-----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, APcf+yR7rcTz3bdCpac9FbI4dWV3hgb8/1m1JdeX88aPrWM45AbZ5EaNbxRi7UWd MrrOA7CAZxT8rLP8pXOfWA== 0000950110-97-001324.txt : 19970912 0000950110-97-001324.hdr.sgml : 19970912 ACCESSION NUMBER: 0000950110-97-001324 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19970531 FILED AS OF DATE: 19970829 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: TSR INC CENTRAL INDEX KEY: 0000098338 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-COMPUTER PROGRAMMING SERVICES [7371] IRS NUMBER: 132635899 STATE OF INCORPORATION: DE FISCAL YEAR END: 0531 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-08656 FILM NUMBER: 97672768 BUSINESS ADDRESS: STREET 1: 400 OSER AVE CITY: HAUPPAUGE STATE: NY ZIP: 11788 BUSINESS PHONE: 5162310333 MAIL ADDRESS: STREET 1: 400 OSER AVENUE CITY: HAUPPAUGE STATE: NY ZIP: 11788 FORMER COMPANY: FORMER CONFORMED NAME: TIME SHARING RESOURCES INC DATE OF NAME CHANGE: 19840129 10-K 1 FORM 10-K ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 ------------------ FORM 10-K ------------------ [X] Annual Report Pursuant to Section 13 or 15(d) of The Securities Exchange Act Of 1934 For the fiscal year ended May 31, 1997 or [ ] Transition Report Under Section 13 or 15(d) of The Securities Exchange Act Of 1934 For the transition period from ______ to ______ Commission File Number: 0-8656 ----------------- TSR, INC. ------------------------------------------------------ (Exact name of registrant as specified in its charter) DELAWARE 13-2635899 - ------------------------------- ------------------------------------ (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 400 OSER AVENUE, HAUPPAUGE, NY 11788 ---------------------------------------- (Address of principal executive offices) Registrant's telephone number: 516-231-0333 ----------------------- Securities registered pursuant to Section 12(b) of the Exchange Act: NONE ---------------- (Title of Class) Securities registered pursuant to Section 12(g) of the Exchange Act: COMMON STOCK, PAR VALUE $0.01 PER SHARE ----------------------------------------- (Title of Class) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. [X] Yes [ ] No Indicate by check mark if there is no disclosure of delinquent filers in response to Item 405 of Regulation S-K contained in this form, and no disclosure will be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] ================================================================================ State the aggregate market value of the voting stock held by non-affiliates of the Registrant. The aggregate market value shall be computed by reference to the price at which the stock was sold, or the average bid and asked prices of such stock, as of a specified date within 60 days prior to the date of filing. (See definition of affiliate in Rule 12b-2 of the Exchange Act). The aggregate market value was approximately $15,824,000 based on the market price of the Registrant's Common Stock at July 31, 1997 of $25.13 and excluding shares of common stock held by officers, directors and beneficial holders of 5% of the outstanding common stock of the Registrant, many of which persons may not be affiliates of the Registrant. State the number of shares outstanding of each of the Registrant's classes of common equity, as of the latest practicable date. 2,914,138 shares of Common Stock, par value $0.01 per share, as of July 31, 1997. Documents incorporated by Reference: The information required in Part III, Items 10, 11, 12 and 13 is incorporated by reference to the Registrant's Proxy Statement in connection with the 1997 Annual Meeting of Shareholders, which will be filed by the Registrant within 120 days after the close of its fiscal year. -2- PART I Item 1. Business. --------- General - ------- TSR, Inc. (the "Company") is engaged in the business of providing contract computer programming services to its clients. The Company provides technical computer personnel to companies that desire to supplement their in-house information technology ("IT") capabilities. In addition, the Company has developed Catch/21, a Year 2000 compliance solution ("Catch/21") which enables the Company to correct on a substantially automated basis problems which may occur in computer software as a result of the century change in the year 2000. The Company has recently commenced providing services to customers to make applications Year 2000 compliant. The Company's clients for its contract computer programming services consist primarily of Fortune 1000 companies with significant technology budgets. These clients are faced with the problem of maintaining and improving the service level of increasingly complex information systems. Accelerating technological changes make it increasingly difficult and expensive for IT managers to maintain the necessary in-house capabilities. In addition, IT managers are often subject to corporate pressures to downsize staff levels and reduce expenses relating to IT personnel, which makes outsourcing of computer personnel requirements an attractive alternative. In the year ended May 31, 1997, the Company provided IT staffing services to approximately 85 clients. In recent years, there has been increased awareness of the problems resulting from the inability of many existing software applications to properly interpret dates after the year 1999. The Company has developed a software solution, called Catch/21, which automates to a significant extent the conversion process. Using Catch/21, the Company provides the full range of services necessary to make a software application Year 2000 compliant, including analysis of the client's code, construction of a data base, implementation of the solution and testing. The Company believes its Catch/21 solution allows the Company to convert software to be Year 2000 compliant at a lower cost and more rapidly than other approaches known to the Company. Catch/21 utilizes a Sliding Century approach, which dynamically adjusts the dates in the software application using a separate subroutine and then reinserts the information into the application without changing the program logic. Currently, Catch/21 can be used to convert COBOL and RPG applications. The Company has recently commenced providing Year 2000 conversion services to several companies and a number of other potential clients are engaged in pilot projects pursuant to which they are testing the effectiveness of the Company's approach, or are engaged in discussions with the Company concerning the Company's Year 2000 conversion services. The Company was incorporated in Delaware in 1969. The Company's executive offices are located at 400 Oser Avenue, Hauppauge, NY 11788, and its telephone number is (516) 231-0333. Contract Computer Programming Services - -------------------------------------- STAFFING SERVICES The Company's contract computer programming services involve the provision of technical staff to clients to meet the specialized requirements of their IT operations. The technical personnel provided by the Company generally supplement the in-house capabilities of the Company's clients. The Company's approach is to make available to its clients a broad range of technical personnel to meet their requirements rather than focusing on specific specialized areas. The Company has staffing capabilities in the areas of main-frame and mid-range computer operations, personal computers and client-server support, voice and data communications (including local and wide area networks) and help desk support. The Company's services provide clients with flexibility in staffing their day-to-day operations, as well as special projects, on a short-term or long-term basis. The Company provides technical employees for projects which usually range from three months to one year. Generally, clients may terminate projects at any time. Staffing services are provided at the client's facility and are billed primarily on an hourly basis based on the actual hours worked by technical personnel provided by the Company and with reimbursement for out-of-pocket expenses. The Company pays its technical personnel on a semi-monthly basis and invoices its clients, not less frequently than monthly. -3- The Company's success is dependent upon its ability to attract and retain qualified professional computer personnel. The Company believes that there is a shortage of, and significant competition for, software professionals with the skills and experience necessary to perform the services offered by the Company. Although the Company generally has been successful in attracting employees with the skills needed to fulfill customer engagements, demand for qualified professionals conversant with certain technologies may outstrip supply as new and additional skills are required to keep pace with evolving computer technology or as competition for technical personnel increase. Increasing demand for qualified personnel could also result in increased expenses to hire and retain qualified technical personnel and could adversely affect the Company's profit margins. OPERATIONS The Company provides contract computer programming services in the New York metropolitan area, New England, and the Mid-Atlantic region. The Company provides its services principally through an office located in New York, New York and also maintains branch offices in Edison, New Jersey, Long Island, New York and Farmington, Connecticut. The Company does not currently intend to open additional offices, but will continue to seek to grow its business by adding account executives and technical recruiters in its existing offices. At these offices, the Company maintains 16 persons who are responsible for recruiting technical personnel and 18 persons who are account executives. MARKETING AND CLIENTS The Company focuses its marketing efforts on large businesses and institutions with significant IT budgets and recurring staffing and software development needs. The Company provided services to approximately 85 clients during the year ended May 31, 1997. The Company has historically derived a significant percentage of its total revenues from a relatively small number of clients. In the fiscal year ended May 31, 1997, the Company's two largest clients, American Telephone and Telegraph ("AT&T") and International Business Machines Corporation ("IBM"), accounted for 16.3% and 10.3%, respectively, of the Company's consolidated revenues. The services provided by IBM related primarily to projects outsourced by Lucent Technologies, Inc. ("Lucent"), which was formed as part of the split-up of AT&T. The Company is focusing its marketing efforts on broadening its client base and reducing its client concentration, although there can be no assurance that these efforts will be successful. The Company's marketing is conducted through account executives who are responsible for customers in an assigned territory. Account executives call on potential new customers and are also responsible for maintaining existing client contacts within an assigned territory. Instead of utilizing technical managers to oversee the services provided by technical personnel to each client, the account executives are responsible for this role. As a result of the cost savings due to the combined functions of the account executives, the Company is able to provide its account executives with significantly higher incentive-based compensation. In addition, the Company generally pairs each account executive with a recruiter of technical personnel, who also receives incentive-based compensation. The Company believes that this approach allows the Company to more effectively serve its clients' needs for technical personnel, as well as providing its account executives and recruiters with incentives to maximize revenues in their territories. Currently, account executives for the contract computer programming services business are also engaged in marketing the Company's Catch/21 solution. The Company intends to hire new marketing personnel who will be responsible solely for marketing the Catch/21 solution. In accordance with industry practice, most of the Company's contracts for contract computer programming services are terminable by either the client or the Company on short notice. The Company does not believe that backlog is material to its business. PROFESSIONAL STAFF AND RECRUITMENT The Company maintains a database of over 25,000 technical personnel with a wide range of skills. The Company uses a sophisticated proprietary computer system to match a potential employee's skills and experience with client requirements. The Company periodically contacts personnel in its database to update their availability, skills, employment interests and other matters and continually updates its database. This database is made available to the account executives and recruiters at each of the Company's offices. The Company considers its database to be a valuable asset. The Company employs technical personnel on an hourly basis, as required in order to meet the staffing requirements under particular contracts or for particular projects. The Company recruits technical personnel by publishing weekly advertisements in local newspapers and attending job fairs on a periodic basis. The Company devotes significant resources to recruiting technical personnel, maintaining 16 recruiters. Potential applicants are generally interviewed and tested by the Company's recruiting personnel or by third parties who have the required technical backgrounds to review the qualifications of the applicants. -4- Year 2000 Compliance Solution Services - -------------------------------------- The Company recently commenced providing services to correct problems in software applications which occur as a result of the inability of software applications to correctly interpret date information after 1999. The Company uses an innovative approach through its proprietary Catch/21 Year 2000 compliance solution. The Company's Catch/21 solution does not modify the software application. Instead of expanding the date, changing the date format or otherwise modifying the program logic, the Catch/21 software uses a separate subroutine that dynamically adjusts the date information within the application. A command which calls up the separate subroutine is inserted into the source code by the Catch/21 software each time a date is required to be calculated. The subroutine shifts the dates in the application by designated number of years, referred to as the base year. The shifted dates are then used to calculate the date-related information and after such calculations are completed, the dates are restored to their original value and restored to the program. In those instances where dates used in calculations span more than one century, those specific date fields are manually expanded. The Company believes that its approach represents a total solution to making COBOL and RPG software applications Year 2000 compliant. The Catch/21 software first examines the software application's source code, and, with the assistance of an analyst, locates all date fields and builds a database. In certain cases, a software developer also needs to add enhancements to provide additional software to enable the Catch/21 software to recognize date fields due to unique features of a client's software application. The Year 2000 compliance solution is then implemented by inserting into the client's software application at each place where date information needs to be calculated a call command which calls up the separate subroutine to calculate the date information. The converted software application is then made available to the client for testing to verify that it is Year 2000 compliant using mutually agreed upon acceptance criteria. The Company believes that, due to the extent of the automation of its conversion process and the fact that the program logic is not modified, both the conversion time and testing time are reduced significantly. As a result, the Company believes that its approach reduces the time and cost of converting applications to be Year 2000 compliant. The Company believes that its cost structure for providing conversion services using Catch/21 permits it to charge less than other parties providing conversion services. The Company currently charges a fixed price of $0.25 per line of code, and anticipates increasing its charges to $0.30 per line of code, subject to prevailing market conditions. Currently, the Company's Catch/21 conversion software is designed for conversion of COBOL and RPG programs. The Company is currently developing new versions of its Catch/21 software for conversion of PL/1, Assembler and several fourth generation languages. The Company uses a team of three analysts and an employee responsible for quality assurance on each conversion project. The Company estimates that presently each such team can analyze and convert approximately 300,000 lines of code per week, although there can be no assurance that the Company will be able to continue to achieve these levels. The Company currently has 30 employees (consisting of analysts, personnel responsible for quality assurance, and developers) directly involved in the Year 2000 conversion process and has the capacity at its current facility to double the number of such personnel. The Company currently is converting an aggregate of fifteen software applications consisting of 10,000,000 lines of code pursuant to agreements with six companies. These projects are in the preliminary stages and the Company believes that, assuming successful completion of these projects, it will receive additional conversion projects from these companies. In addition, the Company is having discussions with other companies relating to its retention to convert applications to be Year 2000 compliant or performing pilot projects to permit such companies to evaluate the Catch/21 solution. There can be no assurance that these discussions or pilot projects will result in additional contracts. The Company is expanding its capacity to perform Year 2000 conversions. However, this business is still in the early stages and the Company is unable to predict the extent to which it will obtain additional applications for Year 2000 conversion or the receipt of revenues from this business. The Company's agreements relating to Year 2000 conversion projects generally do not provide for a minimum number of lines of code or applications to be converted by the Company. The agreements generally provide that the Company will convert applications that are agreed to by the Company and the client. In addition, the agreements are generally terminable by the client after short notice periods. The Company's revenues under these agreements with respect to each application are subject to satisfactory acceptance testing of such converted application. In addition, The Company has agreed to refund any amounts paid if the converted application does not perform in accordance with mutually