-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, UH8ZMWGAKd+Avvuaz1Of/t4yXDjrxY+XaqLghzzpcPNH7Um78Y/2kATUiDIJ5gP1 mkPPaI5+6l4Khlq+3xqC4w== 0000950110-01-500401.txt : 20010815 0000950110-01-500401.hdr.sgml : 20010815 ACCESSION NUMBER: 0000950110-01-500401 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20010531 FILED AS OF DATE: 20010814 FILER: COMPANY DATA: COMPANY CONFORMED NAME: TSR INC CENTRAL INDEX KEY: 0000098338 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-COMPUTER PROGRAMMING SERVICES [7371] IRS NUMBER: 132635899 STATE OF INCORPORATION: DE FISCAL YEAR END: 0531 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-08656 FILM NUMBER: 1712814 BUSINESS ADDRESS: STREET 1: 400 OSER AVE CITY: HAUPPAUGE STATE: NY ZIP: 11788 BUSINESS PHONE: 5162310333 MAIL ADDRESS: STREET 1: 400 OSER AVENUE CITY: HAUPPAUGE STATE: NY ZIP: 11788 FORMER COMPANY: FORMER CONFORMED NAME: TIME SHARING RESOURCES INC DATE OF NAME CHANGE: 19840129 10-K 1 e86038.txt ANNUAL REPORT UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-K [X] Annual Report Pursuant to Section 13 or 15(d) of The Securities Exchange Act Of 1934 For the fiscal year ended May 31, 2001 or [ ] Transition Report Under Section 13 or 15(d) of The Securities Exchange Act Of 1934 For the transition period from__________ to__________ Commission File Number: 0-8656 --------------------------------------------------------- TSR, Inc - -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) Delaware 13-2635899 - ------------------------------- ------------------------------------ (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 400 Oser Avenue, Hauppauge, NY 11788 ---------------------------------------- (Address of principal executive offices) Registrant's telephone number: 631--231--0333 -------------------------------------------------- Securities registered pursuant to Section 12(b) of the Exchange Act: None ------------ (Title of Class) Securities registered pursuant to Section 12(g) of the Exchange Act: Common Stock, par value $0.01 per share - -------------------------------------------------------------------------------- (Title of Class) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. [X] Yes [ ] No Indicate by check mark if there is no disclosure of delinquent filers in response to Item 405 of Regulation S-K contained in this form, and no disclosure will be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] The aggregate market value of voting stock held by non-affiliates of the Registrant based upon the closing price of $5.50 at July 31, 2001 was $13,412,000. The number of shares of the Registrant's common stock outstanding as of July 31, 2001 was 4,418,012. 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 2001 Annual Meeting of Shareholders, which will be filed by the Registrant within 120 days after the close of its fiscal year. Page 2 PART I Item 1. Business. General TSR, Inc. (the "Company") is primarily engaged in the business of providing contract computer programming services to its clients. The Company provides technical computer personnel to companies to supplement their in-house information technology ("IT") capabilities. 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, 2001, the Company provided IT staffing services to approximately 120 clients. 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 (631) 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, internet and e-commerce operations, 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. The Company's success is dependent upon its ability to attract and retain qualified professional computer personnel. The Company believes that there is 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. Page 3 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 offices located in New York, New York, Edison, New Jersey, Long Island, New York and Farmington, Connecticut. The Company does not currently intend to open additional offices, but intends to seek to grow its business by adding account executives and technical recruiters in its existing offices. However, due to the economic downturn, the Company is not currently hiring new account executives and technical recruiters and has not replaced account executives and technical recruiters who have left the Company. At these offices, as of May 31, 2001, the Company employed 15 persons who are responsible for recruiting technical personnel and 17 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 120 clients during the year ended May 31, 2001 as compared to 130 in the prior fiscal year. 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, 2001, the Company had one client which constituted more than 10% of consolidated revenues (AT&T, 12%). AT&T has been reorganizing its IT departments and is outsourcing certain parts of its IT function. This could affect, to some extent, its need for the Company's technical staffing services. Additionally, the Company's top ten clients accounted for 51% of consolidated revenues in fiscal 2001 as compared to 49% in fiscal 2000. While continuing its efforts to expand further its client base, the Company's marketing efforts are focused primarily on increasing business from its existing accounts. The Company's marketing is conducted through account executives that 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. 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 65,000 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 primarily 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 15 recruiters. Potential applicants are generally interviewed and tested by the Company's recruiting personnel, by third parties that have the required technical backgrounds to review the qualifications of the applicants, or by on-line testing services. Page 4 Competition The technical staffing industry is highly competitive and fragmented and has low barriers to entry. The Company competes for potential clients with providers of outsourcing services, systems integrators, computer systems consultants, other providers of technical staffing services and, to a lesser extent, temporary personnel agencies. The Company competes for technical personnel with other providers of technical staffing services, systems integrators, providers of outsourcing services, computer systems consultants, clients and temporary personnel agencies. Many of the Company's competitors are significantly larger and have greater financial resources than the Company. The Company believes that the principal competitive factors in obtaining and retaining clients are accurate assessment of clients' requirements, timely assignment of technical employees with appropriate skills and the price of services. The principal competitive factors in attracting qualified technical personnel are compensation, availability, quality and variety of projects and schedule flexibility. The Company believes that many of the technical personnel included in its database may also be pursuing other reemployment opportunities. Therefore, the Company believes that its responsiveness to the needs of technical personnel is an important factor in the Company's ability to fill projects. Although the Company believes it competes favorably with respect to these factors, it expects competition to increase and there can be no assurance that the Company will remain competitive. Intellectual Property Rights The Company relies primarily upon a combination of trade secret, nondisclosure and other contractual arrangements 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 As of June 30, 2001, the Company employs 255 people including its 3 executive officers. Of such employees 17 are engaged in sales, 15 are recruiters for programmers, 200 are technical and programming consultants, and 20 are in administration and clerical functions. Of the 255 employees, approximately 244 are employed by the contract computer programming services subsidiary, and 11 are employed directly by the Company. Item 2. Properties. The Company leases 8,000 square feet of space in Hauppauge, New York for a term expiring October 31, 2005, with annual rentals of approximately $100,000. This space is used as executive and administrative offices as well as by the Registrant's operating subsidiary. The Company also leases sales and technical recruiting offices in New York City (lease expires July, 2002), Edison, New Jersey (lease expires August, 2005), and Farmington, Connecticut (lease expires November, 2002), with aggregate monthly rentals of approximately $23,000. The Company believes the present locations are adequate for its current needs as well as for the future expansion of its existing business. Item 3. Legal Proceedings. None Item 4. Submission of Matters to a Vote of Security Holders. Not Applicable Page 5 PART II Item 5. Market for Common Equity and Related Stockholder Matters. The Company's shares of Common Stock trade on the NASDAQ National Market System under the symbol TSRI. The following are the high and low sales prices for each quarter during the fiscal years ended May 31, 2000 and 2001: JUNE 1, 1999 - MAY 31, 2000 1ST 2ND 3RD 4TH QUARTER QUARTER QUARTER QUARTER ----------------------------------------- High Sales Price .......... 