-----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, MPmYCf8ciU2tVUYITWbQHzIguto9SAZ7wUuoIFi1hapSDa39kF6Y9ieBFIgL2FjV /wZM9dJSq67pLpfsXCTmpw== 0001072613-03-001431.txt : 20030818 0001072613-03-001431.hdr.sgml : 20030818 20030818143240 ACCESSION NUMBER: 0001072613-03-001431 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 20030531 FILED AS OF DATE: 20030818 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: 03852715 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 form10-k_12176.txt FORM 10-K FOR PERIOD ENDED MAY 31, 2003 ================================================================================ 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, 2003 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] Page 1 ================================================================================ Indicated by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes [ ] No [X]. The aggregate market value of voting and non-voting common equity held by non-affiliates of the Registrant based upon the closing price of $5.00 at November 30, 2002 was $12,400,000. The number of shares of the Registrant's common stock outstanding as of July 31, 2003 was 4,544,012. Documents incorporated by Reference: The information required in Part III, Items 10, 11, 12, 13 and 14 is incorporated by reference to the Registrant's Proxy Statement in connection with the 2003 Annual Meeting of Stockholders, 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 its clients with technical computer personnel 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 and state and local government agencies with significant technology budgets. In the year ended May 31, 2003, the Company provided IT staffing services to approximately 100 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. This annual report, and each of our other periodic and current reports, including any amendments, are available, free of charge, on our website, WWW.TSRCONSULTING.COM, as soon as reasonably practicable after such material is electronically filed with, or furnished to, the Securities and Exchange Commission. The information contained on our website is not incorporated by reference into this annual report on Form 10-K and should not be considered part of this report. 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 mainframe 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, among other things, 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 and Long Island, New York. 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 closed its Farmington, Connecticut office in October 2002 and 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, 2003, the Company employed 11 persons who are responsible for recruiting technical personnel and 15 persons who are account executives. As of May 31, 2002 the Company had employed 7 technical personnel recruiters and 14 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 100 clients during the year ended May 31, 2003 as compared to 110 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, 2003, the Company had two clients which constituted more than 10% of consolidated revenues (Procurestaff Ltd., 20.7% and NYC Department of Education, 19.6%). (Procurestaff Ltd. is a vendor management services provider. The majority of the revenue generated was from AT&T as the end client). Additionally, the Company's top ten clients accounted for 73% of consolidated revenues in fiscal 2003 as compared to 61% in fiscal 2002. 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. The Company's marketing has been affected because some major customers have retained a third party to provide vendor management services and centralize the consultant hiring process. 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. This process weakens the relationship the Company has built with its client contacts, the project managers, who the Company would normally work directly with to place consultants. Instead, the Company is required to interface with the vendor management provider, making it more difficult to maintain its relationships with its customers and preserve and expand its business. These changes have also reduced the Company's profit margins. 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 85,000 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 11 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. 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. 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, 2003, the Company employs 220 people including its 3 executive officers. Of such employees 15 are engaged in sales, 11 are recruiters for programmers, 179 are technical and programming consultants, and 12 are in administration and clerical functions. None of the Company's employees belong to unions. 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 August, 2007) and Edison, New Jersey (lease expires August, 2005), with aggregate monthly rentals of approximately $20,000. 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. ----------------- There are no material legal proceedings. 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, 2003 and 2002: June 1, 2002 - May 31, 2003 1st 2nd 3rd 4th Quarter Quarter Quarter Quarter ---------------------------------------- High Sales Price............. 6.45 5.34 5.83 6.73 Low Sales Price.............. 3.51 4.12 4.55 4.45 June 1, 2001 - May 31, 2002 1st 2nd 3rd 4th Quarter Quarter Quarter Quarter ---------------------------------------- High Sales Price............. 5.85 5.35 7.00 6.35 Low Sales Price.............. 4.50 4.42 5.02 5.01 There were 174 holders of record of the Company's Common Stock as of July 31, 2003. Additionally, the Company estimates that there were approximately 1,600 beneficial holders as of that date. On June 23, 2003, the Company declared a special, large nonrecurring dividend of $2.00 per share payable on July 28, 2003 to holders of record as of July 11, 2003. Additionally, the Company intends to declare a quarterly dividend of $0.15 during the fiscal year ending May 31, 2004. The Company also intends to maintain an ongoing quarterly dividend rate of $0.15 beyond fiscal year 2004 assuming cash flow from operations remains at current levels. If cash flows from operations is not maintained, the dividend rate will be reassessed. There can be no assurance that the Company will continue to pay dividends. Securities authorized for issuance under equity compensation plans. The following table provides information as of May 31, 2003 with respect to compensation plans (including individual compensation arrangements) under with equity securities of the Company are authorized for issuances:
Equity Compensation Plan Information - ------------------------------ ---------------------------------- --------------------------- -------------------------------------- Number of securities to be issued Weighted-average exercise Number of securities remaining upon exercise of outstanding price of outstanding available for future issuance under options, warrants and rights options, warrants and equity compensation plans (excluding rights securities reflected in column (a)) Plan Category (a) (b) (c) - ------------------------------ ---------------------------------- --------------------------- -------------------------------------- Equity compensation Plans approved by security holders. 160,000 $5.53 549,950 - ------------------------------ ---------------------------------- --------------------------- -------------------------------------- Equity compensation Plans not approved by security holders 0 0 0 - ------------------------------ ---------------------------------- --------------------------- -------------------------------------- Total 160,000 $5.53 549,950 - ------------------------------ ---------------------------------- --------------------------- --------------------------------------
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Item 6. Selected Financial Data. ----------------------- (Amounts in Thousands, Except Per Share Data) May 31, May 31, May 31, May 31, May 31, 2003 2002 2001 2000 1999 ---- ---- ---- ---- ---- Revenues....................................... $ 52,443 $ 59,455 $ 78,951 $ 78,493 $ 84,123 Income From Operations......................... 3,975 4,424 6,294 7,241 8,174 Net Income..................................... 2,362 2,708 3,858 4,402 4,840 Basic and Diluted Net Income Per Common Share.. 0.53 0.61 0.86 0.88 0.81 Working Capital................................ 23,028 20,518 17,810 15,294 17,303 Total Assets................................... 27,852 25,597 23,284 20,945 23,191 Stockholders' Equity........................... 23,258 20,896 18,187 15,749 17,765 Book Value Per Common Share.................... 5.26 4.73 4.12 3.36 3.23