agreed upon acceptance criteria. -5- Other Business - -------------- CONSTRUCTION SPECIFICATIONS In 1983, the Company acquired certain of the operating assets of Bowne Information Systems, Inc. (a subsidiary of Bowne & Co.) through a wholly-owned subsidiary, Construction Data Services, Inc. (formerly BIS, Inc.). As a result of such acquisition, the Company succeeded to certain contractual rights to market construction specification databases on magnetic media that are useful to the engineering, architectural and building contractors fields in both the public and private sectors. This subsidiary provided all of its products and services under an exclusive license agreement dated December 1, 1983, as amended, with the Construction Sciences Research Foundation, Inc. (CSRF), which terminated March 1, 1996. In June 1996, the Company entered into a termination arrangement under which it received $76,850 recorded as non-operating income in the first quarter of fiscal 1997. HEALTH CARE SERVICES The Company, through its wholly-owned subsidiary TSR Health Care Services, Inc., provided temporary nurses and nurses' aides to health care facilities and home care patients. In the second quarter of fiscal 1996, the Company determined to discontinue this business and the existing caseload was transferred to another licensed home care agency in October 1995. The agreement to transfer the account base provided that the purchaser would pay the Company 50% of the gross profit generated from the Company's accounts for a period of two years. The Company received approximately $132,000 and $46,000 in such payments which were included in revenues during fiscal 1997 and 1996, respectively. OTHER PROGRAMMING SERVICES The Company has entered into maintenance agreements to service its conversion software which moved customer applications from one computer platform to another. Pursuant to these agreements, the Company provides maintenance and support for its existing installed base of conversion software customers. As a result of a consensual settlement of certain legal proceedings, the Company ceased marketing the services in 1988. Subsequent to 1988, the Company's revenues have been declining as the service contracts with existing customers expire. Unless expiring contracts are renewed, this revenue base will further decline. Competition - ----------- The technical staffing industry is highly competitive and fragmented and has low barriers to entry. The Company competes for potential clients with providers of outsourcing services, systems integrators, computer systems consultants, other providers of technical staffing services and, to a lesser extent, temporary personnel agencies. The Company competes for technical personnel with other providers of technical staffing services, systems integrators, providers of outsourcing services, computer systems consultants, clients and temporary personnel agencies. Many of the Company's competitors are significantly larger and have greater financial resources than the Company. The Company believes that the principal competitive factors in obtaining and retaining clients are accurate assessment of clients' requirements, timely assignment of technical employees with appropriate skills and the price of services. The principal competitive factors in attracting qualified technical personnel are compensation, availability, quality and variety of projects and schedule flexibility. The Company believes that many of the technical personnel included in its database may also be pursuing other reemployment opportunities. Therefore, the Company believes that its responsiveness to the needs of technical personnel is an important factor in the Company's ability to fill projects. Although the Company believes it competes favorably with respect to these factors, it expects competition to increase and there can be no assurance that the Company will remain competitive. The market for IT services addressing the Year 2000 problem is highly competitive and is expected to become more competitive as others enter this segment of the business. The Company's competitors include systems consulting and implementation firms, application software firms, service groups of computer equipment companies, general management consulting firms and programming companies. Many of these competitors have significantly greater financial, technical and marketing resources and greater name recognition than the Company. In addition, the Company competes with its clients' internal IT personnel. Such competition may impose additional pricing pressures on the Company. The principal competitive factors involve speed and reliability in the conversion process and the price charged for the services. There can be no assurance that the Company can compete successfully with its existing competitors or with any new competitors. -6- Intellectual Property Rights - ---------------------------- The Company's success in the Year 2000 compliance solution services business is dependent upon its Catch/21 Year 2000 solution and other proprietary intellectual property rights. The Company has filed a patent application covering certain aspects of Catch/21. There can be no assurance that this patent application will result in patents being issued. Even if the Company obtains patent rights, the Company believes that the protection of its rights will depend primarily on its proprietary technology and techniques which constitute "trade secrets." There can be no assurance that any patents which may be issued to the Company will afford adequate protection to the Company or not be challenged, invalidated, infringed or circumvented. The Company is aware of other patent applications that have been filed with respect to Year 2000 compliance software programs. It is possible that others may have or be granted patents claiming products or processes that are necessary for or useful to the development or continued use of Catch/21 and that legal actions could be brought against the Company claiming infringement. In the event that the Company is unsuccessful against such a claim, it may be required to obtain licenses to such patents or to other patents or proprietary technology in order to continue to utilize Catch/21. There can be no assurance the Company will be able to obtain such licenses on commercially reasonable terms, if at all. The Company relies primarily upon a combination of trade secret, nondisclosure and other contractual arrangements, technical measures and copyright and trademark laws to protect its proprietary rights. The Company generally enters into confidentiality agreements with its employees, consultants, clients and potential clients and limits access to and distribution of its proprietary information. There can be no assurance that the steps taken by the Company in this regard will be adequate to deter misappropriation of its proprietary information or that the Company will be able to detect unauthorized use and take appropriate steps to enforce its intellectual property rights. Personnel - --------- The Company presently employs 347 people including its 3 executive officers. Of such employees 18 are engaged in sales, 16 are recruiters for programmers, 290 are technical and programming consultants, and 20 are in administration and clerical functions. Of the 347 employees, approximately 302 are employed by the contract computer programming subsidiary, 35 by the Year 2000 subsidiary and 10 are employed directly by the Company. Item 2. Properties. ----------- The Company leases 8,000 square feet of space in Hauppauge, New York for a term expiring December 31, 1998, with annual rentals of approximately $70,000. This space is used as executive and administrative offices as well as by the Registrant's operating subsidiaries. The Company leases an additional 8,000 square feet of space in Hauppauge, New York for a term expiring July, 2000 with annual rentals of approximately $84,000. This space is used for its Year 2000 compliance solution business. The Company also leases sales and technical recruiting offices in New York City (lease expires July, 2002), Edison, New Jersey (lease expires August, 2000), and Farmington, Connecticut (lease expires November, 1999), with aggregate monthly rentals of approximately $17,000. The Company believes the present locations are adequate for its current needs as well as for the future expansion of its existing business. Item 3. Legal Proceedings. ------------------ None Item 4. Submission of Matters to a Vote of Security Holders. ---------------------------------------------------- Not Applicable -7- PART II Item 5. Market for Common Equity and Related Stockholder Matters. --------------------------------------------------------- The Company's shares of Common Stock trade on the NASDAQ National Market System under the symbol TSRI. The following are the high and low sales prices for each quarter during the fiscal years ended May 31, 1997 and 1996: JUNE 1, 1995 - MAY 31, 1996 1ST 2ND 3RD 4TH QUARTER QUARTER QUARTER QUARTER ----------------------------------------------- High Sales Price............... 4 1/2 5 1/4 3 5/16 10 1/2 Low Sales Price................ 2 3/8 2 5/8 2 9/16 2 11/16 JUNE 1, 1996 - MAY 31, 1997 1ST 2ND 3RD 4TH QUARTER QUARTER QUARTER QUARTER ----------------------------------------------- High Sales Price............... 6 3/4 11 1/4 50 1/4 28 3/8 Low Sales Price................ 3 7/8 4 1/8 9 1/2 13 There were 220 holders of record of the Company's Common Stock as of July 31, 1997. Additionally, the Company estimates that there were approximately 700 beneficial holders as of that date. On October 10, 1996, the Company declared a stock split in the form of a 100% stock dividend on the shares of Common Stock payable November 14, 1996 to shareholders of record on October 28, 1996. All share prices and cash dividends have been adjusted for this split. Historically, no cash dividends have been paid by the Company on its Common Stock except that on July 18, 1995, the Board of Directors declared a special cash dividend of $0.20 per share on its Common Stock payable on August 28, 1995 to shareholders of record as of July 31, 1995. Also, on September 16, 1991, the Company paid a special dividend of $0.50 per share on its Common Stock. The Company has not adopted a policy of paying cash dividends on a regular periodic basis and does not intend to declare a cash dividend for fiscal 1997. Item 6. Selected Financial Data. ------------------------ (Amounts in Thousands, Except Per Share Data)
MAY 31, May 31, May 31, May 31, May 31, 1997 1996 1995 1994 1993 ------- ------- ------- ------- ------- Revenues............................................. $49,704 $31,810 $26,674 $21,926 $17,006 Income From Operations............................... 2,970 1,456 1,264 799 142 Net Income........................................... 1,796 964 802 500 152 Net Income Per Common Share.......................... 0.62 0.32 0.26 0.16 0.04 Working Capital...................................... 9,884 8,358 8,337 7,525 7,372 Total Assets......................................... 14,044 11,167 10,629 9,191 8,734 Shareholders' Equity................................. 10,431 8,635 8,609 7,808 7,642 Book Value Per Common Share.......................... 3.58 2.96 2.84 2.58 2.35 Cash Dividends Declared Per Common Share................................... -- 0.20 -- -- --
Note: Net Income, Book Value and Cash Dividends Per Common Share have been adjusted for a stock split in the form of a 100% stock dividend paid in November 1996. -8- Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations. ----------------------------------------------------------- The following discussion and analysis should be read in conjunction with the financial statements and the notes to the consolidated financial statements presented elsewhere in this report. Overview - -------- The Company is engaged in the business of providing contract computer programming services to its clients. The Company provides technical computer personnel to companies that desire to supplement their in-house IT capabilities. In addition, the Company has developed Catch/21, a Year 2000 compliance solution, which enables the Company to correct on a substantially automated basis problems which may occur in computer software as a result of the century change in the year 2000. In its fiscal year ended May 31, 1997 the Company has commenced providing services to customers to make applications Year 2000 compliant. In the year ended May 31, 1997, the Company provided IT staffing services to approximately 85 clients. Two of such clients, AT&T and IBM, accounted for 16.3% and 10.3%, respectively, of the Company's consolidated revenues in the year ended May 31, 1997. The services provided to IBM related primarily to projects which were outsourced by Lucent, which was formed as part of the split up of AT&T. The Company has recently expanded its marketing staff and is focusing its marketing efforts on broadening its client base. The Company's Year 2000 compliance solution business is in the early stages. The Company currently is converting an aggregate of 15 software applications having 10,000,000 lines of code pursuant to agreements with six companies. These projects are in the preliminary stages and the Company believes that, assuming successful completion of these projects, it will receive additional conversion projects from these companies. In addition, the Company is having discussions with other companies relating to its retention to convert applications to be Year 2000 compliant or performing pilot projects to permit companies to evaluate the Catch/21 solution. The Company is expanding its capacity to perform Year 2000 conversions. However, the Company is unable to predict the extent to which it will obtain additional applications for Year 2000 conversion or the timing or amount of receipt of revenues from this business. The Company's agreements relating to Year 2000 conversion projects generally do not provide for a minimum number of lines of code or applications to be converted by the Company. The Company's revenues for applications converted under these agreements are subject to satisfactory acceptance testing of such converted applications and the Company agrees to refund any amounts paid if the converted application does not perform in accordance with mutually agreed upon acceptance criteria. The Company previously engaged in the business of marketing construction specification databases on magnetic media that are useful to the engineering, architectural and building contractor fields. The Company provided all of its products and services under an exclusive license agreement with the Construction Sciences Research Foundation, Inc. ("CSRF"), which terminated March 1, 1996. In addition, the Company provided temporary nurses and nurses' aides to health care facilities and home care patients. In the second quarter of fiscal 1996, the Company discontinued its health care services business and the existing caseload was transferred to another licensed home care agency. The agreement to transfer the account base provided that the purchaser would pay the Company 50% of the gross profit generated from the Company's accounts for a period of two years. -9- Results of Operations - --------------------- The following table sets forth for the periods indicated certain financial information derived from the Company's consolidated statement of operations. There can be no assurance that trends in sales growth or operating results will continue in the future:
(Amounts in Thousands) YEAR ENDED MAY 31, -------------------------------------- 1997 1996 1995 ------- ------- ------- Revenues................................................. $49,704 $31,810 $26,674 Cost of Sales............................................ 37,485 23,317 19,352 ------- ------- ------- Gross Profit............................................. 12,219 8,493 7,322 Research and Development................................. 325 -- -- Selling, General, and Administrative expenses............ 8,924 7,037 6,058 ------- ------- ------- Income from Operations................................... 2,970 1,456 1,264 Other Income............................................. 297 250 224 ------- ------- ------- Income Before Income Taxes............................... 3,267 1,706 1,488 Provision for Income Taxes............................... 1,471 742 686 ------- ------- ------- Net Income............................................... $ 1,796 $ 964 $ 802 ======= ======= =======
