-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Ia5qMglVwFxYWMw6yFnlPHsnZHhG8HGGWDpDughGsJCwPej42Pv24b82KQk7i2nw TDZHtMHS7Voo+83xpmpB4Q== /in/edgar/work/0000835412-00-000023/0000835412-00-000023.txt : 20001123 0000835412-00-000023.hdr.sgml : 20001123 ACCESSION NUMBER: 0000835412-00-000023 CONFORMED SUBMISSION TYPE: 10KSB PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20000831 FILED AS OF DATE: 20001122 FILER: COMPANY DATA: COMPANY CONFORMED NAME: TMS INC /OK/ CENTRAL INDEX KEY: 0000835412 STANDARD INDUSTRIAL CLASSIFICATION: [7372 ] IRS NUMBER: 911098155 STATE OF INCORPORATION: OK FISCAL YEAR END: 0831 FILING VALUES: FORM TYPE: 10KSB SEC ACT: SEC FILE NUMBER: 033-22780-NY FILM NUMBER: 775783 BUSINESS ADDRESS: STREET 1: 206 WEST SIXTH AVENUE STREET 2: P O BOX 1358 CITY: STILLWATER STATE: OK ZIP: 74076 BUSINESS PHONE: 4053770880 MAIL ADDRESS: STREET 1: 206 W. 6TH AVE. , P.O. BOX 1358 CITY: STILLWATER STATE: OK ZIP: 74076-1358 FORMER COMPANY: FORMER CONFORMED NAME: TMS INC DATE OF NAME CHANGE: 19920703 10KSB 1 0001.txt UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10KSB (Mark One) [X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended August 31, 2000 [ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _________ to _________ Commission File Number: 00018250 TMS, Inc. (Name of small business issuer in its charter) Oklahoma 91-1098155 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 206 West 6th Avenue P.O. Box 1358 Stillwater, Oklahoma 74076 (Address of principal executive offices) (Zip Code) (405)377-0880 (Issuer's telephone number) SECURITIES REGISTERED UNDER SECTION 12(b) OF THE EXCHANGE ACT: None SECURITIES REGISTERED UNDER SECTION 12(g) OF THE EXCHANGE ACT: Common Stock, $.05 par value Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for at least the past 90 days. YES[X] NO__ Check if no disclosure of delinquent filers in response to Item 405 of Regulation S-B is contained in this form, 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. [ ] The Issuer's revenues for its most recent fiscal year $3,605,249 ---------- As of October 31, 2000 the aggregate market value of voting stock held by nonaffiliates of such stock was $2,904,283 (based on the average bid and asked price of such common equity on such date). As of October 31, 2000 there were 13,331,864 shares of Common Stock $.05 par value, outstanding. 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 26, 2001 is incorporated by reference in Part III, Items 9, 10, 11 and 12. Transitional Small Business Disclosure Format: YES__ NO[X] ___________ Form 10-KSB for the fiscal year ended August 31, 2000 Table of Contents PAGE PART I 2 - -------- Item 1. Description of Business 2 Item 2. Description of Properties 7 Item 3. Legal Proceedings 8 Item 4. Submission of Matters to a Vote of Security Holders 8 PART II 8 - --------- Item 5. Market for Common Equity and Related Stockholder Matters 8 Item 6. Management's Discussion and Analysis or Plan of Operation 8 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 13 Signatures 14 Index to Financial Statements and Financial Statement Schedule F1 Companies and products named in this document may be trademarks of the respective companies with which they are associated. ________________ Part I ITEM 1. DESCRIPTION OF BUSINESS General Development of Business TMS, Inc., doing business as TMSSequoia ("TMSSequoia" or the "Company") has been engaged in the computer software business since 1981 and was incorporated in 1990. The Company licenses computer software products and provides services to enable businesses to use document imaging to solve critical business problems. Typically, businesses wish to solve these problems by electronically publishing and disseminating information. The Company offers customers the following imaging technology solutions and services: Component Products Software toolkits for: Image Viewing Image Enhancement Forms Processing Color Image Processing Software applications for: Web-based Image Viewing Image Enhancement Color Image Processing Assessment Products Web-based Scoring Center Services Consulting and Integration Services Data Capture and Conversion Services Component Products - --------------------------------------------------------------------------- TMSSequoia sells software development toolkits and applications and receives license fees and/or royalties from the sales of these products. Software development toolkits include the core "building block" technologies necessary for a customer to develop new software applications or enhance existing applications. In particular, the Company's toolkits provide the fundamental technologies necessary for creating successful document imaging and forms processing applications. Applications are stand alone software programs that install directly on the user's system or on the server in a client/server environment. This software may function independently of any other software or may be closely associated with another software package. Programming knowledge is not typically required to use a software application. 2 Customers use the Company's toolkit products to create custom applications to meet critical business needs that pre-packaged software applications often cannot achieve. They may wish to capture, display and enhance 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, corporate intranets, the Internet or extranets via secure or authenticated servers. Users may transmit the images to other computers or facsimile machines, share the images with other users, and annotate, manipulate, modify or print the images. Customers use the Company's application products to enhance or optimize images through a stand-alone interface, and to display, annotate or extract text from digitized images through optical character recognition. The Company's applications apply to many types of digitized images such as engineering drawings, legal or financial transaction documents, reference or regulatory documents and photographs that our customers may provide access to via many kinds of computer workstations or personal computers, local area networks, corporate intranets, the Internet and/or extranets via secure or authenticated servers. Users may transmit the images to other computers or facsimile machines, share the images with other users, and manipulate, modify or print the images. Following are the Company's primary component products. Image Viewing Toolkits ViewDirector(TM)Imaging Toolkit. ViewDirector(TM) products are software development tools that provide image display capabilities for black and white and color imaging applications. The tools are typically used for image- enabling existing applications or for creating custom applications for the document management industry. ViewDirector functionality includes rapid image display and an extensive suite of image display tools including magnifiers, rotation, hyperlinking and annotations. It is available as cross platform C libraries or as ActiveX controls. The Company licenses ViewDirector toolkits to a wide variety of document imaging, workflow and document management solution providers including value-added resellers, system integrators, independent software vendors, original equipment manufacturers, government agencies and corporations who use the product to develop proprietary software internally. The Company receives a royalty for each computer workstation or server using the product. Prizm(TM) ActiveX Controls. Prizm(TM) ActiveX controls provide essentially the same document image viewing, manipulation and printing functionality available through ViewDirector ActiveX controls. However, Prizm ActiveX operates in the Microsoft Internet Explorer web browser environment. PrizmT ActiveX Controls are licensed on a per web server basis rather than with a runtime royalty agreement as the product is used for web-enabled image viewing. Similar to retrieving information over the Internet, users of corporate intranets or extranets access corporate image documents using standard web browsers. Most standard web browsers do not have the ability or flexibility to display these scanned images without the assistance of additional third party technology such as the Prizm products. Image Viewing Applications Prizm(TM) Plug-in. The Prizm(TM) plug-in is an application that greatly extends the capabilities of Netscape Navigator/Communicator or Microsoft Internet Explorer browsers by providing document image viewing, manipulation and printing of TIFF, JPEG and other compressed images. It offers image batch printing, virtual multi-page documents, image annotation, optical character recognition for text extraction, hyperlinking and magnifying capabilities at each end-users desktop. The Company sells a unit of the product for each individual user. Units are sold both to corporate users in high volumes and on a per unit basis over the web. The product is supported on the Windows, Macintosh and UNIX platforms. Netscape's plug-in page (http://home.netscape.com/plugins/image_viewers.html) lists the Prizm Plug-in and provides the Company with a steady source of leads for the product. Image Enhancement Toolkits ScanFix(R) image enhancement toolkit. ScanFix(R) software technology automatically enhances scanned images by removing specks, lines, shading, broken characters, and black borders. It also deskews scanned images. ScanFix C libraries and ActiveX controls are used in virtually all types of document imaging applications, especially where optical character recognition processing is required. The ScanFix toolkit is licensed to original equipment manufacturers such as IBM, Minolta, Ricoh, Panasonic and Xerox as well as corporate customers, government organizations, and service bureaus. The Company receives a royalty for each computer workstation using the product. Image Enhancement Application ScanFix(R) image optimizer. The ScanFix(R) image optimizer is a stand-alone application that offers corporate clients, small office-home office and individual users the functionality of the ScanFix toolkit. The Company primarily sells the ScanFix image optimizer through a direct sales channel and plans to expand the distribution channel for this product by creating opportunities for bundling and co-marketing this product with original equipment manufacturers and other independent software vendors. 3 Forms Processing Toolkit FormFix(R) developer's toolkit. The Company markets to customers with highly skilled development staffs for developing custom applications for high volume data capture systems. Customers can create custom forms processing applications with the FormFix(R) development tool. Users can automatically identify a specific form and extract typed or handwritten text, which can be read by optical character recognition 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 product is available as a C library. The Company licenses FormFix to value-added resellers, system integrators, software developers and government agencies, as well as companies which use the software internally. The Company receives a royalty for each computer workstation utilizing the FormFix product. Color Image Processing Toolkit and Application Color Image Processing toolkit & application. In fiscal 1999 the Company launched SpectrumFix(R) color imaging technology to fill the market need for color image processing. The SpectrumFix product did not provide adequate tools for addressing this market need and the Company wrote off the investment in SpectrumFix technology in fiscal 2000. However, as more scanner manufacturers enter the production color marketplace, there exists a strong opening for software tools that deskew, crop, threshold and enhance color images, and the market is poised to accept and implement color technology as more production level color scanners are sold. There is also a need for software that allows organizations to process color documents by identifying colors on a scanned document, dropping out selected colors and selecting zones based on color information. With the depth of the Company's background and experience in black and white image processing and algorithms, extending the TMSSequoia product line to include color processing is a logical next step, and the Company is poised to take advantage of this opening in the marketplace with a suite of robust software tools. The Company anticipates offering a color image processing toolkit in second quarter fiscal 2001 as a result of extensive customer and scanner manufacturer input. The Company also expects to launch a color image processing application in third quarter fiscal 2001. Component Product Markets The primary markets for the Company's component products are large corporations, system integrators, original equipment manufacturers, value-added resellers and branches of the federal government desiring to more cost- effectively and time-effectively use their information. The Company's products span industry boundaries with customers including financial institutions, law firms, pharmaceutical companies, transportation, energy, engineering and aerospace companies, insurance companies, software companies, private and public utilities, manufacturers, and defense agencies. The increasing use of the World Wide Web, the Internet and secure and authenticated servers offers marketing opportunities to these customers looking to exploit the opportunity for distributed scanning and document handling. TMSSequoia's marketing efforts are conducted primarily through cultivating strategic partnerships with industry-leading original equipment manufacturers, value-added resellers and software developers, trade show marketing, field sales calls, telemarketing, direct mail, print and Internet advertising. Many of the Company's products are listed in a General Services Administration (GSA) contract schedule to enable all agencies and branches of the federal government and government contractors to easily purchase products, training and technical support directly from the Company. The Company currently employs seven people in the marketing and sales of its component products. The Company has marketing and sales offices in Stillwater and Tulsa, Oklahoma. Component Product Distribution Methods The Company distributes its products through a direct sales force, domestic and international resellers, online Internet-based stores, and through firms creating and selling turnkey solutions. Component Product Competition The computer software field is highly competitive with many companies in the industry and is characterized by rapid changes in technology and frequent introductions of new platforms and features. TMSSequoia competes with a number of companies that have greater financial, technical and marketing resources. The Company believes that the primary competitive factors with respect to its products are the features of its products, the technical capabilities of the Company's personnel, quality of services and price. The Company believes that it can compete favorably with respect to all of these factors and is focusing on markets where it believes it can achieve a leadership position; however, there can be no assurance that the Company will be able to continue to compete effectively in its market, that competition will not intensify or that future competition will not have a material adverse effect on the Company's business, operating results, cash flows and financial condition. The Company has competitors in each of the basic imaging tools and end user applications markets to which it supplies products. These companies, which include AccuSoft, Pixel Translations, Snowbound Software, Kofax Image Products, Lead Technologies, Seaport Imaging and Visionshape, are selling products aimed at the Company's customer base in the black and white image enhancement, forms processing, Internet/intranet image viewing and toolkit arena. As the Company moves forward with color image processing and enhancement software, Dunord Technologies and Picture Elements can also be considered competitors. The Company expects additional entrants into the color image enhancement toolkit and application market with the increased sales of production level color scanners. 4 Assessment Products - ------------------------------------------------------------------------------ The Company created a new operating segment during fiscal 2000 to develop technologies that will improve the overall process of scoring large-scale assessments, commonly referred to as tests, for grades K-12 in the education marketplace, leveraging the Company's core competencies in forms recognition, image processing, viewing and enhancement. Following is a description of the status of the Company's assessment scoring product. Web-based Scoring Virtual Scoring Center(TM). The Company's new Virtual Scoring Center(TM) product has been designed to provide qualified raters the ability to score student responses to open-ended test questions in a web-enabled environment. Open-ended test questions require students to respond in the form of an essay or "show your work" type of answer. The Virtual Scoring Center includes capabilities for the test answer sheets to be captured and displayed in a standard web browser for raters to score in any location where access to the Internet exists. The Virtual Scoring Center product will also provide self- paced training to raters, as well as references and resource materials including score criteria and samples. Rater accuracy is monitored by inter- rater reliability capabilities built into the software, and test integrity is maintained by presenting anonymous responses to raters and allowing for multiple raters to randomly score the same test. The Company has received a commitment from one state to adopt an early version of the Virtual Scoring Center in the second quarter of the Company's 2001 fiscal year. The first commercial version of the Virtual Scoring Center is currently projected to be available by the Company's fiscal 2001 third quarter. Assessment Product Markets The Company plans to license its Virtual Scoring Center product to individual state departments of education, school districts, to collections of small school districts through educational service agencies, or to third-party vendors that provide scoring services to states or school districts that have the desire to control the scoring process. TMSSequoia's marketing efforts into the educational assessment marketplace are primarily through education industry trade conferences, field sales calls, and telemarketing to identify leads for school districts with plans to implement or automate the process of scoring open-ended assessments. The Company currently employs four people in the marketing and sales of its assessment products. The Company has marketing and sales offices in Stillwater and Tulsa, Oklahoma. Assessment Product Competition The education assessment field is highly competitive and includes many vendors with an already established presence in providing services for the scoring of open-ended assessments. Those vendors include entities such as Harcourt Educational Measurement, Educational Testing Services, NCS Pearson, CTB-McGraw Hill, Measured Progress, and Measurement Inc. All of these vendors provide both test development and scoring services, and some provide the ability for educational entities to use their own teachers for scoring at regional centers throughout the United States. Some of these companies have also developed computerized assessment scoring systems for their own internal use. While we do not know of any commercial products on the market that currently provide a web-enabled scoring environment, the Company expects more competitors to enter the marketplace in the future. The market for open-ended assessments is expected to continue to grow because many educators believe that the measurement of children is more effective through the open-ended assessment process. Many states and school districts have developed or are developing custom tests that expand the use of open-ended test questions. These educators also have the desire to use their own teachers to score these custom tests. Because open-ended responses cannot be machine-scored, many of the existing scoring vendors are already at or have exceeded the supply of qualified raters that are available to come to central locations to score student responses. The rater supply issue has already delayed the timely reporting of test results in many cases and the delays are not expected to improve, considering the projected increase in open-ended testing. Additionally, most of the existing scoring vendors do not currently allow educational entities to use their own teachers to score. The Virtual Scoring Center offers a competitive advantage against existing open-ended scoring alternatives because it does not create limitations on the physical location of raters and thus potentially expands the population of qualified raters. It also provides educational entities the ability to control and have more flexibility in assessment activities by integrating their teachers into the scoring process and improving the turn-around time for reporting results. Company management believes that the Virtual Scoring Center is a product that addresses several needs in the educational assessment marketplace, but there can be no assurance that the Company will be able to compete successfully against current and future competitors, many of which have larger technical staffs, greater brand name recognition and market presence, more established and larger marketing and sales organizations and substantially greater financial resources than the Company. There can also be no assurances that the competitive pressures faced by the Company will not have a material adverse effect on the Company's business, operating results, cash flows and financial condition. 