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, 2003 and 2002. Fiscal 2003 ----------- First Second Third Fourth ----- ------ ----- ------ Revenues......................... $13,681 $13,859 $11,987 $12,916 Gross Profit..................... 2,981 3,078 2,564 2,801 Net Income....................... 664 709 452 537 Basic and Diluted Net Income per Common Share...... $ 0.15 $ 0.16 $ 0.10 $ 0.12 Fiscal 2002 ----------- First Second Third Fourth ----- ------ ----- ------ Revenues*........................ $17,468 $15,381 $12,886 $13,720 Gross Profit..................... 3,857 3,364 2,679 2,987 Net Income....................... 861 763 395 689 Basic and Diluted Net Income per Common Share...... $ 0.19 $ 0.17 $ 0.09 $ 0.16 * Amounts reported prior to the fourth quarter of fiscal 2002 have been revised to reflect the Company's adoption of Emergency Issues Task Force (EITF) Issue 01-14, "Income Statement Characterization of Reimbursements for `Out-of-Pocket' Expenses Incurred", effective March 1, 2002. Page 7 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 Company's consolidated financial statements and the notes thereto 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 historical trends in operating results will continue in the future:
Year Ended May 31, (Dollar Amounts in Thousands) 2003 2002 2001 ---- ---- ---- % of % of % of Amount Revenue Amount Revenue Amount Revenue ------ ------- ------ ------- ------ ------- Revenues*.............................................. $ 52,443 100.0 $ 59,455 100.0 $ 78,951 100.0 Cost of Sales*......................................... 41,019 78.2 46,568 78.3 61,830 78.3 -------- ------ -------- ------ ------- ------ Gross Profit........................................... 11,424 21.8 12,887 21.7 17,121 21.7 Selling, General, and Administrative Expenses.......... 7, 450 14.2 8,463 14.2 10,827 13.7 -------- ------ -------- ------ ------- ------ Income from Operations................................. 3,974 7.6 4,424 7.5 6,294 8.0 Other Income........................................... 182 0.3 314 0.5 488 0.6 -------- ------ -------- ------ ------- ------ Income Before Income Taxes............................. 4,156 7.9 4,738 8.0 6,782 8.6 Provision for Income Taxes............................. 1,794 3.4 2,030 3.4 2,924 3.7 -------- ------ -------- ------ ------- ------ Net Income............................................. $ 2,362 4.5 $ 2,708 4.6 $ 3,858 4.9 ======== ====== ======== ====== ======== ======
* For fiscal 2001, amounts revised to reflect the Company's adoption of EITF Issue 01-14, "Income Statement Characterization of Reimbursements for `Out of Pocket' Expenses Incurred", effective March 1, 2002. Revenues - -------- Revenues consist primarily of revenues from computer programming consulting services. Revenues for the fiscal year ended May 31, 2003 decreased $7,012,000 or 11.8% from fiscal 2002. The continuing weak economic environment has significantly reduced the IT spending levels of many of our major customers, limiting opportunities to place new consultants on billing. The economic environment has decreased demand for placements, resulting in an overall decrease in the rates charged for computer programming services. In addition, the economic environment has caused a decrease in the placement of new consultants with clients, resulting in a decrease in the average number of consultants on billing from approximately 368 for the year ended May 31, 2002 to 358 for the year ended May 31, 2003. During the fiscal year, the Company experienced periods of both increasing and decreasing numbers of consultants on billing, with no strong trends developing. However, at May 31, 2003 the Company, was near the high end of consultants on billing for the fiscal year. 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 third parties to provide vendor management services and centralize the consultant hiring process. 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. This process weakens the relationship the Company has built with its client contacts, the project managers, who the Company would normally work directly with to place consultants. Instead, the Company is required to interface with the vendor management provider, making it more difficult to maintain its relationships with its customers and preserve and expand its business. These changes have also reduced the Company's profit margins. The Company is unable to predict the long-term effects of these changes. Revenues for fiscal 2002 decreased $19,496,000 from fiscal 2001. This decrease resulted from an overall decrease in the number of programmers on billing with clients from approximately 430 at May 31, 2001 to approximately 340 at May 31, 2002. Page 8 Cost of Sales - ------------- Cost of sales decreased by $5,549,000, or 11.9%, in fiscal 2003 from fiscal 2002. The decrease in costs resulted primarily from the decrease in amounts paid to technical personnel resulting primarily from the decrease in contract computer programming services revenues and from decreases in amounts paid to programmers. Cost of sales as a percentage of revenues decreased to 78.2% in fiscal 2003 from 78.3% in fiscal 2002. This resulted primarily from decreased amounts paid to programmers as a result of price rollbacks and discounts required by several clients, as discussed above. Fiscal 2002 cost of sales decreased $15,262,000, or 24.7%, compared to fiscal 2001. The decrease in costs resulted primarily from the decrease in amounts paid to technical personnel resulting from primarily the decrease in contract computer programming services revenues. 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 $1,013,000, or 12.0%, from $8,463,000 in fiscal 2002 to $7,450,000 in fiscal 2003. Commissions relating to revenues from contract computer programming services decreased, and there was an overall decrease in expenses as a result of the reduction of account executives, technical recruiting professionals and administrative assistants. Included in selling, general and administrative expenses in fiscal 2002 was a provision for bad debts of $200,000. This amount reflected an anticipated increase in credit losses on our accounts receivable due to the changes in the economic environment. Selling, general and administrative expenses decreased $2,364,000 or 21.8% from $10,827,000 in fiscal 2001 to $8,463,000 in fiscal 2002. Commissions relating to revenues from contract computer programming services decreased, and there was an overall decrease in expenses as a result of a reduction of account executives and technical recruiting professionals. Other Income - ------------ Fiscal 2003 other income resulted primarily from interest and dividend income of $235,000, which decreased due to lower interest rates. The Company also had a net loss of $6,000 from marketable securities due to mark to market adjustments of its equity portfolio. Fiscal 2002 other income also resulted primarily from interest and dividend income of $323,000, which decreased due to lower interest rates. The Company also had a net loss of $6,000 from marketable securities due to mark to market adjustments of its equity portfolio. Income Taxes - ------------ The effective income tax rate increased to 43.2% in fiscal 2003 from 42.8% in fiscal 2002 because of higher state and local taxes. The effective income tax rate decreased to 42.8% in fiscal 2002 from 43.1% in fiscal 2001 because of lower state and local taxes. Liquidity, Capital Resources and Changes in Financial Condition The Company expects that cash flow generated from operations together with its available cash and marketable securities and available credit facilities will be sufficient to provide the Company with adequate resources to meet its liquidity requirements for the foreseeable future. At May 31, 2003, the Company had working capital of $23,028,000 and cash and cash equivalents of $5,063,000 as compared to working capital of $20,518,000 and cash and cash equivalents of $5,794,000 at May 31, 2002. In July, 2003, the Company declared a special, large nonrecurring dividend of $2.00 per share, and announced a policy of declaring dividends at the rate of $0.15 per quarter for its 2004 fiscal year end and, if it is able to maintain cash flow from operations, beyond. The $2.00 