins for licensing and royalties were 72% and 73% for fiscal years 1997
and 1996, respectively. Fluctuations in gross profit margins result primarily
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 services increased $206,283, or 34%,
over costs reported for fiscal year 1996. Gross profit margins for software
development services were 39% in both fiscal years 1997 and 1996. The
increase in costs primarily relates to additional personnel necessary to
satisfy requirements under software development service contracts, as well
as salary adjustments and additional employee benefit offerings mentioned
above. Additionally, the software development services group increased
overhead costs by opening a leased office in Tulsa, Oklahoma, midway through
the current year to house additional software development services engineers.
The cost of document conversion services decreased $288,122, or 39%,
from costs reported for fiscal year 1997. The gross profit margins for
document conversion services were 40% and 23% for fiscal years 1997 and 1996,
respectively. The decrease in total document conversion costs resulted from
the adjustment in the number of hourly employees needed to meet contract
service requirements. Improved margins over the prior year reflect greater
productivity from employees due to increased experience, lower voluntary
turnover, and the complexity of the projects.
Selling, general and administrative expenses for fiscal year 1997
increased $274,447, or 9%, when compared to fiscal year 1996. The increase
in costs is almost entirely due to personnel related expenses. As mentioned
above, the Company made several market adjustments to salaries in addition
to regular merit and cost of living increases. Improved employee benefit
offerings included the implementation of a 401(k) retirement plan matching
program (see "Employee Benefit Plan" in Note 5 to the Financial Statements)
and absorption of 25% more of the cost of employee medical insurance
premiums. Additionally, the Company hired four additional sales staff and
shifted certain employee responsibilities from direct product and service
providers to management and business development positions.
Income Taxes. The Company's effective income tax expense rate was 35%
for fiscal year 1997 compared to 81% income tax benefit rate for fiscal year
1996. The effective income tax rates for both fiscal years 1997 and 1996
differed from the "expected" Federal tax expense rate of 34%, primarily
because of the deferred tax benefit recorded to reduce the valuation
allowance provided against the Company's deferred tax assets. The fiscal
1996 effective rate was also significantly impacted by merger costs not
deductible for income tax purposes. For further discussion of income taxes,
see "Income Taxes" in Note 3 to the Financial Statements.
Net Income. Net income for fiscal year 1997 was $43,541 compared to
$383,153 for fiscal year 1996, a decrease of $339,612, or 89%. Flat revenue
performance over the prior year, increases in personnel related costs, and
the deferred tax benefit recognized in fiscal 1996 were the primary factors
that caused a decline in fiscal 1997 net income when compared to fiscal 1996.
<PAGE> 13
Financial Condition
Working capital at August 31, 1997 was $1,794,908 with a current ratio
of 3.3:1 compared to $1,838,180, with a current ratio of 3.9:1, at August
31, 1996. Net cash provided by operating activities for fiscal year 1997 was
$505,054 compared to $389,585 for fiscal year 1996. Improved collections
from customers and a 37% decline in bad debt expense were the primary factors
resulting in improved operating cash flow. Net cash used in investing
activities for fiscal year 1997 was $668,734 compared to $603,126 for fiscal
year 1996. Capitalized software development costs for new products and
significant enhancements to existing products accounted for 50% and 57% of
the cash used for investing activities in 1997 and 1996, respectively.
During fiscal year 1997 the Company borrowed $78,000 on its line of
credit for the repurchase of common stock to be held in treasury. The Company
received approximately $67,000 of its financing from certain employees and
other key individuals exercising options to purchase the Company's common
stock.
The Company believes net cash provided by operating activities and the
operating line of credit of $800,000 will be adequate to meet its current
obligations and current operating and capital requirements. The line of
credit expires on November 3, 1997. The Company anticipates the line of
credit will remain at $800,000 and be extended for another year 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, significant equipment investments for document conversion
services, 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.
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128, "Earnings per Share"
(SFAS No. 128). SFAS No. 128 establishes standards for computing and presenting
earnings per share. This statement is effective for financial statements
issued for periods ending after December 15, 1997. Management believes that
the adoption of SFAS No. 128 will not have a significant impact on the
financial condition or the results of operations of the Company.