5 Services - ---------------------------------------------------------------------------- Consulting and Integration Services TMSSequoia has historically offered a variety of services for analyzing business and information management processes as well as integrating business solutions. These services are included in the Professional Services segment in the Financial Statements. Customers who do not have in-house technical staff or expertise in a particular area seek outsourcing services as a cost-efficient way to meet their needs. In particular, the services that the Company has offered include: Requirements analysis System design Systems integration Custom development System maintenance The Company charged for projects on a time and materials basis as well as a flat fee basis. On occasion, some of the Company's toolkit customers have contracted for services. Furthermore, customers who did not have in-house technical staff desired to purchase ongoing maintenance services from the Company. During fiscal 2000, the Company decided to transition out of its existing professional service business model, and substantially completed projects for all of the remaining customer contracts. The Company has on-going system maintenance obligations for two of those customers that will continue through fiscal 2001. Data Capture and Conversion Services TMSSequoia has also historically provided data capture and conversion services for customers desiring the ability to use electronic data for online information retrieval, intranet or Internet distribution, permanent archives, electronic publishing or printing on demand. During fiscal 1999, TMSSequoia decided to scale back its data capture and conversion services. The Company is not selling and marketing these services to new customers. The Company does plan to continue to provide services to pre- existing customers including Pennwell Publishing, TORO, ARI, US Coast Guard and Nissan Diesel America. Backlog - ------------------------------------------------------------------------------ As of October 31, 2000, the Company had a backlog of component product and assessment product revenue of approximately $615,000 and software development services revenue of approximately $36,000. At October 31, 1999, the Company had a backlog of component product revenue of approximately $78,000 and software development and document conversion services revenue of approximately $360,000. Copyrights, Patents, Proprietary Information, Trademarks and Licenses - ------------------------------------------------------------------------------ The copyright laws permit the Company to copyright many aspects of its software. TMSSequoia 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 resulted in the Patent Office awarding eight patents. The awarded patents cover the following technology areas: image processing, image line removal, detection of scanned page skew, a method of deskewing (incremental digital image rotation), document registration, dot shaded removal, images despecking, horizontal and vertical line removal, line intersection repair, automatic correction of inverted (white) text and general methods of high speed image manipulation. The patents cover most of the key elements of the ScanFix product line. The patents expire during the years 2011 through 2015. The scope and extent of patent rights protecting 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. In addition, the Company has applied with the United States Patent and Trademark office for patents covering technology developed in connection with the Digital Mark Recognition engine. The Digital Mark Recognition technology is described below in the Research and Development section of this report. The Company does not believe that any of its products or soon to be released products present questions of patent infringement or violations of any other intellectual property rights belonging to others. There can be no assurance, however, that claims of infringement of the intellectual property rights of others will not arise that could require the Company to procure license for the use of third party technology, to make additional investments to modify or replace technologies to remove the basis for an allegation of infringement, or to discontinue use of technology accused of infringement, any of which could have a material adverse effect on the Company's operations or financial condition. There can also be no assurance that others will not infringe on the intellectual property rights of the Company or that the Company will have financial or other resources available to adequately enforce infringement of its intellectual property rights. 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. TMSSequoia has applied for trademark rights for the ViewDirector, Virtual Scoring Center, DMR and Prizm marks, and has developed, through use, common law trademark rights in RasterView, InnerView and MasterView as used in connection with the Company's software products. The Company has registered trademarks on the ScanFix and FormFix products. 6 The Company grants its customers a nonexclusive, nontransferable license for the ViewDirector, ScanFix, Prizm and FormFix 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 a required annual maintenance fee for such products. Licenses of the Company's toolkits entitle licensees to develop custom applications using the toolkits, and then distribute the software to users inside their organization or to their end customers. The Company then receives a royalty for each computer workstation on which the software is used. The duration of license agreements generally ranges from one to five years. Research and Development - ------------------------------------------------------------------------------ TMSSequoia recognizes the need to continually develop new and improved products. Current plans include efforts to further enhance the ScanFix user interface, to improve secure server and authenticated server support in the Prizm plug-in product, to update and improve the features and functions of the ViewDirector product and to increase color imaging and forms processing technology. In addition, the Company plans to move forward on development of Internet-based document imaging products related to improving the efficiency and economics of scoring large-scale standardized tests for K-12 public schools. The Company also plans to continue to pursue research and development activities specific to Digital Mark Recognition technology. A prototype of the Digital Mark Recognition technology currently exists that was designed to provide a software alternative to the existing optical mark recognition hardware widely used for scoring assessments. The Company applied for a patent on the Digital Mark Recognition technology during fiscal 2000 and is currently in discussions with a third party independent software vendor to integrate this technology into their forms processing software products. The Company believes it can leverage the independent software vendor's distribution channel in markets where entities currently rely on optical mark recognition for processing forms, but could greatly benefit from adopting the Digital Mark Recognition technology to increase flexibility and significantly improve many aspects of the workflow required to process forms. Pursuing these efforts will necessitate further improvements in the Company's core technologies and new technology development. The Company is open to creating new products whose concepts dovetail with the Company's development direction, and which offer opportunities for funded development from customers with specific needs. In fiscal years 2000 and 1999, the Company spent $909,000 and $609,000, respectively, in research and development costs. Additionally, the Company capitalized software development costs of $332,190 and $350,626, respectively, related to new products and existing product enhancements. In fiscal 2000 the Company secured a financial commitment of $237,000 for funded development from a customer to add and enhance features to the Prizm Plug-in product. Approximately $66,000 of the funded development dollars were applied against development costs during fiscal 2000, with the remaining $171,000 expected to be applied to fiscal 2001 development dollars. The Company will recognize funded development dollars in revenue upon final acceptance of the product by the customer to the extent that those funded development dollars exceed actual costs. Employees - ------------------------------------------------------------------------------ At August 31, 2000, the Company had 36 full-time employees and 6 hourly employees for a total of 42 employees. The Company's business depends 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 - ------------------------------------------------------------------------------ One customer accounted for $414,807, or 12%, of the Company's total revenue in fiscal 2000. Total funding under the agreement with that customer is approximately $890,000. Of that amount, $450,000 is license fee revenue of which a portion is recognized upon the delivery and acceptance of each of the operating platforms provided to the customer. In addition, $237,000 is for funded development as discussed in the "Research and Development" section above. The remaining $203,000 is maintenance revenue to be recognized as revenue over the three-year maintenance agreement term. The remaining license fee will be recognized as revenue by the end of the second quarter of fiscal 2001. The Tinker Small Business Innovation Research grant contract accounted for approximately $495,000, or 10%, of the Company's total revenue in fiscal 1999. Sales to Foreign Customers - ------------------------------------------------------------------------------ Approximately 15% and 13% of total revenues for fiscal 2000 and 1999, respectively, are attributable to sales to foreign customers. See Note 8 to the Financial Statements. ITEM 2. DESCRIPTION OF PROPERTIES The Company's headquarters consist of approximately 14,700 square feet of office space located at 206 West Sixth Avenue in Stillwater, Oklahoma. The Company purchased the building in fiscal 1994 and occupied the space in fiscal 1995 after renovation was complete. The Company secured a mortgage on the building in fiscal 1995 and at August 31, 2000, $281,000 in principal remained owing under such mortgage. The Company has approximately 2,000 square feet of office space in Tulsa, Oklahoma with a monthly rental of approximately $2,500. In the second quarter of fiscal 2000 the Company closed its Burlingame, California office. Monthly rental on that property was approximately $3,500. 7 The Company believes its facilities are in adequate condition and will meet capacity requirements for the foreseeable future. ITEM 3. LEGAL PROCEEDINGS On September 12, 2000, the Company filed arbitration proceedings with the American Arbitration Association against one of the Company's value added resellers for failing to comply with royalty reporting and payment obligations as outlined in the Company's value added reseller agreement. The Company is seeking a one-time royalty payment of $440,000 plus interest and legal fees from the reseller. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. - -------------- Part II ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Market Information - ------------------------------------------------------------------------------ The Company's Common Stock is traded in the over-the-counter market, and prices are quoted by Pink Sheets LLC (formerly the National Quotation Bureau, Incorporated) 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 2000 and 1999. The quotations are inter-dealer prices without retail markups, markdowns, or commissions and may not represent actual transactions. The source of such quotations is Pink Sheets LLC.
BID PRICES FISCAL 2000 HIGH LOW - ------------------------------------------ First Quarter $.300 .140 Second Quarter .750 .150 Third Quarter 1.188 .250 Fourth Quarter .438 .210 FISCAL 1999 HIGH LOW - ------------------------------------------ First Quarter $.375 .260 Second Quarter .380 .260 Third Quarter .350 .290 Fourth Quarter .340 .260
Dividends - ------------------------------------------------------------------------------ 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. Shareholders - ------------------------------------------------------------------------------ As of October 31, 2000, there were approximately 700 shareholders of record according to the records of the Company's transfer agent. As of that date, the Company had approximately 1,860 shareholders including beneficial owners holding shares in nominee. ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION 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 industry 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. Component Product Technologies Segment 2000 1999 - ----------------------------------------------------------------------- Revenue from external customers $ 2,982,195 3,260,443 - ----------------------------------------------------------------------- Operating income $ 649,007 382,417 - ----------------------------------------------------------------------- Fiscal 2000 revenue for the component product technologies segment was $2,982,195 compared to $3,260,443 for fiscal 1999, a decrease of $278,248, or 9%. Despite this overall decrease, image viewing products increased 4% in fiscal 2000 due to the recognition of approximately $415,000 of revenue from one customer in the fourth quarter. This revenue results from the largest Prizm Plug-in product sales contract in the Company's history. Total funding 8 under the agreement is approximately $890,000. Of that amount, $450,000 is license fee revenue of which a portion is recognized upon the delivery and acceptance of each of the operating platforms provided to the customer. In addition, $237,000 is for funded development to add and enhance features to the Prizm Plug-in product. Approximately $66,000 of the funded development dollars were applied against development costs during fiscal 2000, with the remaining $171,000 expected to be applied to fiscal 2001 development dollars. The Company will recognize funded development dollars in revenue upon final acceptance of the product by the customer to the extent that those funded development dollars exceed actual costs. The remaining $203,000 of funding under the contract is maintenance revenue to be recognized as revenue over the three-year maintenance agreement term. The remaining license fee revenue will be recognized as revenue by the end of the second quarter of fiscal 2001. Partially offsetting the effect of the Prizm revenue increase is a $230,000, or 34%, decrease in ViewDirector revenue in fiscal 2000 compared to fiscal 1999. The Company believes this continuing decline in ViewDirector revenue is a result of the Company's product development and marketing focus over the past three years on products that did not result in adequate financial return to the Company (see a discussion of Scan `n' Store, SpectrumFix Version 1.0, Prizm Image Server and ScanFix Twain Filter Version 1.0 below). This has impacted the Company's ability to potentially benefit from updated product releases of not only the ViewDirector product, but also the Company's image enhancement products. Image enhancement revenue decreased approximately $118,000, or 17%, from fiscal 1999 to fiscal 2000. Fiscal year 2000 forms processing revenue decreased approximately $165,000, or 47%, compared to fiscal 1999. This decrease is due to fewer direct toolkit sales and declining revenue from royalty reporting customers. In addition, in fiscal 1999, the Company had one sale of FormFix that totaled $138,000, or 39% of the forms processing revenue for fiscal 1999. No forms processing product sales of that magnitude were made in fiscal 2000. The Company has reallocated resources in fiscal 2000 from the professional services segment as projects are completed in order to further develop the image viewing and image enhancement products in an effort to make them more competitive in the current marketplace. Additionally, the Company is leveraging its expertise in image enhancement and forms processing to produce a new color image processing suite of products to support the emerging document imaging color market. These products build upon existing image enhancement and forms processing technologies, but will support the processing of color images rather than black and white images. Management believes its decision to refocus on its core competencies as a software product company is warranted based on the positive financial operating results reported by the component product technologies segment over the past two years. Operating income margins for the component product technologies segment were 22% and 12% for the fiscal year ending August 31, 2000 and 1999, respectively. The increase in the operating margin is primarily due to a $545,000, or 19%, decrease in operating expenses in fiscal 2000 compared to fiscal 1999. Selling and marketing expenses decreased approximately $183,000, or 19%, due to management's decision to attend fewer trade shows and spend less on advertising expenses in fiscal 2000 than in fiscal 1999, and because the Company had fewer sales personnel as a result of closing the Burlingame, California office in the second quarter of fiscal 2000. Amortization expense for capitalized software development costs decreased by $100,000, or 30%, due to the development costs of several products released in prior years becoming fully amortized in fiscal 2000. Offsetting these decreases was an increase of $155,000, or 30%, in research and development personnel costs in fiscal 2000 due to the Company's refocus on developing its component product and assessment product technologies. The Company also had several specific charges and credits to expenses that, on a net basis, decreased operating expenses by approximately $65,000 in fiscal 2000 and increased operating expenses by approximately $241,000 in fiscal 1999. In fiscal 2000, these transactions included the recovery of a previously recorded bad debt of approximately $258,000. This credit to expenses was offset by approximately $193,000 of capitalized development costs written off because those products were not expected to result in adequate financial return for the Company. Of the $193,000 in write-offs, $71,000 was charged to expense during the fourth quarter of fiscal 2000. During fiscal 1999, these operating transactions included charges of $130,000 for a potential uncollectible account and $111,000 to write-down the remaining unamortized software development costs for Scan `n' Store. Assessment Product Technologies Segment 2000 1999 - ----------------------------------------------------------------------- Revenue from external customers $ 3,000 -- - ----------------------------------------------------------------------- Operating loss $ (420,978) -- - ----------------------------------------------------------------------- The assessment product technologies segment was created during fiscal 2000 to focus on developing technologies to improve the overall process of scoring large-scale assessments, commonly referred to as tests, for grades K-12 in the educational marketplace. The technologies being developed within this segment leverage the Company's existing core competencies in forms recognition, image processing, viewing enhancement. The Company incurred combined costs of approximately $424,000 in research and development and business development in two primary product areas. The first product area resulted in the creation of the Digital Mark Recognition software product prototype. The Digital Mark Recognition software prototype was designed to replace the need for hardware 9 based optical mark recognition. Digital Mark Recognition offers many competitive advantages over optical mark recognition because Digital Mark Recognition provides significantly more flexibility in printing and processing of certain types of forms. The Company incurred approximately $23,000 in costs during fiscal 2000 to apply for a patent on the Digital Mark Recognition technology. The Company is currently in discussions with an independent software vendor to integrate the Digital Mark Recognition into their forms processing software in an effort to offer an alternative to vendors and/or educational entities that process large volumes of "fill in the bubble" form answer sheets for standardized tests. The second area of focus within the assessment product technologies segment during fiscal 2000 was on the design of a new product called Virtual Scoring Center. The Virtual Scoring Center provides the ability for qualified raters to score student responses to open- ended test questions in a web-enabled environment. Open-ended test questions require students to respond in the form of an essay or "show your work" type of an answer. The Company has received a commitment from one state to adopt an early version of the Virtual Scoring Center during the second quarter of fiscal 2001. The first commercial version of the product is expected to be available by the third quarter of fiscal 2001. Professional Consulting and Integration Services Segment 2000 1999 - ------------------------------------------------------------------------ Revenue from external customers $360,615 1,204,403 - ------------------------------------------------------------------------ Operating loss $(318,092) (441,757) - ------------------------------------------------------------------------ Fiscal 2000 revenue for the professional consulting and integration services segment was $360,615 compared to $1,204,403 for fiscal 1999, a decrease of $843,788, or 70%. The revenue decline was anticipated due to the Company's decision in fiscal 2000 to transition out of the existing professional service business model. Three customer contracts accounted for approximately 80% and 84% of service revenue for fiscal years 2000 and 1999, respectively. Operating losses for the professional consulting and integration services segment were 88% and 37% of revenue for fiscal year ending 2000 and 1999, respectively. Fiscal year 2000 operating margins were negatively impacted by continuing cost overruns on two fixed-fee projects. These two projects accounted for approximately 65% of fiscal 2000 revenue. One project was completed and accepted by the customer by August 31, 2000, while the other project was substantially completed by August 31, 2000 and accepted by the customer in the first quarter of fiscal 2001. This project is in a loss situation, therefore the estimated costs to complete the contract have been recorded at August 31, 2000. Approximately $21,000 was accrued at August 31, 2000 for the anticipated costs to complete this project in fiscal 2001. The segment will provide maintenance during fiscal 2001 for these projects. The Company has been allocating segment resources for product development upon the completion of these projects. Document Conversion Segment 2000 1999 - --------------------------------------------------------------------- Revenue from external customers $259,439 491,291 - --------------------------------------------------------------------- Operating loss $ (906) (186,288) - --------------------------------------------------------------------- Fiscal 2000 revenue for the document conversion segment was $259,439 compared to $491,291 for fiscal 1999, a decrease of $231,852 or 47%. Approximately 92% of fiscal 2000 revenue came from four customers and 65% of fiscal 1999 revenue came from three customers. The significant reduction in document conversion revenue was expected and resulted from the Company's decision to restructure document conversion operations during the first quarter of fiscal 1999. Operating loss margins were 0% and 38% for fiscal year ending 2000 and 1999, respectively. The reduction in the loss margin in fiscal 2000 from 1999 primarily resulted from the prior year transitional costs associated with the restructuring of the document conversion segment, a $25,000 inter-segment bad debt charge from the component product technologies segment in the prior year for an uncollectible account, and an increase in the proportion of services performed in fiscal 2000 under higher margin electronic publishing contracts. Total Company Operating Results Following is a report of total company revenue and a reconciliation of reportable segments' operating loss to the Company's total net loss for fiscal year ending 2000 and 1999.