9 3/8 8 3/4 8 7/8 6 1/2 Low Sales Price ........... 7 1/16 6 5 3/4 5 31/64 JUNE 1, 2000 - MAY 31, 2001 1ST 2ND 3RD 4TH QUARTER QUARTER QUARTER QUARTER ----------------------------------------- High Sales Price .......... 6 1/8 6 31/32 5 5/16 5 7/8 Low Sales Price ........... 4 1/2 4 9/16 3 7/16 3 25/32 There were 175 holders of record of the Company's Common Stock as of July 31, 2001. Additionally, the Company estimates that there were approximately 2,500 beneficial holders as of that date. 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 the year ending May 31, 2002. Item 6. Selected Financial Data. (Amounts in Thousands, Except Per Share Data)
MAY 31, May 31, May 31, May 31, May 31, 2001 2000 1999 1998 1997 ------- ------- ------- ------- ------- Revenues* ........................ $78,528 $78,320 $83,774 $70,435 $49,704 Income From Operations ............ 6,294 7,241 8,174 6,604 2,970 Net Income ........................ 3,858 4,402 4,840 3,430 1,796 Diluted Net Income Per Common Share .................... 0.86 0.88 0.81 0.57 0.31 Working Capital ................... 17,810 15,294 17,303 14,994 9,884 Total Assets ...................... 23,284 20,945 23,191 20,516 14,044 Shareholders' Equity .............. 18,187 15,749 17,765 16,167 10,431 Book Value Per Common Share ....... 4.12 3.36 3.23 2.70 1.79
Note: Net Income and Book Value Per Common Share have been adjusted for a stock split in the form of 100% stock dividend paid in November 1997. Page 6 Unaudited Quarterly Financial Data (Amounts in Thousands, except Per Share Data) The following is a summary of unaudited quarterly operating results for the fiscal years ended May 31, 2001 and 2000. Fiscal 2001 ----------- First Second Third Fourth ------- ------- ------- ------- Revenues* .................. $19,740 $21,048 $19,220 $18,520 Gross Profit ............... 4,506 4,627 4,158 3,830 Net Income ................. 1,058 1,076 799 925 Basic and Diluted Net Income per Common Share ....... 0.23 0.24 0.18 0.21 Fiscal 2000 ----------- First Second Third Fourth ------- ------- ------- ------- Revenues ................... $20,649 $20,440 $18,266 $18,965 Gross Profit ............... 4,793 5,043 4,377 4,512 Net Income ................. 1,155 1,214 882 1,151 Basic and Diluted Net Income per Common Share ....... 0.22 0.23 0.18 0.24 * Amounts reported prior to the fourth quarter of fiscal 2001 have been revised to reflect the Company's adoption of EITF 99-19, "Reporting Revenue Gross as a Principal Versus Net as an Agent", effective March 1, 2001. 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. Results of Operations The following table sets forth for the periods indicated certain financial information derived from the Company's consolidated statements of earnings. There can be no assurance that trends in sales growth or operating results will continue in the future:
YEAR ENDED MAY 31, (DOLLAR AMOUNTS IN THOUSANDS) 2001 2000 1999 ------------------- ----------------- ----------------- % OF % of % of AMOUNT REVENUE Amount Revenue Amount Revenue ------- ------- ------- ------- ------- ------- Revenues* ................................... $78,528 100.0 $78,320 100.0 $83,774 100.0 Cost of Sales* .............................. 61,407 78.2 59,595 76.1 61,787 73.8 ------- ----- ------- ----- ------- ----- Gross Profit ................................ 17,121 21.8 18,725 23.9 21,987 26.2 Selling, General, and Administrative Expenses 10,827 13.8 11,484 14.7 13,523 16.1 Research and Development Expenses ........... -- -- -- -- 290 0.4 ------- ----- ------- ----- ------- ----- Income from Operations ...................... 6,294 8.0 7,241 9.2 8,174 9.7 Other Income ................................ 488 0.6 453 0.6 396 0.5 ------- ----- ------- ----- ------- ----- Income Before Income Taxes .................. 6,782 8.6 7,694 9.8 8,570 10.2 Provision for Income Taxes .................. 2,924 3.7 3,292 4.2 3,730 4.4 ------- ----- ------- ----- ------- ----- Net Income .................................. $ 3,858 4.9 $ 4,402 5.6 $ 4,840 5.8 ======= ===== ======= ===== ======= =====
* For fiscal 2000 and 1999, amounts revised to reflect the Company's adoption of EITF 99-19, effective March 1, 2001, as discussed above. Page 7 Revenues Revenues consist primarily of revenues from contract computer programming services. In addition, the Company's revenues included revenues from its Year 2000 compliance solution service, which commenced in 1997. Overall, revenues for fiscal 2001 increased $208,000 over fiscal 2000. For fiscal 2001, 99.9% of revenues were derived from contract computer programming services and 0.1% of revenues were from Year 2000 services, as compared with 97.3% and 2.7% respectively in fiscal 2000. Contract computer programming services revenues increased $2,291,000 from $76,170,000 in fiscal 2000 to $78,461,000 in fiscal 2001. Such increase in the contract computer programming services business resulted from increases in the billing rates to clients. This was partially offset by the average number of programmers on billing with clients decreasing from 500 for fiscal 2000 to 475 for fiscal 2001. The year end number of consultants on billing decreased from 470 at May 31, 2000 to 430 at May 31, 2001. The fiscal year for contract computer programming services was broken in two very distinct halves. From June to November 2000, new projects increased as the delay of new projects from lingering Year 2000 effects lifted. During this period the number of consultants on billing with clients increased from 470 to 520. From December 2000 to May 2001, the number of consultants decreased to 430. The Company believes that this decline has resulted from the downturn in the economy. This has resulted in a significant decrease in IT projects and IT spending that has affected the IT staffing industry generally and has reduced the demand for the Company's services. The Company's revenues from programmers on billing have also been affected by discounts required by major customers as a condition to remaining on their approved vendor lists, such as discounts for prompt payment and volume discounts. In addition, some major customers have retained a third party to provide vendor management services. Under this system, the third party retains the Company to provide contract computer programming services and the Company bills the third party and the third party bills the ultimate customer. These changes have reduced the Company's profit margins. Revenues from the Company's Catch/21 Year 2000 compliance services, which commenced in fiscal 1997, were $67,000 for the year versus $2,150,000 in fiscal 2000. The Company expects to recognize no further Year 2000 revenues. Revenues for fiscal 2000 decreased $5,454,000 or 6.5% from fiscal 1999. Contract computer programming services revenues decreased $367,000 resulting from a decrease in the number of consultants on billing with the clients, while Year 2000 compliance solution services revenues decreased $5,087,000. The Company believes that the decline in revenues from contract computer programming services in the year ended May 31, 2000 resulted from a slow down in new projects commenced by clients in the 1999 calendar year. The Company believes that the slow down was attributable to a delay in new IT projects due to lingering Year 2000 effects. Cost of Sales Cost of sales increased by $1,812,000 or 3.0% in fiscal 2001 over fiscal 2000. This increase included an increase in cost of sales in contract computer programming of $2,348,000 from $59,029,000 in fiscal 2000 to $61,377,000 for fiscal 2001. The increase in costs resulted primarily from the increase in amounts paid to technical personnel resulting primarily from the increase in contract computer programming services revenues. Year 2000 services incurred cost of sales of $30,000 in fiscal 2001 versus $566,000 in fiscal 2000. Cost of sales as a percentage of revenues increased