ITEM 7. FINANCIAL STATEMENTS
The financial statements required by this Item are set forth beginning
on page F-l hereof.
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.
<PAGE> 14
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 1997.
<PAGE> 15
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: 11/4/97 By: /s/ Arthur D. Crotzer
------- -----------------
Arthur D. Crotzer,
Chief Executive Officer
Date: 11/4/97 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: 11/4/97 By: /s/ Doyle E. Cherry
------- ---------------
Doyle E. Cherry,
Chairman of the Board
Date: 11/4/97 By: /s/ Arthur D. Crotzer
------- -----------------
Arthur D. Crotzer,
Chief Executive Officer and
Director
Date: 11/4/97 By: /s/ Dana R. Allen
------- -------------
Dana R. Allen,
Executive Vice President and
Director
Date: 11/4/97 By: /s/ Marshall C. Wicker
------- ------------------
Marshall C. Wicker, Director
Date: 11/4/97 By: /s/ James R. Rau, M.D.
------- ------------------
James R. Rau, M.D., Director
<PAGE> F-1
INDEX TO FINANCIAL STATEMENTS AND
FINANCIAL STATEMENT SCHEDULE
TMS, Inc. (dba TMSSequoia)
PAGE
Independent Auditors' Report F-2
Financial Statements:
Balance Sheets - August 31, 1997 and 1996 F-3 and F-4
Statements of Operations - Years Ended August 31, 1997
and 1996 F-5
Statements of Shareholders' Equity - Years Ended
August 31, 1997 and 1996 F-6
Statements of Cash Flows - Years Ended August 31, 1997
and 1996 F-7
Notes to Financial Statements - August 31, 1997
and 1996 F-8 through F-16
Financial Statement Schedule:
Schedule II - Valuation and Qualifying Accounts - Years Ended
August 31, 1997 and 1996 F-17
All other schedules are omitted as they are inapplicable or not required, or
the required information is included in the Financial Statements or Notes to
Financial Statements.
<PAGE> F-2
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
TMS, Inc.:
We have audited the financial statements of TMS, Inc. (dba TMSSequoia) as
listed in the accompanying index. In connection with our audits of the
financial statements, we also have audited the financial statement schedule
as listed in the accompanying index. These financial statements and financial
statement schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these 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 financial statements referred to above present fairly, in
all material respects, the financial position of TMS, Inc. as of August 31,
1997 and 1996, and the results of its operations and its 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 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 2, 1997
<PAGE> F-3
TMS, Inc. (dba TMSSequoia)
Balance Sheets
August 31, 1997 and 1996
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------
1997 1996
- ----------------------------------------------------------------------------
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 426,174 542,072
Trade accounts receivable, net of
allowance for doubtful accounts
of $100,130 in 1997 and
$100,000 in 1996 1,235,195 1,370,367
Contract service work in process 579,137 209,583
Deferred income taxes 240,425 265,938
Prepaid expenses and other current assets 81,866 92,603
- -----------------------------------------------------------------------------
Total current assets 2,562,797 2,480,563
- -----------------------------------------------------------------------------
Property and equipment:
Land 111,000 111,000
Building 748,589 739,744
Computer equipment 1,482,587 1,207,510
Furniture and fixtures 372,005 326,012
- -----------------------------------------------------------------------------
2,714,181 2,384,266
Less accumulated depreciation (1,167,738) (901,927)
- -----------------------------------------------------------------------------
Net property and equipment 1,546,443 1,482,339
- -----------------------------------------------------------------------------
Other assets:
Capitalized software development costs,
net of accumulated amortization of
$482,354 in 1997 and $311,738 in 1996 499,444 509,867
Deferred income taxes 190,223 190,223
Other assets 48,120 45,393
- -----------------------------------------------------------------------------
Total other assets 737,787 745,483
- -----------------------------------------------------------------------------
Total assets $4,847,027 4,708,385
=============================================================================
</TABLE>
See accompanying notes to financial statements.