2000 1999 - ------------------------------------------------------------- Total company revenue $3,605,249 4,956,137 - ------------------------------------------------------------- Operating loss for reportable segments (90,969) (245,628) Unallocated corporate expenses (350,016) (449,296) Interest income 60,531 25,971 Interest expense (21,161) (31,793) Other, net 5,857 17,964 - ------------------------------------------------------------- Income tax expense (800) (3,702) - ------------------------------------------------------------- Net loss $ (396,558) (686,484) - ------------------------------------------------------------- Loss per share: Basic $(0.03) (0.05) Diluted (0.03) (0.05) - -------------------------------------------------------------
Total revenue for fiscal 2000 was $3,605,249 compared to $4,956,137 for fiscal 1999, a decrease of $1,350,888, or 27%. Licensing and royalty revenue of $2,982,195 decreased by 9% from fiscal 1999. Although image viewing revenue increased by $75,000, or 4%, due to the recognition of Prizm revenue in the fourth quarter of 2000 from one customer that accounted for 14% of total licensing and royalty revenue, the $118,000, or 17%, decrease in image 10 enhancement revenue and the $165,000, or 47%, decrease in forms processing revenue offset the image viewing increase, leading to the overall decline in licensing and royalty revenue. In addition, professional consulting and integration services revenue decreased $844,000, or 70%, due to the Company's plan to only complete the projects in process at the end of 1999 and then reallocate resources from the professional consulting and integration services segment to other segments for product development. Document conversion revenue of $259,000 decreased 47% based on the restructuring of the document conversion service operations in the first quarter of fiscal 1999. Net loss for fiscal year ending 2000 was $396,558, or $0.03 loss per share (basic and diluted), compared to net loss of $686,484, or $0.05 loss per share (basic and diluted), for fiscal 1999. The net loss of $396,558 reported for the fiscal year ending 2000 is primarily the result of the continuing cost overruns for the professional consulting and integration services segment, investment in new product development for the assessment product technologies segment, and the product write-offs of $193,000 for Scanfix Twain, Prizm Image Server and SpectrumFix. The Company's income tax expense rate was 0% and 1% for fiscal 2000 and 1999, respectively. The effective income tax rates for both fiscal years 2000 and 1999 differed from the "expected" Federal tax expense rate of 34%, primarily because of a change in the valuation allowance provided against the Company's deferred tax assets. Deferred tax assets are primarily the result of the Company's net operating loss carryforwards. See "Income Taxes" in Note 3 to the Financial Statements. Financial Condition Working capital at August 31, 2000, was $1,376,235 with a current ratio of 2.9:1 compared to $1,797,164 with a current ratio of 4.3:1, at August 31, 1999. The working capital and current ratio declines are due to a combination of factors. Current assets decreased by approximately $260,000 at August 31, 2000 primarily due to the reclassification of deferred tax assets from current assets to long-term assets to reflect the Company's expectation of the timing for realization of the benefits related to the deferred tax assets. Also, current liabilities increased by approximately $162,000 primarily as a result of increased deferred revenue related to software maintenance agreements sold to customers in fiscal 2000. Net cash provided by operations for the fiscal year ending 2000 was $865,864 compared to $1,023,821 for fiscal year ending 1999. Despite the decrease in total revenue and the operating loss reported for the current fiscal year, operating cash flow remained strong because of aggressive customer collection processes and the completion of several significant service contracts, resulting in the final billing and collection on the contracts in the current year. Net cash used in investing activities for fiscal year ending August 31, 2000 was $397,471 compared to $384,158 for the same period in fiscal 1999. Net cash used in financing activities was $166,411 and $73,649 for fiscal year ending August 31, 2000 and 1999, respectively. This increase is primarily due to repurchase and subsequent retirement of 350,000 shares of common stock in fiscal 2000. During fiscal years 2000 and 1999 the Company did not borrow against its line of credit. The Company did not renew the line of credit upon its expiration in the third quarter of fiscal 2000 and anticipates that operating cash flows will be adequate to meet its current obligations and current operating and capital requirements. The funding of long-term needs is dependent upon increased revenue and profitability and obtaining funds through outside debt and equity sources. The funding for long-term needs includes funding for increased product development, for expanded marketing and promotion of the Company and its products, and for potential merger/acquisition activities. Factors Affecting Business The computer software industry is subject to rapid change that could result in significant additional costs or the Company's products and services becoming obsolete. The markets for the Company's products are characterized by rapid technological advances and can be significantly affected by new product introductions and changing customer requirements. The Company's future success will depend upon its ability to continue to improve existing products and to develop and introduce products with new or enhanced capabilities that address the increasingly sophisticated needs of its customers and keep pace with technological and competitive developments. There can be no assurance that the Company will be able to successfully develop and market new or enhance products or respond effectively to technological changes or new product announcements by others. Any failure by the Company to anticipate or respond adequately to technological developments and customer requirements, or any significant delays in product development or introduction, could result in a material adverse effect on the Company's business, operating results, cash flows and financial condition. The Company's markets are highly competitive, and if the Company does not compete effectively, the Company could suffer price reductions and loss of market share. The computer software and education assessment fields are highly competitive and include many companies in those industries. The computer software field is characterized by rapid changes in technology and frequent introductions of new platforms and features. Competitors in this market include AccuSoft, Pixel Translations, Snowbound Software, Kofax Image Products, Lead Technologies, Seaport Imaging and Visionshape. As the Company moves forward 11 with color image processing and enhancement software, Dunord Technologies and Picture Elements can also be considered competitors. Certain of the Company's competitors for is component products have greater financial, technical and marketing resources than the Company. The Company believes that the primary competitive factors with respect to its component products are the features of its products, the technical capabilities of the Company's personnel, quality of services and price. The Company believes that is can compete favorably with respect to all of these factors and is focusing on markets where it believes it can achieve a leadership position; however, there can be no assurance that the Company will be able to continue to compete effectively in its market, that competition will not intensify or that future competition will not have a material adverse effect on the Company's business, operating results, cash flows and financial condition. The education assessment market includes many vendors with an already established presence in providing services for the scoring of open-ended assessments. Those vendors include entities such as Harcourt Educational Measurement, Educational Testing Services, NCS Pearson, CTB-McGraw Hill, Measured Progress, and Measurement Inc. Company management believes that the Virtual Scoring Center is a product that addresses several needs in the educational assessment marketplace, but there can be no assurance that the Company will be able to compete successfully against current and future competitors, many of which have larger technical staffs, greater brand name recognition and market presence, more established and larger marketing and sales organizations and substantially greater financial resources than the Company. There can also be no assurances that the competitive pressures faced by the Company will not have a material adverse effect on the Company's business, operating results, cash flows and financial condition. If the Company is unable to protect its intellectual property it may lose a valuable asset, experience reduced market share or incur costly litigation to protect its rights. The Company relies on a combination of patent rights, copyright and trademark laws, nondisclosure agreements and other contractual provisions and technical measures to protect its intellectual property rights. The Company does not believe that any of its products or soon to be released products present questions of patent infringement or violations of any other intellectual property rights belonging to others. There can be no assurance, however, that claims of infringement of the intellectual property rights of others will not arise that could require the Company to procure license for the use of third party technology, to make additional investments to modify or replace technologies to remove the basis for an allegation of infringement, or to discontinue use of technology accused of infringement, any of which could have a material adverse effect on the Company's operations or financial condition. There can also be no assurance that others will not infringe on the intellectual property rights of the Company or that the Company will have financial or other resources available to adequately enforce infringement of its intellectual property rights. There can be no assurance that a third party will not assert that the Company's technology violates its intellectual property rights in the future. As the number of products in the Company's target markets increases and the functionality of these products further overlap, developers may become increasingly subject to infringement claims. Any such claims, with or without merit, can be time consuming and expensive to defend. There can be no assurance that third parties will not assert infringement claims against the Company in the future with respect to its current or future products or that any such assertion will not require the Company to enter into royalty arrangements or litigation that could be costly to the Company. Defects in the Company's products could result in claims against the Company that could cause unanticipated losses. The Company's license agreements with its customers typically contain provisions designed to limit the Company's exposure to potential product liability claims. It is possible, however, that the limitation of liability provisions contained in the Company's license agreements may not be effective under the laws of certain state and foreign jurisdictions. The sale and support of products by the Company and its retailers and other resellers may entail the risk of such claims, and there can be no assurance that the Company will not be subject to such claims in the future. A product liability claim brought against the Company could have a material adverse effect upon the Company's business, results of operations and financial condition. The Company's operating results and financial condition could suffer if its if unable to continue to secure significant sales of multiple licenses to individual customers. The Company has historically relied upon large sales transactions with individual customers to achieve positive operating results. In fiscal 2000 and 1999, a single customer accounted for 12% and 10%, respectively, of the Company's total revenue. There can be no assurance that the Company will continue to obtain such large sales transactions on a consistent basis and, as such, the Company's inability to obtain sufficient large sales could have a material adverse effect on the Company's business, operating results and financial position. 12 Impact of Recently Issued Accounting Standards In June 1999, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133 is effective for fiscal years beginning after June 15, 2000. SFAS No. 133 establishes standards for accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. It requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. The accounting for changes in fair value of a derivative depends on the intended use of the derivative and the resulting designation. Adoption of SFAS No. 133 is not expected to impact the Company because the Company does not have any derivative instruments. In March 2000, the FASB issued Interpretation No. 44, "Accounting for Certain Transactions Involving Stock Compensation-an interpretation of APB Opinion No. 25" ("FIN 44"). Among other issues, this interpretation clarifies the definition of employee for purposes of applying APB Opinion No. 25, Accounting for Stock issued to Employees ("APB 25"), the criteria for determining whether a plan qualifies as a non compensatory plan, the accounting consequence of various modifications to the terms of a previously fixed stock option or award, and the accounting for an exchange of stock compensation awards in a business combination. This Interpretation was effective July 1, 2000, but certain conclusions in this Interpretation cover specific events that occur after either December 15, 1998, or January 12, 2000. FIN 44 did not affect the Company in fiscal 2000 and management believes that FIN 44 will not have a material effect on the financial position or results of operations of the Company in future fiscal years. ITEM 7. FINANCIAL STATEMENTS The financial statements required by this Item are set forth beginning on page F1 hereof. ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. - ----------------- Part III Information required in response to Items 9-12 shall appear in the Company's definitive proxy statement to be filed pursuant to Regulation 14A within 120 days of the fiscal year end covered hereby, and shall be incorporated herein by reference when filed. ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits The following exhibits are included with this report; all employment contracts and compensatory plans are marked with an asterisk (*): Exhibit Name of Exhibit - ------------------------------------------------------------------------------ 3.1 Certificate of Incorporation of the Registrant, as amended, incorporated herein by reference to Exhibit No. 3.1 to the Registrant's Form 10K for the fiscal year ended August 31, 1995. 3.2 Bylaws of the Registrant, as amended on September 24, 1999. 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* TMS, Inc. Employee Stock Purchase Plan, incorporated herein by reference to Exhibit No. 10.9 to the Registrant's Form 10-KSB for the fiscal year ended August 31, 1999. 10.5* TMS, Inc. 1996 Stock Option Plan, incorporated herein by reference to Exhibit No. 99 to the Registrant's Form S-4 as filed with the Commission on May 16, 1996. 10.6 Contract number F34601-98-C-0145 between the Registrant and the Department of the Air Force, incorporated herein by reference to Exhibit No. 10.11 to the Registrant's Form 10-KSB for the fiscal year ended August 31, 1999. 10.7 Corporate Software License Agreement between the Registrant and The Boeing Company, incorporated herein by reference to Exhibit No. 10.1 to the Registrant's Form 10-QSB for the quarterly period ended May 31, 2000. 10.8 Development Agreement between the Registrant and The Boeing Company, incorporated herein by reference to Exhibit No. 10.2 to the Registrant's Form 10-QSB for the quarterly period ended May 31, 2000. 10.9 Purchase Contract number W 311305 between the Registrant and The Boeing Company, incorporated herein by reference to Exhibit No. 10.3 to the Registrant's Form 10-QSB for the quarterly period ended May 31, 2000. 23.1 Consent of KPMG 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 2000. 13 - --------------- Signatures Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. REGISTRANT: TMS, INC. - ----------------------------------------------------------------------------- Date: 11/22/00 BY: /s/ Deborah D. Mosier ---------------------------------------------------- Deborah D. Mosier, President 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: 11/22/00 BY: /s/ Doyle E. Cherry ----------------------------------------------------- Doyle E. Cherry, Director Date: 11/22/00 BY: /s/ Deborah D. Mosier ----------------------------------------------------- Deborah D. Mosier, President Principal Executive Officer Date: 11/22/00 BY: /s/ James R. Rau, M.D. ----------------------------------------------------- James R. Rau, M.D., Director Date: 11/22/00 BY: /s/ Russell W. Teubner ----------------------------------------------------- Russell W. Teubner, Director Date: 11/22/00 BY: /s/ Marshall C. Wicker ----------------------------------------------------- Marshall C. Wicker, Director Date: 11/22/00 BY: /s/ Kent E. Warkentin ----------------------------------------------------- Kent E. Warkentin, Controller Principal Financial Officer 14 Index to Financial Statements and Financial Statement Schedule - ------------------------------------------------------------------------------ PAGE Independent Auditors' Report F1 Financial Statements Balance Sheets: August 31, 2000 and 1999 F2 and F3 Statements of Operations: Years Ended August 31, 2000 and 1999 F4 Statements of Shareholders' Equity: Years Ended August 31, 2000 and 1999 F5 Statements of Cash Flows: Years Ended August 31, 2000 and 1999 F6 Notes to Financial Statements: August 31, 2000 and 1999 F7 through F14 Financial Statement Schedule Schedule II -- Valuation and Qualifying Accounts: Years Ended August 31, 2000 and 1999 F15 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. 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 auditing standards generally accepted in the United States of America. 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, 2000 and 1999 and the results of its operations and its cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America. 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 LLP Oklahoma City, Oklahoma October 19, 2000 F1 Balance Sheets August 31, 2000 and 1999