per share dividend resulted in a reduction of working capital and cash and marketable securities of $9,088,000 in July 2003. Page 9 Net cash flow of $3,298,000 was provided by operations during fiscal 2003 as compared to $4,380,000 of net cash flow from in operations in fiscal 2002. The cash flow from operations primarily resulted from net income of $2,362,000 in fiscal 2003 and as a result of a decrease in accounts receivable of $894,000 from $10,132,000 at May 31, 2002 to $9,238,000 at May 31, 2003. The reductions in net cash flow provided by operations occurred because of a reduction in net income and less of a decrease in accounts receivable during fiscal 2003 as compared with fiscal 2002. Net cash used in investing activities amounted to $4,019,000 for fiscal 2003, compared to $4,795,000 for fiscal 2002. The net cash flows used in investing activities primarily resulted from purchases of marketable securities in excess of sales and proceeds from maturities of marketable securities. Cash used in financing activities during the fiscal year ended May 31, 2003 resulted from a distribution of $9,000 to the minority interest. Cash provided by financing activities resulted from the sale of a minority interest in a subsidiary for $1,000 during the fiscal year ended May 31, 2002. Cash used in financing activities for fiscal 2001 consisted of purchases of treasury stock amounting to $1,419,000. The Company's capital resource commitments at May 31, 2003 consisted of lease obligations on its branch and corporate facilities. The Company intends to finance these lease commitments from cash flow provided by operations, available cash and short-term marketable securities. A summary of noncancelable long-term operating lease commitments as of May 31, 2003 follows: FY 04 FY 05 FY 06 FY 07 Thereafter Total Operating Leases... $343,000 $349,000 $170,000 $118,000 $17,000 $ 997,000 The Company's cash and marketable securities were sufficient to enable it to meet its liquidity requirements during fiscal 2003. The Company has available a revolving line of credit of $5,000,000 with a major money center bank through October 6, 2003. As of May 31, 2003, no amounts were outstanding under this line of credit. Impact of New Accounting Standards - ---------------------------------- In December, 2002, the FASB issued Statement of Financial Accounting Standards (SFAS) No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure." SFAS No. 148 provides alternative methods of transition for a voluntary change to the fair value method of accounting for stock-based employee compensation as originally provided by SFAS No. 123 "Accounting for Stock-Based Compensation." Additionally, SFAS No. 148 amends the disclosure requirements of SFAS No. 123 in both annual and interim financial statements. The Company intends on continuing to apply the intrinsic value method of accounting for stock-based employee compensation, and will provide the required disclosures of SFAS No. 148 in all its filings. In November 2002, the FASB issued Interpretation No. 45 "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others", ("Interpretation 45"). Interpretation 45 requires a guarantor to include disclosure of certain obligations, and if applicable, at the inception of the guarantee, recognize a liability for the fair value of other certain obligations undertaken in issuing a guarantee. The recognition requirement is effective for guarantees issued or modified after December 31, 2002. The Company has no obligations regarding Interpretation No. 45. In January 2003, the FASB issued Interpretation No. 46 "Consolidation of Variable Interest Entities" ("Interpretation 46"). Interpretation 46 clarifies the application of Accounting Research Bulletin No. 51 "Consolidated Financial Statements", and applies immediately to any variable interest entities created after January 31, 2003 and to variable interest entities in which an interest is obtained after that date. The Company holds no interest in variable interest entities. In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity", ("SFAS 150"). This statement establishes standards for how an issuer classifies and measures in its statement of financial position certain financial instruments with characteristics of both liabilities and equity. In accordance with the standard, financial instruments that embody obligations for the issuer are required to be classified as liabilities. This Statement is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. The Company does not expect the provision of this statement to have a significant impact on the Company's consolidated financial statements. Page 10 Critical Accounting Policies - ---------------------------- The Securities and Exchange Commission ("SEC") recently issued disclosure guidance for "critical accounting policies." The SEC defines "critical accounting policies" as those that require the application of management's most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain and may change in subsequent periods. The Company's significant accounting policies are described in Note 1 to its consolidated financial statements, contained elsewhere in this report. The Company believes that the following accounting policies require the application of management's most difficult, subjective or complex judgments: Estimating Allowances for Doubtful Accounts Receivable We perform ongoing credit evaluations of our customers and adjust credit limits based upon payment history and the customer's current credit worthiness, as determined by our review of their current credit information. We continuously monitor collections and payments from our customers and maintain a provision for estimated credit losses based upon our historical experience and any specific customer collection issues that we have identified. While such credit losses have historically been within our expectations and the provisions established, we cannot guarantee that we will continue to experience the same credit loss rates that we have in the past. A significant change in the liquidity or financial position of any of our significant customers could have a material adverse effect on the collectibility of our accounts receivable and our future operating results. Valuation of Deferred Tax Assets We regularly evaluate our ability to recover the reported amount of our deferred income taxes considering several factors, including our estimate of the likelihood of the Company generating sufficient taxable income in future years during the period over which temporary differences reverse. Presently, 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. In the event that actual results differ from our estimates or we adjust these estimates in future periods, we may need to establish a valuation allowance against a portion or all of our deferred tax assets, which could materially impact our financial position or results of operations. Valuation of Long-Lived Assets We assess the recoverability of long-lived assets and intangible assets whenever we determine that events or changes in circumstances indicate that their carrying amounts may not be recoverable. Our assessment is primarily based upon our estimate of future cash flows associated with these assets. Although there has been a sustained weakness in our operating results, through May 31, 2003, we have continued and expect to continue to generate sufficient cash flows, and, therefore, we have not determined that there has been an indication of impairment of any of our assets. However, should our operating results deteriorate in the future, we may determine that some portions of our long-lived assets or intangible assets are impaired. Such determination could result in non-cash charges to income that could materially affect our financial position or results of operations in future periods. 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, 2007 and 2005, respectively. 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. Page 11 Dependence on Significant Relationships. In the fiscal year, ended May 31, 2003, the Company's largest clients, Procurestaff Ltd. and the NYC Department of Education accounted for 20.7% and 19.6% of the Company's consolidated revenues, respectively. 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, 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. Rapidly Changing Industry The computer industry is characterized by rapidly changing technology and evolving industry standards. 