Revenues - -------- Revenues consist primarily of revenues from contract computer programming services. In addition, the Company's revenues included revenues from its Catch/21 business which was commenced in 1997, and the construction specifications business and health care services business which were terminated in fiscal 1996. Revenues for fiscal 1997 increased $17,894,000 or 56.3% over fiscal 1996. Contract computer programming services revenues increased $19,452,000 from $29,909,000 in fiscal 1996 to $49,361,000 in fiscal 1997. This increase resulted from an increase in technical personnel on billing from several large projects and an overall increase in the number of programmers on billing with clients in fiscal 1997. Although inroads have been made in expanding the account base for its contract computer programming services, a significant portion of the revenue increase in contract computer programming services was derived from the Company's largest customer, AT&T. During the 1997 fiscal year, Lucent outsourced much of its information technology requirements to national vendors, primarily IBM. The Company has been successful in becoming a supplier to these national vendors in conjunction with projects for Lucent as well as maintaining its direct relationship with Lucent. At the end of the current fiscal year, a large project for AT&T ended which is expected to slow the rate of revenue growth in the first quarter of fiscal 1998. The Company does not expect to continue the rate of growth in revenues experienced in 1997 as it does not anticipate the same opportunity for large staffing projects in fiscal 1998 as it had in fiscal 1997. Revenues from construction specifications and health care services decreased $1,729,000 from $1,901,000 in fiscal 1996 to $172,000 in fiscal 1997 due to the termination of these businesses in fiscal 1996. Revenues from the Company's Catch/21 Year 2000 compliance business, which was commenced in fiscal 1997, were $171,000 for the year. These revenues consisted primarily of pilot projects for which the Company was paid, and to a lesser extent from ongoing conversion services. The Company believes that potential customers that are evaluating its Catch/21 Year 2000 compliance solution services have been delaying their decision to commence converting software applications to make them Year 2000 compliant. As a result, revenues from the Company's Catch/21 Year 2000 conversion business have been less than anticipated. Revenues for fiscal 1996 increased $5,136,000 or 19.3% over the fiscal 1995. Contract computer programming services revenues contributed an increase of $6,221,000 which was offset by decreases in construction specifications of $582,000 and health care services of $503,000 which businesses were terminated during the 1996 fiscal year. The increase in revenues in contract computer programming services resulted primarily from further penetration within existing accounts, and $3,700,000 of such increase resulted from further penetration in the Company's largest account, AT&T. -10- Cost of Sales - ------------- Cost of sales increased by $14,168,000 or 60.8% in fiscal 1997 over fiscal 1996. This increase included an increase in cost of sales in contract computer programming of $14,520,000 from $22,828,000 in fiscal 1996 to $37,348,000 for fiscal 1997. The increase in costs resulted primarily from the increase in amounts paid to technical personnel resulting primarily from the increase in technical personnel assigned to client projects and was related to the above-mentioned revenue increase. Construction specification and health care services costs decreased from $489,000 in fiscal 1996 to zero in fiscal 1997 due to the termination of these businesses. The Year 2000 business incurred cost of sales of $137,000 in fiscal 1997. These costs consisted primarily of salaries of analysts and quality assurance personnel. The Company expects cost of sales from the Year 2000 business to continue to increase due to the hiring of additional personnel in anticipation of future conversion projects. The cost of sales for the Company's contract computer programming business are variable because technical personnel are generally hired on a per diem basis to staff particular projects for clients. However, the cost of sales for the Catch/21 solution business are fixed. A substantial portion of these cost of sales consist of technical personnel hired to perform the conversion services. The technical personnel are hired and trained in advance of the time the Company has conversion projects and these expenses are incurred by the Company whether or not the Company is generating anticipated revenues from the Year 2000 solutions business. Fiscal 1996 cost of sales increased $3,965,000 or 20.5% over fiscal 1995. The increase included additional costs of $4,748,000 from contract computer programming which primarily resulted form the above mentioned revenue increase. Construction specifications and health care services costs decreased by $411,000 and $372,000 respectively due to the termination of these businesses during fiscal year 1996. Gross Profit - ------------ Overall, gross profit margins have declined in the last two fiscal years as the higher gross profit margin construction specifications and health care services businesses have been phased out. Contract programming gross margins increased slightly in fiscal 1997 from the prior year due to increased billing rates on a portion of its lower margin business. In the fourth quarter of fiscal 1997, however, contract programming margins decreased against the year earlier comparable period for the first time in a year. This decrease is attributable to increases in amounts being paid to qualified programming professionals outpacing the Company's ability to pass these increases on to customers. Contract computer programming gross margins declined slightly in 1996 from the prior year. However, margins increased in the fourth quarter of fiscal 1996 against the fourth quarter in fiscal 1995 after decreasing for approximately 15 months. The decline in margins was attributable to increased amounts paid to qualified programming professionals who have been in demand. The increase in the fourth quarter of fiscal 1996 was attributable to the Company's ability to increase billing rates on a portion of its lower margin business. Research and Development - ------------------------ Research and development costs of $325,000 in the current year represent amounts expended to develop Catch/21, the Company's Year 2000 compliance solution. Currently, Catch/21 can convert IBM mainframe COBOL and RPG applications. The development expenditures are expected to continue into fiscal 1998 as the Company seeks to expand its product offerings into additional computer platforms and languages such as PL/1, Assembler and several fourth generation languages. -11- Selling, General and Administrative Expenses - -------------------------------------------- Selling, general and administrative expenses consist primarily of expenses relating to account executives, technical recruiters, facilities costs, management and corporate overhead. These expenses increased $1,887,000 or 26.8% from $7,037,000 in fiscal 1996 to $8,924,000 in fiscal 1997. Contract computer programming services expenses increased $2,406,000 over the prior year to $8,411,000. The increase was primarily attributable to additional commission-based compensation due to the increased revenues. Also, these expenses increased as a result of the expenses relating to the hiring of additional account executives and technical recruiting professionals to broaden its client base in connection with the continuation of the Company's planned expansion. Construction specifications and health care services expenses decreased by $815,000 to $217,000 due to the termination of these businesses. Approximately $296,000 in selling, general and administrative expenses were attributable to the Catch/21 solution business which commenced operations in the current fiscal year. These expenses consisted primarily of marketing, advertising and facilities expenses. In fiscal 1996, selling, general and administrative expenses increased $979,000 or 16.2% over the prior year. The contract computer programming business incurred increases amounting to $1,418,000 which resulted primarily from increased personnel in recruiting and sales, including those hired to staff a new office in Connecticut. The increase also included additional commission based compensation due to the increased revenues. Expenses decreased in construction specifications and health care by $227,000 and $212,000 respectively due to the termination of those businesses. Other Income - ------------ Fiscal 1997 other income resulted primarily from interest and dividend income which decreased by $68,000 to $159,000 due to a lower average investable base. During fiscal 1997 the Company recorded other income of $77,000 in connection with the termination agreement for its construction specifications subsidiary. Gain from the sale of securities of $59,000 resulted from the purchase and sale of marketable equity securities during the period. Interest and dividend income increased $19,000 in fiscal 1996 on a lower average investable base due to higher rates paid on the Company's treasury bills. Gains from the sale of securities resulted from the purchase and sale of marketable equity securities during the period, none of which were held at the end of fiscal year 1996. Income Taxes - ------------ The effective income tax rate increased to 45.0% in fiscal 1997 from 43.5% in the fiscal 1996 because the losses incurred by the Year 2000 code conversion business were not available to offset state and local income taxes other than for New York State. The effective income tax rate dropped to 43.5% in fiscal 1996 from 46.1% in the prior year because of lower state and local taxes, as the majority of the Company's growth came from New Jersey as compared with New York City, which has a higher combined tax rate. Liquidity, Capital Resources and Changes in Financial Condition - --------------------------------------------------------------- Subject to continued profitability, the Company expects that cash flow generated from operations together with its cash and marketable securities and available credit facilities will be sufficient to provide the Company with adequate resources to meet its requirements with respect to its existing business. The Company also expects its cash flow from operations, cash and short-term marketable securities to be sufficient for the foreseeable future to meet its cash requirements, including its substantial investment in the Catch/21 Year 2000 compliance solution business. At May 31, 1997, the Company had working capital of $9,884,000 and cash and cash equivalents of $2,931,000 as compared to working capital of $8,358,000 and cash and cash equivalents of $2,959,000 at May 31, 1996. Working capital increased due to the Company's net income in the 1997 fiscal year. Cash and equivalents declined slightly from May 31, 1996 to May 31, 1997 due to the cash used in operations, as discussed below, which was mostly offset by the cash and cash equivalents generated from the maturity of marketable securities to finance such cash used in operations. -12- Net cash flow of $1,405,000 was used in operations during fiscal 1997 as compared to $711,000 of net cash flow provided by operations in fiscal 1996. While the Company had net income of $1,796,000, in fiscal 1997 the Company had cash flow used in operations as a result of an increase in accounts receivable of $4,386,000 from $6,022,000 at May 31, 1996 to $10,408,000 at May 31, 1997. The increase in accounts receivable occurred primarily because of the substantial revenue increase. The cash used in operations as a result of the increase in accounts receivable was offset to some extent by the increase in the Company's accounts payable and accrued expenses of $693,000 from $2,001,000 at May 31, 1996 to $2,694,000 at May 31, 1997. The increase in accounts payable and accrued expenses resulted from the increase in cost of sales. Cash flow provided by investing activities resulted primarily from the Company's decisions to not roll over some maturing United States Treasury Bills. The cash made available was used to finance the increase in accounts receivable and the purchase of fixed assets. The increase in the purchase of fixed assets from $149,000 in fiscal 1996 to $425,000 in 1997 related primarily to the commencement of the Year 2000 compliance solution business. The Company's capital resource commitments at May 31, 1997 consisted of lease obligations on its branch and corporate facilities amounting to $1,178,000 over the next five years. The Company intends to finance these commitments from cash flow provided by operations, available cash and short-term marketable securities. During the 1997 fiscal year, the Company incurred total operating expenses of $758,000 in connection with the development and marketing of its Catch/21 Year 2000 compliance solution. The Company expects research and development costs and marketing costs relating to its Year 2000 conversion business to increase in fiscal 1998. Although the Company's cash and marketable securities were sufficient to enable it to provide the cash necessary to finance the cash used in operations during fiscal 1997, the Company may require a credit facility to finance its accounts receivable if its accounts receivable continue to grow as a result of a continued significant increase in revenues. The Company has received a commitment for such a facility and is in the process of negotiating definitive agreements relating to such credit facility. Forward-Looking Statements - -------------------------- Certain statements contained in "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Business", including statements concerning the development of the Company's Catch/21 solution, future prospects and the Company's future cash flow requirements are forward looking statements, as defined in the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those projections in the forward looking statements which statements involve risks and uncertainties, including but not limited to the following: risks relating to the competitive nature of the markets for contract computer programming services and the Year 2000 compliance solution market, concentration of the Company's business with certain customers and uncertainty as to the Company's ability to achieve commercial acceptance of its Catch/21 Year 2000 compliance solution. New Accounting Pronouncements - ----------------------------- In October 1995, the Financial Accounting Standards Board (FASB) issued Statement No. 123, "Accounting for Stock-Based Compensation," which has been adopted by the Company in fiscal 1997. The Company has elected not to implement the fair value based accounting method for employee stock options, but has elected to disclose, commencing in fiscal 1997, the pro-forma net income and earnings per share as if such method had been used to account for stock-based compensation cost as described in the Statement. In March 1995, the FASB issued Statement No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of," which was also adopted by the Company in fiscal 1997. The effect of adopting the standard is insignificant. Statement of Financial Account Standards No. 128, "Earnings Per Share", is required to be adopted in fiscal 1998. At that time the Company will be required to change the method currently being used to compute earnings per share and restate all prior periods. Under the new requirements for calculating basic earnings per share, the dilutive effect of stock option plans will be excluded, but will be reflected in diluted earnings per share. The impact of SFAS No. 128 in the calculation of earnings per share is not expected to be material. -13- Item 8. Financial Statements. --------------------- INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Page ---- Report of Independent Auditor.......................................... 15 Financial Statements: Consolidated Balance Sheets as of May 31, 1997 and 1996................ 16 Consolidated Statements of Earnings for the years ended May 31, 1997, 1996 and 1995.............................. 18 Consolidated Statements of Shareholders' Equity for the years ended May 31, 1997, 1996 and 1995...................... 19 Consolidated Statements of Cash Flows for the years ended May 31, 1997, 1996 and 1995.............................. 20 Notes to Consolidated Financial Statements............................. 21 -14- INDEPENDENT AUDITORS' REPORT The Board of Directors and Stockholders TSR, Inc.: We have audited the accompanying consolidated balance sheets of TSR, Inc. and subsidiaries as of May 31, 1997 and 1996, and the related consolidated statements of earnings, shareholders' equity and cash flows for each of the years in the three-year period ended May 31, 1997. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of TSR, Inc. and subsidiaries as of May 31, 1997 and 1996, and the results of their operations and their cash flows for each of the years in the three-year period ended May 31, 1997, in conformity with generally accepted accounting principles. KPMG PEAT MARWICK LLP Jericho, New York July 15, 1997 -15- TSR, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS MAY 31, 1997 AND 1996 ASSETS
1997 1996 ---- ---- CURRENT ASSETS: Cash and cash equivalents (note 1(e)).............................................. $ 2,931,180 $ 2,958,922 Marketable securities (note 1(f)).................................................. 26,175 1,691,462 Accounts receivable: Trade (net of allowance for doubtful accounts of $173,000 in 1997 and $164,000 in 1996)................................... 10,408,542 6,022,264 Other......................................................................... 57,333 35,315 ----------- ----------- 10,465,875 6,057,579 Prepaid expenses................................................................... 3,860 34,039 Prepaid and recoverable income taxes............................................... 11,095 29,875 Deferred income taxes.............................................................. 59,000 118,000 ----------- ----------- TOTAL CURRENT ASSETS..................................................... 13,497,185 10,889,877 ----------- ----------- EQUIPMENT AND LEASEHOLD IMPROVEMENTS, AT COST: Equipment.......................................................................... 641,862 429,236 Furniture and fixtures............................................................. 169,330 151,032 Automobiles........................................................................ 252,553 262,805 Leasehold improvements............................................................. 82,804 76,748 ----------- ----------- 1,146,549 919,821 Less accumulated depreciation and amortization..................................... 686,647 699,098 ----------- ----------- 459,902 220,723 OTHER ASSETS............................................................................ 57,782 34,091 DEFERRED INCOME TAXES (NOTE 2).......................................................... 29,000 22,000 ----------- ----------- $14,043,869 $11,166,691 =========== ===========
See accompanying notes to consolidated financial statements. (Continued) -16- TSR, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS, CONTINUED MAY 31, 1997 AND 1996 LIABILITIES AND SHAREHOLDERS' EQUITY
1997 1996 ---- ---- CURRENT LIABILITIES: Accounts and other payables........................................................ $ 207,074 $ 159,797 Accrued and other liabilities: Salaries, wages and commissions............................................... 2,204,254 1,484,437 Legal and professional fees................................................... 97,570 82,211 Customer support.............................................................. -- 182,600 Other......................................................................... 184,964 91,859 ----------- ----------- 2,486,788 1,841,107 Advances from customers............................................................ 783,892 399,945 Income taxes payable............................................................... 135,173 130,695 ----------- ---------- TOTAL CURRENT LIABILITIES................................................ 3,612,927 2,531,544 COMMITMENTS AND CONTINGENCIES (NOTES 5 AND 6) SHAREHOLDERS' EQUITY (NOTES 4, 7 AND 9): Preferred stock, $1.00 par value, authorized 1,000,000 shares; none issued........................................ -- -- Common stock, $.01 par value, authorized 4,000,000 shares; issued 2,914,138 and 4,939,192 shares......................... 29,141 49,392 Additional paid-in capital......................................................... 907,588 1,538,277 Retained earnings.................................................................. 9,494,213 10,334,277 ----------- ----------- 10,430,942 11,921,946 Less 2,025,054 common shares in treasury in 1996, at cost.......................... -- 3,286,799 ----------- ----------- TOTAL SHAREHOLDERS' EQUITY............................................... 10,430,942 8,635,147 ----------- ----------- $14,043,869 $11,166,691 =========== =========== See accompanying notes to consolidated financial statements.