TMS, Inc. (dba TMSSequoia) 2000 1999 - ---------------------------------------------------------------------- Assets Current assets: Cash and cash equivalents $1,359,692 1,057,710 Trade accounts receivable, net of allowance for doubtful accounts of $54,032 in 2000 and $395,069 in 1999 461,549 574,067 Contract service work in process 146,848 415,985 Deferred income taxes 64,007 242,701 Prepaid expenses and other current assets 54,285 55,317 - ---------------------------------------------------------------------- Total current assets 2,086,381 2,345,780 - ---------------------------------------------------------------------- Property and equipment: Land 111,000 111,000 Building 747,634 747,634 Computer equipment 1,515,148 1,662,954 Furniture and fixtures 349,015 371,366 - ---------------------------------------------------------------------- 2,722,797 2,892,954 Less accumulated depreciation and amortization (1,649,589) (1,590,081) - ---------------------------------------------------------------------- Net property and equipment 1,073,208 1,302,873 - ---------------------------------------------------------------------- Other assets: Capitalized software development costs, net of accumulated amortization of $422,306 in 2000 and $645,004 in 1999 388,258 481,169 Deferred income taxes 420,493 241,799 Accounts receivable, long-term 77,406 -- Other assets 43,508 45,191 - ---------------------------------------------------------------------- Total other assets 929,665 768,159 - ---------------------------------------------------------------------- Total assets $4,089,254 4,416,812 - ----------------------------------------------------------------------
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. F2
2000 1999 - ----------------------------------------------------------------------- Liabilities and Stockholders' Equity Current liabilities: Current obligations under capital leases $11,705 66,250 Current installments of long-term debt 28,943 27,313 Accounts payable 80,879 103,341 Accrued payroll expenses 301,107 236,070 Deferred revenue 287,512 115,642 - ----------------------------------------------------------------------- Total current liabilities 710,146 548,616 - ----------------------------------------------------------------------- Obligations under capital leases, net of current installments -- 12,149 Long-term debt, net of current installments 252,456 282,674 Other liabilities 10,375 -- - ----------------------------------------------------------------------- Total liabilities 972,977 843,439 - ----------------------------------------------------------------------- Shareholders' equity: Preferred stock, $.01 par value. Authorized 1,000,000 shares; none issued -- -- Common stock, $.05 par value. Authorized 50,000,000 shares; 13,490,659 shares issued and 13,292,690 outstanding in 2000 and 13,820,622 shares issued and 13,578,659 outstanding in 1999 674,533 691,031 Additional paid-in capital 11,422,299 11,501,760 Unamortized deferred compensation (1,809) (20,072) Accumulated deficit (8,884,719) (8,488,161) Treasury stock, at cost, 197,969 shares in 2000 and 241,963 shares in 1999 (94,027) (111,185) - ----------------------------------------------------------------------- Total shareholders' equity 3,116,277 3,573,373 - ----------------------------------------------------------------------- Commitments (Note 8) - ----------------------------------------------------------------------- Total liabilities and shareholders' equity $4,089,254 $4,416,812 - -----------------------------------------------------------------------
F3 Statements of Operations Years Ended August 31, 2000 and 1999
TMS, Inc. (dba TMSSequoia) 2000 1999 - ----------------------------------------------------------------- Revenue: Licensing and royalties $2,982,195 3,260,443 Software development services 363,615 1,204,403 Document conversion services 259,439 491,291 - ----------------------------------------------------------------- 3,605,249 4,956,137 - ----------------------------------------------------------------- Operating costs and expenses: Cost of licensing and royalties 555,713 630,847 Cost of software development services 463,807 1,022,769 Cost of document conversion services 137,569 274,815 Selling, general and administrative 2,279,734 3,337,818 Research and development 609,411 313,917 Restructuring charge -- 70,895 - ----------------------------------------------------------------- 4,046,234 5,651,061 - ----------------------------------------------------------------- Operating loss (440,985) (694,924) Other income, net 45,227 12,142 - ----------------------------------------------------------------- Loss before income taxes (395,758) (682,782) Income tax expense 800 3,702 - ----------------------------------------------------------------- Net loss $(396,558) $ (686,484) - ----------------------------------------------------------------- Net loss per share Basic $(0.03) (0.05) Diluted $(0.03) (0.05) - ----------------------------------------------------------------- Weighted average shares: Basic 13,364,352 13,570,605 Diluted 13,364,352 13,570,605 - -----------------------------------------------------------------
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. F4 Statements of Shareholders' Equity Years Ended August 31, 2000 and 1999
ADDITIONAL UNAMORTIZED TOTAL TMS, Inc. COMMON STOCK PAID-IN DEFERRED ACCUM. TREASURY SHAREHOLDERS' (dba TMSSequoia) SHARES AMOUNT CAPITAL COMPENSATION DEFICIT STOCK EQUITY - ------------------------------------------------------------------------------------------------------------------------- Balance at August 31, 1998 13,466,109 $673,305 11,476,190 (23,967) (7,801,677) (78,885) 4,244,966 Exercise of stock options 354,513 17,726 25,570 -- -- -- 43,296 Issuance of common stock held in treasury -- -- -- -- -- 2,700 2,700 Purchase of common stock held in treasury -- -- -- -- -- (35,000) (35,000) Amortization of deferred compensation -- -- -- 3,895 -- -- 3,895 Net loss -- -- -- -- (686,484) -- (686,484) - ------------------------------------------------------------------------------------------------------------------------ Balance at August 31, 1999 13,820,622 691,031 11,501,760 (20,072) (8,488,161) (111,185) 3,573,373 Exercise of stock options 16,000 800 1,200 -- -- -- 2,000 Issuance of common stock to employees 4,037 202 1,022 -- -- -- 1,224 Sale of common stock held in treasury -- -- -- -- -- 18,211 18,211 Issuance of common stock held in treasury to employees -- -- 479 -- -- 2,787 3,266 Purchase of common stock held in treasury -- -- -- -- -- (3,840) (3,840) Purchase and retirement of common stock (350,000) (17,500) (70,000) -- -- -- (87,500) Amortization of deferred compensation -- -- -- 6,101 -- -- 6,101 Forfeiture of stock options -- -- (12,162) 12,162 -- -- -- Net loss -- -- -- -- (396,558) -- (396,558) - ------------------------------------------------------------------------------------------------------------------------- Balance at August 31, 2000 13,490,659 $674,533 11,422,299 (1,809) (8,884,719) (94,027) 3,116,277 - -------------------------------------------------------------------------------------------------------------------------
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. F5 Statements of Cash Flows Years Ended August 31, 2000 and 1999
TMS, Inc. (dba TMSSequoia) 2000 1999 - ---------------------------------------------------------------------------------- Cash flows from operating activities: Net loss $(396,558) (686,484) Adjustments to reconcile net loss to net cash provided by operating activities: Depreciation and amortization 509,272 660,604 Loss on disposal of equipment 20,626 65,218 Loss on write-off of software development costs 192,681 157,251 Employee stock-based compensation 10,591 3,895 Net change in: Accounts receivable 35,112 719,854 Work in process 269,137 181,360 Prepaid expenses and other assets 183 34,656 Accounts payable (22,462) (44,503) Accrued payroll expenses 75,412 (83,925) Deferred revenue 171,870 15,895 - ---------------------------------------------------------------------------------- Net cash provided by operating activities 865,864 1,023,821 - ---------------------------------------------------------------------------------- Cash flows from investing activities: Purchases of property and equipment (66,532) (72,011) Proceeds from disposal of equipment 1,251 38,479 Capitalized software development costs (332,190) (350,626) - ---------------------------------------------------------------------------------- Net cash used in investing activities (397,471) (384,158) - ---------------------------------------------------------------------------------- Cash flows from financing activities: Repayment of long-term debt (28,588) (23,630) Repayment of capital lease (66,694) (61,015) Sale of common stock 2,000 43,296 Sale of treasury stock, at cost 18,211 2,700 Purchase of treasury stock, at cost (91,340) (35,000) - ---------------------------------------------------------------------------------- Net cash used in financing activities (166,411) (73,649) - ---------------------------------------------------------------------------------- Net increase in cash and cash equivalents 301,982 566,014 Cash and cash equivalents at beginning of year 1,057,710 491,696 - ---------------------------------------------------------------------------------- Cash and cash equivalents at end of year $1,359,692 $1,057,710 - ---------------------------------------------------------------------------------- Supplemental cash flow information: Cash paid for interest $21,161 31,793 Cash paid for income taxes 800 7,600 - ----------------------------------------------------------------------------------
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. F6 Notes to Financial Statements August 31, 2000 and 1999 Note 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 document conversion services to corporations and government organizations to assist them in migrating from paper to electronic information systems. The Company is also developing technologies to improve the overall process of scoring large-scale assessments ("tests") for grades K-12 in the educational marketplace. In fiscal 2000 the Company decided to transition out of its professional service business model for which the Company had historically offered a variety of services for analyzing business and information management processes as well as integrating business solutions. Use of Estimates in the Preparation of Financial Statements The preparation of financial statements in conformity with generally accepted accounting principles in the United States of America 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 and overnight investments 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 $332,190 and $350,626 of software development costs, which primarily includes personnel costs, in 2000 and 1999, respectively. Funding received from customers for the development of products is first applied against the capitalized software development costs and any remaining funding is recognized as revenue upon product acceptance. In fiscal 2000, the Company applied approximately $43,000 of customer funding against capitalized software costs. 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 $232,420 and $332,744 of software development costs in 2000 and 1999, 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 operations. During fiscal 2000, the Company charged approximately $118,000 to cost of revenue and $75,000 to research and development to write-down the unamortized development costs for SpectrumFix, ScanFix Twain, and Prizm Image Server. During fiscal 1999, the Company charged approximately $157,000 to cost of revenue to write-down unamortized development costs. 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 equipment and furniture, which includes amortization for equipment held under capital leases, is calculated using the straight-line method over periods ranging from three to ten years, but not less than the estimated useful life of the leased property. The Company reviews long-lived assets and certain identifiable intangibles 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 exceeds 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. Patent Costs Included in other assets at August 31, 2000 and 1999, are $33,020 and $35,552, respectively, of unamortized capitalized costs associated with obtaining patent rights for certain software products. Various patents were approved during fiscal 1996 through 1998 and the capitalized costs are amortized using the straight-line method over the seventeen-year life of the patents. F7 Revenue Statement of Position (SOP) 97-2 "Software Revenue Recognition" requires software licensing and royalties revenue to be recognized only after the software is delivered, all significant obligations of the Company are fulfilled, and all significant uncertainties regarding customer acceptance have expired. SOP 97-2 also requires the unbundling of multiple elements in software transactions and the allocation of pricing to each element based upon vendor specific objective evidence of fair values. The Company offers multiple element arrangements to its customers, mostly in the form of technical phone support and product maintenance, for fees that are deferred and recognized in income ratably over the applicable technical support period. At August 31, 2000 and 1999, deferred technical support and product maintenance revenue was $166,277 and $78,070, respectively. The Company also, on occasion and as part of the initial contract price, offers delivery of enhanced versions of future products to customers on a when-and-if-available basis. SOP 97-2 generally requires that the promise for future product deliveries be treated as separate elements and deferred from revenue recognition until produced, delivered and accepted by the customer. At August 31, 2000 and 1999, the Company had deferred revenue of $6,991 and $1,591, respectively, representing software products and/or enhancements expected to be delivered in the Company's fiscal year 2001 and 2000, respectively. The Company also deferred $49,936 and $18,482 of software product revenue at August 31, 2000 and 1999, respectively, because of uncertainties surrounding customer payment. Funding received from customers for the development of products is first applied against the capitalized software development costs and any remaining funding is recognized as revenue upon product acceptance. In fiscal 2000, the Company recognized revenue of approximately $23,000 that represented the excess of customer funding over the cost of the product development. 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 $64,307 and $17,500 at August 31, 2000 and 1999, respectively. Contract service work in process of $146,848 and $415,985 at August 31, 2000 and 1999, respectively, represented costs and related profits recognized on a percentage-of-completion basis in excess of customer billings. Contract costs primarily include direct labor. Provisions for losses on contracts are recorded at the time such losses are known. Amounts for contracts in process at August 31, 2000, will be billed pursuant to contractual terms and are expected to be collected during fiscal 2001. Net Loss Per Share Basic EPS is computed by dividing net income available to common shareholders by the weighted-average number of shares of common stock outstanding during the period. Diluted EPS recognizes the potential dilutive effects of the future exercise of common stock options. Stock-based Compensation 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, compensation cost for stock- based awards is expensed in an amount equal to the excess of the quoted market price on the grant date over the exercise price. Such expense is recognized at the grant date for awards fully vested. For awards with a vesting period, the expense is deferred and recognized over the vesting period. The amount of expense recognized in 2000 and 1999 related to employee stock-based awards was $10,591 and $3,895, respectively. Compensation cost is not required to be recorded for the employee stock purchase plan (see Note 4), as it is non- compensatory under the provisions of APB No. 25. Income Taxes The Company accounts for income taxes using the asset and liability method. 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. F8 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. Comprehensive Income Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income" (SFAS No. 130), establishes standards for reporting and display of "comprehensive income" and its components in a set of financial statements. It requires that all items that are required to be recognized under accounting standards as components of comprehensive income be reported in a financial statement that is displayed at the same prominence as other financial statements. The Company currently does not have any components of comprehensive income that are not included in net loss. Reclassifications Certain 1999 amounts have been reclassified to conform to the 2000 financial statement presentation. In 2000, certain distribution expenses, which had been previously reported in "Selling, general and administrative" expenses, are now presented in "Cost of licensing and royalties" on the statements of operations. In addition, certain expenses related to the research and development of the Company's component products and assessment products, which had been previously reported in "Cost of licensing and royalties", are now presented separately on the statements of operations. Note 2: Note Payable and Long-Term Debt At August 31, 1999, the Company had an $800,000 operating line of credit with a bank that bore interest at .75% above prime (9.00% at August 31, 1999) and expired on November 3, 1999. The Company renewed this line of credit at an interest rate of 1% above prime and it expired on March 31, 2000. The Company chose not to renew this line of credit at that time. No balance was outstanding against the line of credit at August 31, 1999. The Company had $281,399 and $309,987 outstanding under a long-term note payable to a bank, at August 31, 2000 and 1999, respectively. The note bore interest at 5.57% at August 31, 2000 and 1999 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, 2000, and thereafter, are as follows: 2001, $28,943; 2002, $30,620; 2003, $32,395; 2004, $34,245; 2005, $36,257; thereafter, $118,939. The line of credit (prior to its expiration) and long-term note are secured by all accounts receivable, equipment, furniture and fixtures, and real property of the Company. Note 3: Income Taxes Income tax expense for fiscal 2000 was $800. The significant components of the 2000 expense include: deferred tax benefit, $146,404; increase in the valuation allowance for deferred tax assets, $147,567; state income tax paid, $800; and benefit for correction of prior year estimates, $1,163. Income tax expense for fiscal 1999 was $3,702. The significant components of the 1999 benefit include: deferred tax benefit, $255,370; increase in the valuation allowance for deferred tax assets, $260,634; state income tax refund, $2,943; and expense for correction of prior year estimates, $1,381. Income tax expense for 2000 and 1999 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: 2000 1999 - ---------------------------------------------------------------------------- Computed "expected" tax benefit (34.0%) (34.0%) Change in the tax assets valuation allowance 37.0% 38.0% State income tax, net of Federal income tax benefit (4.0%) (4.0%) Other 1.0% 1.0% - ---------------------------------------------------------------------------- Effective income tax expense 0.0% 1.0% - ---------------------------------------------------------------------------- The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and liabilities at August 31, 2000 and 1999 are presented in Table 3a. ________________ Table 3a 2000 1999 - ------------------------------------------------------------------------------ Deferred tax assets: Tax operating loss carryforwards $1,636,823 1,554,621 Tax credit carryforwards 79,152 79,152 Accounts receivable 20,511 149,968 Other 44,246 43,821 - ------------------------------------------------------------------------------ Total gross deferred tax assets 1,780,732 1,827,562 Less valuation allowance 1,130,030 1,114,267 - ------------------------------------------------------------------------------ Net deferred tax assets 650,702 713,295 - ------------------------------------------------------------------------------ Deferred tax liabilities: Property and equipment (18,819) (46,143) Capitalized software costs (147,383) (182,652) - ------------------------------------------------------------------------------ Net deferred tax assets $ 484,500 484,500 - ------------------------------------------------------------------------------ F9 Deferred tax assets are recognized 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 $484,500 at August 31, 2000. 