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. This change weakens the Company's relationship with its customer, which makes it more difficult for the Company to maintain and expand its business. It also reduces the Company's profit margins. 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 a significant portion to this decline to customers reducing their spending on IT projects as a result of the current economic environment. During fiscal 2003, the Company experienced periods of both increasing and decreasing numbers of consultants on billing, with no strong trends developing. The Company cannot predict when economic conditions will improve and the demand for IT services will increase. Page 12 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 of 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. 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 and claims have been against the Company. Certain of these cost and liabilities are not covered by insurance. 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, or will, cover any such liability. Page 13 Item 7A. Quantitative and Qualitative Disclosure About Market Risk --------------------------------------------------------- The Company's earnings and cash flows are subject to fluctuations due to (i) changes in interest rates primarily affecting its income from the investment of available cash balances in money market funds and (ii) changes in market values of its investments in trading equity securities. Under its current policies, the Company does not use interest rate derivative instruments to manage exposure to interest rate changes. The Company's present exposure to changes in the market value of its investments in equity securities is not significant. Item 8. Financial Statements. -------------------- INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Page Report of Independent Certified Public Accountants........... 15 Independent Auditors' Report................................. 16 Consolidated Financial Statements: Consolidated Balance Sheets as of May 31, 2003 and 2002...... 17 Consolidated Statements of Income for the years ended May 31, 2003, 2002 and 2001................. 19 Consolidated Statements of Stockholders' Equity for the years ended May 31, 2003, 2002 and 2001......... 20 Consolidated Statements of Cash Flows for the years ended May 31, 2003, 2002 and 2001................. 21 Notes to Consolidated Financial Statements................... 22 Page 14 Report Of Independent Certified Public Accountants Board of Directors and Stockholders TSR, Inc. and Subsidiaries Hauppauge, New York We have audited the accompanying consolidated balance sheet of TSR, Inc. and subsidiaries as of May 31, 2003 and the related consolidated statements of income, stockholders' equity, and cash flows for the year then ended. We have also audited the financial statement schedule for the year ended May 31, 2003 as listed on Item 15(a)2. These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audit. We conducted our audit 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 and schedule are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements and schedule. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements and schedule. We believe that our audit provides 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 at May 31, 2003, and the results of their operations and their cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, the schedule presents fairly, in all material respects, the information set forth therein. /s/ BDO SEIDMAN, LLP Melville, New York July 8, 2003 Page 15 Independent Auditors' Report The Board of Directors and Shareholders TSR, Inc.: We have audited the accompanying consolidated balance sheet of TSR, Inc. and subsidiaries as of May 31, 2002, and the related consolidated statements of earnings, shareholders' equity and cash flows for each of the years in the two-year period then ended, and the related consolidated financial statement schedule as of and for each of the years in the two-year period ended May 31, 2002, as listed in Item 15(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, 2002, and the results of their operations and their cash flows for each of the years in the two-year period ended May 31, 2002, 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 18, 2002 Page 16 TSR, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS May 31, 2003 and 2002 ASSETS
2003 2002 ----------- ----------- CURRENT ASSETS: Cash and cash equivalents (note1 (d)) .............................. $ 5,063,098 $ 5,793,896 Marketable securities (note 1 (e)) ................................ 12,949,174 8,941,535 Accounts receivable: Trade, net of allowance for doubtful accounts of $430,000 in 2003 and 2002 (note 1(f)) .................... 9,238,037 10,131,579 Other .......................................................... 50,828 49,819 ----------- ----------- 9,288,865 10,181,398 Prepaid expenses ................................................... 39,857 50,926 Prepaid and recoverable income taxes ............................... 60,739 69,357 Deferred income taxes (note 2) .................................... 180,000 180,000 ----------- ----------- TOTAL CURRENT ASSETS ......................................... 27,581,733 25,217,112 ----------- ----------- EQUIPMENT AND LEASEHOLD IMPROVEMENTS, AT COST: Equipment .......................................................... 423,867 455,325 Furniture and fixtures ............................................. 112,196 126,404 Automobiles ........................................................ 128,859 128,859 Leasehold improvements ............................................. 68,379 69,386 733,301 779,974 Less accumulated depreciation and amortization ..................... 708,346 703,930 ----------- ----------- 24,955 76,044 OTHER ASSETS ........................................................... 50,804 52,182 DEFERRED INCOME TAXES (NOTE 2) ......................................... 123,000 123,000 ACQUIRED CLIENT RELATIONSHIPS, NET OF ACCUMULATED AMORTIZATION OF $100,105 AND $42,902 (NOTE 3) ................... 71,503 128,706 ----------- ----------- $27,851,995 $25,597,044 =========== ===========
See accompanying notes to consolidated financial statements. (Continued) Page 17 TSR, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS, Continued May 31, 2003 and 2002 LIABILITIES AND STOCKHOLDERS' EQUITY
2003 2002 ----------- ----------- Current liabilities: Accounts and other payables .............................. $ 230,632 $ 119,176 Accrued and other liabilities: Salaries, wages and commissions ...................... 2,067,042 2,333,507 Legal and professional fees .......................... 103,776 81,426 Other ................................................ 115,464 114,331 ----------- ----------- 2,286,282 2,529,264 Advances from customers .................................. 1,793,496 1,814,611 Income taxes payable ..................................... 242,981 235,888 ----------- ----------- Total current liabilities ..................... 4,553,391 4,698,939 ----------- ----------- Minority interest ............................................ 40,902 2,578 Commitments and contingencies (notes 6 and 8) Stockholders' equity (notes 4 and 7): 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 ........................................ 31,094,167 28,731,992 ----------- ----------- 35,289,003 32,926,828 Less: Treasury stock, 1,660,314 shares, at cost ......... 12,031,301 12,031,301 ----------- ----------- Total stockholders' equity .................... 23,257,702 20,895,527 ----------- ----------- $27,851,995 $25,597,044 =========== ===========
See accompanying notes to consolidated financial statements. Page 18 TSR, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME Years ended May 31, 2003, 2002 and 2001