to 78.2% in fiscal 2001 from 76.1% in fiscal 2000. This increase is primarily attributable to the higher cost of sales as a percentage of revenue in contract computer programming services as compared to the Year 2000 services. Costs of sales in contract computer programming services as a percentage of revenue increased to 78.2% in fiscal 2001 from 77.5% in fiscal 2000. This resulted primarily from increased amounts paid to programmers outpacing the Company's ability to pass increases on to customers and discounts required by several clients, as discussed above. Fiscal 2000 cost of sales decreased $2,192,000 or 3.5% compared to fiscal 1999. The decrease included reduced costs of $163,000 from contract computer programming, which primarily resulted from the above mentioned revenue decrease. Year 2000 services costs declined by $2,029,000 in fiscal 2000 compared to fiscal 1999. Page 8 Cost of sales as a percentage of revenues increased to 76.1% in fiscal 2000 from 73.8% in fiscal 1999. This increase is primarily attributable to the higher cost of sales as a percentage of revenue in contract computer programming services as compared to the Year 2000 services. Costs of sales in contract computer programming services as a percentage of revenue increased to 77.5% in fiscal 2000 from 77.3% in fiscal 1999. This resulted primarily from increased amounts paid to programmers outpacing the Company's ability to pass increases on to customers. The cost of sales for the Company's contract computer programming services are variable because technical personnel are generally hired on a per diem basis to staff particular projects for clients. Due to slower than anticipated growth in its Year 2000 compliance services, the Company significantly reduced the number of employees in its Year 2000 services during fiscal year 1999, and provided such services in fiscal 2000 through contractual arrangement with certain former employees. 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 decreased $657,000 or 5.7% from $11,484,000 in fiscal 2000 to $10,827,000 in fiscal 2001. Selling, general and administrative expenses attributable to contract computer programming services expenses decreased $544,000 from the prior year to $10,811,000. Commissions relating to revenues from contract computer programming services decreased, and there was an overall decrease in expenses as a result of the turnover of account executives and technical recruiting professionals. In fiscal 2001 approximately $16,000 in selling, general and administrative expenses were attributable to the Catch/21 compliance services as compared to $129,000 in fiscal 2000. These expenses consisted primarily of management and facilities expenses. Selling, general and administrative expenses decreased $2,039,000 or 15.1% from $13,523,000 in fiscal 1999 to $11,484,000 in fiscal 2000, primarily from the reduction in expenses related to Year 2000 services. Contract computer programming services expenses in fiscal 2000 increased $72,000 over the prior year to $11,355,000. Although commissions relating to revenues from contract computer programming services decreased, there was an overall increase in expenses as a result of the hiring of additional account executives and technical recruiting professionals in fiscal 2000 to broaden the Company's client base in connection with the continuation of the Company's planned expansion. In fiscal 2000 approximately $129,000 in selling, general and administrative expenses were attributable to the Catch/21 compliance services as compared to $2,240,000 in fiscal 1999. These expenses consisted primarily of marketing, advertising, and management and facilities expenses. Research and Development Research and development costs of $290,000 in the fiscal 1999 represent amounts expended to expand Catch/21, the Company's Year 2000 compliance solution, and product offerings into additional computer platforms and languages. There were no research and development costs in fiscal 2001 or 2000 as a result of the phase out of the Year 2000 services. Income from Operations In the fiscal year ended May 31, 2001 contract computer programming services contributed $6,273,000 or 99.7% of income from operations, while Year 2000 services contributed the remaining $21,000 or 0.3%. In the fiscal year ended May 31,2000, contract computer programming services contributed $5,786,000 or 79.9% of income from operations, Year 2000 services contributed $1,455,000 or 20.1%. The increased income from operations from contract computer programming services resulted primarily from a reduction in selling, general and administrative expenses. Although revenues in this area increased over $2 million, there was a corresponding increase in the cost of sales. Other Income Fiscal 2001 other income resulted primarily from interest and dividend income of $466,000, which increased due to a higher investable base. The Company also had a net gain of $22,000 from marketable securities due to a gain of $23,000 from a sale of trading securities partially offset by the mark to market adjustments of its equity portfolio. Fiscal 2000 other income also resulted primarily from interest and dividend income of $421,000. The Company also had a net gain of $8,000 from marketable securities due to mark to market adjustments of its equity portfolio and $24,000 in gains from sales of fixed assets. Page 9 Income Taxes The effective income tax rate increased from 42.8% in fiscal 2000 to 43.1% in fiscal 2001 because of higher state and local taxes. The effective income tax rate decreased from 43.5% in fiscal 1999 to 42.8% in fiscal 2000 because of lower state and local taxes and non-deductible expenses. Liquidity, Capital Resources and Changes in Financial Condition 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 cash requirements. At May 31, 2001, the Company had working capital of $17,810,000 and cash and cash equivalents of $6,208,000 as compared to working capital of $15,294,000 and cash and cash equivalents of $4,110,000 at May 31, 2000. Working capital and cash and cash equivalents increased primarily due to the Company's net income. Net cash flow of $4,712,000 was provided by operations during fiscal 2001 as compared to $5,808,000 of net cash flow from in operations in fiscal 2000. The cash flow from operations primarily resulted from net income of $3,858,000 in fiscal 2001 and as a result of a decrease in accounts receivable of $881,000 from $12,817,000 at May 31, 2000 to $11,936,000 at May 31, 2001. This decrease in accounts receivable occurred primarily because of earlier payments from some larger clients, which have instituted prompt payment discounts, thereby shortening the payment cycle. Cash flow used in investing activities resulted primarily because the Company used excess cash to buy additional United States Treasury Bills with maturities in excess of three months. Cash flow used in financing activities resulted from the purchase of 262,400 shares of common stock for $1,419,000. As of July 31, 2001, the Company has repurchased a cumulative total of 1,660,314 shares at an average price of $7.25 or a total cost of $12,031,000. The Company completed the initial buy back authorization of 600,000 shares and the Company's board of directors has authorized three additional repurchases totaling up to an additional 1,250,000 shares of its common stock. No time limit has been placed on the duration of the share repurchases. Subject to applicable securities laws, such purchases will be at times and in amounts as the Company deems appropriate and may be discontinued at any time. The Company has no obligation or commitment to repurchase all or any portion of the shares covered by the authorizations. The Company's capital resource commitments at May 31, 2001 consisted of lease obligations on its branch and corporate facilities amounting to $1,238,000 over the next five years. The Company intends to meet these commitments from cash flow provided by operations, available cash and short-term marketable securities. The Company's cash and marketable securities were sufficient to enable it to meet its cash requirements during fiscal 2001. The Company has available a revolving line of credit of $5,000,000 with a major money center bank which the Company believes provides sufficient financing if the need arose. As of May 31, 2001 there were no amounts outstanding under this line of credit. Impact of New Accounting Standards Statement of Financial Accounting Standards No. 133 "Accounting for Derivative Instruments and Hedging