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 be required to generate future taxable income of approximately $1,275,000 prior to the expiration of the net operating loss and tax credit carryforwards. Taxable loss for the year ended August 31, 2000 approximated $552,000 compared to a financial loss of approximately $397,000. Taxable loss for the year ended August 31, 1999 approximated $388,000 compared to a financial loss of approximately $682,000. In fiscal 2000 and 1999, the differences in the tax and financial losses primarily resulted from timing differences associated with the deductibility of capitalized software and bad debt estimates compared to the recognition of related expenses in accordance with generally accepted accounting principles ("GAAP"). The $1,130,030 valuation allowance provides for net operating loss and tax credit carryforwards that, as of August 31, 2000, are not expected to be realized prior to expiration. At August 31, 2000 the Company's tax net operating loss carryforwards, investment tax credit carryforwards, and research and experimental tax credit carryforwards approximated $4,312,000, $39,000 and $40,000, respectively. These carryforwards expire during the years 2001 through 2015. Approximately $2,160,000, or 50%, of the net operating loss carryforwards expire by the end of fiscal year 2001. The benefits from these carryforwards could also be limited under Internal Revenue Service Code Section 382 due to changes in ownership. Note 4: Stock-Based Compensation Stock Options In 1985, the Company's board of directors approved an employee incentive stock option plan ("1985 Plan"). Options to purchase 1,000,000 shares of the Company's common stock at a price of $.125 per share were granted under this plan. The options are exercisable after one year of continued employment with the Company following the grant date, and expire ten years after the grant date. In 1989, the Company adopted an employee stock option plan and a senior employee stock option plan. Options to purchase 1,150,000 shares of the Company's common stock at $.125 per share were granted under the employee stock option plan and options to purchase 850,000 shares of the Company's common stock at $.125 per share were granted under the senior employee stock option plan. The options become exercisable over a five-year period, beginning one year after the grant date. No options were outstanding at August 31, 2000 and 1999 under the senior employee stock option plan. ________________ Table 4a
WEIGHTED WEIGHTED AVERAGE OPTION AVERAGE SHARES EXERCISE PRICE PRICE RANGE FAIR VALUE - ----------------------------------------------------------------------------------------------- Shares under option: - ----------------------------------------------------------------------------------------------- At August 31, 1998 1,495,209 $ 0.32 $ 0.13-$0.75 Options granted 385,000 $ 0.54 $ 0.40-$0.75 $ 0.16 Options exercised (354,513) $ 0.13 $ 0.13 Options cancelled (776,982) $ 0.44 $ 0.13-$0.75 - ----------------------------------------------------------------------------------------------- At August 31, 1999 748,714 $ 0.41 $ 0.13-$0.75 - ----------------------------------------------------------------------------------------------- Options granted 275,000 $ 0.28 $ 0.27-$0.29 $ 0.23 Options exercised (16,000) $ 0.13 $ 0.13 Options cancelled (266,740) $ 0.58 $ 0.13-$0.75 - ----------------------------------------------------------------------------------------------- At August 31, 2000 740,974 $ 0.30 $ 0.13-$0.40 - -----------------------------------------------------------------------------------------------
_________________ Table 4b
OPTIONS WEIGHTED AVERAGE WEIGHTED OPTIONS WEIGHTED RANGE OF OUTSTANDING REMAINING AVERAGE EXERCISABLE AVERAGE OPTION PRICES AT 8/31/00 CONTRACT LIFE EXERCISE PRICE AT 8/31/00 EXERCISE PRICE - ----------------------------------------------------------------------------------------------------------------------- $0.13-$ 0.31 600,500 4.5 Years $0.28 350,400 $0.29 - ----------------------------------------------------------------------------------------------------------------------- $0.38-$ 0.75 140,474 4.6 Years $0.39 90,474 $0.39 - ----------------------------------------------------------------------------------------------------------------------- $0.13-$ 0.75 740,974 4.5 Years $0.30 440,874 $0.31 - -----------------------------------------------------------------------------------------------------------------------
F10 Pursuant to the Company's merger with Sequoia Data Corporation (Sequoia) in fiscal 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 the Company's 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. No options under this plan were outstanding at August 31, 2000. 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. See Table 4a for a summary of stock option transactions. Table 4b summarizes information about stock options outstanding at August 31, 2000. Employee Stock Purchase Plan On January 21, 2000, the shareholders approved the TMS, Inc. Employee Stock Purchase Plan ("ESPP"). The ESPP allows eligible employees the right to purchase common stock on a quarterly basis at the lower of 85% of the market price at the beginning or end of each three-month offering period. Employee contributions to the ESPP were approximately $19,300 for fiscal 2000. Pursuant to the ESPP, 52,031 shares were issued in fiscal 2000 from common shares held in treasury by the Company. As of August 31, 2000, 197,969 shares are available for future issuances under the plan. Fair Value Disclosures 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 and ESPP in fiscal years 2000 and 1999 been based on the fair value method prescribed by SFAS No. 123, net loss would have been increased by $31,096 and $16,118 in 2000 and 1999, respectively, with no effect on loss per share. 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 95.96% and 76.95% in 2000 and 1999, respectively; risk-free interest rate of 6% and 5.4% for the stock option grants and the ESPP, respectively; expected lives of approximately 6 to 8 years in 2000 and 3.5 to 6 years in 1999 for the stock option grants; and expected lives for the ESPP of approximately .25 years in fiscal 2000. Pro forma net earnings reflects only options granted after September 1, 1995. 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. Note 5: Earnings Per Share Table 5a is a reconciliation of the numerators and the denominators of the basic and diluted per-share computations for income available to common shareholders. Options to purchase approximately 182,000 and 401,000 shares of common stock at prices ranging from $.38-$.75 per share were outstanding at August 31, 2000 and 1999, but were not included in the computation of EPS because the options' exercise price was greater than the average market price of common shares. Additionally, approximately 114,000 options to purchase common stock at prices ranging from $.125-$.310 were excluded from the per share computation for fiscal 2000, because of their anti-dilutive effect. All options expire during periods through the year 2008. - ---------------- Table 5a
FISCAL YEAR 2000 FISCAL YEAR 1999 ------------------------------------------------------------------------------------------------ INCOME SHARES PER-SHARE INCOME SHARES PER-SHARE (NUMERATOR) (DENOMINATOR) AMOUNT (NUMERATOR) (DENOMINATOR) AMOUNT - ----------------------------------------------------------------------------------------------------------------------------------- Basic EPS: $(396,558) 13,364,352 $(0.03) $(686,484) 13,570,605 $(0.05) Effect of Dilutive Securities: Common stock options -- -- - ----------------------------------------------------------------------------------------------------------------------------------- Diluted EPS: $(396,558) 13,364,352 $(0.03) $(686,484) 13,570,605 $(0.05) - -----------------------------------------------------------------------------------------------------------------------------------
F11 Note 6: Reportable Segments The Company's reportable segments are determined by its products and services and include: Component Product Technologies ("CPT"), Assessment Product Technologies ("APT"), Professional Services ("PS") and Document Conversion ("DC") Services. The CPT segment develops the Company's core product technologies. These products include core image viewing, image enhancement and forms processing software products (toolkits) that are necessary for developing new software applications or enhancing existing software applications. In addition, the CPT segment develops software products (applications) that may function independently from any other software package or may be closely associated with other software packages. The toolkits are primarily licensed to developers, system integrators, value added resellers ("VARs") and/or companies who use the software internally. The Company generally receives royalties for each workstation/system that utilizes the product. The applications install directly on a user's system or on a server in a client/server environment. The applications are primarily licensed to entities that require the capability to view and manipulate images through their Internet or intranet web browsers. The APT segment was created during fiscal 2000 to focus on developing technologies to improve the overall process of scoring large-scale assessments ("tests") for grades K-12 in the educational marketplace. The technologies being developed within this segment leverage the Company's existing core competencies in forms recognition, image processing, viewing and enhancement. The APT segment created a Digital Mark Recognition ("DMR") software product prototype designed to replace the need for hardware based Optical Mark Recognition ("OMR"). The APT segment also began design and development of a new product called Virtual Scoring Center ("VSC"). The VSC provides the ability for qualified raters to score student responses to open-ended test questions in a web-enabled environment. In fiscal 2000 the Company decided to transition out of its existing professional service business model. The PS segment offered a variety of consulting and integration services for business and information management processes. In general, the professional service projects focused on an entity's need for document imaging solutions. The Company charged for projects on a time and materials or fixed fee basis. The DC segment primarily offers services for electronic publishing of documents. These services include indexing - for large volume searching of on-line information; hyperlinking - for navigating through complex sets of on-line information; and document markup - for electronic publishing of documents on CD-Rom and the Internet/intranet. Document conversion also participates in a limited amount of data capture activities - converting paper documents to electronic forms. Direct costs are charged to the segments and certain selling, general and administrative expenses for corporate services (i.e. marketing, accounting, information systems, facilities administration et. al.) are allocated to the segments based on various factors such as segment full-time equivalent employees, segment revenue or segment costs. Financial results are measured in accordance with the manner in which management assesses segment performance and allocates resources. Except for capitalized software development costs, financial results do not include separately identifiable balance sheet assets for each segment, as this is not a common measure that management uses to assess segment performance or allocate resources. In the software development business, the most important assets are the employees. Performance measures of the employees are included in the derivation of operating income and loss. Revenue for the PS segment includes a fiscal 1999 fourth quarter adjustment of approximately $105,000 to reflect cost overruns on two fixed fee contracts that represented 44% of fiscal 1999 PS revenue. See Table 9a for the results of operations for each reportable segment for fiscal years ending 2000 and 1999. All revenue and expenses are from unaffiliated sources. Table 6b is a reconciliation of segment operating loss to the total company fiscal 2000 and 1999 net loss. _______________ Table 6b 2000 1999 - --------------------------------------------------------------- Operating loss for reportable segments (90,969) (245,628) Unallocated corporate expenses (350,016) (449,296) Interest income 60,531 25,971 Interest expense (21,161) (31,793) Other, net 5,857 17,964 Income tax expense (800) (3,702) - --------------------------------------------------------------- Net loss $(396,558) (686,484) - --------------------------------------------------------------- Note 7: 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. The Company matches 50% of employee contributions in an amount up to 6% of employees' total compensation. The cost of employer matching approximated $48,000 and $62,000 in 2000 and 1999, respectively. Employees vest in employer matching contributions at a rate of 20% per year after two years of service. F12 ________________ Table 6a
COMPONENT ASSESSMENT PRODUCT PRODUCT PROFESSIONAL DOCUMENT 2000 TECHNOLOGIES TECHNOLOGIES SERVICES CONVERSION TOTALS - ----------------------------------------------------------------------------------------------------------------------------- Revenue to external customers 2,982,195 3,000 360,615 259,439 3,605,249 - ----------------------------------------------------------------------------------------------------------------------------- Depreciation and amortization 86,853 11,132 31,937 81,418 211,340 - ----------------------------------------------------------------------------------------------------------------------------- Operating income (loss) 649,007 (420,978) (318,092) (906) (90,969) - ----------------------------------------------------------------------------------------------------------------------------- Other significant noncash items: Amortization of capitalized software development costs 232,420 -- -- -- 232,420 - ----------------------------------------------------------------------------------------------------------------------------- Write-off of capitalized software development costs 192,681 -- -- -- 192,681 - ----------------------------------------------------------------------------------------------------------------------------- Identifiable segment assets: Capitalized software development costs, net 388,258 -- -- -- 388,258 - ----------------------------------------------------------------------------------------------------------------------------- Expenditures for capitalized software development costs 332,190 -- -- -- 332,190 - ----------------------------------------------------------------------------------------------------------------------------- COMPONENT ASSESSMENT PRODUCT PRODUCT PROFESSIONAL DOCUMENT 1999 TECHNOLOGIES TECNOLOGIES SERVICES CONVERSION TOTALS - ----------------------------------------------------------------------------------------------------------------------------- Revenue to external customers 3,260,443 -- 1,204,403 491,291 4,956,137 - ----------------------------------------------------------------------------------------------------------------------------- Depreciation and amortization 100,314 -- 66,744 98,475 265,533 - ----------------------------------------------------------------------------------------------------------------------------- Restructuring charge -- -- -- 70,895 70,895 - ----------------------------------------------------------------------------------------------------------------------------- Operating income (loss) 382,417 -- (441,757) (186,288) (245,628) - ----------------------------------------------------------------------------------------------------------------------------- Other significant noncash items: Amortization of capitalized software development costs 332,744 -- -- -- 332,744 Write-off of capitalized software development costs 157,251 -- -- -- 157,251 - ----------------------------------------------------------------------------------------------------------------------------- Identifiable segment assets: Capitalized software development costs, net 481,169 -- -- -- 481,169 - ----------------------------------------------------------------------------------------------------------------------------- Expenditures for capitalized software development costs 350,626 -- -- -- 350,626 - -----------------------------------------------------------------------------------------------------------------------------
F13 Note 8: Leases The Company leases office space and equipment under operating leases. Rent expense was approximately $51,000 and $77,000 for 2000 and 1999, respectively. The Company has non-cancelable future minimum lease obligations of $80,864 in fiscal 2000. In November 1997, the Company entered into two capital lease agreements for scanning equipment and related software. The leases have a three- year term and provide for the Company to either relinquish the equipment and software to the leasing company at the end of the lease or purchase the equipment and software at fair market value. Assets under capital leases are included in the Company's balance sheet as follows:
2000 1999 - -------------------------------------------------------------------------------- Computer equipment $ 165,003 $165,003 Less: accumulated amortization (154,043) (102,569) - -------------------------------------------------------------------------------- $ 10,960 $62,434
Future minimum payments, by year and in the aggregate, under capital leases follow: - --------------------------------------------------------------------- 2001 14,236 - --------------------------------------------------------------------- Less: estimated executory costs included in capital leases 2,181 - --------------------------------------------------------------------- Net minimum lease payments 12,055 under capital leases - --------------------------------------------------------------------- Less: amount representing interest 350 - --------------------------------------------------------------------- Present value of net minimum lease payment under capital lease 11,705 - ---------------------------------------------------------------------