2003 2002 2001 ------------ ------------ ------------ Revenues, net ..................................................... $ 52,443,160 $ 59,455,162 $ 78,950,548 Cost of sales ..................................................... 41,018,719 46,568,053 61,829,907 Selling, general and administrative expenses ...................... 7,449,831 8,463,186 10,826,855 ------------ ------------ ------------ 48,468,550 55,031,239 72,656,762 ------------ ------------ ------------ Income from operations ............................................ 3,974,610 4,423,923 6,293,786 ------------ ------------ ------------ Other Income: Interest and dividend income ................................. 234,867 322,520 466,006 Unrealized gain (loss) from marketable securities, net ....... (5,620) (6,371) 21,855 Minority interest in subsidiary operating profit ............. (47,682) (1,578) -- ------------ ------------ ------------ 181,565 314,571 487,861 ------------ ------------ ------------ Income before income taxes ........................................ 4,156,175 4,738,494 6,781,647 Provision for income taxes (note 2) ............................... 1,794,000 2,030,000 2,924,000 ------------ ------------ ------------ Net income ................................................... $ 2,362,175 $ 2,708,494 $ 3,857,647 ============ ============ ============ Basic net income per common share ................................. $ 0.53 $ 0.61 $ 0.86 ============ ============ ============ Weighted average number of common shares outstanding .............. 4,418,012 4,418,012 4,494,495 ============ ============ ============ Diluted net income per common share ............................... $ 0.53 $ 0.61 $ 0.86 ============ ============ ============ Weighted average number of diluted common shares outstanding ................................... 4,418,012 4,422,348 4,494,495 ============ ============ ============
See accompanying notes to consolidated financial statements. Page 19 TSR, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY Years ended May 31, 2003, 2002 and 2001
Shares of Additional Total common Common paid-in Retained Treasury stock-holders' stock stock Capital earnings stock Equity ----- ----- ------- -------- ----- ------ Balance of May 31, 2000.......... 6,078,326 $ 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.......... 6,078,326 60,783 4,134,053 26,023,498 (12,031,301) 18,187,033 Net Income....................... -- -- -- 2,708,494 -- 2,708,494 ------------ ------------ ------------ ------------ ------------ ------------ Balance at May 31, 2002.......... 6,078,326 60,783 4,134,053 28,731,992 (12,031,301) 20,895,527 Net Income....................... -- -- -- 2,362,175 -- 2,362,175 ------------ ------------ ------------ ------------ ------------ ------------ Balance at May 31, 2003.......... 6,078,326 $ 60,783 $ 4,134,053 $ 31,094,167 $(12,031,301) $ 23,257,702 ============ ============ ============ ============ ============ ============
See accompanying notes to consolidated financial statements. Page 20 TSR, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS Years ended May 31, 2003, 2002 and 2001
2003 2002 2001 ------------ ------------ ------------ Cash flows from operating activities: Net Income ............................................................... $ 2,362,175 $ 2,708,494 $ 3,857,647 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization ........................................ 114,506 130,446 104,626 Provision for doubtful accounts ...................................... -- 200,000 100,000 Unrealized loss (gain) from marketable securities, net ............... 5,620 6,371 (21,855) Deferred income taxes ................................................ -- (21,000) 8,000 Minority interest in subsidiary operating profit ..................... 47,682 1,578 -- Changes in operating assets and liabilities: Accounts receivable-trade ..................................... 893,542 1,900,911 780,967 Other accounts receivable ..................................... (1,009) 16,022 87,302 Prepaid expenses .............................................. 11,069 (17,199) 5,973 Prepaid and recoverable income taxes .......................... 8,618 75,006 (105,205) Other assets .................................................. 1,378 (6,037) (5,843) Accounts payable and accrued expenses ......................... (131,526) (763,119) (546,341) Advances from customers ....................................... (21,115) 126,461 453,490 Income taxes payable .......................................... 7,093 21,933 (6,868) ------------ ------------ ------------ Net cash provided by operating activities ................................ 3,298,033 4,379,867 4,711,893 ------------ ------------ ------------ Cash flows from investing activities: Proceeds from maturities and sales of marketable securities ......... 16,854,460 10,312,027 5,692,241 Purchases of marketable securities .................................. (20,867,719) (14,826,955) (6,824,132) Purchases of fixed assets ........................................... (6,214) (5,840) (62,783) Purchase of net assets, net of cash acquired ........................ -- (274,564) -- ------------ ------------ ------------ Net cash used in investing activities .................................... (4,019,473) (4,795,332) (1,194,674) ------------ ------------ ------------ Cash flows from financing activities: Distribution to minority interest ................................... (9,358) -- -- Proceeds from sale of minority interest ............................. -- 1,000 -- Purchases of treasury stock ......................................... -- -- (1,419,141) ------------ ------------ ------------ Net cash provided by (used) in financing activities ...................... (9,358) 1,000 (1,419,141) ------------ ------------ ------------ Net increase (decrease) in cash and cash equivalents ......................... (730,798) (414,465) 2,098,078 Cash and cash equivalents at beginning of year ............................... 5,793,896 6,208,361 4,110,283 ------------ ------------ ------------ Cash and cash equivalents at end of year ..................................... $ 5,063,098 $ 5,793,896 $ 6,208,361 ============ ============ ============ Supplemental Disclosure: Income taxes paid ........................................................ $ 1,778,000 $ 1,954,000 $ 3,028,000 ============ ============ ============
See accompanying notes to consolidated financial statements. Page 21 TSR, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS May 31, 2003, 2002 and 2001 (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (a) BUSINESS AND NATURE OF OPERATIONS TSR, Inc. and subsidiaries ("the Company") are primarily engaged in providing contract computer programming services to commercial customers and state and local government agencies located primarily in the Metropolitan New York area. The Company provides its clients with technical computer personnel to supplement their in-house information technology capabilities. In fiscal 2003, two customers accounted for more than 10% of the Company's revenues, constituting 20.7% and 19.6% of revenues, respectively. In fiscal 2002 two customers accounted for more than 10% of the Company's revenues, constituting 15.3% and 11.6% of revenues, respectively. In fiscal 2001, one customer accounted for 12.1% of revenues. The Company operates in one business segment, computer programming services. (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 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. Advances from customers represent amounts received from customers prior to the Company's provision of the related services and credit balances from overpayments. Effective March 1, 2002, the Company adopted Emerging Issues Task Force (EITF) Issue 01-14 "Income Statement Characterization of Reimbursements Received for `Out-of-Pocket' Expenses Incurred." Accordingly, reimbursements received by the Company for out-of-pocket expenses are characterized as revenue. Prior to adoption of EITF Issue 01-14, the Company characterized such amounts as a reduction of cost of sales. Accordingly, amounts previously reported for revenues and cost of sales have been increased by $422,817, for fiscal year 2001. (d) 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, 2003 and 2002: 2003 2002 ----------- ----------- Cash in banks....................... $ 341,815 $ 229,889 Money Market Funds.................. 4,721,283 5,564,007 ----------- ----------- $ 5,063,098 $ 5,793,896 =========== =========== (Continued) Page 22 TSR, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued May 31, 2003, 2002 and 2001 (e) 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 two years), such securities have been classified as held-to-maturity and are carried at amortized cost. The Company's equity securities are classified as trading securities, which are carried at fair value with unrealized 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 ----------- ----------- ----------- ----------- 2003: US Treasury securities...... $12,928,408 $ -- $ -- $12,928,408 Equity securities....... 28,287 -- (7,521) 20,766 ----------- ----------- ----------- ----------- $12,956,695 $ -- $ (7,521) $12,949,174 =========== =========== =========== =========== 2002: US Treasury securities...... $ 8,915,149 $ -- $ -- $ 8,915,149 Equity securities....... 28,287 5,229 (7,130) 26,386 ----------- ----------- ----------- ----------- $ 8,943,436 $ 5,229 $ (7,130) $ 8,941,535 =========== =========== =========== ===========