<PAGE> F-4
- -----------------------------------------------------------------------------
1997 1996
- -----------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
<S> <C> <C>
Current liabilities:
Note payable $ 78,000 -
Current installments of long-term debt 23,934 20,825
Accounts payable 247,124 201,575
Accrued payroll expenses 310,697 272,623
Deferred revenue 108,134 147,360
- -----------------------------------------------------------------------------
Total current liabilities 767,889 642,383
- -----------------------------------------------------------------------------
Long-term debt, net of current installments 333,618 355,801
- -----------------------------------------------------------------------------
Total liabilities 1,101,507 998,184
- -----------------------------------------------------------------------------
Shareholders' equity:
Preferred stock, $.01 par value.
Authorized 1,000,000 shares; none
issued - -
Common stock, $.05 par value.
Authorized 50,000,000 shares;
13,431,049 shares issued and
13,283,906 outstanding in 1997
and 13,213,837 shares issued and
outstanding in 1996 671,552 660,692
Additional paid-in capital 11,473,561 11,416,680
Unamortized deferred compensation (30,048) (32,970)
Accumulated deficit (8,290,660) (8,334,201)
Treasury stock, at cost, 147,143
shares in 1997 (78,885) -
- -----------------------------------------------------------------------------
Total shareholders' equity 3,745,520 3,710,201
- -----------------------------------------------------------------------------
Commitments (Notes 2 and 7)
- -----------------------------------------------------------------------------
Total liabilities and shareholders' equity $4,847,027 4,708,385
=============================================================================
</TABLE>
<PAGE> F-5
TMS, Inc. (dba TMSSequoia)
Statements of Operations
Years Ended August 31, 1997 and 1996
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------
1997 1996
- -----------------------------------------------------------------------------
<S> <C> <C>
Revenue:
Licensing and royalties $3,553,516 3,630,970
Software development services 1,348,190 1,014,264
Document conversion services 763,479 967,342
- -----------------------------------------------------------------------------
5,665,185 5,612,576
- -----------------------------------------------------------------------------
Operating costs and expenses:
Cost of licensing and royalties 983,512 986,518
Cost of software development services 821,266 614,983
Cost of document conversion services 456,635 744,757
Selling, general and administrative 3,368,838 3,094,391
- -----------------------------------------------------------------------------
5,630,251 5,440,649
- -----------------------------------------------------------------------------
Operating income 34,934 171,927
Other income (expense):
Interest income 16,436 15,584
Interest expense (24,378) (30,867)
Other, net 40,149 55,567
- -----------------------------------------------------------------------------
Income before income taxes 67,141 212,211
Income tax (expense) benefit (23,600) 170,942
- -----------------------------------------------------------------------------
Net income $ 43,541 383,153
=============================================================================
Net income per common
and common equivalent share $ 0.00 0.03
=============================================================================
Weighted average common and
common equivalent shares 14,066,892 14,015,948
=============================================================================
</TABLE>
See accompanying notes to financial statements.
<PAGE> F-6
TMS, Inc. (dba TMSSequoia)
Statements of Shareholders' Equity
Years Ended August 31, 1997 and 1996
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------
Unamor-
Addi- tized Total
tional Deferred Trea- Share-
Common Stock Paid-in Compen- Accum. sury holders'
Shares Amount Capital sation Deficit Stock Equity
- -----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance
at Aug-
ust 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
grant-
ing
of
employee
stock
options - - 32,265 - - - 32,265
Less:
deferred
compen-
sation
expense - - - (32,265) - - (32,265)
Amorti-
zation
of
deferred
compen-
sation - - - 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
Exer-
cise
of
stock
options 217,212 10,860 56,881 - - - 67,741
Amorti-
zation
of
deferred
compen-
sation - - - 2,922 - - 2,922
Purchase
of
147,143
shares
of
common
stock,
at
cost - - - - - (78,885) (78,885)
Net
income - - - - 43,541 - 43,541
- ------------------------------------------------------------------------------
Balance
at
August
31,
1997 13,431,049 $671,552 11,473,561 (30,048) (8,290,660) (78,885)3,745,520
==============================================================================
</TABLE>
See accompanying notes to financial statements.