During fiscal 2000 and 1999, depreciation expense included $51,474 and $53,237, respectively for amortization of assets held under capital lease. In fiscal 1999, the Company entered into an operating sublease for certain computer equipment and software held under capital lease. The Company received $29,000 and $19,000 in rental payments under the sublease in fiscal 2000 and 1999, respectively. The initial $100,000 cost of the subleased computer equipment and software differed from the August 31, 1999, $26,000 carrying amount due to a $21,000 write-down of the assets to fair value and accumulated depreciation of $53,000. The $21,000 write-down occurred in conjunction with the restructuring of the Company's Document Conversion segment and was based on the present value of discounted future cash flows expected to be received under the operating sublease. The operating sublease expires the earlier of 30 days written notice or November 1, 2000. Note 9: Business and Credit Concentrations In 2000, one customer accounted for 12% and 38% of the Company's total revenue and trade accounts receivable, respectively. In 1999, the Tinker Small Business Innovation Research Grant Services contract accounted for 10% of the Company's total revenue. Information regarding the Company's operations by geographic area as of and for the years ended August 31, 2000 and 1999, follows: Revenue: 2000 1999 - ------------------------------------------------------------------ United States $3,053,608 4,317,397 Europe (export sales) 359,684 381,398 Asia (export sales) 89,096 104,330 Australia (export sales) 28,238 50,281 Canada (export sales) 20,606 83,602 Other (export sales) 54,017 19,129 - ------------------------------------------------------------------ $3,605,249 4,956,137 - ------------------------------------------------------------------ Accounts receivable (gross): 2000 1999 - ------------------------------------------------------------------ United States $525,001 922,984 Europe 52,951 20,807 Asia (2,273) 872 Australia 17,308 18,223 Canada 6,250 - ------------------------------------------------------------------ $592,987 969,136 Note 10: Restructuring In October of fiscal 1999, the Company restructured DC operations to support only customer relationships that primarily relate to electronic publishing activities and for which there are contractual obligations. The restructuring charge of $70,895 incurred in fiscal 1999 included approximately $53,000 of equipment write-downs, $15,000 of employee severance costs, and $3,000 for closing down the leased DC facility. At August 31, 2000 and 1999, there were no outstanding liabilities associated with the restructuring of DC. F14 _______________ Schedule II Valuation and Qualifying Accounts TMS, Inc. (dba TMSSequoia) BALANCE AT ADDITIONS CHARGED TO DEDUCTIONS-- BALANCE AT BEGINNING COSTS & RECOVERY/WRITE-OFF END Classification OF PERIOD EXPENSES OF ACCOUNTS OF PERIOD - -------------------------------------------------------------------------------------------------------------------------------- Year ended August 31, 2000: Allowance for doubtful accounts $ 395,069 66,178 407,215 $ 54,032 Year ended August 31, 1999: Allowance for doubtful accounts $ 190,000 267,131 62,062 $ 395,069 - --------------------------------------------------------------------------------------------------------------------------------
F15 EX-27 2 0002.txt
5 This schedule contains summary financial information extracted from the fiscal year end 10-KSB for the fiscal year ending August 31, 2000 and is qualified in its entirety by reference to such financial statements. 12-MOS AUG-31-2000 AUG-31-2000 1,359,692 0 515,581 54,032 0 2,086,381 2,722,797 1,649,589 4,089,254 710,146 0 0 0 674,533 2,441,744 4,089,254 3,605,249 3,605,249 1,157,089 1,157,089 2,889,145 (252,846) 21,161 (395,758) 800 (396,558) 0 0 0 (396,558) (0.03) (0.03)
EX-3.2 3 0003.txt BYLAWS OF TMS, INC. (An Oklahoma Corporation) ------------------------- ARTICLE I DEFINITIONS 1.01. Definitions. Unless the context clearly requires ------------ otherwise, in these Bylaws: (a) "Board" means the board of directors of the Corporation. (b) "Bylaws" means these bylaws as adopted by the Board and includes amendments subsequently adopted by the Board or by the Shareholders. (c) "Certificate of Incorporation" means the Certificate of Incorporation of TMS Inc. as filed with the Secretary of State of the State of Oklahoma and includes all amendments thereto subsequently filed. (d) "Corporation" means Time Management Software Inc. (e) "Section" refers to sections of these Bylaws. (f) "Shareholder" means a shareholder of record of the Corporation. 1.02. Offices. The title of an office refers to the person ------- or persons who at any given time perform the duties of that particular office for the Corporation. ARTICLE II OFFICES 2.01. Principal Office. The Corporation may locate its ----------------- principal office within or without the state of incorporation as the Board may determine. 2.02. Registered Office. The registered office of the ----------------- Corporation required by law to be maintained in the State of Oklahoma may be, but need not be, identical with the principal office of the Corporation. The Board may change the address of the registered office from time to time. 2.03. Other Offices. The Corporation may have offices at --------------- such other places, either within or without the State of Oklahoma, as the Board may designate or as the business of the Corporation may require from time to time. ARTICLE III MEETINGS OF SHAREHOLDERS 3.01. Annual Meetings. The Shareholders of the Corporation ---------------- shall hold their annual meetings for the purpose of electing directors and for the transaction of such other proper business as may come before such meetings at such time, date and place as the Board shall determine by resolution. 3.02. Special Meetings. The Board or a committee of the ----------------- Board duly designated and whose powers and authority include the power to call meetings may call special meetings of the Shareholders of the Corporation at any time for any purpose or purposes. 3.03. Place of Meetings. The Shareholders shall hold all ------------------ meetings at such places, within or without the State of Oklahoma, as the Board or a committee of the Board shall specify in the notice or waiver of notice for such meetings. 3.04. Notice of Meetings. Except as otherwise required by ------------------ law, the Board or a committee of the Board shall give notice of each meeting of shareholders, whether annual or special, not less than 10 nor more than 60 days before the date of the meeting. The Board or a committee of the Board shall deliver a notice to each Shareholder entitled to vote at such meeting by delivering a typewritten or printed notice thereof to him personally, or by depositing such notice in the United States mail, in a postage prepaid envelope, directed to him at his address as it appears on the records of the Corporation, or by transmitting a notice thereof to him at such address by telegraph, telecopy, cable or wireless. If mailed, notice is given on the date deposited in the United States mail, postage prepaid, directed to the Shareholder at his address as it appears on the records of the Corporation. An affidavit of the Secretary or an Assistant Secretary or of the Transfer Agent of the Corporation that he has given notice shall constitute, in the absence of fraud, prima facie evidence of the facts stated therein. 2 Every notice of a meeting of the Shareholders shall state the place, date and hour of the meeting and, in the case of a special meeting, also shall state the purpose or purposes of the meeting. Furthermore, if the Corporation will maintain the list at a place other than where the meeting will take place, every notice of a meeting of the Shareholders shall specify where the Corporation will maintain the list of Shareholders entitled to vote at the meeting. 3.05. Waiver of Notice. Whenever these Bylaws require ----------------- written notices, a written waiver thereof, signed by the person entitled to notices, whether before or after the time stated therein, shall constitute the equivalent of notice. Attendance of a person at any meeting shall constitute a waiver of notice of such meeting, except when the person attends the meeting for the express purpose of objecting, at the beginning of the meeting, to the transaction of any business because the meeting is not lawfully called or convened. No written waiver of notice need specify either the business to be transacted at, or the purpose or purposes of any regular or special meeting of the Shareholders, directors or members of a committee of the Board. 3.06. Adjournment of Meeting. When the Shareholders adjourn ----------------------- a meeting to another time or place, notice need not be given of the adjourned meeting if the time and place thereof are announced at the meeting at which the adjournment is taken. At the adjourned meeting, the Shareholders may transact any business which they may have transacted at the original meeting. If the adjournment is for more than 30 days or, if after the adjournment, the Board or a committee of the Board fixes a new record date for the adjourned meeting, the Board or a committee of the Board shall give notice of the adjourned meeting to each Shareholder of record entitled to vote at the meeting. 3.07. Quorum. Except as otherwise required by law, the ------- holders of a majority of all of the shares of the stock entitled to vote at the meeting, present in person or by proxy, shall constitute a quorum for all purposes at any meeting of the Shareholders. In the absence of a quorum at any meeting or any adjournment thereof, the holders of a majority of the shares of stock entitled to vote who are present, in person or by proxy, or, in the absence therefrom of all the Shareholders, any officer entitled to preside at, or to act as secretary of, such meeting may adjourn such meeting to another places, date or time. If the chairman of the meeting gives notice of any adjourned special meeting of Shareholders to all Shareholders entitled to vote thereat, stating that those present shall constitute a quorum, then, except as otherwise required by law, those present at such adjourned meeting shall constitute a quorum and a majority of the votes cast at such meeting shall determine all matters. 3 3.08. Organization. Such person as the Board may have ------------- designated or, in the absence of such a persons, the highest ranking officer of the Corporation who is present shall call to order any meeting of the Shareholders, determine the presence of a quorum, and act as chairman of the meeting. In the absence of the Secretary or an Assistant Secretary of the Corporation, the chairman shall appoint the secretary of the meeting. 3.09. Conduct of Business. The chairman of any meeting of -------------------- Shareholders shall determine the order of business and the procedure at the meeting, including such regulations of the manner of voting and the conduct of discussion as he deems in order. 3.10. List of Shareholders. At least 10 days before every --------------------- meeting of Shareholders, the Secretary shall prepare a list of the Shareholders entitled to vote at the meeting or any adjournment thereof, arranged in alphabetical order, showing the address of each Shareholder and the number of shares registered in the name of each Shareholder. The Corporation shall make the list available for examination by any Shareholder for any purpose germane to the meetings either at a place within the city where the meeting will take place or at the place designated in the notice of the meeting. The Secretary shall produce and keep the list at the meeting during the entire duration of the meeting, and any Shareholder who is present may inspect the list at the meeting. The list shall constitute presumptive proof of the identity of the Shareholders entitled to vote at the meeting and the number of shares each Shareholder holds. A determination of Shareholders entitled to vote at any meeting of Shareholders pursuant to this Section shall apply to any adjournment thereof. 3.11. Closing of Transfer Books or Fixing of Record Date. ------------------------------------------------------ For the purpose of determining Shareholders entitled to notice of or to vote at any meeting of Shareholders or any adjournment thereof, or Shareholders entitled to receive payment of any dividend, or in order to make a determination of Shareholders for any other proper purposes the Board or a committee of the Board may provide that the Corporation shall close the stock transfer books for a stated period not to exceed 60 days. If the Corporation closes the stock transfer books for the purpose of determining Shareholders entitled to notice of or to vote at a meeting of Shareholders, the Corporation shall close such books a minimum of 10 days and a maximum of 60 days immediately preceding such meeting. In lieu of closing the stock transfer books, the Board or a committee of the Board may fix in advance a date as the record date for any such determination of Shareholders. However, the Board shall not fix such date, in any case, more than 60 days prior to the date of the particular action. 4 If the Board or a committee of the Board does not close the stock transfer books and does not fix a record date for the determination of Shareholders entitled to notice of or to vote at a meeting of Shareholders, the date of the mailing of notice of the date on which the Board adopts the resolution declaring a dividend, as the case may be, shall be the record date for such determination of Shareholders. 3.12. Voting of Shares. Each Shareholder shall have one ----------------- vote for every share of stock having voting rights registered in his name on the record date for the meeting. The Corporation shall not have the right to vote treasury stock of the Corporation, nor shall another corporation have the right to vote its stock of the Corporation if the Corporation holds, directly or indirectly, a majority of the shares entitled to vote in the election of directors of such other corporation. Persons holding stock of the Corporation in a fiduciary capacity shall have the right to vote such stock. Persons who have pledged their stock of the Corporation shall have the right to vote such stock unless in the transfer on the books of the Corporation the pledgor expressly empowered the pledgee to vote such stock. In that event, only the pledgee, or his proxy, may represent such stock and vote thereon. A plurality of the votes cast shall determine all elections of directors and, except when the law or the Certificate of Incorporation requires otherwise, a majority of the votes cast shall determine all other matters. The Shareholders may vote by voice vote on all matters. However, upon demand by a Shareholder entitled to vote, or his proxy, the Shareholders shall vote by ballot. In that event, each ballot shall state the name of the Shareholder or proxy voting the number of shares voted and such other information as the Corporation may require under the procedure established for the meeting. 3.13. Judges. At any meeting in which the Shareholders vote -------- by ballot, the chairman may appoint a judge or judges. Each judge shall subscribe an oath to execute the duties of a judge at such meeting faithfully, with strict impartiality, and according to the best of his ability. The judge or judges shall decide the qualification of the voters and shall report the number of shares represented at the meeting and entitled to vote on any question, shall conduct and accept the votes, and, when the Shareholders have completed voting, ascertain and report the number of shares voted respectively for and against the question. The judge or judges shall prepare a subscribed, written report and shall deliver the report to the Secretary of the Corporation. A judge need not be a Shareholder of the Corporation, and any officer of the Corporation may be a judge on any question other than a vote for or against a proposal in which he has a material interest. 5 3.14. Proxies. A Shareholder may exercise any voting rights --------- in person or by his proxy appointed by an instrument in writing, which he or his authorized attorney-in-fact has subscribed and which the proxy has delivered to the secretary of the meeting. A proxy is not valid after the expiration of three years after the date of its execution, unless the person executing it specifies thereon the length of time for which it is to continue in force(which length may exceed three years) or limits its use to a particular meeting. The attendance at any meeting of a Shareholder who previously has given a proxy shall not have the effect of revoking the same unless he notifies the Secretary in writing prior to the voting of the proxy. 3.15. Consent of Shareholders in Lieu of Meeting. The ------------------------------------------- Shareholders may take any action which they could take at any annual or special meeting without a meeting, prior notice and a vote if the holders of outstanding stock having not less than the minimum number of votes necessary to authorize or take the action at a meeting at which all shares entitled to vote were present and voted sign, a consent in writing, setting forth the action taken. The Secretary or an Assistant Secretary shall give prompt notice of the taking of any corporate action without a meeting by less than unanimous consent to the Shareholders who have not consented in writing. ARTICLE IV BOARD OF DIRECTORS ------------------- 4.01. General Powers. The Board shall manage the property --------------- business and affairs of the Corporation. 4.02. Number. The number of directors who shall constitute -------- the Board shall equal not less than one nor more than 15, as the Board may determine by resolution from time to time. 4.03. Election of Directors and Term of Office. The Share- ------------------------------------------ holders of the Corporation shall elect the directors at the annual or adjourned annual meeting (except as otherwise provided herein for the filling of vacancies). Each director shall hold office until his death, resignation, retirement, removal, or disqualification, or until his successor shall have been elected and qualified. 4.04. Resignations. Any director of the Corporation may -------------- resign at any time by giving written notice to the Board or to the Secretary of the corporation. Any resignation shall take effect upon receipt or at the time specified in the notice. Unless the notice specifies otherwise, the effectiveness of the resignation shall not depend upon its acceptance. 6 4.05. Removal. Shareholders holding a majority of the out- -------- standing shares entitled to vote at an election of directors may remove any director at any time with or without cause. 4.06. Vacancies. A majority of the remaining directors, ----------- although less than a quorum, may fill any vacancy in the Board, whether because of death, resignation, disqualification, an increase in the number of directors, or any other cause. Each director so chosen shall hold office until his death, resignation, retirement, removal, or disqualification, or until his successor shall have been elected and qualified. 