-17- TSR, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF EARNINGS YEARS ENDED MAY 31, 1997, 1996 AND 1995
1997 1996 1995 ---- ---- ---- REVENUES............................................................. $49,704,325 $31,810,163 $26,674,386 COST OF SALES........................................................ 37,485,148 23,317,141 19,351,891 RESEARCH AND DEVELOPMENT............................................. 324,768 -- -- SELLING, GENERAL AND ADMINISTRATIVE EXPENSES......................... 8,924,027 7,037,025 6,058,504 ----------- ----------- ----------- 46,733,943 30,354,166 25,410,395 ----------- ----------- ----------- INCOME FROM OPERATIONS............................................... 2,970,382 1,455,997 1,263,991 ----------- ----------- ----------- OTHER INCOME: Interest and dividend income.................................... 159,324 227,184 208,244 Gain from sales of securities, net.............................. 59,439 23,508 -- Gain (loss) from sales of assets................................ 77,650 (424) 15,425 ----------- ----------- ----------- 296,413 250,268 223,669 ----------- ----------- ----------- INCOME BEFORE INCOME TAXES........................................... 3,266,795 1,706,265 1,487,660 PROVISION FOR INCOME TAXES (NOTE 2).................................. 1,471,000 742,000 686,000 ----------- ----------- ----------- NET INCOME...................................................... $ 1,795,795 $ 964,265 $ 801,660 =========== =========== =========== NET INCOME PER COMMON SHARE.......................................... $ 0.62 $ 0.32 $ 0.26 =========== =========== =========== WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING *........................................ 2,914,138 2,996,514 3,029,138 =========== =========== =========== * Adjusted for a stock split in the form of a 100% stock dividend on November 14, 1996.
See accompanying notes to consolidated financial statements. -18- TSR, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY YEARS ENDED MAY 31, 1997, 1996 AND 1995
TOTAL ADDITIONAL SHARE- COMMON PAID-IN RETAINED TREASURY HOLDERS' STOCK* CAPITAL* EARNINGS STOCK EQUITY -------- ---------- ----------- ----------- ----------- BALANCE AT MAY 31, 1994...................... $ 49,392 $1,538,277 $ 9,174,180 $(2,954,043) $ 7,807,806 NET INCOME................................... -- -- 801,660 -- 801,660 -------- ---------- ----------- ----------- ----------- BALANCE AT MAY 31, 1995...................... 49,392 1,538,277 9,975,840 (2,954,043) 8,609,466 CASH DIVIDENDS ($0.20 PER SHARE)............. -- -- (605,828) -- (605,828) PURCHASE OF TREASURY STOCK................... -- -- -- (332,756) (332,756) NET INCOME................................... -- -- 964,265 -- 964,265 -------- ---------- ----------- ----------- ----------- BALANCE AT MAY 31, 1996...................... 49,392 1,538,277 10,334,277 (3,286,799) 8,635,147 NET INCOME................................... -- -- 1,795,795 -- 1,795,795 RETIRED TREASURY STOCK....................... (20,251) (630,689) (2,635,859) 3,286,799 -- -------- ---------- ---------- ----------- ----------- BALANCE AT MAY 31, 1997...................... $ 29,141 $ 907,588 $ 9,494,213 $ -- $10,430,942 ======== ========== =========== =========== =========== * Amounts adjusted for a stock split in the form of a 100% stock dividend on November 14, 1996.
See accompanying notes to consolidated financial statements. -19- TSR, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED MAY 31, 1997, 1996 AND 1995
1997 1996 1995 ---- ---- ---- CASH FLOWS FROM OPERATING ACTIVITIES: Net income............................................................... $ 1,795,795 $ 964,265 $ 801,660 ----------- ---------- ---------- Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization........................................ 185,455 141,708 127,534 Provision for losses (recovery) on accounts receivable............... -- 10,000 (5,000) Gain on sale of marketable securities, net........................... (59,439) (23,508) -- Loss (gain) on sale of fixed assets.................................. (77,650) 424 (15,425) Deferred income taxes................................................ 52,000 16,000 (84,000) Changes in assets and liabilities: Accounts receivable-trade......................................... (4,386,278) (987,153) (1,099,882) Other accounts receivable......................................... (22,018) 82,220 (7,047) Prepaid expenses.................................................. 30,179 (3,979) 24,411 Prepaid and recoverable income taxes.............................. 18,780 9,817 (22,898) Other assets...................................................... (23,691) (10,770) 5,939 Accounts payable and accrued expenses............................. 692,958 315,212 405,042 Advances from customers........................................... 383,947 161,354 238,591 Income taxes payable.............................................. 4,478 35,583 (7,581) ----------- ---------- ---------- Total adjustments.................................................... (3,201,279) (253,092) (440,316) ----------- ---------- ---------- Net cash provided by (used in) operating activities...................... (1,405,484) 711,173 361,344 ----------- ---------- ---------- CASH FLOWS FROM INVESTING ACTIVITIES: Proceeds from maturity and sale of marketable securities............. 4,846,275 8,079,734 3,006,577 Purchase of marketable securities.................................... (3,121,549) (5,393,507) (5,835,390) Proceeds from sale of fixed assets................................... 77,650 15,756 16,763 Purchase of fixed assets............................................. (424,634) (149,306) (176,936) ----------- ---------- ---------- Net cash provided by (used in) investing activities...................... 1,377,742 2,552,677 (2,988,986) ----------- ---------- ---------- CASH FLOWS FROM FINANCING ACTIVITIES: Cash dividends paid.................................................. -- (605,828) -- Purchase of treasury stock........................................... -- (332,756) -- ----------- ---------- ---------- Net cash used in financing activities.................................... -- (938,584) -- ----------- ---------- ---------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS......................... (27,742) 2,325,266 (2,627,642) CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR............................... 2,958,922 633,656 3,261,298 ----------- ---------- ---------- CASH AND CASH EQUIVALENTS AT END OF YEAR..................................... $ 2,931,180 $ 2,958,922 $ 633,656 =========== =========== ========== SUPPLEMENTAL DISCLOSURE: Income taxes paid........................................................ $ 1,396,000 $ 681,000 800,000 =========== =========== ========== Interest paid............................................................ $ -- $ -- $ -- =========== =========== ==========
See accompanying notes to consolidated financial statements. -20- TSR, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MAY 31, 1997, 1996 AND 1995 (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (A) BUSINESS The Company is engaged in the business of providing contract computer programming services. The Company provides technical computer personnel to companies that desire to supplement their in-house information technology capabilities. During fiscal 1997, the Company developed Catch/21, a Year 2000 compliance solution which enables the Company to correct, on a substantially automated basis, problems which may occur in computer software as a result of the century change in the year 2000. The Company has recently commenced providing services to customers to make applications Year 2000 compliant. Previously, until March 1, 1996, the Company provided construction specifications databases on magnetic media, primarily to architectural and engineering firms, and, until October 8, 1995, provided temporary nurses and nurses' aides to health care facilities and home care patients. On October 8, 1995, the Company discontinued its health care services business by transferring the existing caseload to another licensed home care agency, which did not result in a gain or loss to the Company. Based on the agreement, the purchasing agency pays the Company 50% of the gross profit generated from the transferred accounts for a period of two years, which amounted to $132,000 and $46,000 included in revenues in fiscal 1997 and 1996, respectively. The Company's exclusive license to market construction specifications databases expired March 1, 1996. In June 1996, in accordance with the terms of the termination agreement of its licensing contract, the Company sold its customer database for $76,850 which was recorded as non-operating income in fiscal 1997. (B) PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of TSR, Inc. and its subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation. (C) REVENUE RECOGNITION POLICY The Company recognizes contract computer programming services revenues as services are provided. Revenues from the maintenance and support of the Company's proprietary software are recognized monthly as services are rendered. The revenues from the licensing of construction specifications databases were recognized at shipment. The revenues from health care services were recognized as services were provided. Provided that acceptance is probable, revenue from code conversion is recognized as services are rendered. (D) RESEARCH AND DEVELOPMENT In fiscal 1997 the Company commenced efforts to develop an automated solution to the Year 2000 compliance problem. The resultant software, Catch/21, has been used successfully to convert legacy IBM mainframe/COBOL and RPG applications to attain Year 2000 compliance. These expenditures will continue into fiscal 1998 as the Company seeks to expand its product offerings into additional computer platforms and languages. (E) CASH AND CASH EQUIVALENTS The Company considers short-term highly liquid investments with maturities of three months or less at the time of purchase to be cash equivalents. Cash and cash equivalents were comprised of the following as of May 31, 1997 and 1996: 1997 1996 ---------- ---------- Cash in banks ............................. $ 549,959 $ 208,946 Money Market Funds......................... 1,658,537 1,258,406 US Treasury Bills.......................... 722,684 1,491,570 ---------- ---------- $2,931,180 $2,958,922 ========== ========== (Continued) -21- TSR, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED MAY 31, 1997, 1996 AND 1995 (F) MARKETABLE SECURITIES The Company classifies securities as held to maturity and carries them at amortized cost only if it has a positive intent and ability to hold those securities to maturity. If not classified as held to maturity, such securities are classified as trading securities or securities available for sale. Unrealized gains or losses for securities available for sale are excluded from earnings and reported as a net amount as a separate component of stockholders' equity. Unrealized holding gains and losses for trading securities are included in earnings. The Company's marketable debt securities primarily consisting of U.S. Treasury Bills with a maturity at acquisition in excess of 90 days are classified as held to maturity securities and, its equity securities are classified as trading securities. The amortized cost, gross unrealized holding gains, gross unrealized holding losses and fair value for marketable securities by major security type at May 31, 1997 and 1996, are as follows:
Gross Gross Unrealized Unrealized Amortized Holding Holding Cost Gains Losses Fair Value ---------- ---------- ---------- ---------- 1997: EQUITY SECURITIES................... $ 28,287 $ -- $(2,112) $ 26,175 ========== ======= ======= ========== 1996: US Treasury Securities.............. $1,691,462 $14,086 $ -- $1,705,548 ========== ======= ======= ==========
(G) DEPRECIATION AND AMORTIZATION Depreciation and amortization of equipment and leasehold improvements has been computed using the straight-line method over the following useful lives: Equipment................... 3 years Furniture and fixtures...... 3 years Automobiles................. 3 years Leasehold improvements...... Lesser of lease term or useful life (H) NET INCOME PER COMMON SHARE Net income per common share has been computed on the weighted average number of shares outstanding during the year of 2,914,138 in 1997, 2,996,514 in 1996, and 3,029,138 in 1995. The prior years' shares outstanding have been adjusted for a stock split in the form of a 100% stock dividend paid in November 1996. Since the assumed exercise of stock options and warrants would be less than 3% dilutive, shares issuable have not been included in the weighted average shares outstanding for those years. Statement of Financial Accounting Standards No. 128, "Earnings Per Share", is required to be adopted in fiscal 1998. At that time, the Company will be required to change the method currently used to compute earnings per share and restate all prior periods. Under the new requirements for calculating basic earnings per share, the dilutive effect of stock option plans will be excluded, but will be reflected in diluted earnings per share. The impact of SFAS No. 128 on the calculation of earnings per share is not expected to be material. (I) INCOME TAXES Deferred tax liabilities and assets are recognized for the future tax consequences attributable to temporary differences between the financial reporting bases and the tax bases of the Company's assets and liabilities at enacted rates expected to be in effect when such amounts are realized or settled. The effect of enacted tax law or rate changes is reflected in income in the period of enactment. (Continued) -22- TSR, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED MAY 31, 1997, 1996 AND 1995 (J) FAIR VALUE OF FINANCIAL INSTRUMENTS Statement of Financial Accounting Standards No. 107, "Disclosures About Fair Value of Financial Instruments," requires disclosure of the fair value of certain financial instruments. Cash and cash equivalents, accounts receivable, accounts and other payables, accrued liabilities and advances from customers are reflected in the financial statements at fair value because of the short-term maturity of these instruments. Marketable securities are carried at their fair value based upon quoted market values at May 31, 1997. (K) USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. (L) ACCOUNTING FOR STOCK-BASED COMPENSATION The Company records compensation expense for employee stock options only if the current market price of the underlying stock exceeds the exercise price on the date of the grant. On June 1, 1996, the Company adopted SFAS No. 123, "Accounting for Stock-Based Compensation." The Company has elected not to implement the fair value based accounting method for employee stock options, but has elected to disclose the pro forma net earnings and pro forma earnings per share for employee stock option grants made beginning in fiscal 1996 as if such method had been used to account for stock-based compensation cost as described in SFAS No. 123. (2) INCOME TAXES A reconciliation of the provisions for income taxes computed at the federal statutory rates for fiscal 1997, 1996 and 1995 to the reported amounts is as follows:
1997 1996 1995 AMOUNT % Amount % Amount % -------------------- ----------------- ------------------ Amounts at statutory federal tax rate......... $1,111,000 34.0% $580,000 34.0% $506,000 34.0% State and local taxes, net of federal income tax effect.................. 313,000 9.6 123,000 7.2 142,000 9.5 Non-deductible expenses....................... 48,000 1.4 39,000 2.3 39,000 2.6 Other, net.................................... (1,000) -- -- -- (1,000) -- ---------- ---- -------- ---- -------- ---- $1,471,000 45.0% $742,000 43.5% $686,000 46.1% ========== ==== ======== ==== ======== ====
The components of the provision for income taxes are as follows: Federal State Total -------- -------- ---------- 1997: CURRENT.............. $945,000 $474,000 $1,419,000 DEFERRED............. 52,000 -- 52,000 -------- -------- ---------- $997,000 $474,000 $1,471,000 ======== ======== ========== 1996: Current.............. $539,000 $187,000 $ 726,000 Deferred............. 16,000 -- 16,000 -------- -------- ---------- $555,000 $187,000 $ 742,000 ======== ======== ========== 1995: Current.............. $556,000 $214,000 $ 770,000 Deferred............. (84,000) -- (84,000) -------- -------- ---------- $472,000 $214,000 $ 686,000 ======== ======== ========== (Continued) -23- TSR, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED MAY 31, 1997, 1996 AND 1995 The tax effects of temporary differences that give rise to significant portions of the deferred income tax assets at May 31, 1997 and 1996 are as follows: 1997 1996 ---- ---- Allowance for doubtful accounts receivable.... $59,000 $ 56,000 Equipment and leasehold improvement depreciation and amortization............... 29,000 22,000 Accrued customer support...................... -- 62,000 ------- -------- Total deferred income tax assets............ $88,000 $140,000 ======= ======== The Company believes that it is more likely than not that it will realize its deferred tax asset of $88,000 at May 31, 1997 based on the Company's recent earnings. (3) SEGMENT REPORTING AND MAJOR CUSTOMERS The Company currently operates in one business segment, computer software, and is engaged primarily in the business of providing contract computer programming and Year 2000 compliance solution services. Previously, from fiscal 1993 through fiscal 1996, the Company also provided temporary nurses and nurses' aides to health care facilities and home care patients. The following table summarizes certain financial information for the computer software segment and the health care services segment as of and for the years ended May 31, 1997, 1996 and 1995.