<PAGE> F-7
TMS, Inc. (dba TMSSequoia)
Statements of Cash Flows
Years Ended August 31, 1997 and 1996
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------
1997 1996
- -----------------------------------------------------------------------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 43,541 383,153
Adjustments to reconcile net income
to net cash provided by
operating activities:
Depreciation and amortization 612,650 418,450
Deferred income tax expense (benefit) 25,513 (171,742)
Employee compensation-stock options 2,922 3,105
Provision for returns
and doubtful accounts 89,650 142,535
Gain on sale of equipment (2,927) (346)
(Increase) decrease in:
Accounts receivable 45,522 (369,365)
Work in process (369,554) (122,396)
Prepaid expenses
and other assets 13,339 (45,198)
Increase (decrease) in:
Accounts payable 45,549 78,371
Accrued payroll expenses 38,074 18,671
Deferred revenue (39,226) 54,347
- -----------------------------------------------------------------------------
Net cash provided by
operating activities 505,054 389,585
- -----------------------------------------------------------------------------
Cash flows from investing activities:
Purchases of property and equipment (335,462) (248,248)
Proceeds from disposal of equipment 7,245 5,955
Capitalized software development costs (332,895) (345,050)
Patent costs (7,622) (15,783)
- ------------------------------------------------------------------------------
Net cash used in
investing activities (668,734) (603,126)
- ------------------------------------------------------------------------------
Cash flows from financing activities:
Repayment of long-term debt (19,074) (19,485)
Proceeds from short-term note payable - 468,000
Repayments on short-term note payble - (543,000)
Issuance of common stock 67,741 445,860
Purchase of treasury stock, at cost (885) -
- ------------------------------------------------------------------------------
Net cash provided
by financing activities 47,782 351,375
- ------------------------------------------------------------------------------
Net (decrease) increase in cash and
cash equivalents (115,898) 137,834
Cash and cash equivalents at beginning of year 542,072 404,238
- ------------------------------------------------------------------------------
Cash and cash equivalents at end of year $426,174 542,072
==============================================================================
Supplemental Cash Flow Information:
Cash paid for interest $ 24,378 30,867
Cash paid for income taxes $ 800 800
Noncash increase in additional
paid-in capital and unamortized
deferred compensation for granting
of stock options $ - 32,265
Purchase of treasury stock, at cost,
through issuance of short-term notes
payable $ 78,000 -
==============================================================================
</TABLE>
See accompanying notes to financial statements.
<PAGE> F-8
TMS, Inc. (dba TMSSequoia)
Notes to Financial Statements
August 31, 1997 and 1996
(1) Summary of Significant Accounting Policies
Organization
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, 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 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 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 fair value.
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
$332,895 and $345,050 of software development costs, which primarily
includes personnel costs, in 1997 and 1996, 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 $343,318 and $174,745 of software development costs in 1997
and 1996, 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
The Company adopted the provisions of Statement of Financial
Accounting Standards No. 121, "Accounting for the Impairment of Long-
Lived Assets and for Long-Lived Assets to Be Disposed Of" (SFAS No.
121) on September 1, 1996. SFAS No. 121 requires that long-lived
assets and certain identifiable intangibles be reviewed for
impairment whenever events or changes in circumstances indicate that
the carrying amount of an asset may not be recoverable.
Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to future net cash
flows expected to be generated by the asset. If such assets are
considered to be impaired, the impairment to be recognized is
measured by the amount by which the carrying amount of the assets
exceed the fair value of the assets. Assets to be disposed of are
reported at the lower of the carrying amount or fair value less
costs to sell. Adoption of SFAS No. 121 did not have an impact on
the Company's financial position or results of operations.