4.07. Chairman of the Board. At the initial and annual ---------------------- meeting of the Board, the directors may elect from their number a Chairman of the Board of Directors. The Chairman shall preside at all meetings of the Board and shall perform such other duties as the Board may direct. The Board also may elect a Vice Chairman and other officers of the Board, with such powers and duties as the Board may designate from time to time. 4.08. Compensation. The Board may compensate directors for ------------- their services and may provide for the payment of all expenses the directors incur by attending meetings of the Board. ARTICLE V MEETINGS OF DIRECTORS ---------------------- 5.01. Regular Meetings. The Board may hold regular meetings ----------------- at such places, dates and times as the Board shall establish by resolution. If any day fixed for a meeting falls on a legal holiday, the Board shall hold the meeting at the same place and time on the next succeeding business day. The Board need not give notice of regular meetings. 5.02. Place of Meetings. The Board may hold any of its ------------------ meetings in or out of the State of Oklahoma, at such places as the Board may designate, at such places as the notice or waiver of notice of any such meeting may designate, or at such places as the persons calling the meeting may designate. 5.03. Meetings by Telecommunications. The Board or any ------------------------------- committee of the Board may hold meetings by means of conference telephone or similar telecommunications equipment that enable all persons participating in the meeting to hear each other. Such participation shall constitute presence in person at such meeting. 7 5.04. Special Meetings. The Chairman of the Board, the ----------------- President, or one-third of the directors then in office may call a special meeting of the Board. The person or persons authorized to call special meetings of the Board may fix any place, either in or out of the State of Oklahoma as the place for the meeting. 5.05. Notice of Special Meetings. The person or persons --------------------------- calling a special meeting of the Board shall give written notice to each director of the time, place, date and purpose of the meeting of not less than three business days if by mail and not less than 24 hours if by telegraph or in person. A director may waive notice of any special meeting, and any meeting shall constitute a legal meeting without notice if all the directors are present or if those not present sign either before or after the meeting a written waiver of notice, a consent to such meeting, or an approval of the minutes of the meeting. A notice or waiver of notice need not specify the purposes of the meeting or the business which the Board will transact at the meeting. 5.06. Waiver by Presence. Except when expressly for the -------------------- purpose of objecting to the legality of a meeting, a director's presence at a meeting shall constitute a waiver of notice of such meeting. 5.07. Quorum. A majority of the directors then in office -------- shall constitute a quorum for all purposes at any meeting of the Board. In the absence of a quorum, a majority of directors present at any meeting may adjourn the meeting to another place, date or time without further notice. 5.08. Conduct of Business. The Board shall transact -------------------- Business in such order and manner as the Board may determine. Except as the law requires otherwise, the Board shall determine all matters by the vote of a majority of the directors present. The directors shall act as a Board, and the individual directors shall have no power as such. 5.09. Action by Consent. The Board or a committee of the ------------------ Board may take any required or permitted action without a meeting if all members of the Board or committee sign a written consent and file the consent with the minutes of the proceedings of the Board. ARTICLE VI COMMITTEES ----------- 6.01. Committees of the Board. The Board may designate, by ------------------------ a vote of a majority of the directors then in office, committees of the Board. The committees shall serve at the pleasure of the Board and shall possess such lawfully delegable powers and duties as the Board may confer. 8 6.02. Selection of Committee Members. The Board shall ------------------------------- elect by a vote of a majority of the directors then in office a director or directors to serve as the member of members of a committee. By the same votes, the Board may designate other directors as alternative members who may replace any absent or disqualified member at any meeting of a committee. In the absence or disqualification of any member of any committee and any alternate member in his place, the member or members of the committee present at the meeting and not disqualified from voting, whether or not he or they constitute a quorum, may appoint by unanimous vote another member of the Board to act at the meeting in the place of the absent or disqualified member. 6.03. Conduct of Business. Each committee may determine the -------------------- procedural rules for meeting and conducting its business and shall act in accordance therewith, except as the law or these Bylaws require otherwise. Each committee shall make adequate provision for notice of all meetings to members. A majority of the members shall constitute a quorum, unless the committee consists of one or two members. In that event, one member shall constitute a quorum. A majority vote of the members present shall determine all matters. A committee may take action without a meeting if all the members of the committee consent in writing and file the consent or consents with the minutes of the proceedings of the committee. 6.04. Authority. Any committee to the extent the Board ----------- provides, shall have and may exercise all the powers and authority of the Board in the management of the business and affairs of the Corporation, and may authorize the affixation of the Corporation's seal to all instruments which may require or permit it. However, no committee shall have any power or authority with regard to amending the Certificate of Incorporation, adopting an agreement of merger or consolidation, recommending to the Shareholders the sale, lease or exchange of all or substantially all of the Corporation's property, recommending to the Shareholders a dissolution of the Corporations, or amending these Bylaws of the Corporation. Unless a resolution of the Board expressly provides, no committee shall have the power or authority to declare a dividend or to authorize the issuance of stock. 6.05. Minutes. Each committee shall keep regular minutes of -------- its proceedings and report the same to the Board when required. ARTICLE VII OFFICERS ----------- 7.01. Officers of the Corporation. The officers of the ---------------------------- Corporation shall consist of a President, a Secretary, a Treasurer and such Vice Presidents, Assistant Secretaries, Assistant Treasurers, and other officers as the Board may designate and elect from time to time. The same person may hold at the same time any two offices, except the offices of President and Secretary. 9 7.02. Election and Term. The Board shall elect the officers ------------------ of the Corporation. Each officer shall hold office until his deaths, resignation, retirement, removal or disqualification, or until his successor shall have been elected and qualified. 7.03. Compensation of Officers. The Board shall fix the ------------------------ compensation of all officers of the Corporation. No officer shall serve the Corporation in any other capacity and receive compensation, unless the Board authorizes the additional compensation. 7.04. Removal of Officers and Agents. The Board may remove ------------------------------- any officer or agent it has elected or appointed at any time, with or without cause. 7.05. Resignation of Officers and Agents. Any officer or ----------------------------------- agent the Board has elected or appointed may resign at any time by giving written notice to the Board, the Chairman of the Board, the President, or the Secretary of the Corporation. Any such resignation shall take effect at the date of the receipt of such notice or at any later time specified. Unless otherwise specified in the notice, the Board need not accept the resignation to make it effective. 7.06. Bond. The Board may require by resolution any ----- officer, agent, or employee of the Corporation to give bond to the Corporation, with sufficient sureties conditioned on the faithful performance of the duties of his respective office or agency. The Board also may require by resolution any officer, agent or employee to comply with such other conditions as the Board may require from time to time. 7.07. President. The President shall be the principal --------- executive officer of the Corporation and, subject to the Board's control, shall supervise and control all of the business and affairs of the Corporation. When present, he shall sign (with or without the Secretary, an Assistant Secretary or any other officer or agent of the Corporation which the Board has authorized) deeds, mortgages, bonds, contracts or other instruments which the Board has authorized an officer or agent of the Corporation to execute. However, the President shall not sign any instrument which the law, these Bylaws, or the Board expressly require some other officer or agent of the Corporation to sign and execute. In general, the President shall perform all duties incident to the office of President and such other duties as the Board may prescribe from time to time. 10 7.08. Vice Presidents. In the absence of the President or ---------------- In the event of his death, inability or refusal to act, the Vice Presidents in the order of their length of service as Vice Presidents, unless the Board determines otherwise, shall perform the duties of the President. When acting as the President, a Vice President shall have all the powers and restrictions of the Presidency. A Vice President shall perform such other duties as the President or the Board may assign to him from time to time. 7.09. Secretary. The Secretary shall (a) keep the minutes ---------- of the meetings of the Shareholders and of the Board in one or more books for that purpose; (b) give all notices which these Bylaws or the law requires; (c) serve as custodian of the records and seal of the Corporation; (d) affix the seal of the Corporation to all documents which the Board has authorized execution on behalf of the Corporation under seal; (e) maintain a register of the address of each Shareholder of the Corporation; (f) sign, with the President, a Vice President, or any other officer or agent of the Corporation which the Board has authorized, certificates for shares of the Corporation; (g) have charge of the stock transfer books of the Corporation, and (h) perform all duties which the President or the Board may assign to him from time to time. 7.10. Assistant Secretaries. In the absence of the ---------------------- Secretary or in the event of his death, inability or refusal to act, the Assistant Secretaries in the order of their length of service as Assistant Secretary, unless the Board determines otherwise, shall perform the duties of the Secretary. When acting as the Secretary, an Assistant Secretary shall have the powers and restrictions of the Secretary. An Assistant Secretary shall perform such other duties as the President, Secretary or Board may assign from time to time. 7.11. Treasurer. The treasurer shall (a) have ---------- responsibility for all funds and securities of the Corporation, (b) receive and give receipts for monies due and payable to the Corporation from any source whatsoever, (c) deposit all monies in the name of the Corporation in depositories which the Board selects, and (d) perform all of the duties which the President or the Board may assign to him from time to time. 7.12. Assistant Treasurers. In the absence of the Treasurer -------------------- or in the event of his death., inability or refusal to act, the Assistant Treasurers in the order of their length of service as Assistant Treasurer, unless the Board determines otherwise, shall perform the duties of the Treasurer. When acting as the Treasurer, an Assistant Treasurer shall have the powers and restrictions of the Treasurer. An Assistant Treasurer shall perform such other duties as the Treasurer, the President, or the Board may assign to him from time to time. 7.13. Delegation of Authority Notwithstanding any provision ------------------------ of these Bylaws to the contrary, the Board may delegate the powers or duties of any officer to any other officer or agent. 11 7.14. Action with Respect to Securities of Other Corpora- ---------------------------------------------------- tions. Unless the Board directs otherwise, the President shall have the power to vote and otherwise act on behalf of the Corporation, in person or by proxy, at any meeting of Shareholders of or with respect to any action of Shareholders of any other corporation in which the Corporation holds securities. Furthermore, unless the Board directs otherwise, the President shall exercise any and all rights and powers which the Corporation possesses by reason of its ownership of securities in another corporation. 7.15. Vacancies. The Board may fill any vacancy in any ----------- office because of death, resignation, removal, disqualification or any other cause in the manner which these Bylaws prescribe for the regular appointment to such office. ARTICLE VIII CONTRACTS, LOANS, DRAFTS, DEPOSITS AND ACCOUNTS ------------------------------------------------ 8.01. Contracts. The Board may authorize any officer or ---------- officers, agent or agents, to enter into any contract or execute and deliver any instrument in the name and on behalf of the certificates in the name of the Corporation. Any or all certificates may contain facsimile signatures. In case any officer, transfer agent, or registrar, who has signed a certificate, or whose facsimile signature appears on a certificate, ceases to serve as such officer, transfer agent, or registrar before the Corporation issues the certificate, the Corporation may issue the certificate with the same effect as though the person who signed such certificate, or whose facsimile signature appears on the certificate, was such officer, transfer agent, or registrar at the date of issue. The Secretary, transfer agent, or registrar of the Corporation shall keep a record in the stock transfer books of the Corporation of the names of the persons, firms or corporations owning the stock represented by the certificates, the number and class of shares represented by the certificates and the dates thereof and, in the case of cancellation, the dates of cancellation. The Secretary, transfer agent, or registrar of the Corporation shall cancel every certificate surrendered to the Corporation for exchange or transfer. Except in the case of a lost, destroyed or mutilated certificate, the Secretary, transfer agent, or registrar of the Corporation shall not issue a new certificate in exchange for an existing certificate until he has cancelled the existing certificate. 8.02. Transfer of Shares. The holder of record of shares of ------------------- the Corporation's stock, or his attorney-in-fact authorized by power of attorney duly executed and filed with the Secretary, transfer agent or registrar of the Corporation, may transfer his shares only on the stock transfer books of the Corporation. Such person shall furnish to the Secretary, transfer agent, or registrar of the corporation 12 proper evidence of his authority to make the transfer and shall properly endorse and surrender for cancellation his existing certificate or certificates for such shares. Whenever the holder of record of shares of the Corporation's stock makes a transfer of shares for collateral security, the Secretary, transfer agent, or registrar of the Corporation shall state such fact in the entry of transfer if the transferor and the transferee request. 8.03. Lost, Stolen, Destroyed and Mutilated Certificates. ---------------------------------------------------- The Board may direct the Secretary, transfer agent, or registrar of the Corporation to issue a new certificate to any holder of record of shares of the Corporation's stock claiming that he has lost such certificate, or that someone has stolen, destroyed or mutilated such certificate, upon the receipt of an affidavit from such holder to such fact. When authorizing the issue of a new certificate, the Board, in its discretion, may require as a condition precedent to the issuance that the owner of such certificate give the Corporation a bond of indemnity in such form and amount as the Board may direct. 8.04. Regulations. The Board may make such rules and ------------- Regulations, not inconsistent with these Bylaws, as it deems expedient concerning the issue, transfer and registration of certificates for shares of the stock of the Corporation. The Board may appoint or authorize any officer or officers to appoint one or more transfer agent, or one or more registrar, and may require all certificates for stock to bear the signature or signatures of any of them. 8.05. Holder of Record. The Corporation may treat as ---------------- absolute owners of shares the person in whose name the shares stand of record as if that person had full competency, capacity and authority to exercise all rights of ownership, despite any knowledge or notice to the contrary or any description indicating a representative pledge or other fiduciary relation, or any reference to any other instrument or to the rights of any other person appearing upon its record or upon the share certificate. However, the Corporation shall treat any person furnishing proof of his appointment as a fiduciary as if he were the holder of record of the shares. 8.06. Treasury Shares. Treasury shares of the Corporation ---------------- shall consist of shares which the Corporation has issued and thereafter acquired but not cancelled. Treasury shares shall not carry voting or dividend rights. ARTICLE IX INDEMNIFICATION ---------------- 13 9.01. Actions Other Than By or In the Right of the Corpora- ----------------------------------------------------- tion. The Corporation may indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (other than an action by or in the right of the Corporation) by reason of the fact that he is or was a shareholder, director, officer, employee or agent of the Corporation, or is or was serving at the request of the Corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise or as a member of any committee or similar body, against expenses (including attorneys' fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by him in connection with such action, suit or proceeding if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the Corporation and, with respect to any criminal action or proceeding, had no reasonable cause to believe his conduct was unlawful. The termination of any action, suit or proceeding by judgment, order, settlement, conviction, or upon a plea of nolo contendere or its equivalent, shall not create, of itself, a presumption that the person did not act in good faith and in a manner which he reasonably believed to be in or not opposed to the best interests of the Corporation, and, with respect to any criminal action or proceeding, that he had reasonable cause to believe that his conduct was unlawful. 