Activities", as amended ("SFAS No. 133") establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. In accordance with SFAS No. 133, an entity is required to recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. SFAS No. 133 requires that changes in the derivative's fair value be recognized currently in earnings unless specific hedge accounting criteria are met. Special accounting for qualifying hedges allows a derivative's gains and losses to offset related results on the hedged item in the income statement and requires that a company formally document, designate and assess the effectiveness of transactions that receive hedge accounting. SFAS No. 133 is effective for all fiscal quarters of all fiscal years beginning after June 15, 2000. The Company has not yet completed its evaluation of the impact of SFAS No. 133 on its consolidated financial statements. Page 10 Item 7A. Quantitative and Qualitative Disclosure About Market Risk The Company's earnings and cash flows are subject to fluctuations due to changes in interest rates primarily from its investment of available cash balances in money market funds and marketable securities. Under its current policies, the Company does not use interest rate derivative instruments to manage exposure to interest rate changes. Forward-Looking Statements; Factors that Affect Future Results Certain statements contained in "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Business", including statements concerning the Company's, 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 factors set forth below. Dependence Upon Key Personnel. The Company is dependent on its Chairman of the Board, Chief Executive Officer and President, Joseph Hughes, and Ernest Bago, the President of TSR's contract computer programming services subsidiary. The Company has entered into employment agreements with Mr. Hughes and Mr. Bago for terms expiring on May 31, 2002. The Company is also dependent on certain of its account executives who are responsible for servicing its principal customers and attracting new customers. The Company does not have employment contracts with these persons. There can be no assurance that the Company will be able to retain its existing personnel or find and attract additional qualified employees. The loss of the services of any of these personnel could have a material adverse effect on the Company. Dependence on Significant Relationships. In the fiscal year, ended May 31, 2001, the Company's largest client, AT&T Corp. ("AT&T") accounted for 12% of the Company's consolidated revenues. AT&T has reorganized its IT department and is outsourcing more of its IT functions. Additionally, AT&T is in the process of spinning off several of its business units. This restructuring may reduce, to some extent, AT&T'S requirements for temporary personnel. Client contract terms vary depending on the nature of the engagement, and there can be no assurance that a client will renew a contract when it terminates. In addition, the Company's contracts, including those with AT&T, are generally cancelable by the client at any time on short notice, and clients may unilaterally reduce their use of the Company's services under such contracts without penalty. The termination or significant reduction of its business relationship with any of its significant clients would have a material adverse effect on the Company's financial condition and results of operations. Competitive Market for Technical Personnel. The Company's success is dependent upon its ability to attract and retain qualified computer professionals to provide as temporary personnel to its clients. Competition for the limited number of qualified professionals with a working knowledge of certain sophisticated computer languages, which the Company requires for its contract computer services business, is intense. 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. The Company's ability to maintain and renew existing engagements and obtain new business in its contract computer programming business depends, in large part, on its ability to hire and retain technical personnel with the IT skills that keep pace with continuing changes in software evolution, industry standards and technologies, and client preferences. 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 increases. 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. Page 11 Rapidly Changing Industry The computer industry is characterized by rapidly changing technology and evolving industry standards. In recent years, there have been certain trends in the computer industry which have increased the demand for technical staffing services. These include the overall increase in the sophistication and interdependency of computer technology and a focus by IT managers on cost-efficient solutions. Recently, there has been an increased focus on the Internet and e-Commerce and there has been a shift away from mainframe legacy systems. Historically, much of the Company's staffing services has related to mainframe legacy systems. There can be no assurance that these changes will not adversely affect demand for technical staffing services. Organizations may elect to perform such services in-house or outsource such functions to companies that do not utilize temporary staffing, such as that provided by the Company. There have also been recent changes in the industry, which could potentially affect the Company's operating results. Many customers have begun retaining third parties to provide vendor management services. The third party is then responsible for retaining companies to provide temporary IT personnel. This results in the Company contracting with such third parties and not directly with the ultimate customer. Additionally, a number of companies have begun limiting the number of companies on their approved vendor lists, and in some cases this has required the Company to sub-contract with a company on the approved vendor list to provide services to customers. The Company can not predict at this time what long-term effect these changes will have on the Company's business and results of operations. Effect of Fluctuations in Economic Conditions Demand for the Company's IT staffing services is significantly affected by the general economic environment. During periods of slowing economic activity, customers may reduce their IT projects and their demand for outside consultants. As a result, any significant economic downturn could have material adverse affect on the Company's results of operations. Beginning with the second half of the Company's 2001 fiscal year, the Company has experienced a decline in demand for its IT staffing services. The Company attributes this decline to customers reducing their spending on IT projects as a result of the current economic environment. Fluctuations in Quarterly Operating Results. The Company's revenues and operating results are subject to significant variations from quarter to quarter. Revenues are subject to fluctuation based upon a number of factors, including the timing and number of client projects commenced and completed during the quarter, delays incurred in connection with projects, the growth rate of the market for contract computer programming services and general economic conditions. Unanticipated termination of a project or the decision by a client not to proceed to the next stage of a project anticipated by the Company could result in decreased revenues and lower utilization rates which could have a material adverse effect on the Company's business, operating results and financial condition. Compensation levels can be impacted by a variety of factors, including competition for highly skilled employees and inflation. The Company's operating results are also subject to fluctuation as a result of other factors. Intellectual Property Rights. The Company relies primarily upon a combination trade secret, nondisclosure and other contractual agreements 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. Page 12 Competition. The technical staffing industry is highly competitive and fragmented and has low barriers to entry. The Company competes for potential clients with providers of outsourcing services, systems integrators, computer systems consultants, other providers of technical staffing services and, to a lesser extent, temporary personnel agencies. The Company competes for technical personnel with other providers of technical staffing services, systems integrators, providers of outsourcing services, computer systems consultants, clients and temporary