Patent Costs
Included in other assets at August 31, 1997 and 1996, are $38,383
and $33,352, 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
are 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. The Company also contracts with customers
for maintenance. Revenue pursuant to maintenance contracts is
deferred and recognized ratably over the contract period. At August
31, 1997 and 1996, deferred customer support revenue pursuant to non-
refundable fixed fee contracts and maintenance contracts was $48,514
and $47,335, 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 $59,620 and $100,025 at August 31,
1997 and 1996, respectively. Contract service work in process of
$579,137 and $209,583 at August 31, 1997 and 1996, respectively,
represent costs and related profits recognized on a percentage-of-
completion basis in excess of customer billings. Such amounts for
contracts in process at August 31, 1997, will be billed pursuant to
contractual terms and are expected to be collected during fiscal year
1998.
Net Income Per Common and Common Equivalent Share
Net income per common and common equivalent share (common stock
options) 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.
<PAGE> F-10
Employee Compensation-Stock Options
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation," (SFAS No. 123), encourages, but does not
require companies to record compensation cost for stock-based
employee compensation plans at fair value. The Company has chosen to
continue to account for stock-based compensation using the intrinsic
value method prescribed in Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees," (APB No. 25), and
related Interpretations. Accordingly, 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 1997 and 1996
related to employee stock options was $2,992 and $3,105,
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, "Accounting for Income Taxes" (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 Receivables
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.
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 1996 amounts have been reclassified to conform to the 1997
financial statement presentation.
<PAGE> F-11
(2) Note Payable and Long-Term Debt
At August 31, 1997, the Company had a $800,000 operating line of
credit with a bank which bears interest at 1.0% above prime (9.25% at
August 31, 1997) and expires on November 3, 1997. At August 31, 1997,
there was $78,000 outstanding against the line of credit. No balance
was outstanding against the line of credit at August 31, 1996. At
August 31, 1997 and 1996, the Company had $357,552 and $376,626
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, 1997, and thereafter, are as follows: 1998,
$23,934; 1999, $23,631; 2000, $25,119; 2001, $26,822; 2002, $28,561;
thereafter, $229,485.
The line of credit and long-term note are secured by all accounts,
equipment, furniture and fixtures, and real property of the Company.
(3) Income Taxes
Income tax expense for fiscal year 1997 was $23,600. The significant
components of the 1997 expense include: deferred tax expense,
$30,284; decrease in the beginning-of-the-year balance in the
valuation allowance for deferred tax assets, $4,771; and federal
income tax refund, $1,913. 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 (expense) benefit for 1997 and
1996 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>
- -----------------------------------------------------------------------------
1997 1996
- -----------------------------------------------------------------------------
<S> <C> <C>
Computed "expected" tax expense (34.0%) (34.0%)
Change in the beginning-of-the-year
deferred tax assets valuation allowance 7.0% 158.0%
Merger costs not deductible - (40.0%)
State income tax, net of Federal income
tax benefit (4.0%) (4.0%)
Other (4.0%) 1.0%
- -----------------------------------------------------------------------------
Effective income tax (expense)
benefit rate (35.0%) 81.0%
=============================================================================
</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, 1997 and 1996 are presented in the following table.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------
1997 1996
- -----------------------------------------------------------------------------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards $1,567,287 1,777,671
Tax credit carryforwards 417,000 417,000
Employee stock options 76,271 134,496
Other 86,055 47,502
- -----------------------------------------------------------------------------
Total gross deferred tax assets 2,146,613 2,376,669
Less valuation allowance 1,456,946 1,545,469
- -----------------------------------------------------------------------------
Net deferred tax assets 689,667 831,200
Deferred tax liabilities:
Property and equipment (69,430) (55,670)
Capitalized software costs (189,589) (193,546)
Cash method of accounting for Sequoia's
income tax - (125,823)
- -----------------------------------------------------------------------------
Net deferred tax asset $ 430,648 456,161
- -----------------------------------------------------------------------------
</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
$430,648 at August 31, 1997. 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, and 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 $1,300,000 prior to
the expiration of the net operating loss and tax credit
carryforwards. Taxable income for the years ended August 31, 1997 and
1996 approximated $490,000 and $214,000, respectively. The Company's
taxable income of approximately $490,000 differed from book income
of approximately $67,000 due to the change from cash to accrual basis
for tax reporting purposes upon the Sequoia subsidiary merging with
and into the Company on September 1, 1996. (See Note 9 "Merger")
The $1,456,946 valuation allowance provides for net operating loss
and tax credit carryforwards that, as of August 31, 1997, are not
expected to be realized prior to expiration. At August 31, 1997 the
Company's net operating loss carryforwards, investment tax credit
carryforwards, and research and experimental tax credit carryforwards
approximated $4,600,000, $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.