COMPUTER HEALTH CONSOLIDATED SOFTWARE CARE CORPORATE TOTAL ----------- -------- ---------- ------------ Revenues to 1997............. $49,571,888 $132,437 -- $49,704,325 =========== ======== ========== =========== unaffiliated customers 1996............. 31,365,091 445,072 -- 31,810,163 =========== ======== ========== =========== 1995............. 25,726,756 947,630 -- 26,674,386 =========== ======== ========== =========== Operating profit 1997............. 2,839,329 131,053 -- 2,970,382 =========== ======== ========== =========== 1996............. 1,374,076 81,921 -- 1,455,997 =========== ======== ========== =========== 1995............. 1,263,351 640 -- 1,263,991 =========== ======== ========== =========== Identifiable assets 1997............. 10,987,419 -- 3,056,450(1) 14,043,869 =========== ======== ========== =========== 1996............. 6,345,536 896 4,820,259(1) 11,166,691 =========== ======== ========== =========== 1995............. 5,251,621 193,711 5,183,529(1) 10,628,861 =========== ======== ========== =========== Capital expenditures 1997............. 424,634 -- -- 424,634 =========== ======== ========== =========== 1996............. 135,084 14,222 -- 149,306 =========== ======== ========== =========== 1995............. 176,936 -- -- 176,936 =========== ======== ========== =========== Depreciation and amortization 1997............. 184,262 1,193 -- 185,455 =========== ======== ========== =========== 1996............. 134,419 7,289 -- 141,708 =========== ======== ========== =========== 1995............. $ 113,360 $ 14,174 $ -- $ 127,534 =========== ======== ========== ===========
(1) Corporate identifiable assets consist of cash, marketable securities and prepaid, recoverable and deferred income taxes. (Continued) -24- TSR, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED MAY 31, 1997, 1996 AND 1995 In the fiscal years ended May 31, 1997, 1996 and 1995 the Company derived 16.3%, 22.4%, and 12.8% respectively, of consolidated revenues from one customer for contract computer programming services. The Company derived 10.3% of consolidated revenues from another contract computer programming services customer in fiscal 1997. The two previously mentioned customers represented 12.2% and 11.7%, respectively, of consolidated trade accounts receivable as of May 31, 1997. (4) STOCK OPTIONS The Board of Directors of the Company has approved the 1997 Employee Stock Option Plan. The plan provides for the granting of options to purchase up to 400,000 shares of the Company's common stock at prices equal to fair market values at the grant dates. Options are exercisable after one year from date of grant and expire on the third anniversary of the date of grant. Treatment of the options granted, to the extent allowable, as Incentive Stock Options is subject to shareholder approval. None of the options granted in fiscal 1997 were granted to officers or directors of the Company. STOCK OPTIONS OUTSTANDING EXERCISE SHARES PRICE ------- -------- Balance May 31, 1996.......................... 0 $ 0.00 Options granted............................... 110,000 18.25 ------- ------ BALANCE AT MAY 31, 1997 (none exercisable).... 110,000 $18.25 ======= ====== The per share weighted-average fair value of stock options granted during 1997 was approximately $9.95 on the date of grant using the Black-Scholes option pricing model with the following weighted-average assumptions: expected dividend yield of 0%, risk free interest rate of 6%,expected stock volatility of 100% and an expected option life of two years. The Company applies APB Opinion No. 25 in accounting for its stock option grants and accordingly, no compensation cost has been recognized in the financial statements for its stock options which have an exercise price equal to or greater than the fair value of the stock on the date of the grant. Had the Company determined compensation cost based on the fair value at the grant date for its stock options under SFAS No. 123, the Company's net income and net income per common share in fiscal 1997 would have been reduced to the pro forma amounts indicated below: 1997 ---- Net Income: As reported...................... $1,795,795 Pro forma ....................... 1,746,000 Net income per common share: As reported...................... $ 0.62 Pro forma........................ 0.60 (Continued) -25- TSR, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED MAY 31, 1997, 1996 AND 1995 (5) COMMITMENTS A summary of noncancellable long-term operating lease commitments for facilities as of May 31, 1997 follows: FISCAL YEAR AMOUNT ----------- ------ 1998.................. $334,000 1999.................. 321,000 2000.................. 267,000 2001.................. 124,000 Thereafter............ 132,000 Total rent expenses under all lease agreements amounted to $236,000, $211,000, and $190,000 and in 1997, 1996 and 1995, respectively. (6) EMPLOYMENT AGREEMENTS In June 1994, an employment agreement was entered into with the President of the contract computer programming subsidiary providing for an annual base salary of $150,000 and additional incentive compensation based upon a formula which is agreed upon from time to time and is currently based on the profitability of the Company's contract computer programming subsidiary. During fiscal 1997, 1996, and 1995, $407,000, $253,000 and $253,000 was paid as incentive compensation. This agreement is for a five year term and provides for severance, in the event of termination, of the base salary for the shorter of three years or the remainder of the original term. In June 1997, an employment agreement was entered into with the Chairman of the Board, Chief Executive Officer, President and Treasurer which terminates May 31, 2002. This agreement provides for an initial base salary of $375,000 with annual adjustments based upon increases in the Consumer Price Index, such increases to be no less than 3% and no more than 8% per year. Additionally, the agreement provides for an annual discretionary bonus for each fiscal year, the maximum to be $50,000 if pre-tax profits are less than $1,000,000 and a minimum of 7.5% of pre-tax profit if such profits exceed $1,000,000. In fiscal 1997, 1996 and 1995, the minimum bonus of 7.5% of pre-tax profit was awarded, which amounted to $265,000, $139,000 and $120,000 respectively under a similar plan included in this executive's prior contract. (7) TREASURY STOCK During fiscal 1996, under a buy-back plan authorized by the Board of Directors to repurchase up to 300,000 shares of the Company's common stock, the Company purchased for $332,756, 115,000 shares of its common stock at the market value of the stock on the purchase date. The remaining authorization under the buy-back plan has been canceled. During fiscal 1997, the Company retired all its previously acquired treasury stock, which amounted to 2,025,054 shares. (8) CASH DIVIDEND On July 18, 1995 the Board of Directors of the Company declared a cash dividend of $0.20 per share on Common Stock payable on August 28, 1995 to shareholders of record on July 31, 1995. The Company funded such dividend from its available cash and maturing marketable securities. This dividend, which amounted to $605,828, did not have a material impact on the liquidity of the Company. The Company has not adopted a policy of paying dividends on a regular periodic basis, and does not expect to declare a cash dividend for fiscal 1997. (9) STOCK DIVIDEND On October 10, 1996 the Board of Directors of the Company declared a stock split in the form of a 100% stock dividend on the shares of Common Stock payable November 14, 1996 to stockholders of record as of October 28, 1996. All data for prior periods has been adjusted accordingly. Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. --------------------------------------------------------------- None -26- PART III Item 10. Directors and Executive Officers of the Company. ------------------------------------------------ The information required by this Item 10 is incorporated by reference to the Company's definitive proxy statement in connection with the 1997 Annual Meeting of Shareholders. Item 11. Executive Compensation. ----------------------- The information required by this Item 11 is incorporated by reference to the Company's definitive proxy statement in connection with the 1997 Annual Meeting of Shareholders. Item 12. Security Ownership of Certain Beneficial Owners and Management. --------------------------------------------------------------- The information required by this Item 12 is incorporated by reference to the Company's definitive proxy statement in connection with the 1997 Annual Meeting of Shareholders. Item 13. Certain Relationships and Related Transactions. ----------------------------------------------- The information required by this Item 13 is incorporated by reference to the Company's definitive proxy statement in connection with the 1997 Annual Meeting of Shareholders. PART IV Item 14. Exhibits; Financial Statement Schedules, and Reports on Form 8-K. ----------------------------------------------------------------- (a) Exhibits: --------- 3.1 Articles of Incorporation of the Company, as amended, incorporated by reference to Exhibit 3.1 to the Annual Report on Form 10-K filed by the Company for the fiscal year ended May 31, 1992. 3.2 Bylaws of the Company, as amended, incorporated by reference to Exhibit 3.2 to the Annual Report on Form 10-K filed by the Company for the fiscal year ended May 31, 1992. 10.1 Employment Agreement between TSR, Inc. and Ernest G. Bago, dated as of June 1, 1994, incorporated by reference to Exhibit 10.2 to the Annual Report on Form 10-KSB filed by the Company for the fiscal year ended May 31, 1995. 10.2 1997 Employee Stock Option Plan. 10.3 Form of Employee Stock Option Agreement. 10.4 Employment Agreement dated June 1, 1997 between the Company and Joseph F. Hughes. 10.5 Subscription and Shareholders Agreement dated September 30, 1996 among the Company, Catch/21 Enterprises Incorporated and William Connor, incorporated by reference to Exhibit 10.1 to the Quarterly Report on Form 10-Q filed by the Company for the quarter ended November 30, 1996. 21 List of Subsidiaries. 27 Financial Data Schedule. (b) Reports on Form 8-K: -------------------- None -27- Signatures ---------- Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the Undersigned, thereunto duly authorized. TSR, INC. By: /s/ J.F. HUGHES --------------------------------------------------------------------- J. F. Hughes, Chairman Dated: August 27, 1997 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 Company and in the capacities and on the dates indicated. By: /s/ J.F. HUGHES --------------------------------------------------------------------- J. F. Hughes, President, Treasurer and Director By: /s/ JOHN G. SHARKEY --------------------------------------------------------------------- John G. Sharkey, Vice President, Finance, Controller and Secretary By: /s/ ERNEST G. BAGO --------------------------------------------------------------------- Ernest G. Bago, President, TSR Consulting Services, Inc. and Director By: /s/ JOHN H. HOCHULI, JR. --------------------------------------------------------------------- John H. Hochuli, Jr., Director By: /s/ JAMES J. HILL --------------------------------------------------------------------- James J. Hill, Director Dated: August 27, 1997 -28- TSR, INC. AND SUBSIDIARIES EXHIBIT INDEX FORM 10-K, MAY 31, 1997
EXHIBIT SEQUENTIAL NUMBER EXHIBIT PAGE # - ------- ------- ---------- 3.1 Articles of Incorporation of the Company, as amended, incorporated by reference N/A to Exhibit 3.1 to the Annual Report on Form 10-K filed by the Company for the fiscal year ended May 31, 1992. 3.2 Bylaws of the Company, as amended, incorporated by reference to Exhibit 3.2 to the N/A Annual Report on Form 10-K filed by the Company for the fiscal year ended May 31, 1992. 10.1 Employment Agreement between TSR, Inc. and Ernest G. Bago, dated as of June 1, N/A 1994, incorporated by reference to Exhibit 10.2 to the Annual Report on Form 10-KSB filed by the Company for the fiscal year ended May 31, 1995. 10.2 1997 Employee Stock Option Plan. 10.3 Form of Employee Stock Option Agreement. 10.4 Employment Agreement dated July 1, 1997 between the Company and Joseph F. Hughes. 10.5 Subscription and Shareholders Agreement dated September 30, 1996 among the N/A Company, Catch/21 Enterprises Incorporated and William Connor, incorporated by reference to Exhibit 10.1 to the Quarterly Report on Form 10-Q filed by the Company for the quarter ended November 30, 1996. 21 List of Subsidiaries. 27 Financial Data Schedule.