9.02. Actions By or In the Right of the Corporation. ----------------------------------------------- The Corporation may indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action or suit by or in the right of the Corporation to procure a judgment in its favor by reason of the fact that he is or was a shareholder, director, officer, employee or agent of the Corporation, or is or was serving at the request of the Corporation as a shareholder, director, officer, employee, or agent of another corporation, partnership, joint venture, trust or other enterprise, or as a member of any committee or similar body, against expenses (including attorneys' fees) actually and reasonably incurred by him in connection with the defense or settlement of such action or suit if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interest of the Corporation, except that the Corporation shall make no indemnification in respect of any claim, issue or matter as to which such person shall have been adjudged to be liable for negligence or misconduct in the performance of his duty to the Corporation unless and only to the extent that the court in which such action or suit was brought shall determine upon application that, despite the adjudication of liability but in view of all the circumstances of the case, such person is fairly and reasonably entitled to indemnity for such expenses which the court shall deem proper. 9.03. Determination of Right of Indemnification. ------------------------------------------- The Corporation shall not indemnify any person under Section 9.01 or Section 9.02, in the absence of a court order, unless authorized in the specific case upon a determination that the director, officer, employee or agent 14 has met the applicable standard of conduct set forth in Section 9.01 or Section 9.02. One of the following shall make the determination: (a) the Board, by a majority vote of a quorum of directors not a party to the actions, suit or proceeding; (b) absent a quorum or at the direction of a quorum of disinterested directors, independent legal counsel, by a written opinion; or (c) the Shareholders. 9.04. Indemnification Against Expenses of Successful Party. ----------------------------------------------------- Notwithstanding the other provisions of this Article 9, to the extent that a shareholder, director, officer, employee or agent of the corporation has been successful on the merits or otherwise in defense of any actions, suit or proceeding referred to in Section 9.01 or Section 9.02 of these Bylaws, or in defense of any claims, issue or matter therein the Corporation shall indemnify him against expenses (including attorneys' fees) which he actually and reasonably has incurred in connection therewith. 9.05. Advance of Expenses. If the Corporation ultimately ---------------------- determines that the Corporation should not indemnify any person pursuant to the provisions of this Article 9, the Corporation nevertheless may pay his expenses incurred in defending an action or proceeding in advance of the final disposition of such action or proceeding upon specific authorization by the Board and upon his delivery to the Board of an undertaking to repay such amount. 9.06. Other Rights and Remedies. The indemnification ------------------------- provided by this Article 9 shall not be deemed exclusive and is declared expressly to be nonexclusive of any other rights to which those seeking indemnification may be entitled under any bylaws, agreements, vote of Shareholders or disinterested directors or otherwise, both as to actions in his official capacity and as to actions in another capacity while holding such office. In addition, the indemnification provided by this Article 9 shall continue as to any person who has ceased to be a directors, officers, employee or agent and shall inure to the benefit of the heirs, executors and administrators of such a person. 9.07. Insurance. Upon resolution passed by the Board, the ---------- Corporation may purchase and maintain insurance on behalf of any person who is or was a director, officer, employee or agent of the Corporation, or is or was serving at the request of the Corporation as a shareholder, director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise or as a member of any committee of similar body, against any liability asserted against him and incurred by him in any such capacity, or arising out of his status as such, whether or not the Corporation would have the power to indemnify him against such liability under the provisions of this Article 9. 15 9.08. Constituent Corporations. For the purposes of this -------------------------- Article 9, references to "the Corporation" include in addition to the resulting corporation, any constituent corporation (including any constituent of a constituent) absorbed in a consolidation or merger which, if its separate existence had continued, would have had power and authority to indemnify its directors, officers and employees or agents, so that any person who is or was a director, officer, employee or agent of such constituent corporation or is or was serving at the request of such constituent corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise or as a member of any committee or similar body, shall stand in the same position under the provisions of this Article 9 with respect to the resulting or surviving corporation as he would have with respect to such constituent corporation if its existence had continued. 9.09. Other Insurance. The Corporation shall reduce the ---------------- amount of the indemnification of any person pursuant to the provisions of this Article IX by the amount which such person collects as indemnification (a) under any policy of insurance which the Corporation purchased and maintained on his behalf or (b) from another corporation, partnership, joint venture, trust or other enterprise. 9.10. Public Policy . Nothing contained in this Article XI, --------------- or elsewhere in these Bylaws, shall operate to indemnify any director or officer if such indemnification is contrary to law, either as a matter of public policy, or under the provisions of the Federal Securities Act of 1933, as amended, the Securities Exchange Act of 1934, as amended, or any other applicable state of Federal law. ARTICLE X NOTICES -------- 10.01. General. Whenever these Bylaws require notice to any --------- Shareholder, director, officer or agent, such notice does not mean personal notice. A person may give effective notice under these Bylaws in every case by depositing a writing in a post office or letter box in a postpaid, sealed wrapper, or by dispatching a prepaid telegram addressed to such Shareholder, director, officer or agent at his address on the books of the Corporation. Unless these Bylaws expressly provide to the contrary, the time when the person sends notice shall constitute the time of the giving of notice. 10.02. Waiver of Notice. Whenever the law or these Bylaws ------------------ require notice, the person entitled to said notice may waive such notice in writing, either before or after the time stated therein. 16 ARTICLE XI MISCELLANEOUS -------------- 11.01. Facsimile Signatures. In addition to the use of ---------------------- facsimile signatures which these Bylaws specifically authorize, the Corporation may use such facsimile signatures of any officer or officers, agents or agent, of the Corporation as the Board or a committee of the Board may authorize. 11.02. Corporate Seal. The Board may provide for a suitable ---------------- seal containing the name of the Corporation, of which the Secretary shall be in charge. The Treasurer, any Assistant Secretary, or any Assistant Treasurer may keep and use the seal or duplicates of the seal if and when the Board or a committee of the Board so directs. 11.03. Fiscal Year. The Board shall have the authority to ------------- fix and change the fiscal year of the Corporation. ARTICLE XII AMENDMENTS ----------- Subject to the provisions of the Certificate of Incorporation, the Shareholders or the Board may amend or repeal these Bylaws at any meeting. Adopted as of the 27 day of April, 1990, by the undersigned, being the incorporators of the Corporation. /s/ J. Richard Phillips ------------------- J. Richard Phillips /s/ Doyle E. Cherry ------------------- Doyle E. Cherry /s/ James R. Rau, M.D. ------------------- James R. Rau, M.D. The undersigned hereby certifies that the foregoing constitutes a true and correct copy of the Bylaws of the Corporation as adopted by the Board on the 27 day of April, 1990. Executed as of this 27 day of April, 1990. (SEAL) TMS#5/BYLAWS /s/ Winfrey D. Houston --------------------- Winfrey D. Houston Secretary 17 TMS, Inc. Certification of Amendments to Bylaws I, Margaret T. Adcock, Corporate Secretary of TMS, Inc. do hereby certify that at a duly called special meeting of the Board of Directors of TMS, Inc. held at 3:15 p.m. on Thursday, May 20, 1993, at the corporate headquarters of TMS, Inc., 110 West Third Street, Stillwater, Oklahoma the following resolutions were adopted which amend the Company Bylaws: RESOLVED, That Section 7.01 of the Bylaws of the Company be amended to read in its entirety as follows: 7.01 Officers of the Corporation. The officers of the ---------------------------- Corporation shall consist of a Chairman of the Board of Directors, a President, a Secretary, a Treasurer, and such Vice Presidents, Assistant Secretaries, Assistant Treasurers and such other officers as the Board may designate and elect from time to time. The same person may hold at the same time any two offices except the offices of President and Secretary. RESOLVED, That Section 7.07 of the Bylaws of the Company be amended to read in its entirety as follows: 7.07 Chairman of the Board; President. --------------------------------- (a) The Chairman of the Board, or "Chairman," shall preside at all meetings of the shareholders and of the Board of Directors. The Chairman shall be the chief executive officer of the Corporation. In general, the Chairman shall be responsible for and perform all duties incident to the office of Chairman of the Board of Directors and such other duties as the Board may prescribe from time to time. (b) The President shall be the chief operating officer of the Corporation. In general, the President shall oversee the day-to-day operations of the Corporation and shall be responsible for and perform all duties incident to the office of President and such other duties as the Board may prescribe from time to time. In the absence of the Chairman or in the event of his death, inability or refusal to act, the President, unless the Board determines otherwise, shall perform the duties of the Chairman. When acting as the Chairman, the President shall have all the powers and restrictions of the Chairman; however, the President shall not be entitled to vote as a director unless: (i) the President was, immediately prior to assuming the duties as Chairman, a member of the Board of Directors, or (ii) the President was elected by the Board of Directors to fill a vacancy on the Board of Directors at the time of assuming the duties as Chairman. 18 RESOLVED, that Sections 7.09(f) and 7.09(h) shall be amended, respectively, to read in their entirety as follows: "(f) sign, with the Chairman, President, a Vice President, or any other officer or agent of the Corporation which the Board has authorized, certificates for shares of the Corporation;" "(h) perform all duties which the Chairman of the Board may assign to him from time to time." RESOLVED, that the last sentence of Section 7.10 shall be amended to read in its entirety as follows: "An Assistant Secretary shall perform such other duties as the Chairman, The President, Secretary or Board may assign from time to time." RESOLVED, that the last sentence of Section 7.11 shall be amended to read in its entirety as follows: "An Assistant Treasurer shall perform such other duties as the Chairman, the President, Treasurer or Board may assign from time to time." RESOLVED, that all references to "President' in Section 7.14 shall be revised and amended to read "Chairman." CORPORATE SEAL /s/ Margaret Tomlinson Adcock ------------------------- MARGARET TOMLINSON ADCOCK CORPORATE SECRETARY 19 CERTIFICATE OF AMENDMENT OF BYLAWS OF TMS, INC. TMS Inc. (the "Company") a corporation organized and existing under the laws of the State of Oklahoma, does hereby certify that at a telephonic meeting of the Board of Directors of the Company held at 4:00 p.m. on Thursday, October 23, 1997, the following resolutions were adopted which amend the Bylaws of the Company: RESOLVED that Section 7.01 of the Bylaws of the Company be amended to read in its entirety as follows: 7.01 Officers of the Corporation. The officers of the Corporation shall consist of a Chairman of the Board of Directors, a President and Chief Executive Officer, a Secretary, a Treasurer, and such Vice Presidents, Assistant Secretaries, Assistant Treasurers, and such other officers as the Board may designate and elect from time to time. The same person may hold at the same time any two offices, except the offices of President and Secretary. FURTHER RESOLVED that Section 7.07 of the Bylaws of the Company be amended to read in its entirety as follows: 7.07 Chairman of the Board; President. (a) The Chairman of the Board, or "Chairman," shall preside at all meetings of the shareholders and of the Board of Directors. In general, the Chairman shall be responsible for and perform all duties incident to the office of Chairman of the Board of Directors and such other duties as the Board may prescribe from time to time. 20 (b) The President shall be the chief executive officer of the Corporation. In general, the President shall oversee the day-to-day operations of the Corporation and shall be responsible for and perform all duties incident to the office of President and such other duties as the Board may prescribe from time to time. In the absence of the Chairman or in the event of his death, inability or refusal to act, the President, unless the Board determines otherwise, shall perform the duties of the Chairman. When acting as the Chairman, the President shall have all the powers and restrictions of the Chairman; however, the President shall not be entitled to vote as a director unless: (i) the President was, immediately prior to assuming the duties as Chairman, a member of the Board of Directors, or (ii) the President was elected by the Board of Directors to fill a vacancy on the Board of Directors at the time of assuming the duties as Chairman. FURTHER RESOLVED that the last sentence of Section 7.11 shall be amended to read in its entirety as follows: "An Assistant Treasurer shall perform such other duties as the Chairman, the President, Treasurer or Board may assign from time to time." FURTHER RESOLVED, that all references to "Chairman" in Section 7.14 shall be revised and amended to read "President." CORPORATE SEAL /s/ Deborah D. Mosier ------------------ DEBORAH D. MOSIER SECRETARY 21 CERTIFICATE OF AMENDMENT OF BYLAWS OF TMS, INC. TMS Inc. (the "Company") a corporation organized and existing under the laws of the State of Oklahoma, does hereby certify that at a telephonic meeting of the Board of Directors of the Company held at 1:00 p.m. on Friday, September 24, 1999, the following resolutions were adopted which amend the Bylaws of the Company: RESOLVED that Section 3.08 of the Bylaws of the Company be amended to read in its entirety as follows: 3.08. Organization. Unless otherwise directed by the Board of Directors, the Chairman of the Board of Directors shall call to order any meeting of the Shareholders, determine the presence of a quorum, and act as the chairman of the meeting. In the absence of the Secretary or an Assistant Secretary of the Corporation, the chairman shall appoint the secretary of the meeting. FURTHER RESOLVED, that Section 7.01 of the Bylaws of the Company be amended to read in its entirety as follows: 7.01. Officers of the Corporation. The officers of the Corporation shall consist of a Chairman of the Board of Directors, a President, a Chief Executive Officer, a Secretary, a Treasurer, and such Vice Presidents, Assistant Secretaries, Assistant Treasurers and such other officers as the Board may designate and elect from time to time. The same person may hold at the same time any two offices, except the offices of President, Chairman of the Board of Directors, Chief Executive Officer and Secretary. 22 FURTHER RESOLVED, that Section 7.07 of the Bylaws of the Company be amended to read in its entirety as follows: 7.07. Chairman of the Board; President; Chief Executive Officer. (a) The Chairman of the Board, or "Chairman," shall preside at all meetings of the Board of Directors and, unless otherwise directed by the Board of Directors, shall preside at all meetings of the shareholders. In general, the Chairman shall be responsible for and perform all duties incident to the office of chairman of the Board of Directors and such other duties as the Board may prescribe from time to time. (b) The President shall be the principal executive officer of the Corporation. In general, the President shall oversee the day-to-day operations of the Corporation and shall be responsible for and perform all duties incident to the office of President and such other duties as the Board may prescribe from time to time. In the absence of the Chairman or in the event of his death, inability or refusal to act, the President, unless the Board determines otherwise, shall perform the duties of the Chairman. When acting as the Chairman, the President shall have all the powers and restrictions of the Chairman; however, the President shall not be entitled to vote as a director unless; (i) the President was, immediately prior to assuming the duties as Chairman, a member of the Board of Directors, or (ii) the President was elected by the Board of Directors to fill a vacancy on the Board of Directors at the time of assuming the duties as Chairman. (c) The Chief Executive Officer, subject to such supervisory powers, if any, as may be given the Board of Directors to the chairman of the Board if there be such an officer, shall, subject to the control of the Board of Directors, have general supervision, discretion, and control of the business and the offices of the corporation. CORPORATE SEAL /s/ Marshall Wicker ------------------------ MARSHALL WICKER SECRETARY 23 EX-23.1 4 0004.txt Exhibit 23.1 INDEPENDENT AUDITORS' CONSENT The Board of Directors TMS, Inc.: We consent to incorporation by reference in the registration statement (no. 333-03909) on Form S-8 of TMS, Inc. of our report dated October 19, 2000, relating to the balance sheets of TMS, Inc. as of August 31, 2000 and 1999, and the related statements of operations, shareholders' equity, and cash flows for the years then ended, and the related financial statement schedule, which report appears in the August 31, 2000, annual report on Form 10-KSB of TMS, Inc. KPMG LLP Oklahoma City, Oklahoma November 20, 2000 -----END PRIVACY-ENHANCED MESSAGE-----