(4) 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.
<PAGE> F-13
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.
Pursuant to the Company's merger with Sequoia Data Corporation
(Sequoia) in fiscal year 1996, 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 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 merger
was accounted for as a pooling of interests. Accordingly, the table
below 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 and
key employees 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 Company has adopted the disclosure-only provisions of SFAS No.
123. Accordingly, compensation cost has been recognized using the
intrinsic value method prescribed in APB No. 25, and related
Interpretations. Had compensation cost for the Company's stock option
grants in fiscal years 1997 and 1996 been based on the fair value
method prescribed by SFAS No. 123, net income would have been reduced
by $5,275 and $2,112, respectively, with no effect on earnings per
share in either year. The fair values of each option grant was
estimated using the Black-Scholes option-pricing model with the
following weighted-average assumptions: dividend yield of 0%;
expected volatility of 84.22%; risk-free interest rate of 7%; and
expected lives of approximately 4 years.
Pro forma net earnings reflects only options granted in 1997 and 1996.
Therefore, the full impact of calculating compensation cost for stock
options under SFAS No. 123 is not reflected in the pro forma net
earnings amounts presented above because compensation cost is reflected
over the options' vesting period and compensation cost for options
granted prior to September 1, 1995 is not considered.
<PAGE> F-14
The following is a summary of stock option transactions:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------
Weighted Weighted
Average Option Average
Shares Exercise Price Price Range Fair Value
- -----------------------------------------------------------------------------
Shares
under option:
<S> <C> <C> <C> <C>
At August 31,
1995 3,046,365 $0.37 $0.13-$0.75
Options
granted 27,000 $0.13 $0.13 $1.26
Options
exercised (1,165,670) $0.38 $0.13-$0.53
Options
cancelled (149,021) $0.52 $0.13-$0.53
- -----------------------------------------------------------------------------
At August 31,
1996 1,758,674 $0.34 $0.13-$0.53
Options
granted 30,000 $0.56 $0.56 $0.46
Options
exercised (217,212) $0.31 $0.13-$0.53
Options
cancelled (34,044) $0.53 $0.53
- -----------------------------------------------------------------------------
At August 31,
1997 1,537,418 $0.35 $0.13-$0.56
=============================================================================
</TABLE>
The following table summarizes information about stock options outstanding at
August 31, 1997:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------
Options Weigted Weighted Options Weighted
Outstanding Average Average Exercisable Average
Range of at Remaining Exercise at Exercise
Option Prices 8/31/97 Contract Life Price 8/31/97 Price
- -----------------------------------------------------------------------------
<C> <C> <C> <C> <C> <C>
$0.13-$0.31 680,796 4.5 Years $0.16 649,196 $0.15
$0.38-$0.75 856,622 3.7 Years $0.50 826,622 $0.48
- -----------------------------------------------------------------------------
$0.13-$0.75 1,537,418 4.1 Years $0.35 1,475,818 $0.33
- -----------------------------------------------------------------------------
</TABLE>
(5) Employee Benefit Plan
The Company sponsors a defined contribution benefit plan for
substantially all employees for the purpose of accumulating funds
for retirement. Participation in the plan is based on one year of
service and a minimum of 1,000 hours of annual service. In March of
1997, the Company began matching 50% of employee contributions in an
amount up to 6% of employees' total compensation. The cost of
employer matching approximated $30,000 in 1997. Employees vest in
employer matching contributions at a rate of 20% per year after two
years of service.
(6) Capital Stock
Of the Company's 13,431,049 shares of common stock issued at August
31, 1997, approximately 2,648,071 shares are restricted securities
as defined by Rule 144 under the Securities Act of 1933, as amended.
The Company purchased 147,143 shares of common stock, at cost, to be
held in treasury.