personnel agencies. Many of the Company's competitors are significantly larger and have greater financial resources than the Company. The Company believes that the principal competitive factors in obtaining and retaining clients are accurate assessment of clients' requirements, timely assignment of technical employees with appropriate skills and the price of services. The principal competitive factors in attracting qualified technical personnel are compensation, availability, quality and variety of projects and schedule flexibility. The Company believes that many of the technical personnel included in its database may also be pursuing other employment 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. Potential for Contract and Other Liability. The personnel provided by the Company to clients provide services involving key aspects of its clients' software applications. A failure in providing these services could result in a claim for substantial damages against the Company, regardless of the Company's responsibility for such failure. The Company attempts to limit, contractually, its liability for damages arising from negligence or omissions in rendering services. Despite this precaution, there can be no assurance that the limitations of liability set forth in its contracts would be enforceable or would otherwise protect the Company from liability for damages. The Company's contract computer programming services business involves assigning technical personnel to the workplace of the client, typically under the client's supervision. Although the Company has little control over the client's workplace, the Company may be exposed to claims of discrimination and harassment and other similar claims as a result of inappropriate actions allegedly taken against technical personnel by clients. As an employer, the Company is also exposed to other possible employment-related claims. The Company is exposed to liability with respect to actions taken by its technical personnel while on a project, such as damages caused by technical personnel, errors, and misuse of client proprietary information or theft of client property. To reduce such exposures, the Company maintains insurance policies and a fidelity bond covering general liability, worker's compensation claims, errors and omissions and employee theft. In certain instances, the Company indemnifies its clients from the foregoing. There can be no assurance that insurance coverage will continue to be available and at its current price or that it will be adequate to cover any such liability. Page 13 Item 8. Financial Statements. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Page Independent Auditors' Report .............................................. 15 Consolidated Financial Statements: Consolidated Balance Sheets as of May 31, 2001 and 2000 ................... 16 Consolidated Statements of Earnings for the years ended May 31, 2001, 2000 and 1999 ................................... 18 Consolidated Statements of Shareholders' Equity for the years ended May 31, 2001, 2000 and 1999 ........................... 19 Consolidated Statements of Cash Flows for the years ended May 31, 2001, 2000 and 1999 ................................... 20 Notes to Consolidated Financial Statements ................................ 21 Page 14 INDEPENDENT AUDITORS' REPORT The Board of Directors and Shareholders TSR, Inc.: We have audited the accompanying consolidated balance sheets of TSR, Inc. and subsidiaries as of May 31, 2001 and 2000, 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, 2001. In connection with our audits of the consolidated financial statements, we have also audited the financial statement schedule as listed in Item 14(a)2. These consolidated financial statements and the financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and the financial statement schedule based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of TSR, Inc. and subsidiaries as of May 31, 2001 and 2000, and the results of their operations and their cash flows for each of the years in the three-year period ended May 31, 2001, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, the related financial statement schedule referred to above, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein. /s/ KPMG LLP Melville, New York July 16, 2001 Page 15 TSR, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS MAY 31, 2001 AND 2000 ASSETS 2001 2000 ----------- ----------- CURRENT ASSETS: Cash and cash equivalents (note 1(e)) ............. $ 6,208,361 $ 4,110,283 Marketable securities (note 1 (f)) ................ 4,432,978 3,279,232 Accounts receivable: Trade (net of allowance for doubtful accounts of $273,000 in 2001 and $173,000 in 2000) ....... 11,935,795 12,816,762 Other ............................................ 59,016 146,318 ----------- ----------- 11,994,811 12,963,080 Prepaid expenses .................................. 33,727 39,700 Prepaid and recoverable income taxes .............. 144,363 39,158 Deferred income taxes (note 2) .................... 93,000 59,000 ----------- ----------- TOTAL CURRENT ASSETS .............................. 22,907,240 20,490,453 ----------- ----------- EQUIPMENT AND LEASEHOLD IMPROVEMENTS, AT COST: Equipment ......................................... 433,250 435,692 Furniture and fixtures ............................ 126,404 103,237 Automobiles ....................................... 128,859 128,859 Leasehold improvements ............................ 69,386 92,215 ----------- ----------- 757,899 760,003 Less accumulated depreciation and amortization .... 616,386 576,647 ----------- ----------- 141,513 183,356 OTHER ASSETS ....................................... 46,145 40,302 DEFERRED INCOME TAXES (NOTE 2) ..................... 189,000 231,000 ----------- ----------- $23,283,898 $20,945,111 =========== =========== See accompanying notes to consolidated financial statements. (Continued) Page 16
TSR, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS, CONTINUED MAY 31, 2001 AND 2000 LIABILITIES AND SHAREHOLDERS' EQUITY 2001 2000 ---- ---- CURRENT LIABILITIES: Accounts and other payables ....................................... $ 123,852 $ 178,077 Accrued and other liabilities: Salaries, wages and commissions .................................. 2,839,049 3,222,932 Legal and professional fees ...................................... 142,597 110,284 Other ............................................................ 89,262 229,808 ----------- ----------- 3,070,908 3,563,024 Advances from customers ........................................... 1,688,150 1,234,660 Income taxes payable .............................................. 213,955 220,823 ----------- ----------- TOTAL CURRENT LIABILITIES ......................................... 5,096,865 5,196,584 ----------- ----------- COMMITMENTS AND CONTINGENCIES (NOTES 6 AND 7) SHAREHOLDERS' EQUITY (NOTES 4 AND 8): Preferred stock, $1.00 par value, Authorized 1,000,000 shares; none issued ......................... -- -- Common stock, $.01 par value authorized 25,000,000 shares; issued 6,078,326 shares ....................... 60,783 60,783 Additional paid-in capital ........................................ 4,134,053 4,134,053 Retained earnings ................................................. 26,023,498 22,165,851 ----------- ----------- 30,218,334 26,360,687 Less: Treasury stock, 1,660,314 and 1,397,914 shares, at cost ..... 12,031,301 10,612,160 ----------- ----------- TOTAL SHAREHOLDERS' EQUITY ........................................ 18,187,033 15,748,527 ----------- ----------- $23,283,898 $20,945,111 =========== ===========
See accompanying notes to consolidated financial statements. Page 17