(f) ACCOUNTS RECEIVABLE AND CREDIT POLICIES: The carrying amount of accounts receivable is reduced by a valuation allowance that reflects management's best estimate of the amounts that will not be collected. In addition to reviewing delinquent accounts receivable, management considers many factors in estimating its general allowance, including historical data, experience, customer types, credit worthiness and economic trends. From time to time, management may adjust its assumptions for anticipated changes in any of those or other factors expected to affect collectability. (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 stockholders (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 160,000, 185,664 and 190,000 have been omitted from the calculation of diluted net income per common share for the fiscal year ended May 31, 2003, 2002 and 2001, respectively. (i) INCOME TAXES Deferred tax assets and liabilities are recognized for the future tax consequences attributable to temporary differences between the financial reporting and 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 23 TSR, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued May 31, 2003, 2002 and 2001 (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 maturities of these instruments. The fair value of marketable securities is based upon quoted market values at May 31, 2003. (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. Such estimates include, but are not limited to provisions for doubtful accounts receivable, and assessments of the recoverability of the Company's deferred tax assets and intangible assets. Actual results could differ from those estimates. (l) LONG-LIVED ASSETS The Company reviews its long-lived assets, including intangibles, for possible impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If the sum of the expected cash flows undiscounted and without interest, is less than the carrying amount of the asset, an impairment loss is recognized for the amount by which the carrying amount of the asset exceeds its fair value. (m) COMPREHENSIVE INCOME The Company's net income equaled comprehensive income in fiscal 2003, 2002 and 2001. (n) STOCK OPTIONS The Company has one stock-based employee compensation plan in effect, which is described more fully in Note 4. The Company accounts for all transactions under which employees receive shares of stock or other equity instruments in the Company based on the price of its stock in accordance with the provisions of Accounting Principles Board Opinion No. 25 "Accounting for Stock Issued to Employees." No stock-based employee compensation cost is reflected in net income, as all options granted under the plan had an exercise price equal to the market value of the underlying common stock, and the number of shares represented by such options were known and fixed, on the date of grant. The following table illustrates the effect on net income and earnings per share if the Company had applied the fair value recognition provisions of SFAS No. 123 "Accounting for Stock-Based Compensation".
Year Ended May 31, ------------------ 2003 2002 2001 ------------ ------------ ------------ Net income: As reported.......................... $ 2,362,175 $ 2,708,494 $ 3,857,647 Deduct: Total stock-based employee compensation expense determined under fair value method for all awards, net of minority interest and related tax effects................................ (12,175) (12,494) (214,647) ------------ ------------ ------------ Proforma Net Income.................. $ 2,350,000 $ 2,696,000 $ 3,643,000 ============ ============ ============ Basic net income per share: As reported.......................... $ 0.53 $ 0.61 $ 0.86 ============ ============ ============ Proforma SFAS 123.................... $ 0.53 $ 0.61 $ 0.81 ============ ============ ============
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 2003 and 2002. Page 24 (o) IMPACT OF NEW ACCOUNTING STANDARDS In December, 2002, the FASB issued Statement of Financial Accounting Standards (SFAS) No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure." SFAS No. 148 provides alternative methods of transition for a voluntary change to the fair value method of accounting for stock-based employee compensation as originally provided by SFAS No. 123 "Accounting for Stock-Based Compensation." Additionally, SFAS No. 148 amends the disclosure requirements of SFAS No. 123 in both annual and interim financial statements. The Company intends on continuing to apply the intrinsic value method of accounting for stock-based employee compensation, and will provide the required disclosures of SFAS No. 148 in all its filings. In November 2002, the FASB issued Interpretation No. 45 "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others", ("Interpretation 45"). Interpretation 45 requires a guarantor to include disclosure of certain obligations, and if applicable, at the inception of the guarantee, recognize a liability for the fair value of other certain obligations undertaken in issuing a guarantee. The recognition requirement is effective for guarantees issued or modified after December 31, 2002. The Company has no obligations regarding Interpretation No. 45. In January 2003, the FASB issued Interpretation No. 46 "Consolidation of Variable Interest Entities" ("Interpretation 46"). Interpretation 46 clarifies the application of Accounting Research Bulletin No. 51 "Consolidated Financial Statements", and applies immediately to any variable interest entities created after January 31, 2003 and to variable interest entities in which an interest is obtained after that date. The Company holds no interest in variable interest entities. In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity", ("SFAS 150"). This statement establishes standards for how an issuer classifies and measures in its statement of financial position certain financial instruments with characteristics of both liabilities and equity. In accordance with the standard, financial instruments that embody obligations for the issuer are required to be classified as liabilities. This Statement is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. The Company does not expect the provision of this statement to have a significant impact on the Company's consolidated financial statements. Page 25 TSR, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued May 31, 2003, 2002 and 2001 (2) INCOME TAXES A reconciliation of the provisions for income taxes computed at the federal statutory rates for fiscal 2003, 2002, and 2001 to the reported amounts is as follows:
2003 2002 2001 Amount % Amount % Amount % ---------- ---- ---------- ---- ---------- ---- Amounts at statutory federal tax rate $1,413,000 34.0% $1,611,000 34.0% $2,306,000 34.0% State and local taxes, net of federal income tax effect .... 334,000 8.0 340,000 7.2 574,000 8.5 Non-deductible expenses, and other ... 47,000 1.2 79,000 1.6 44,000 0.6 ---------- ---- ---------- ---- ---------- ---- $1,794,000 43.2% $2,030,000 42.8% $2,924,000 43.1% ========== ==== ========== ==== ========== ====