<PAGE> F-15
(7) Operating Leases
The Company leases office space and equipment under operating leases.
Rent expense was approximately $68,000 and $76,000 for 1997 and 1996,
respectively. The Company has non-cancelable future minimum lease
obligations of $43,070 in fiscal 1998.
(8) Business and Credit Concentrations
In 1996, POWERCOM-2000 accounted for 11% and 8% of the Company's
total revenue and trade accounts receivable, respectively. In 1997,
no one customer accounted for more than 10% of the Company's
total revenue or trade accounts receivable.
Information regarding the Company's operations by geographic area
as of and for the years ended August 31, 1997 and 1996, is as
follows:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------
Revenue: 1997 1996
- ---------------------------------------------------------------------------
<S> <C> <C>
United States $4,657,368 4,915,612
Europe/Asia (export sales) 892,860 494,082
Australia (export sales) 45,219 120,516
Canada (export sales) 45,599 32,266
Other (export sales) 24,139 50,100
- ---------------------------------------------------------------------------
$5,665,185 5,612,576
===========================================================================
- ---------------------------------------------------------------------------
Accounts receivable (gross): 1997 1996
- ---------------------------------------------------------------------------
United States $1,078,225 1,364,951
Europe/Asia 229,434 68,526
Australia 26,954 28,400
Canada 712 7,490
Other 0 1,000
- ---------------------------------------------------------------------------
$1,335,325 1,470,367
===========================================================================
</TABLE>
(9) 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. On September 1, 1996, Sequoia
merged with and into TMS.
<PAGE> F-16
The merger qualified as a tax-free reorganization and was accounted
for as a pooling of interests. Accordingly, the Company's 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 period preceding the merger were as follows:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------
TMS Sequoia Eliminations Combined
- -----------------------------------------------------------------------------
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
- -----------------------------------------------------------------------------
</TABLE>
The combined financial results presented above include
reclassification adjustments made to conform the accounting policies
of the two companies. All material intercompany transactions were
eliminated. 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-17
Schedule II
TMS, Inc. (dba TMSSequoia)
Valuation and Qualifying Accounts
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------
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,
1997:
Allowance
for doubtful
accounts $100,000 89,650 - 89,520 $100,130
Year ended
August 31,
1996:
Allowance
for doubtful
accounts $ 99,318 142,535 - 141,853 $100,000
- -----------------------------------------------------------------------------
</TABLE>
<PAGE> F-18
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 2, 1997, relating to the balance sheets of TMS, Inc. as of
August 31, 1997 and 1996, and the related statements of operations,
shareholders' equity, and cash flows for the years then ended and related
financial statement schedule, which report appears in the August 31, 1997,
annual report on Form 10-KSB of TMS, Inc.
KPMG Peat Marwick LLP
Oklahoma City, Oklahoma
November 19, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Company's 10-KSB for the fiscal year ending August 31, 1997 and is qualified
in its entirety by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> AUG-31-1997
<PERIOD-END> AUG-31-1997
<CASH> 426,174
<SECURITIES> 0
<RECEIVABLES> 1,335,325
<ALLOWANCES> 100,130
<INVENTORY> 0
<CURRENT-ASSETS> 2,562,797
<PP&E> 2,714,181
<DEPRECIATION> 1,167,738
<TOTAL-ASSETS> 4,847,027
<CURRENT-LIABILITIES> 767,889
<BONDS> 0
0
0
<COMMON> 671,552
<OTHER-SE> 3,073,968
<TOTAL-LIABILITY-AND-EQUITY> 4,847,027
<SALES> 5,665,185
<TOTAL-REVENUES> 5,665,185
<CGS> 2,261,413
<TOTAL-COSTS> 2,261,413
<OTHER-EXPENSES> 3,368,838
<LOSS-PROVISION> 89,650
<INTEREST-EXPENSE> 24,378
<INCOME-PRETAX> 67,141
<INCOME-TAX> 23,600
<INCOME-CONTINUING> 43,541
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 43,541
<EPS-PRIMARY> 0.00
<EPS-DILUTED> 0.00
</TABLE>