TSR, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF EARNINGS YEARS ENDED MAY 31, 2001, 2000 AND 1999 2001 2000 1999 ----------- ----------- ----------- REVENUES ....................................... $78,527,731 $78,320,755 $83,773,531 COST OF SALES .................................. 61,407,090 59,595,087 61,786,271 SELLING, GENERAL AND ADMINISTRATIVE EXPENSES ... 10,826,855 11,484,803 13,523,290 RESEARCH AND DEVELOPMENT EXPENSES .............. -- -- 289,498 ----------- ----------- ----------- 72,233,945 71,079,890 75,599,059 ----------- ----------- ----------- INCOME FROM OPERATIONS ......................... 6,293,786 7,240,865 8,174,472 ----------- ----------- ----------- OTHER INCOME: Interest and dividend income .................. 466,006 421,139 369,736 Gain from marketable securities, net .......... 21,855 7,810 3,300 Gain from sales of assets ..................... -- 23,950 22,861 ----------- ----------- ----------- 487,861 452,899 395,897 ----------- ----------- ----------- INCOME BEFORE INCOME TAXES ..................... 6,781,647 7,693,764 8,570,369 PROVISION FOR INCOME TAXES (NOTE 2) ............ 2,924,000 3,292,000 3,730,000 ----------- ----------- ----------- NET INCOME ................................. $ 3,857,647 $ 4,401,764 $ 4,840,369 =========== =========== =========== BASIC NET INCOME PER COMMON SHARE .............. $ 0.86 $ 0.88 $ 0.81 =========== =========== =========== WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING ................................... 4,494,495 5,022,948 5,951,274 =========== =========== =========== DILUTED NET INCOME PER COMMON SHARE ............ $ 0.86 $ 0.88 $ 0.81 =========== =========== =========== WEIGHTED AVERAGE NUMBER OF DILUTED COMMON SHARES OUTSTANDING ................................... 4,494,495 5,022,948 5,951,274 =========== =========== ===========
See accompanying notes to consolidated financial statements. Page 18
TSR, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY YEARS ENDED MAY 31, 2001, 2000 AND 1999 ADDITIONAL TOTAL SHARE- COMMON PAID-IN RETAINED TREASURY HOLDERS' STOCK CAPITAL EARNINGS STOCK EQUITY ------------ ------------ ------------ ---------- ------------ BALANCE AT MAY 31, 1998 ..... $ 59,883 $ 3,183,246 $ 12,923,718 $ -- $ 16,166,847 EXERCISE OF STOCK OPTIONS ... 900 820,807 -- -- 821,707 TAX BENEFIT RELATING TO STOCK OPTIONS ..................... -- 130,000 -- -- 130,000 PURCHASE OF TREASURY STOCK .. -- -- -- (4,194,378) (4,194,378) NET INCOME .................. -- -- 4,840,369 -- 4,840,369 ------------ ------------ ------------ ----------- ------------ BALANCE OF MAY 31, 1999 ..... 60,783 4,134,053 17,764,087 (4,194,378) 17,764,545 PURCHASE OF TREASURY STOCK .. -- -- -- (6,417,782) (6,417,782) NET INCOME .................. -- -- 4,401,764 -- 4,401,764 ------------ ------------ ------------ ----------- ------------ BALANCE AT MAY 31, 2000 ..... 60,783 4,134,053 22,165,851 (10,612,160) 15,748,527 PURCHASE OF TREASURY STOCK .. -- -- -- (1,419,141) (1,419,141) NET INCOME .................. -- -- 3,857,647 -- 3,857,647 ------------ ------------ ------------ ----------- ------------ BALANCE AT MAY 31, 2001 ..... $ 60,783 $ 4,134,053 $ 26,023,498 $(12,031,301) $ 18,187,033 ============ ============ ============ ============ ============
See accompanying notes to consolidated financial statements. Page 19
TSR, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED MAY 31, 2001, 2000 AND 1999 2001 2000 1999 ----------- ----------- ----------- Cash flows from operating activities: Net Income ........................................ $ 3,857,647 $ 4,401,764 $ 4,840,369 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization ................... 104,626 143,618 1,037,103 Provision for doubtful accounts ................. 100,000 -- -- Gain from marketable securities, net ............ (21,855) (7,810) (3,300) Gain on sale of fixed assets .................... -- (23,950) (22,861) Deferred income taxes ........................... 8,000 34,000 (192,000) Changes in assets and liabilities Accounts receivable-trade ........................ 780,967 1,409,527 811,706 Other accounts receivable ........................ 87,302 21,097 (80,643) Prepaid expenses ................................. 5,973 5,031 22,718 Prepaid and recoverable income taxes ............. (105,205) 59,631 (7,966) Other assets ..................................... (5,843) (5,026) (19,281) Accounts payable and accrued expenses ............ (546,341) (338,479) 850,184 Advances from customers .......................... 453,490 28,523 259,880 Income taxes payable ............................. (6,868) 80,275 97,171 ----------- ----------- ----------- Net cash provided by operating activities ......... 4,711,893 5,808,201 7,593,080 ----------- ----------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES: Proceeds from maturities and sales of marketable securities ............................ 5,692,241 6,985,767 2,426,364 Purchases of marketable securities ................ (6,824,132) (4,358,917) (6,745,391) Proceeds from sales of fixed assets ............... -- 23,950 25,000 Purchases of fixed assets ......................... (62,783) (165,659) (116,781) ----------- ----------- ----------- Net cash provided by (used in) investing activities (1,194,674) 2,485,141 (4,410,808) ----------- ----------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from exercises of stock options .......... -- -- 821,707 Purchases of treasury stock ....................... (1,419,141) (6,417,782) (4,194,378) ----------- ----------- ----------- Net cash used in financing activities ............. (1,419,141) (6,417,782) (3,372,671) ----------- ----------- ----------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS .................................. 2,098,078 1,875,560 (190,399) CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR ..... 4,110,283 2,234,723 2,425,122 ----------- ----------- ----------- CASH AND CASH EQUIVALENTS AT END OF YEAR ........... $ 6,208,361 $ 4,110,283 $ 2,234,723 =========== =========== =========== SUPPLEMENTAL DISCLOSURE: Income taxes paid ................................. $ 3,028,000 $ 3,118,000 $ 3,833,000 =========== =========== ===========
See accompanying notes to consolidated financial statements. Page 20 TSR, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MAY 31, 2001, 2000 AND 1999 (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (A) BUSINESS TSR, Inc. and subsidiaries ("the Company") is primarily engaged in providing contract computer programming services. The Company provides technical computer personnel to companies to supplement their in-house information technology capabilities. In addition, the Company provided services converting software applications to be Year 2000 compliant utilizing Catch/21, a Year 2000 compliance software solution which automated to a significant extent, the conversion process. (B) PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of TSR, Inc. and its wholly-owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation. (C) REVENUE RECOGNITION The Company's contract computer programming services are generally provided under time and materials arrangements with its customers. Accordingly, such revenues are recognized as services are provided. Provided that acceptance was probable, revenue from Catch/21 code conversion was recognized when the converted code was delivered. Advances from customers represent amounts received from customers prior to the Company's provision of the related services. Such amounts are expected to be settled within the next fiscal year. Effective March 1, 2001, the Company adopted Emerging Issues Task Force Issue No. 99-19, "Reporting Revenue Gross as a Principal Versus Net as an Agent." Accordingly, prior years' revenues and cost of sales have been revised to conform to the fiscal 2001 presentation. (D) RESEARCH AND DEVELOPMENT Research and development expenses in fiscal 1999 consisted of expenditures to expand Catch/21, the Company's Year 2000 compliance solution. There were no such expenses in fiscal 2000 or 2001. (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, 2001 and 2000: 2001 2000 ---------- ---------- Cash in banks .... $2,547,391 $ 701,838 Money Market Funds 2,671,275 2,423,235 US Treasury Bills 989,695 985,210 ---------- ---------- $6,208,361 $4,110,283 ========== ========== (Continued) Page 21 TSR, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED MAY 31, 2001, 2000 AND 1999 (F) MARKETABLE SECURITIES The Company accounts for its marketable securities in accordance with Statement of Financial Accounting Standards ("SFAS") No. 115 "Accounting for Certain Investments in Debt and Equity Securities." Accordingly, the Company classifies its marketable securities at acquisition as either (i) held-to-maturity, (ii) trading or, (iii) available-for-sale. Based upon the Company's intent and ability to hold its US Treasury securities to maturity (which maturities range between three months and one year), such securities have been classified as held-to-maturity and are carried at amortized cost. The Company's equity securities are classified as trading. Trading securities are carried at fair value with unrealized holding gains and losses included in earnings. The Company's marketable securities are summarized as follows:
Gross Gross Unrealized Unrealized Amortized Holding Holding Cost Gains Losses Fair Value ----------- ----------- ----------- ----------- 2001: US TREASURY SECURITIES $ 4,400,221 $ -- $ -- $ 4,400,221 EQUITY SECURITIES .... 28,287 6,413 (1,943) 32,757 ----------- ----------- ----------- ----------- $ 4,428,508 $ 6,413 $ (1,943) $ 4,432,978 =========== =========== =========== =========== 2000: US Treasury Securities $ 3,140,322 $ -- $ -- $ 3,140,322 Equity Securities .... 133,290 34,123 (28,503) 138,910 ----------- ----------- ----------- ----------- $ 3,273,612 $ 34,123 $ (28,503) $ 3,279,232 =========== =========== =========== ===========
(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 Basic net income per common share is computed by dividing income available to common shareholders (which for the Company equals its net income) by the weighted average number of common shares outstanding, and diluted net income per common share adds the dilutive effect of stock options and other common stock equivalents. Antidilutive shares aggregating 190,000 have been omitted from the calculation of diluted net income per common share for the fiscal year ended May 31, 2001. Therefore, the weighted average number of common shares outstanding is the same for the basic and diluted net income per share calculations. (I) INCOME TAXES Deferred tax assets and liabilities 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) Page 22 TSR, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED MAY 31, 2001, 2000 AND 1999 (J) FAIR VALUE OF FINANCIAL INSTRUMENTS SFAS No. 107, "Disclosures About Fair Value of Financial Instruments" requires disclosure of the fair value of certain financial instruments. For cash and cash equivalents, accounts receivable, accounts and other payables, accrued liabilities and advances from customers, the amounts presented in the financial statements approximate fair value because of the short-term maturity of these instruments. The fair value of marketable securities is based upon quoted market values at May 31, 2001. (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) STOCK-BASED COMPENSATION The Company applies Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" and related interpretations, in accounting for employee stock-based compensation and makes pro forma disclosures of net income and net income per share as if the fair value method under SFAS No. 123, "Accounting for Stock Based Compensation", had been applied. (M) LONG-LIVED ASSETS The Company reviews its long-lived assets for possible impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The assessment of impairment is based on a comparison of the carrying amount of the asset to the related projected undiscounted future cash flows. Due to a lack of demand for its Catch/21 compliance services, the Company accelerated the depreciation and amortization of property and equipment relating to such services which resulted in incremental depreciation and amortization expense in fiscal 1999 of approximately $450,000. (N) COMPREHENSIVE INCOME In fiscal 1999, the Company adopted SFAS No. 130, "Reporting Comprehensive Income", which establishes standards for the reporting and display of comprehensive income and its components. The Company's net income equaled comprehensive income in fiscal 1999, 2000, and 2001. (O) IMPACT OF NEW ACCOUNTING STANDARDS SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities", as amended ("SFAS No. 133") establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. In accordance with SFAS No. 133, an entity is required to recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. SFAS No. 133 requires that changes in the derivative's fair value be recognized currently in earnings unless specific hedge accounting criteria are met. Special accounting for qualifying hedges allows a derivative's gains and losses to offset related results on the hedged item in the income statement and requires that a company formally document, designate and assess the effectiveness of transactions that receive hedge accounting. SFAS No. 133 is effective for all fiscal quarters of all fiscal years beginning after June 15, 2000. The Company has not yet completed its evaluation of the impact of SFAS No. 133 on its consolidated financial statements. (Continued) Page 23 TSR, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED MAY 31, 2001, 2000 AND 1999 (2) INCOME TAXES A reconciliation of the provisions for income taxes computed at the federal statutory rates for fiscal 2001, 2000, and 1999 to the reported amounts is as follows:
2001 2000 1999 AMOUNT % Amount % Amount % ---------- ---- ---------- ---- ---------- ---- Amounts at statutory federal tax rate $2,306,000 34.0% $2,616,000 34.0% $2,914,000 34.0% State and local taxes, net of federal income tax effect .......... 574,000 8.5 624,000 8.1 734,000 8.5 Non-deductable expenses ............. 44,000 0.6 52,000 0.7 82,000 1.0 ---------- ---- ---------- ---- ---------- ---- $2,924,000 43.1% $3,292,000 42.8% $3,730,000 43.5% ========== ==== ========== ==== ========== ====
The components of the provision for income taxes are as follows: Federal State Total ----------- ----------- ----------- 2001: CURRENT ............. $ 2,047,000 $ 897,000 $ 2,916,000 DEFERRED ............ 8,000 -- 8,000 ----------- ----------- ----------- $ 2,055,000 $ 869,000 $ 2,924,000 =========== =========== =========== 2000: Current ............. $ 2,313,000 $ 945,000 $ 3,258,000 Deferred ............ 34,000 -- 34,000 ----------- ----------- ----------- $ 2,347,000 $ 945,000 $ 3,292,000 =========== =========== =========== 1999: Current ............. $ 2,810,000 $ 1,112,000 $ 3,922,000 Deferred ............ (192,000) -- (192,000) ----------- ----------- ----------- $ 2,618,000 $ 1,112,000 $ 3,730,000 =========== =========== =========== The tax effects of temporary differences that give rise to significant portions of the deferred income tax assets at May 31, 2001 and 2000 are as follows: 2001 2000 -------- -------- Allowance for doubtful accounts receivable $ 93,000 $ 59,000 Equipment and leasehold improvement depreciation and amortization ......... 189,000 231,000 -------- -------- Total deferred income tax assets ... $282,000 $290,000 ======== ======== The Company believes that it is more likely than not that it will realize the benefits of its deferred tax assets based primarily on the Company's history of and projections for taxable income in the future. (3) SEGMENT REPORTING AND MAJOR CUSTOMERS The Company currently operates in one business segment, computer programming services. In fiscal 2001, 2000 and 1999 the Company derived 12.1%, 17.4% and 13.8%, respectively, of consolidated revenues from one customer for contract computer programming services. (Continued) Page 24 TSR, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED MAY 31, 2001, 2000 AND 1999 (4) STOCK OPTIONS The 1997 Employee Stock Option Plan provides for the granting of options to purchase up to 800,000 shares of the Company's common stock at prices equal to fair market values at the grant dates. Options are exercisable as determined on the date of the grant and expire on the third anniversary of the date of grant.
Stock Options Outstanding WEIGHTED EXERCISE AVERAGE SHARES PRICE PRICE -------- ------------ --------- Outstanding at May 31, 1998 ........... 610,000 $9.125-14.75 $ 11.38 Options exercised ..................... (90,050) 9.125 9.125 Options canceled ...................... (140,000) 13.50-14.75 13.84 -------- ------------ --------- Outstanding at May 31, 1999 ........... 379,950 9.125-14.625 11.00 Options expired and canceled .......... (149,950) 9.125-14.625 9.86 -------- ------------ --------- Outstanding at May 31, 2000 ........... 230,000 11.75 11.75 Options expired and canceled .......... (230,000) 11.75 11.75 Options granted ....................... 190,000 5.53 5.53 -------- ------------ --------- OUTSTANDING AT MAY 31, 2001 ........... 190,000 $ 5.53 $ 5.53 ======== ============ ========= Exercisable at May 31, 2001 ........... 170,000 $ 5.53 $ 5.53 ======== ============ =========
The per share weighted-average fair value of stock options granted during 2001 was approximately $2.11 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 48%, and an expected option life of three years. There were no options granted in fiscal 1999 or 2000. 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 diluted net income per common share in fiscal 2001, 2000, and 1999 would have been reduced to the pro forma amounts indicated below:
2001 2000 1999 ---- ---- ---- Net Income ---------- As reported ........................ $ 3,857,647 $ 4,401,764 $ 4,840,369 Pro Forma .......................... $ 3,643,000 $ 4,401,764 $ 4,642,000 Diluted Net Income Per Common Share ----------------------------------- As reported ........................ $ 0.86 $ 0.88 $ 0.81 Pro Forma .......................... $ 0.81 $ 0.88 $ 0.78
(5) LINE OF CREDIT The Company has an available line of credit of $5,000,000 with a major money center bank. As of May 31, 2001, no amounts were outstanding under this line of credit. The rate of interest on amounts drawn against the line of credit will be either the Eurodollar Rate plus 1% or the Prime Rate, determined at the time of the advance. (Continued) Page 25 TSR, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED MAY 31, 2001, 2000 AND 1999 (6) COMMITMENTS A summary of noncancellable long-term operating lease commitments for facilities as of May 31, 2001 follows: FISCAL YEAR AMOUNT ----------- ------ 2002 ............ $ 381,000 2003 ............ 278,000 2004 ............ 252,000 2005 ............ 256,000 Thereafter ...... 72,000 Total rent expenses under all lease agreements amounted to $350,000, $311,000, and $355 000, in fiscal 2001, 2000, and 1999 respectively. (7) EMPLOYMENT AGREEMENTS In June 1998, an employment agreement was entered into with the President of the contract computer programming services subsidiary providing for an annual base salary of $200,000 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 services subsidiary. During fiscal 2001, 2000, and 1999, $282,000, $373,000 and $675,000, was paid as incentive compensation. This agreement is for a four-year term ending May 31, 2002 and provides for severance, in the event of termination, of a maximum of one year's salary. In the event of a change in control of the Corporation, the executive would be entitled to a severance payment of 2.99 times his average total compensation but not in excess of $250,000 times the remaining years in the contract 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 2001, 2000, and 1999, the minimum bonus of 7.5% of pre-tax profit was awarded, which amounted to $550,000, $624,000, and $694,000, respectively. (8) TREASURY STOCK During fiscal 1999, under a buy-back plan authorized by the Board of Directors to repurchase up to 600,000 shares of the Company's common stock, the Company purchased for $4,194,378, 576,500 shares of its common stock at the market value of the stock on the purchase date. Additionally, in June 1999 and January 2000 the Board of Directors authorized additional buy backs of up to 500,000 shares of common stock each. In fiscal 2000, the Company repurchased for $6,417,782, 821,414 shares of its common stock at the market value of the stock at the purchase date. In October 2000, the Board of Directors authorized an additional buyback of up to 250,000 shares of common stock. In fiscal 2001, the Company repurchased for $1,419,141, 262,400 shares of its common stock at the market value of the stock at the purchase date. Page 26 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure- None 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 2001 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 2001 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 2001 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 2001 Annual Meeting of Shareholders. PART IV Item 14. Exhibits, Financial Statements, Financial Statement Schedules, and Reports on Form 8-K. (a) The following documents are filed as part of this report: 1. The financial statements as indicated in the index set forth on page 14. 2. Financial statement schedule: Schedule supporting consolidated financial statements: Page ---- Schedule II - Valuation and Qualifying Accounts 27 Schedules other than those listed above have been omitted, since they are either not applicable, not required or the information is included elsewhere herein. 3. Exhibits as listed in Exhibit Index on page 29. (b) Reports on Form 8-K: None
TSR, INC. AND SUBSIDIARIES SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS Balance at Charged to Beginning Cost and Deductions/ Balance at of Period Expense Write-Offs End of Period --------- ------- ---------- ------------- Year ended May 31, 2001: Allowance for doubtful accounts ... $173,000 $ 100,000 $ -- $273,000 ======== ========= ====== ======== Year ended May 31, 2000: Allowance for doubtful accounts ... $173,000 $ -- $ -- $173,000 ======== ========= ====== ======== Year ended May 31, 1999: Allowance for doubtful accounts ... $173,000 $ -- $ -- $173,000 ======== ========= ====== ========
Page 27 Signatures Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the Undersigned, thereunto duly authorized. TSR, INC. By: /s/ J.F. Hughes - ----------------------------- J.F. Hughes, Chairman Dated: August 14, 2001 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. /s/ J.F. Hughes - ---------------------------------------------------------------------- J. F. Hughes, President, Treasurer and Director /s/ John G. Sharkey - ---------------------------------------------------------------------- John G. Sharkey, Vice President, Finance, Controller and Secretary /s/ Ernest G. Bago - ---------------------------------------------------------------------- Ernest G. Bago, President, TSR Consulting Services, Inc. and Director /s/ John H. Hochuli, Jr - ---------------------------------------------------------------------- John H. Hochuli, Jr., Director /s/ James J. Hill - ---------------------------------------------------------------------- James J. Hill, Director /s/ Christopher Hughes - ---------------------------------------------------------------------- Christopher Hughes, Director /s/ Robert A. Esernio - ---------------------------------------------------------------------- Robert Esernio, Director Dated: August 14, 2001 Page 28 TSR, INC. AND SUBSIDIARIES EXHIBIT INDEX FORM 10-K, MAY 31, 2001 EXHIBIT SEQUENTIAL NUMBER EXHIBIT PAGE # ------ ---------- 3.1 Articles of Incorporation for 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, 1998. N/A 3.2 Bylaws of the Company, as amended incorporated by reference to Exhibit 3.2 to the Annual Report of Form 10-K filed by the Company for the fiscal year ended May 31, 1998. N/A 10.1 Employment Agreement between TSR, Inc. and Ernest G. Bago, dated as of June 1, 1998 incorporated by reference to Exhibit 10.1 to the Quarterly Report on Form 10-Q filed by the Company for the quarter ended August 31, 1998. N/A 10.2 1997 Employee Stock Option Plan, incorporated by reference to Exhibit 10.2 to the Annual Report on Form 10-K filed by the Company for the fiscal year ended May 31, 1997. N/A 10.3 Form of Employee Stock Option Agreement, incorporated by reference to Exhibit 10.3 to the Annual Report on Form 10-K filed by the Company for the fiscal year ended May 31, 1997. N/A 10.4 Employment Agreement dated July 1, 1997 between the Company and Joseph F. Hughes, incorporated by reference to Exhibit 10.4 to the Annual Report on Form 10-K filed by the Company for the fiscal year ended May 31, 1997. N/A 10.5 Revolving Credit Agreement dated October 6, 1997 among TSR Consulting Services, Inc., TSR, Inc., Catch/21 Enterprises Incorporated and the Chase Manhattan Bank, incorporated by reference to Exhibit 10.3 to the Quarterly Report on Form 10-Q filed by the Company for the quarter ended August 31, 1997. N/A 10.6 Employment Agreement dated January 1, 2000 between the Company and John G. Sharkey 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, 1999. N/A 21 List of Subsidiaries 30 23 Consent of KPMG LLP 31 Page 29 EX-21 3 ex-21.txt LIST OF SUBSIDIARIES TSR, INC. AND SUBSIDIARIES EXHIBIT 21 LIST OF SUBSIDIARIES TO REPORT ON FORM 10-K FISCAL YEAR ENDED MAY 31, 2001 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 Page 30 EX-23 4 ex-23.txt CONSENT OF INDEPENDENT AUDITORS TSR, INC. AND SUBSIDIARIES EXHIBIT 23 TO REPORT ON FORM 10-K FISCAL YEAR ENDED MAY 31, 2001 CONSENT OF INDEPENDENT AUDITORS The Board of Directors and Shareholders TSR, Inc.: We consent to incorporation by reference in the registration statement (No. 333-47531) on Form S-8 of TSR, Inc. of our report dated July 16, 2001 relating to the consolidated balance sheets of TSR, Inc. and subsidiaries as of May 31, 2001 and 2000, and the related consolidated statements of earnings, shareholders' equity, and cash flows and related financial statement schedule for each of the years in the three-year period ended May 31, 2001, which report appears in the May, 31 2001 Annual Report on Form 10-K of TSR, Inc. /s/ KPMG LLP Melville, New York August 10, 2001 -----END PRIVACY-ENHANCED MESSAGE-----