-29- EX-10.2 2 1997 EMPLOYEE STOCK OPTION PLAN EXHIBIT 10.2 TSR, Inc. 1997 EMPLOYEE STOCK OPTION PLAN Adopted on April 29, 1997 1. Purpose. -------- The purpose of this plan (the "Plan") is to secure for TSR, Inc. (the "Company") and its shareholders the benefits arising from capital stock ownership by employees, officers and directors of, and consultants or advisors to, the Company and its subsidiary corporations who are expected to contribute to the Company's future growth and success. Except where the context otherwise requires, the term "Company" shall include all present and future subsidiaries of the Company as defined in Sections 424(e) and 424(f) of the Internal Revenue Code of 1986, as amended or replaced from time to time (the "Code"). Those provisions of the Plan which make express reference to Section 422 shall apply only to Incentive Stock Options (as that term is defined in the Plan). 2. Type of Options and Administration. ----------------------------------- (a) Types of Options. Options granted pursuant to the Plan shall be authorized by action of the Board of Directors of the Company (or a committee designated by the Board of Directors (the "Committee")) and may be either incentive stock options ("Incentive Stock Options") meeting the requirements of Section 422 of the Code or non-statutory options which are not intended to meet the requirements of Section 422 of the Code; provided that options granted hereunder shall only qualify as Incentive Stock Options if the Plan is approved by the Company's stockholders. (b) Administration. The Plan will be administered by the Board of Directors of the Company, whose construction and interpretation of the terms and provisions of the Plan shall be final and conclusive. The Board of Directors, may in its sole discretion grant options to purchase shares of the Company's Common Stock, $.01 par value per share ("Common Stock") and issue shares upon exercise of such options as provided in the Plan. The Board shall have authority, subject to the express provisions -1- of the Plan, to construe the respective option agreements and the Plan, to prescribe, amend and rescind rules and regulations relating to the Plan, to determine the terms and provisions of the respective option agreements, which need not be identical, and to make all other determinations in the judgment of the Board of Directors necessary or desirable for the administration of the Plan. The Board of Directors may correct any defect or supply any omission or reconcile any inconsistency in the Plan or in any option agreement in the manner and to the extent it shall deem expedient to carry the Plan into effect and it shall be the sole and final judge of such expediency. No director or person acting pursuant to authority delegated by the Board of Directors shall be liable for any action or determination under the Plan made in good faith. The Board of Directors may, to the full extent permitted by or consistent with applicable laws or regulations (including, without limitation, applicable state law and Rule 16b-3 promulgated under the Securities Exchange Act of 1934 (the "Exchange Act"), or any successor rule ("Rule 16b-3")), delegate any or all of its powers under the Plan to a Committee appointed by the Board of Directors, and if the Committee is so appointed all references to the Board of Directors in the Plan shall mean and relate to such Committee with respect to the powers so delegated. Subject to adjustment as provided in Section 15 below, the aggregate number of shares of Common Stock that may be subject to Options granted to any person in a calendar year shall not exceed 25% of the maximum number of shares which may be issued and sold under the Plan, as set forth in Section 4 hereof, as such Section may be amended from time to time. (c) Applicability of Rule 16b-3. Those provisions of the Plan which make express reference to Rule 16b-3 shall apply to the Company only at such time as the Company's Common Stock is registered under the Exchange Act, and then only to such persons as are required to file reports under Section 16(a) of the Exchange Act (a "Reporting Person"). 3. Eligibility. ------------ (a) General. Options may be granted to persons who are, at the time of grant, employees, officers or directors of, or consultants or advisors to, the Company ("Participants"); provided, that Incentive Stock Options may only be granted to individuals who are employees of the Company (within the meaning -2- of Section 3401(c) of the Code). A person who has been granted an option may, if he or she is otherwise eligible, be granted additional options if the Board of Directors shall so determine. (b) Grant of Options to Directors and Officers. From and after the registration of the Common Stock of the Company under the Exchange Act, the selection of a director or an officer who is a Reporting Person (as the terms "director" and "officer" are defined for purposes of Rule 16b-3) as a recipient of an option, the timing of the option grant, the exercise price of the option and the number of shares subject to the option shall be determined either (i) by the Board of Directors, or (ii) by a committee consisting of two or more directors having full authority to act in the matter, each of whom shall be a "non-employee director." For the purposes of the Plan, a director shall be deemed to be a "non-employee director" only if such person qualifies as a "non-employee director" within the meaning of Rule 16b-3, as such term is interpreted from time to time. 4. Stock Subject to Plan. ---------------------- The stock subject to options granted under the Plan shall be shares of authorized but unissued or reacquired Common Stock. Subject to adjustment as provided in Section 15 below, the maximum number of shares of Common Stock of the Company which may be issued and sold under the Plan is 400,000 shares. If an option granted under the Plan shall expire, terminate or is cancelled for any reason without having been exercised in full, the unpurchased shares subject to such option shall again be available for subsequent option grants under the Plan. 5. Forms of Option Agreements. --------------------------- As a condition to the grant of an option under the Plan, each recipient of an option shall execute an option agreement in such form not inconsistent with the Plan as may be approved by the Board of Directors. Such option agreements may differ among recipients. 6. Purchase Price. --------------- (a) General. The purchase price per share of stock deliverable upon the exercise of an option shall be -3- determined by the Board of Directors at the time of grant of such option; provided, however, that in the case of an Incentive Stock Option, the exercise price shall not be less than 100% of the Fair Market Value (as hereinafter defined) of such stock, at the time of grant of such option, or less than 110% of such Fair Market Value in the case of options described in Section 11(b). "Fair Market Value" of a share of Common Stock of the Company as of a specified date for the purposes of the Plan shall mean the closing price of a share of the Common Stock on the principal securities exchange (including the Nasdaq National Market) on which such shares are traded on the day immediately preceding the date as of which Fair Market Value is being determined, or on the next preceding date on which such shares are traded if no shares were traded on such immediately preceding day, or if the shares are not traded on a securities exchange, Fair Market Value shall be deemed to be the average of the high bid and low asked prices of the shares in the over-the-counter market on the day immediately preceding the date as of which Fair Market Value is being determined or on the next preceding date on which such high bid and low asked prices were recorded. If the shares are not publicly traded, Fair Market Value of a share of Common Stock (including, in the case of any repurchase of shares, any distributions with respect thereto which would be repurchased with the shares) shall be determined in good faith by the Board of Directors. In no case shall Fair Market Value be determined with regard to restrictions other than restrictions which, by their terms, will never lapse. (b) Payment of Purchase Price. Options granted under the Plan may provide for the payment of the exercise price by delivery of cash or a check to the order of the Company in an amount equal to the exercise price of such options, or, to the extent provided in the applicable option agreement, (i) by delivery to the Company of shares of Common Stock of the Company having a Fair Market Value on the date of exercise equal in amount to the exercise price of the options being exercised, (ii) by any other means (including, without limitation, by delivery of a promissory note of the optionee payable on such terms as are specified by the Board of Directors) which the Board of Directors determines are consistent with the purpose of the Plan and with applicable laws and regulations (including, without limitation, the provisions of Rule 16b-3 and Regulation T -4- promulgated by the Federal Reserve Board) or (iii) by any combination of such methods of payment. 7. Option Period. --------------- Subject to earlier termination as provided in the Plan, each option and all rights thereunder shall expire on such date as determined by the Board of Directors and set forth in the applicable option agreement, provided, that such date shall not be later than (10) ten years after the date on which the option is granted. 8. Exercise of Options. -------------------- Each option granted under the Plan shall be exercisable either in full or in installments at such time or times and during such period as shall be set forth in the option agreement evidencing such option, subject to the provisions of the Plan. No option granted to a Reporting Person for purposes of the Exchange Act, however, shall be exercisable during the first six months after the date of grant. Subject to the requirements in the immediately preceding sentence, if an option is not at the time of grant immediately exercisable, the Board of Directors may (i) in the agreement evidencing such option, provide for the acceleration of the exercise date or dates of the subject option upon the occurrence of specified events, and/or (ii) at any time prior to the complete termination of an option, accelerate the exercise date or dates of such option. 9. Nontransferability of Options. ------------------------------ No option granted under this Plan shall be assignable or otherwise transferable by the optionee except by will or by the laws of descent and distribution or pursuant to a qualified domestic relations order as defined in the Code or Title I of the Employee Retirement Income Security Act, or the rules thereunder. An option may be exercised during the lifetime of the optionee only by the optionee. In the event an optionee dies during his employment by the Company or any of its subsidiaries, or during the three-month period following the date of termination of such employment, his option shall thereafter be exercisable, during the period specified in the option agreement, by his executors or administrators to the full extent to which such option was -5- exercisable by the optionee at the time of his death during the periods set forth in Section 10 or 11(d). 10. Effect of Termination of Employment or Other Relationship. ---------------------------------------------------------- Except as provided in Section 11(d) with respect to Incentive Stock Options or as otherwise determined by the Board of Directors, and subject to the provisions of the Plan, an optionee may exercise an option at any time within three (3) months following the termination of the optionee's employment or other relationship with the Company or within one (1) year if such termination was due to the death or disability of the optionee, but, except in the case of the optionee's death, in no event later than the expiration date of the Option. If the termination of the optionee's employment is for cause or is otherwise attributable to a breach by the optionee of an employment or confidentiality or non-disclosure agreement, the option shall expire immediately upon such termination. The Board of Directors shall have the power to determine what constitutes a termination for cause or a breach of an employment or confidentiality or non-disclosure agreement, whether an optionee has been terminated for cause or has breached such an agreement, and the date upon which such termination for cause or breach occurs. Any such determinations shall be final and conclusive and binding upon the optionee. 11. Incentive Stock Options. ------------------------- Options granted under the Plan which are intended to be Incentive Stock Options shall be subject to the following additional terms and conditions: (a) Express Designation. All Incentive Stock Options granted under the Plan shall, at the time of grant, be specifically designated as such in the option agreement covering such Incentive Stock Options. (b) 10% Shareholder. If any employee to whom an Incentive Stock Option is to be granted under the Plan is, at the time of the grant of such option, the owner of stock possessing more than 10% of the total combined voting power of all classes -6- of stock of the Company (after taking into account the attribution of stock ownership rules of Section 424(d) of the Code), then the following special provisions shall be applicable to the Incentive Stock Option granted to such individual: (i) The purchase price per share of the Common Stock subject to such Incentive Stock Option shall not be less than 110% of the Fair Market Value of one share of Common Stock at the time of grant; and (ii) the option exercise period shall not exceed five years from the date of grant. (c) Dollar Limitation. For so long as the Code shall so provide, options granted to any employee under the Plan (and any other incentive stock option plans of the Company) which are intended to constitute Incentive Stock Options shall not constitute Incentive Stock Options to the extent that such options, in the aggregate, become exercisable for the first time in any one calendar year for shares of Common Stock with an aggregate Fair Market Value, as of the respective date or dates of grant, of more than $100,000. (d) Termination of Employment, Death or Disability. No Incentive Stock Option may be exercised unless, at the time of such exercise, the optionee is, and has been continuously since the date of grant of his or her option, employed by the Company, except that: (i) an Incentive Stock Option may be exercised within the period of three months after the date the optionee ceases to be an employee of the Company (or within such lesser period as may be specified in the applicable option agreement), provided, that the agreement with respect to such option may designate a longer exercise period and that the exercise after such three-month period shall be treated as the exercise of a non-statutory option under the Plan; (ii) if the optionee dies while in the employ of the Company, or within three months after the optionee ceases to be such an employee, the Incentive -7- Stock Option may be exercised by the person to whom it is transferred by will or the laws of descent and distribution within the period of one year after the date of death (or within such lesser period as may be specified in the applicable option agreement); and (iii) if the optionee becomes disabled (within the meaning of Section 22(e)(3) of the Code or any successor provisions thereto) while in the employ of the Company, the Incentive Stock Option may be exercised within the period of one year after the date the optionee ceases to be such an employee because of such disability (or within such lesser period as may be specified in the applicable option agreement). For all purposes of the Plan and any option granted hereunder, "employment" shall be defined in accordance with the provisions of Section 1.421-7(h) of the Income Tax Regulations (or any successor regulations). Notwithstanding the foregoing provisions, no Incentive Stock Option may be exercised after its expiration date. 12. Additional Provisions. ---------------------- (a) Additional Option Provisions. The Board of Directors may, in its sole discretion, include additional provisions in option agreements covering options granted under the Plan, including without limitation restrictions on transfer, repurchase rights, rights of first refusal, commitments to pay cash bonuses, to make, arrange for or guaranty loans or to transfer other property to optionees upon exercise of options, or such other provisions as shall be determined by the Board of Directors; provided, that such additional provisions shall not be inconsistent with any other term or condition of the Plan and such additional provisions shall not cause any Incentive Stock Option granted under the Plan to fail to qualify as an Incentive Stock Option within the meaning of Section 422 of the Code. (b) Acceleration, Extension, Etc. The Board of Directors may, in its sole discretion, (i) accelerate the date or dates on which all or any particular option or options granted under the Plan may be exercised or (ii) extend the dates during which all, or any particular, option or options granted under the -8- Plan may be exercised; provided, however, that no such extension shall be permitted if it would cause the Plan to fail to comply with Section 422 of the Code or with Rule 16b-3. 13. General Restrictions. --------------------- (a) Investment Representations. The Company may require any person to whom an option is granted, as a condition of exercising such option, to give written assurances in substance and form satisfactory to the Company to the effect that such person is acquiring the Common Stock subject to the option for his or her own account for investment and not with any present intention of selling or otherwise distributing the same, and to such other effects as the Company deems necessary or appropriate in order to comply with federal and applicable state securities laws, or with covenants or representations made by the Company in connection with any public offering of its Common Stock, including any lock-up or other restriction on transferability. (b) Compliance With Securities Law. Each option shall be subject to the requirement that if, at any time, counsel to the Company shall determine that the listing, registration or qualification of the shares subject to such option upon any securities exchange or automated quotation system or under any state or federal law, or the consent or approval of any governmental or regulatory body, or that the disclosure of non-public information or the satisfaction of any other condition is necessary as a condition of, or in connection with the issuance or purchase of shares thereunder, such option may not be exercised, in whole or in part, unless such listing, registration, qualification, consent or approval, or satisfaction of such condition shall have been effected or obtained on conditions acceptable to the Board of Directors. Nothing herein shall be deemed to require the Company to apply for or to obtain such listing, registration or qualification, or to satisfy such condition. 