The components of the provision for income taxes are as follows: Federal State Total ----------- ----------- ----------- 2003: Current............. $ 1,288,000 $ 506,000 $ 1,794,000 Deferred............ -- -- -- ----------- ----------- ----------- $ 1,288,000 $ 506,000 $ 1,794,000 =========== =========== =========== 2002: Current............. $ 1,449,000 $ 602,000 $ 2,051,000 Deferred............ 66,000 (87,000) (21,000) ----------- ----------- ----------- $ 1,515,000 $ 515,000 $ 2,030,000 =========== =========== =========== 2001: Current............. $ 2,047,000 $ 869,000 $ 2,916,000 Deferred............ 8,000 -- 8,000 ----------- ----------- ----------- $ 2,055,000 $ 869,000 $ 2,924,000 =========== =========== =========== The tax effects of temporary differences that give rise to significant portions of the deferred income tax assets at May 31, 2003 and 2002 are as follows: 2003 2002 --------- --------- Allowance for doubtful accounts receivable..... $ 180,000 $ 180,000 Equipment and leasehold improvement Depreciation and amortization.......... 89,000 109,000 Acquired client relationships.................. 34,000 14,000 --------- --------- Total deferred income tax assets.... $ 303,000 $ 303,000 ========= ========= 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. (Continued) Page 26 TSR, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued May 31, 2003, 2002 and 2001 (3) ACQUISITION In August 2001, the Company capitalized a newly formed subsidiary with $4,000 and simultaneously sold a 20% interest to a third party for $1,000. On August 14, 2001, this subsidiary acquired substantially all of the assets and assumed certain liabilities of a computer consulting firm for cash of $286,500 (including cash acquired of $11,936). In accordance with SFAS No. 141, this transaction is being accounted for as a purchase business combination. Accordingly, the purchase price has been allocated to the assets acquired and liabilities assumed based on their estimated fair value, summarized as follows: Cash...................................... $ 11,936 Other current assets...................... 303,520 Equipment................................. 16,235 Acquired client relationships............. 171,608 Current liabilities....................... (216,799) ----------- $ 286,500 In connection with the acquisition, the Company acquired certain contractual client relationships. The related intangible asset is being amortized over a three-year period, reflecting the estimated average life of the underlying client relationships. Amortization expense for the year ended May 31, 2003 and 2002 were $57,203 and $42,902, respectively. The results of operations of the acquired business have been included in the Company's consolidated financial statements from the date of acquisition. Had the acquisition been completed as of June 1, 2000, unaudited pro forma consolidated revenues, net income and net income per common share would have been $59,938,000, $2,719,000, and $0.61, respectively, for the fiscal year ended May 31, 2002. The impact on reported fiscal 2001 results would not have been material. (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 fifth anniversary of the date of grant. There are 709,950 shares of common stock reserved for issuance under the Plan. Stock Options Outstanding Weighted Exercise Average Shares Price Price Outstanding at May 31, 2000............ 230,000 $ 11.75 $ 11.75 Options expired and forfeited.......... (230,000) 11.75 11.75 Options granted........................ 190,000 5.53 5.53 -------- ------- ------- Outstanding at May 31, 2001 and 2002... 190,000 5.53 5.53 Options forfeited...................... (30,000) 5.53 5.53 -------- ------- ------- Outstanding at May 31, 2003............ 160,000 5.53 5.53 -------- ------- ------- Exercisable at May 31, 2003............ 160,000 $ 5.53 $ 5.53 ======== ======= ======= Page 27 TSR, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued May 31, 2003, 2002 and 2001 (5) LINE OF CREDIT The Company has an available line of credit of $5,000,000 with a major money center bank through October 6, 2003. As of May 31, 2003, 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. The Company intends to renew this facility on or before its current expiration. (6) COMMITMENTS AND CONTINGENCIES A summary of noncancellable long-term operating lease commitments for facilities as of May 31, 2003 follows: Fiscal Year Amount ----------- --------- 2004............ 343,000 2005............ 349,000 2006............ 170,000 2007............ 118,000 Thereafter...... 17,000 --------- Total $ 997,000 Total rent expenses under all lease agreements amounted to $357,000, $393,000 and $350,000, in fiscal 2003, 2002, and 2001 respectively. The Company is party to various lawsuits, some involving substantial amounts. Management does not believe that the resolution of these lawsuits will have a material adverse impact on the financial position of the Company. (7) 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 repurchased 576,500 shares of its common stock for $4,194,378, 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 821,414 shares of its common stock for $6,417,782, 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 262,400 shares of its common stock for $1,419,141, at the market value of the stock at the purchase date. In fiscal 2003 and 2002, there were no repurchases. Page 28 TSR, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued May 31, 2003, 2002 and 2001 (8) EMPLOYMENT AGREEMENTS In June 2001, an employment agreement was entered into with the President of the contract computer programming services subsidiary providing for an annual base salary 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. This agreement is for a four-year term ending May 31, 2005 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 2002, an employment agreement was entered into with the Chairman of the Board, Chief Executive Officer, President and Treasurer, which terminates May 31, 2007. This agreement provides for an initial base salary 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. (9) UNAUDITED QUARTERLY FINANCIAL DATA The following is a summary of unaudited quarterly operating results for the fiscal years ended May 31, 2003 and 2002. Fiscal 2003 ----------- First Second Third Fourth ----- ------ ----- ------ Revenues...................... $ 13,681 $ 13,859 $ 11,987 $ 12,916 Gross Profit.................. 2,981 3,078 2,564 2,801 Net Income.................... 664 709 452 537 Basic and Diluted Net Income per Common Share... $ 0.15 $ 0.16 $ 0.10 $ 0.12 (Amounts in Thousands, except Per Share Data) Fiscal 2002 ----------- First Second Third Fourth ----- ------ ----- ------ Revenues*..................... $ 17,468 $ 15,381 $ 12,886 $ 13,720 Gross Profit.................. 3,857 3,364 2,679 2,987 Net Income.................... 861 763 395 689 Basic and Diluted Net Income per Common Share... $ 0.19 $ 0.17 $ 0.09 $ 0.16 *Amounts reported prior to the fourth quarter of fiscal 2002 have been revised to reflect the Company's adoption of EITF Issue 01-14, "Income Statement Characterization of Reimbursements for `Out-of-Pocket' Expenses Incurred", effective March 1, 2002. (10) SUBSEQUENT EVENT On June 23, 2003, the Board of Directors of the Company announced that a special, large nonrecurring cash dividend of $2.00 per share will be paid on July 28, 2003 to shareholders of record as of July 11, 2003. This dividend will amount to approximately $9,088,000 and will be paid from the Company's cash and marketable securities. Additionally, the Company intends to adopt a policy of declaring regular quarterly cash dividends of $0.15 per share, beginning in the first quarter of fiscal 2004. Page 29 Item 9. Changes in and Disagreements with Accountants on Accounting and --------------------------------------------------------------- Financial Disclosure - -------------------- The information required by this Item 9 was previously reported in the Company's Form 8K filed on May 22, 2003. Item 9A. Procedures and Controls ----------------------- The Company carried out an evaluation, under the supervision and with the participation of the Company's management, including the Company's Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company's disclosure controls and procedures pursuant to the Exchange Act Rule 13a-14. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures are effective as of the end of the period covered by the Annual Report on Form 10K. There were no significant changes in internal controls or in other factors that could significantly affect these controls subsequent to the date of their evaluation. There was no change in the Company's internal control over financial reporting during the Company's last fiscal quarter (the fourth fiscal quarter of the Company's year ended May 31, 2003) that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting. 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 2003 Annual Meeting of Stockholders. 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 2003 Annual Meeting of Stockholders. 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 2003 Annual Meeting of Stockholders. 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 2003 Annual Meeting of Stockholders. Item 14. Principal Accountant Fees and Services -------------------------------------- The information required by this Item 14 is incorporated by reference to the Company's definitive proxy statement in connection with the 2003 Annual Meeting of Stockholders. Page 30 Part IV Item 15. 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.......... 31 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 33. (b)Reports on Form 8-K: May 22, 2003 - Reporting a change in Registrant's Certifying Accountants. 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, 2003: Allowance for doubtful accounts........ $ 430,000 $ -- $ -- $ 430,000 ========= ========= ========= ========= Year ended May 31, 2002: Allowance for doubtful accounts........ $ 273,000 $ 200,000 $ 43,000 $ 430,000 ========= ========= ========= ========= Year ended May 31, 2001: Allowance for doubtful accounts........ $ 173,000 $ 100,000 $ -- $ 273,000 ========= ========= ========= =========
