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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
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FORM 10-K
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[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
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TSR, INC.
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(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
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(Address of principal executive offices)
Registrant's telephone number: 516-231-0333
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Securities registered pursuant to Section 12(b)
of the Exchange Act: NONE
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(Title of Class)
Securities registered pursuant to Section 12(g) of the Exchange Act:
COMMON STOCK, PAR VALUE $0.01 PER SHARE
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(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]
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<PAGE>
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.
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<PAGE>
PART I
Item 1. Business.
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General
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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.
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<PAGE>
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-
<PAGE>
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-
<PAGE>
Other Business
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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
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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-
<PAGE>
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
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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.
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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.
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None
Item 4. Submission of Matters to a Vote of Security Holders.
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Not Applicable
-7-
<PAGE>
PART II
Item 5. Market for Common Equity and Related Stockholder Matters.
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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
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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
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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.
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(Amounts in Thousands, Except Per Share Data)
<TABLE>
<CAPTION>
MAY 31, May 31, May 31, May 31, May 31,
1997 1996 1995 1994 1993
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
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 -- -- --
</TABLE>
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-
<PAGE>
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-
<PAGE>
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:
<TABLE>
<CAPTION>
(Amounts in Thousands) YEAR ENDED MAY 31,
--------------------------------------
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
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
======= ======= =======
</TABLE>
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-
<PAGE>
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-
<PAGE>
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-
<PAGE>
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-
<PAGE>
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-
<PAGE>
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-
<PAGE>
TSR, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
MAY 31, 1997 AND 1996
<TABLE>
ASSETS
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
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
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
(Continued)
-16-
<PAGE>
TSR, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS, CONTINUED
MAY 31, 1997 AND 1996
<TABLE>
LIABILITIES AND SHAREHOLDERS' EQUITY
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
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.
</TABLE>
-17-
<PAGE>
<TABLE>
TSR, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
YEARS ENDED MAY 31, 1997, 1996 AND 1995
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
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.
</TABLE>
See accompanying notes to consolidated financial statements.
-18-
<PAGE>
TSR, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED MAY 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
TOTAL
ADDITIONAL SHARE-
COMMON PAID-IN RETAINED TREASURY HOLDERS'
STOCK* CAPITAL* EARNINGS STOCK EQUITY
-------- ---------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
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.
</TABLE>
See accompanying notes to consolidated financial statements.
-19-
<PAGE>
TSR, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED MAY 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
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............................................................ $ -- $ -- $ --
=========== =========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
-20-
<PAGE>
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-
<PAGE>
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:
<TABLE>
<CAPTION>
Gross Gross
Unrealized Unrealized
Amortized Holding Holding
Cost Gains Losses Fair Value
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
1997: EQUITY SECURITIES................... $ 28,287 $ -- $(2,112) $ 26,175
========== ======= ======= ==========
1996: US Treasury Securities.............. $1,691,462 $14,086 $ -- $1,705,548
========== ======= ======= ==========
</TABLE>
(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-
<PAGE>
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:
<TABLE>
<CAPTION>
1997 1996 1995
AMOUNT % Amount % Amount %
-------------------- ----------------- ------------------
<S> <C> <C> <C> <C> <C> <C>
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%
========== ==== ======== ==== ======== ====
</TABLE>
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-
<PAGE>
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.
<TABLE>
<CAPTION>
COMPUTER HEALTH CONSOLIDATED
SOFTWARE CARE CORPORATE TOTAL
----------- -------- ---------- ------------
<S> <C> <C> <C> <C> <C>
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
=========== ======== ========== ===========
</TABLE>
(1) Corporate identifiable assets consist of cash, marketable securities
and prepaid, recoverable and deferred income taxes.
(Continued)
-24-
<PAGE>
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-
<PAGE>
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-
<PAGE>
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-
<PAGE>
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-
<PAGE>
TSR, INC. AND SUBSIDIARIES
EXHIBIT INDEX
FORM 10-K, MAY 31, 1997
<TABLE>
<CAPTION>
EXHIBIT SEQUENTIAL
NUMBER EXHIBIT PAGE #
- ------- ------- ----------
<S> <C> <C>
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.
</TABLE>
-29-
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-
<PAGE>
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-
<PAGE>
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-
<PAGE>
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-
<PAGE>
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-
<PAGE>
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
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<PAGE>
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
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<PAGE>
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
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<PAGE>
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
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<PAGE>
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
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<PAGE>
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-
<PAGE>
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-
<PAGE>
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
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<PAGE>
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
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<PAGE>
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
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<PAGE>
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
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<PAGE>
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.
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).
<PAGE>
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
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<PAGE>
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-
<PAGE>
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,
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<PAGE>
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-
<PAGE>
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:
______________________________________
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<PAGE>
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-
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
<PAGE>
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
<PAGE>
(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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
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
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
TSR, INC. AND SUBSIDIARIES
Exhibit 27, Financial Data Schedule to Report
on Form 10K, May 31, 1997
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAY-31-1997
<PERIOD-END> MAY-31-1997
<CASH> 2,931,180
<SECURITIES> 26,175
<RECEIVABLES> 10,581,806
<ALLOWANCES> 173,264
<INVENTORY> 0
<CURRENT-ASSETS> 13,497,185
<PP&E> 1,146,549
<DEPRECIATION> 686,647
<TOTAL-ASSETS> 14,043,869
<CURRENT-LIABILITIES> 3,612,927
<BONDS> 0
0
0
<COMMON> 29,141
<OTHER-SE> 10,401,801
<TOTAL-LIABILITY-AND-EQUITY> 14,043,869
<SALES> 0
<TOTAL-REVENUES> 49,704,325
<CGS> 0
<TOTAL-COSTS> 37,485,148
<OTHER-EXPENSES> 9,248,795
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 3,266,795
<INCOME-TAX> 1,471,000
<INCOME-CONTINUING> 1,795,795
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,795,795
<EPS-PRIMARY> 0.62
<EPS-DILUTED> 0.62
</TABLE>