14. Rights as a Shareholder. ------------------------ The holder of an option shall have no rights as a shareholder with respect to any shares covered by the option (including, without limitation, any rights to receive dividends -9- or non-cash distributions with respect to such shares) until the date of issue of a stock certificate to him or her for such shares. No adjustment shall be made for dividends or other rights for which the record date is prior to the date such stock certificate is issued. 15. Adjustment Provisions for Recapitalizations, Reorganizations and Related Transactions. -------------------------------------------- (a) Recapitalizations and Related Transactions. If, through or as a result of any recapitalization, reclassification, stock dividend, stock split, reverse stock split or other similar transaction, (i) the outstanding shares of Common Stock are increased, decreased or exchanged for a different number or kind of shares or other securities of the Company, or (ii) additional shares or new or different shares or other non-cash assets are distributed with respect to such shares of Common Stock or other securities, an appropriate and proportionate adjustment shall be made in (x) the maximum number and kind of shares reserved for issuance under the Plan, (y) the number and kind of shares or other securities subject to any then outstanding options under the Plan, and (z) the price for each share subject to any then outstanding options under the Plan, without changing the aggregate purchase price as to which such options remain exercisable. Notwithstanding the foregoing, no adjustment shall be made pursuant to this Section 15 if such adjustment (i) would cause the Plan to fail to comply with Section 422 of the Code or with Rule 16b-3 or (ii) would be considered as the adoption of a new plan requiring stockholder approval. (b) Reorganization, Merger and Related Transactions. All outstanding Options under the Plan shall become fully exercisable for a period of sixty (60) days following the occurrence of any Trigger Event, whether or not such Options are then exercisable under the provisions of the applicable agreements relating thereto. For purposes of the Plan, a "Trigger Event" is any one of the following events: (i) the date on which shares of Common Stock are first purchased pursuant to a tender offer or exchange offer (other than such an offer by the Company, any employee benefit plan of the Company or any entity holding shares or -10- other securities of the Company for or pursuant to the terms of such plan), whether or not such offer is approved or opposed by the Company and regardless of the number of shares purchased pursuant to such offer; (ii) the date the Company acquires knowledge that any person or group deemed a person under Section 13(d)-3 of the Exchange Act (other than the Company, any employee benefit plan of the Company or any entity holding shares of Common Stock or other securities of the Company for or pursuant to the terms of any such plan or any individual or entity or group or affiliate thereof which acquired its beneficial ownership interest prior to the date the Plan was adopted by the Board), in a transaction or series of transactions, has become the beneficial owner, directly or indirectly (with beneficial ownership determined as provided in Rule 13d-3, or any successor rule, under the Exchange Act), of securities of the Company entitling the person or group to 30% or more of all votes (without consideration of the rights of any class or stock to elect directors by a separate class vote) to which all stockholders of the Company would be entitled in the election of the Board of Directors were an election held on such date; (iii) the date, during any period of two consecutive years, when individuals who at the beginning of such period constitute the Board of Directors of the Company cease for any reason to constitute at least a majority thereof, unless the election, or the nomination for election by the stockholders of the Company, of each new director was approved by a vote of at least two-thirds of the directors then still in office who were directors at the beginning of such period; and (iv) the date of approval by the stockholders of the Company of an agreement (a "reorganization agreement") providing for: (A) The merger of consolidation of the Company with another corporation where the stockholders of the Company, immediately prior to the merger or consolidation, do not beneficially own, immediately after the merger or consolidation, shares of the corporation issuing cash or -11- securities in the merger or consolidation entitling such stockholders to 60% or more of all votes (without consideration of the rights of any class of stock to elect directors by a separate class vote) to which all stockholders of such corporation would be entitled in the election of directors or where the members of the Board of Directors of the Company, immediately prior to the merger or consolidation, do not, immediately after the merger or consolidation, constitute a majority of the Board of Directors of the corporation issuing cash or securities in the merger or consolidation; or (B) The sale or other disposition of all or substantially all the assets of the Company. (c) Board Authority to Make Adjustments. Any adjustments under this Section 15 will be made by the Board of Directors, whose determination as to what adjustments, if any, will be made and the extent thereof will be final, binding and conclusive. No fractional shares will be issued under the Plan on account of any such adjustments. 16. Merger, Consolidation, Asset Sale, Liquidation, etc. ---------------------------------------------------- (a) General. In the event of a consolidation or merger or sale of all or substantially all of the assets of the Company in which outstanding shares of Common Stock are exchanged for securities, cash or other property of any other corporation or business entity or in the event of a liquidation of the Company, the Board of Directors of the Company, or the board of directors of any corporation assuming the obligations of the Company, may, in its discretion, take any one or more of the following actions, as to outstanding options: (i) in the event of a merger under the terms of which holders of the Common Stock of the Company will receive upon consummation thereof a cash payment for each share surrendered in the merger (the "Merger Price"), make or provide for a cash payment to the optionees equal to the difference between (A) the Merger Price times the number of shares of Common Stock subject to such outstanding options (to the extent then exercisable at prices not in excess of the Merger Price) and (B) the aggregate exercise price of all such outstanding options in exchange for the termination of such options, and (ii) provide that all or any outstanding options -12- shall become exercisable in full immediately prior to such event and upon written notice to the optionees, provide that all unexercised options will terminate immediately prior to the consummation of such transaction unless exercised by the optionee within a specified period following the date of such notice. (b) Substitute Options. The Company may grant options under the Plan in substitution for options held by employees of another corporation who become employees of the Company, or a subsidiary of the Company, as the result of the Company, or a subsidiary of the Company, as the result of a merger or consolidation of the employing corporation with the Company or a subsidiary of the Company, or as a result of the acquisition by the Company, or one of its subsidiaries, of property or stock of the employing corporation. The Company may direct that substitute options be granted on such terms and conditions as the Board of Directors considers appropriate in the circumstances. 17. No Special Employment Rights. ----------------------------- Nothing contained in the Plan or in any option shall confer upon any optionee any right with respect to the continuation of his or her employment by the Company or interfere in any way with the right of the Company at any time to terminate such employment or to increase or decrease the compensation of the optionee. 18. Other Employee Benefits. ------------------------ Except as to plans which by their terms include such amounts as compensation, the amount of compensation deemed to be received by an employee as a result of the exercise of an option or the sale of shares received upon such exercise will not constitute compensation with respect to which any other employee benefits of such employee are determined, including, without limitation, benefits under any bonus, pension, profit-sharing, life insurance or salary continuation plan, except as otherwise specifically determined by the Board of Directors. 19. Amendment of the Plan. ---------------------- (a) The Board of Directors may at any time, and from time to time, modify or amend the Plan in any respect; provided, however, that if at any time the approval of the shareholders of -13- the Company is required under Section 422 of the Code or any successor provision with respect to Incentive Stock Options, or under Rule 16b-3, the Board of Directors may not effect such modification or amendment without such approval; and provided, further, that the provisions of Section 3(c) hereof shall not be amended more than once every six months, other than to comport with changes in the Code, the Employer Retirement Income Security Act of 1974, as amended, or the rules thereunder. (b) The termination or any modification or amendment of the Plan shall not, without the consent of an optionee, affect his or her rights under an option previously granted to him or her. With the consent of the optionee affected, the Board of Directors may amend outstanding option agreements in a manner not inconsistent with the Plan. The Board of Directors shall have the right to amend or modify (i) the terms and provisions of the Plan and of any outstanding Incentive Stock Options granted under the Plan to the extent necessary to qualify any or all such options for such favorable federal income tax treatment (including deferral of taxation upon exercise) as may be afforded incentive stock options under Section 422 of the Code and (ii) the terms and provisions of the Plan and of any outstanding option to the extent necessary to ensure the qualification of the Plan under Rule 16b-3. 20. Withholding. ------------ (a) The Company shall have the right to deduct from payments of any kind otherwise due to the optionee any federal, state or local taxes of any kind required by law to be withheld with respect to any shares issued upon exercise of options under the Plan. Subject to the prior approval of the Company, which may be withheld by the Company in its sole discretion, the optionee may elect to satisfy such obligations, in whole or in part, (i) by causing the Company to withhold shares of Common Stock otherwise issuable pursuant to the exercise of an option or (ii) by delivering to the Company shares of Common Stock already owned by the optionee. The shares so delivered or withheld shall have a Fair Market Value equal to such withholding obligation as of the date that the amount of tax to be withheld is to be determined. An optionee who has made an election pursuant to this Section 20(a) may only satisfy his or her withholding obligation with shares of Common Stock which are not subject to -14- any repurchase, forfeiture, unfulfilled vesting or other similar requirements. (b) The acceptance of shares of Common Stock upon exercise of an Incentive Stock Option shall constitute an agreement by the optionee (i) to notify the Company if any or all of such shares are disposed of by the optionee within two years from the date the option was granted or within one year from the date the shares were transferred to the optionee pursuant to the exercise of the option, and (ii) if required by law, to remit to the Company, at the time of and in the case of any such disposition, an amount sufficient to satisfy the Company's federal, state and local withholding tax obligations with respect to such disposition, whether or not, as to both (i) and (ii), the optionee is in the employ of the Company at the time of such disposition. (c) Notwithstanding the foregoing, in the case of a Reporting Person, no election to use shares for the payment of withholding taxes shall be effective unless made in compliance with any applicable requirements of Rule 16b-3. 21. Cancellation and New Grant of Options, Etc. ------------------------------------------- The Board of Directors shall have the authority to effect, at any time and from time to time, with the consent of the affected optionees, (i) the cancellation of any or all outstanding options under the Plan and the grant in substitution therefor of new options under the Plan covering the same or different numbers of shares of Common Stock and having an option exercise price per share which may be lower or higher than the exercise price per share of the cancelled options or (ii) the amendment of the terms of any and all outstanding options under the Plan to provide an option exercise price per share which is higher or lower than the then-current exercise price per share of such outstanding options. 22. Effective Date and Duration of the Plan. ---------------------------------------- (a) Effective Date. The Plan shall become effective when adopted by the Board of Directors, but no options shall be -15- granted to officers or directors of the Company hereunder and no Incentive Stock Option granted under the Plan shall become exercisable unless and until the Plan shall have been approved by the Company's shareholders. If such shareholder approval is not obtained within twelve months after the date of the Board's adoption of the Plan, no options previously granted under the Plan shall be deemed to be Incentive Stock Options and no Incentive Stock Options shall be granted thereafter. Amendments to the Plan not requiring shareholder approval shall become effective when adopted by the Board of Directors; amendments requiring shareholder approval (as provided in Section 19) shall become effective when adopted by the Board of Directors, but no Incentive Stock Option granted after the date of such amendment shall become exercisable (to the extent that such amendment to the Plan was required to enable the Company to grant such Incentive Stock Option to a particular optionee) unless and until such amendment shall have been approved by the Company's shareholders. If such shareholder approval is not obtained within twelve months of the Board's adoption of such amendment, any Incentive Stock Options granted on or after the date of such amendment shall terminate to the extent that such amendment to the Plan was required to enable the Company to grant such option to a particular optionee. Subject to this limitation, options may be granted under the Plan at any time after the effective date and before the date fixed for termination of the Plan. (b) Termination. Unless sooner terminated in accordance with Section 16, the Plan shall terminate upon the earlier of (i) the close of business on the day next preceding the tenth anniversary of the date of its adoption by the Board of Directors, or (ii) the date on which all shares available for issuance under the Plan shall have been issued pursuant to the exercise or cancellation of options granted under the Plan. If the date of termination is determined under (i) above, then options outstanding on such date shall continue to have force and effect in accordance with the provisions of the instruments evidencing such options. 23. Provision for Foreign Participants. ----------------------------------- The Board of Directors may, without amending the Plan, modify awards or options granted to participants who are foreign nationals or employed outside the United States to recognize -16- differences in laws, rules, regulations or customs of such foreign jurisdictions with respect to tax, securities, currency, employee benefit or other matters. 24. Governing Law. -------------- The provisions of this Plan shall be governed and construed in accordance with the laws of the State of Delaware without regard to the principles of conflicts of laws. Adopted by the Board of Directors on April 29, 1997. EX-10.3 3 OPTION AGREEMENT EXHIBIT 10.3 TSR, INC. 1997 EMPLOYEE STOCK OPTION PLAN EMPLOYEE STOCK OPTION AGREEMENT OPTION AGREEMENT dated as of _______________, by and between TSR, Inc., a Delaware corporation ("The Company") and _______________, whose address is ______________________________, ("the Optionee"). The Company has adopted the 1997 Employee Stock Option Plan ("the Plan"), a copy of which is attached hereto as Exhibit A, and desires to grant to the Optionee the options provided for herein, all subject to the terms and conditions of the Plan. Capitalized terms used herein and not defined have the same meanings as set forth in the Plan. IT IS AGREED as follows: 1. Grant of Option. The Company hereby grants to the Optionee, as of the date hereof, the right and option, as an incentive stock option (subject to Section 11) ("the Option") to purchase an aggregate of _______ of its shares of Common Stock ("Shares") at an option price per share of $ ______ (subject to adjustment pursuant to Section 15 of the Plan). 2. Option Period. The Option shall expire on the [tenth anniversary] of the date hereof, subject to earlier termination as provided in the Plan. 3. Exercise of Option. (a) Commencing _______________, the Optionee may exercise ___________ of the Option, and an additional _______ of the Option may be exercised, on a cumulative basis, commencing at the end of each 12 month period thereafter, such that 100% of the Option may be exercised on ________________. (b) The Optionee may exercise the Option (to the extent then exercisable) by delivering to the Company a written notice duly signed by the Optionee in the form attached hereto as Exhibit B, stating the number of Shares that the Optionee has elected to purchase, accompanied by payment (in cash or by certified check) of an amount equal to the full purchase price for the Shares to be purchased; provided that, if permitted by the Board of Directors, the purchase price may be paid, in whole or in part by surrender on delivery to the Company of Common Stock of the Company having a Fair Market Value on the date of exercise equal to the portion of the purchase price being so paid. The notice must also contain a statement (if required and -2- in a form acceptable to the Company) that the Optionee is acquiring the Shares for investment and not with a view toward their distribution or resale. Following receipt by the Company of such notice and payment, the Company shall (subject to Section 13 of the Plan) issue, as soon as practicable, the Shares in the name of the Optionee and deliver the certificate therefor to the Optionee. No Shares shall be issued until full payment therefor has been made and until the Company has complied with all requirements of the Securities Act of 1933, the Securities Exchange Act of 1934, any securities exchange on which the Company's stock may then be listed and all state laws applicable to the issuance of the Shares or the listing of the Shares on such securities exchange. 