Page 31 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, 2003 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 A. Esernio, Director Dated: August 14, 2003 Page 32 TSR, INC. AND SUBSIDIARIES EXHIBIT INDEX FORM 10-K, MAY 31, 2003 Exhibit Number Exhibit ------ ------- 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. 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. 10.1 Employment Agreement between TSR, Inc. and Ernest G. Bago, dated as of June 1, 2001 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, 2001. 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. 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. 10.4 Employment Agreement dated June 1, 2002 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, 2002. 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. 10.6 Employment Agreement dated January 1, 2002 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 February 28, 2002. 21 List of Subsidiaries 23.1 Consent of BDO Seidman, LLP 23.2 Consent of KPMG LLP 31.1 Certification by J.F. Hughes Pursuant to Securities Exchange Act Rule 13a-14 31.2 Certification by John G. Sharkey Pursuant to Securities Exchange Act Rule 13a-14 32.1 Certification of J.F. Hughes Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 32.2 Certification of John G. Sharkey Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. Page 33 EX-21 3 exh21_12176.txt LIST OF SUBSIDIARIES EXHIBIT 21 ---------- TSR, INC. AND SUBSIDIARIES List of Subsidiaries to Report on Form 10-K Fiscal Year Ended May 31, 2003 Name State of Incorporation/Formation ---- -------------------------------- TSR Consulting Services, Inc. New York Logixtech Solutions, LLC Delaware EX-23.1 4 exh23-1_12176.txt CONSENT OF BDO SIEDMAN EXHIBIT 23.1 ------------ Consent Of Independent Certified Public Accountants TSR, Inc. Hauppauge, New York We hereby consent to the incorporation by reference in the Registration Statement on Form S-8 (file number 333-47531) of our report dated July 8, 2003 relating to the consolidated financial statements of TSR Inc. as of and for the year ended May 31, 2003 appearing in the Company's Annual Report on Form 10-K for the year ended May 31, 2003. /s/ BDO Seidman, LLP Melville, New York August 15, 2003 EX-23.2 5 exh23-2_12176.txt CONSENT OF KPMG EXHIBIT 23.2 ------------ TSR, INC. AND SUBSIDIARIES To Report on Form 10-K Fiscal Year Ended May 31, 2003 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 18, 2002, relating to the consolidated balance sheet of TSR, Inc. and subsidiaries as of May 31, 2002, and the related consolidated statements of earnings, shareholders' equity, and cash flows and related financial statement schedule for each of the years in the two-year period then ended, which report appears in the May 31, 2003 Annual Report on Form 10-K of TSR, Inc. /s/ KPMG, LLP Melville, New York August 15, 2003 EX-31.1 6 exh31-1_12176.txt 302 CERTIFICATION BY THE CHAIRMAN Exhibit 31.1 ------------ CERTIFICATION PURSUANT TO SECURITIES EXCHANGE ACT RULE 13A-14 I, J.F. Hughes, Chairman of the Board, Chief Executive Officer and Director, certify that: 1. I have reviewed this Annual Report on Form 10-K of TSR, Inc.; 2. Based on my knowledge, this Annual Report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this Annual Report; 3. Based on my knowledge, the financial statements, and other financial information included in this Annual Report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this Annual Report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a. designed such disclosure controls and procedures or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this Annual Report is being prepared; b. evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this Annual Report our conclusions about the effectiveness of the disclosure controls and procedures as of the end of the period covered by this Annual Report based on such evaluation; c. disclosed in this Annual Report any change in registrants disclosure controls that occurred during the registrant's fourth fiscal quarter that materially affected, or is reasonably likely to materially affect, the registrant's internal controls; and 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a. all significant deficiencies or material weaknesses in the design or operation of internal controls which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial data; and b. any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls. Date: August 14, 2003 /s/ J.F. Hughes --------------------------------------- Chairman of the Board, Chief Executive Officer and Director EX-31.2 7 exh31-2_12176.txt 302 CERTIFICATION BY THE C.F.O. Exhibit 31.2 ------------ CERTIFICATION PURSUANT TO SECURITIES EXCHANGE ACT RULE 13A-14 I, John G. Sharkey, Vice President-Finance and Chief Financial Officer, certify that: 1. I have reviewed this Annual Report on Form 10-K of TSR, Inc.; 2. Based on my knowledge, this Annual Report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this Annual Report; 3. Based on my knowledge, the financial statements, and other financial information included in this Annual Report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this Annual Report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a. designed such disclosure controls and procedures or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this Annual Report is being prepared; b. evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this Annual Report our conclusions about the effectiveness of the disclosure controls and procedures as of the end of the period covered by this Annual Report based on such evaluation; c. disclosed in this Annual Report any change in registrants disclosure controls that occurred during the registrant's fourth fiscal quarter that materially affected, or is reasonably likely to materially affect, the registrant's internal controls; and 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a. all significant deficiencies or material weaknessses in the design or operation of internal controls which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial data; and b. any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls. Date: August 14, 2003 /s/ John G. Sharkey ---------------------------- Vice President-Finance and Chief Financial Officer EX-32.1 8 exh32-1_12176.txt 906 CERTIFICATION BY THE CHAIRMAN Exhibit 32.1 ------------ CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Annual Report of TSR, Inc. (the "Company") on Form 10-K for the period ended May 31, 2003 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, J.F. Hughes, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: 1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and 2. The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company. The forgoing certification is incorporated solely for the purposes of complying with the provisions of Section 906 of the Sarbanes-Oxley Act and is not intended to be used for any other purpose. /s/ J.F. Hughes --------------------------------------- Chairman of the Board, Chief Executive Officer and Director August 14, 2003 EX-32.2 9 exh32-2_12176.txt 906 CERTIFICATION BY THE C.F.O. Exhibit 32.2 ------------ CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Annual Report of TSR, Inc. (the "Company") on Form 10-K for the period ended May 31, 2003 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, John G. Sharkey, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: 1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and 2. The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company. The forgoing certification is incorporated solely for the purposes of complying with the provisions of Section 906 of the Sarbanes-Oxley Act and is not intended to be used for any other purpose. /s/ John G. Sharkey ---------------------------- Vice President-Finance and Chief Financial Officer August 14, 2003 -----END PRIVACY-ENHANCED MESSAGE-----