4. Employment. Nothing contained in this Option Agreement shall confer upon the Optionee any right to be employed by the Company nor prevent the Company from terminating its current relationship with the Optionee at any time, with or without cause. If the Optionee's current relationship with the Company is terminated for any reason, the Option shall be exercisable only as to those shares immediately purchasable by -3- the Optionee at the date of termination, during the period provided in the Plan. 5. Non-Transferability of Option. This Option shall not be transferable other than by will or by the laws of descent and distribution or otherwise as provided in Section 9 of the Plan, and may be exercised during the Optionee's lifetime only by Optionee. 6. Tax Status. The option granted hereunder is intended to qualify as an Incentive Stock Option within the meaning of Section 422 of the Internal Revenue Code of 1986, subject to Section 11 of this Agreement. The Company makes no representation or warranty whatsoever to the Optionee as to the tax consequences of the grant or exercise of the Option or of the disposition of Shares acquired thereunder. Reference is made to Section 20 of the Plan regarding withholding tax obligations of the Company. OPTIONEES ARE ADVISED TO CONSULT WITH A TAX ADVISER BEFORE EXERCISING THE OPTION OR DISPOSING OF ANY SHARES. 7. Incorporation of Plan. The Option is subject to, and governed by, all the terms and conditions of the Plan, which are hereby incorporated by reference. This Option Agreement, -4- including the Plan incorporated by reference herein, is the entire agreement among the parties hereto with respect to the subject matter hereof and supersedes all prior agreements and understandings. In the case of any conflict between the terms of this Agreement and the Plan, the provisions of the Plan shall control. 8. Notices. Any notice to be given by the Optionee hereunder shall be sent to the Company at its principal executive offices, and any notice from the Company to the Optionee shall be sent to the Optionee at his address set forth above; all such notices shall be in writing and shall be delivered in person (which includes delivery by Federal Express or similar service) or by registered or certified mail. Either party may change the address to which notices are to be sent by notice in writing given to the other in accordance with the terms hereof. 9. Governing law. This Option Agreement shall be governed by the laws of the State of New York. 10. Notice of Early Disposition - Incentive Stock Options. The Optionee hereby agrees to notify the Company of any early disposition of Shares as set forth in Section 22 of the Plan. -5- 11. Shareholder Approval. The treatment of this Option as an Incentive Stock Option is subject to approval of the Plan by the Stockholders of the Company. If the Plan is not approved by the Stockholders of the Company, then the Option shall remain in full force and effect, except that the Option shall be treated as a non-qualified stock option. IN WITNESS WHEREOF, the parties have executed this Agreement as of the day and year first above written. TSR, INC. By: __________________________________ Name: Title: OPTIONEE: ______________________________________ -6- Exhibit B EXERCISE FORM ------------- Dated _______________________, 19___ The undersigned hereby irrevocably elects to exercise the within option to the extent of purchasing ________ shares of Common Stock and hereby makes payment of in payment __________________ of the exercise price thereof. -7- EX-10.4 4 EMPLOYMENT AGREEMENT Exhibit 10.4 EMPLOYMENT AGREEMENT AGREEMENT, dated as of June 1, 1997 between TSR, INC., having its principal office at 400 Oser Avenue, Hauppauge, New York 11788 (the "Company"), and JOSEPH F. HUGHES, residing at 1278 Ridge Road, Laurel Hollow, New York 11791 ("Hughes"). WHEREAS, Hughes has been employed as the Company's Chief Executive Officer since inception of the Company and has been a key factor in its growth and development; and WHEREAS, the Company's Board of Directors desires to encourage, emphasis during the intermediate term of the continued building of the fundamental businesses, acquisitions of new businesses all for the purposes of improving operating results. WHEREAS, The Company's Board of Directors has determined that it would be advantageous for the Company to implement its current philosophy for the Company through the leadership of Hughes; and WHEREAS, the Board of Directors deems it in the best interest of the Company in furtherance of the foregoing to insure to the extent possible, the continued employment and availability of Hughes and Hughes is willing to continue his employment with the Company pursuant to the terms and conditions herein: NOW, THEREFORE, the parties agree as follows: 1. The Company employs Hughes as President Chief Executive Officer of the Company to perform such duties consistent with such position and such other related duties as may be assigned to him from time to time by the Company's Board of Directors. Hughes shall be employed at the Company's executive offices, primarily in the metropolitan New York area. 1 2. During the term of this Agreement, Hughes shall devote his best efforts, knowledge and skill and shall devote all of his working time and attention to the performance of his duties hereunder. 3. Except in the case of earlier termination as herein specifically provided, the term of this Agreement (the "Term") shall commence as of June 1, 1997 and terminate on May 31, 2002. 4. (a) As compensation for all services to be rendered by Hughes in all capacities hereunder, including services as an officer and director of the Company or any of its subsidiaries, the Company will pay or cause to be paid to Hughes during the Term (i) a base salary (the "Base Salary") of $375,000 as adjusted pursuant to Section 4(b), payable in equal monthly or more frequent installments, as the Company shall determine: (b) The Base Salary shall be adjusted at the beginning of each Fiscal Year following the Fiscal Year ending May 31, 1998, by adding thereto an amount equal to the Incremental Percentage (as defined and determined below) multiplied by the Base Salary, as previously adjusted, as in effect for the Fiscal Year just ended. If the Consumer Price Index ("CPI") shall increase by 8% or more above the CPI from the beginning of the Fiscal Year just ended until the end of such Fiscal Year, the "Incremental Percentage" shall be 8%. If the increase in such CPI shall be less than 8%, then the Incremental Percentage shall be equal to such percentage increase, but in no event shall the Incremental Percentage be less than 3%. As used herein, the CPI for any Fiscal Year end shall be equal to the "Consumer Price Index -- All Items" for the United States as issued by the Bureau of Labor Statistics of the Department of Labor, or any index which replaces the CPI, if no index is published for the beginning of such Fiscal Year, the first date preceding such date for which such index is published. 2 (c) In addition to the compensation set forth in (a) and (b) Hughes shall be entitled to a discretionary bonus as such may be awarded to him by the Board of Directors. The Board of Directors shall on account of each Fiscal Year commencing with the Fiscal Year ending May 31, 1998 consider the granting of such bonus prior to 90 days following the expiration of such Fiscal Year. In considering the grant of the discretionary bonus, the Board of Directors shall consider among other things the performance of the Company during the Fiscal Year and the extent to which Company objectives were achieved. Notwithstanding the foregoing, should the Company earn Pre-Tax Profits during any Term Year in excess of $1,000,000 or more, then the minimum discretionary bonus which Hughes shall be entitled to receive is an amount equal to 7.5% of such Pre-Tax Profits. In the event such Pre-Tax Profits is less than $1,000,000, the maximum amount of discretionary bonus which Hughes shall be entitled to receive shall be limited to $50,000. For purposes of this provision, Pre-Tax Profits shall mean the Company's profits as reported during the fiscal successive year ending May 31, 1997, as determined in accordance with generally accepted accounting principles. There shall be adjustments made to Pre-Tax Profits for the amount of any extraordinary items of income or loss attributable to such Fiscal Year. 5. Hughes shall be entitled to reimbursement for expenses, provided that such expenses are reasonable and are incurred in connection with the performance of his duties hereunder. Such expense reimbursement shall be in accordance with and subject to the expense reimbursement policies and procedures applicable to senior executives, as in effect from time to time during the Term of this Agreement. In addition, Hughes shall be entitled to all benefits and perquisites generally available during the Term to the Company's senior executive officers as well as those benefits and perquisites which he has been receiving prior to the date of this Agreement. Such 3 perquisites shall include membership in a country club and use of a Company owned or leased automobile. 6. During each full Fiscal Year of Hughes' employment hereunder, he shall be entitled to four weeks of vacation time, which to the extent not taken, shall be non-cumulative and non-compensatory. 7. In the event of Hughes' death during the Term, this Agreement shall terminate immediately, and Hughes' legal representatives shall be entitled to receive from the Company in one lump sum an amount equal to his then Fiscal Year rate of compensation for an additional period equal to one year. In addition, within 120 days following completion of the Fiscal Year, Hughes' legal representatives shall also be entitled to receive a prorata portion of the discretionary bonus for which Hughes would have been entitled to at the end of the Fiscal Year had his death not occurred during such year. 8. If, during the Term, Hughes is unable to perform his duties hereunder on account of illness, accident or other physical or mental incapacity, and such illness or other incapacity shall continue for a period of more than six months, the Company shall have the right, on fifteen days' written notice (given after such period) to Hughes, to terminate this Agreement. In such event, the Company shall be obligated to pay to Hughes his Basic Compensation at the annual rate prevailing at the time of such termination for an additional period equal to the difference between two years from the date which such disability commenced and the period during which Hughes was absent from work as a result of such disability through the date of termination. However, if, prior to the date specified in such notice, Hughes' illness or incapacity shall have terminated and he shall have taken up the performance of his duties hereunder, Hughes shall be entitled to 4 resume his employment and receive the compensation payable hereunder as though such notice had not been given. 9. During the Term, the Company shall maintain life insurance on Hughes' life in the amount of $500,000. The beneficiary will be designated by Hughes. 10. During and after the Term, Hughes will not disclose to anyone (except to the extent reasonably necessary for Hughes to perform his duties hereunder) any "confidential information" as such term is hereinafter referred to concerning the business or affairs of the Company or of any of its affiliates or subsidiaries. "Confidential information" shall mean all information which Hughes may have acquired in the course of or as incident to his employment or prior dealings with the company or with any of its affiliates, including, without limitation, customer lists, business or trade secrets of, or methods of techniques used by, the Company or any of its affiliates or subsidiaries in their respective businesses, or any information concerning the customers of any of them. For purposes of this section, confidential information shall not include information which (i) was known to the public prior to the date of communication thereof by Hughes, (ii) becomes known to the public thereafter other than through communications by Hughes, or (iii) becomes known to Hughes subsequent to the date of his termination of employment with the Company. 11. Hughes acknowledges that his services and responsibilities are of unique and particular significance to the Company and that his position with the Company will give him a close knowledge of the Company's and its affiliates' policies and trade secrets. Hughes further acknowledges that in the event the Company loses the services of Hughes, it could be subject to the loss of valuable business relationships which have been cultivated for the Company by 5 Hughes. Hughes acknowledges that as a result of the loss of any of the foregoing, the Company would sustain substantial and irreparable damages. Therefore, in consideration of the foregoing, Hughes agrees that, in the event that there is a termination of this Agreement (including as a result of Hughes' breach), except where the termination is a result of a breach of this Agreement by the Company, he will not, during the unexpired portion of the original contemplated Term and for a period of two years after such period with respect to the restriction in sub-paragraph (ii) below, directly or indirectly, on behalf of himself or others: (i) engage in any business, engaged in by the Company during a period of 12 months prior to the termination of Hughes' employment with the Company which is competitive with any significant business engaged in by the Company, in any jurisdiction where the Company engaged or engages in such business. For purposes of determining whether any aspects of the Company's business is significant such business shall be deemed to be significant if during the 12 month period prior to the termination of Hughes' employment with the Company the Company either (i) recognized revenues equal to 2% of its aggregate revenue from such business recognized or (ii) Pre-Tax Profits equal to 5% of the Company's Pre-Tax Profits, during such period. (ii) call on for the purpose of soliciting, diverting or taking away from the Company or its affiliates, or employ, any person who is an employee of the Company or any of its affiliates or any person who was an employee of the Company or its affiliates during the period of Hughes' employment with the Company, except that this restriction shall not apply to any person who has not been employed by the Company for a period of one year prior to the date of such solicitation. 12. Except as otherwise provided in this Agreement, the Company shall have the right to 6 terminate this Agreement and Hughes' employment hereunder only for a Justifiable Cause and Hughes shall have the right to terminate this Agreement and his employment hereunder only for Justifiable Cause. "Justifiable Cause" as it relates to a termination by the Company shall be limited to (i) a material breach by Hughes of any material provision of the Agreement, but only if after reasonable notice and only after such notice Hughes fails to cure such breach within a reasonable time or (ii) if such breach is not subject to cure, Hughes shall fail on an on-going basis to comply thereafter with the provisions of this Agreement with respect to which he was in such breach within a reasonable time period. In the event the Company terminates this Agreement other than for Justifiable Cause, or Hughes terminates this Agreement for Justifiable Cause, the damages to be awarded to Hughes shall be the value of all compensation and benefits including without limiting the generality of the foregoing, bonuses, options, incentive payments, benefits underother plans and programs or perquisites or fringes sponsored by the Company. Nothing contained herein shall restrict the Company from asserting such rights as it may have to assert defenses regarding the payment or in support of mitigation of damages. 13. Hughes represents and warrants to the Company that he is not under any obligation of a contractual or other nature to any person, firm or corporation other than the Company which would be inconsistent or in conflict with this Agreement, or which would prevent, limit or impair in any way the performance by him of his obligations hereunder. 14. The waiver by either party of a breach of any provision of this Agreement shall not operate as or be construed as a waiver of any subsequent breach thereof. 15. Any notice referred to herein shall be sufficient if furnished in writing, and delivered in person or mailed by certified mail (return receipt requested) to the respective parties 7 at his or its address set forth above or such other address as either party may from time to time designate in writing. 16. Hughes' rights and interest hereunder may not be assigned, pledged or encumbered by him except with the written consent of the Company. 17. This Agreement supersedes any and all prior written or oral agreements between the company and Hughes, and may not be amended or modified except by a writing signed by the party to be charged. 18. This Agreement is executed and delivered in the State of New York and shall be construed and enforced in accordance with the laws and decisions of said State applicable to contract made and performed entirely within said State. IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first above written. TSR, INC. /s/ JOSEPH F HUGHES By: /s/ JAMES J. HILL --------------------- ----------------------------- Joseph F. Hughes James J. Hill Director /s/ JOHN H. HOCHULI, JR. ----------------------------- John H. Hochuli, Jr., Director 8 EX-21 5 LIST OF SUBSIDIARIES TSR, INC. AND SUBSIDIARIES EXHIBIT 21 LIST OF SUBSIDIARIES TO REPORT ON FORM 10-K FISCAL YEAR ENDED MAY 31, 1997 NAME STATE OF INCORPORATION ---- ---------------------- TSR Consulting Services, Inc. New York Construction Data Services, Inc. New York TSR Health Care Services, Inc. New York Catch/21 Enterprises Incorporated Delaware EX-27 6 FDS
5 TSR, INC. AND SUBSIDIARIES Exhibit 27, Financial Data Schedule to Report on Form 10K, May 31, 1997 YEAR MAY-31-1997 MAY-31-1997 2,931,180 26,175 10,581,806 173,264 0 13,497,185 1,146,549 686,647 14,043,869 3,612,927 0 0 0 29,141 10,401,801 14,043,869 0 49,704,325 0 37,485,148 9,248,795 0 0 3,266,795 1,471,000 1,795,795 0 0 0 1,795,795 0.62 0.62
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