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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, 2000
or
[_] Transition Report Under Section 13 or 15(d) of The
Securities Exchange Act Of 1934
For the transition period from ____ to ____
Commission File Number: 0-8656
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TSR, Inc.
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(Exact name of registrant as specified in its charter)
Delaware 13-2635899
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
400 Oser Avenue, Hauppauge, NY 11788
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(Address of principal executive offices)
Registrant's telephone number: 631-231-0333
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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
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(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. [X] Yes [ ] No
Indicate by check mark if there is no disclosure of delinquent filers in
response to Item 405 of Regulation S-K contained in this form, and no disclosure
will be contained, to the best of Registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. [X]
State the aggregate market value of the voting stock held by non-affiliates of
the Registrant. The aggregate market value shall be computed by reference to the
price at which the stock was sold, or the average bid and asked prices of such
stock, as of a specified date within 60 days prior to the date of filing. (See
definition of affiliate in Rule 12b-2 of the Exchange Act).
The aggregate market value was approximately $11,772,000 based on the market
price of the Registrant's Common Stock at July 31, 2000 of $4.63 and excluding
shares of common stock held by officers, directors and beneficial holders of 5%
of the outstanding common stock of the Registrant, many of which persons may not
be affiliates of the Registrant.
State the number of shares outstanding of each of the Registrant's classes of
common equity, as of the latest practicable date.
4,594,712 shares of Common Stock, par value $0.01 per share, as of July 31,
2000.
Documents incorporated by Reference:
The information required in Part III, Items 10, 11, 12 and 13 is incorporated by
reference to the Registrant's Proxy Statement in connection with the 2000 Annual
Meeting of Shareholders, which will be filed by the Registrant within 120 days
after the close of its fiscal year.
-2-
PART I
Item 1. Business.
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General
TSR, Inc. (the "Company") is primarily engaged in the business of providing
contract computer programming services to its clients. The Company provides
technical computer personnel to companies to supplement their in-house
information technology ("IT") capabilities. The Company's clients for its
contract computer programming services consist primarily of Fortune 1000
companies with significant technology budgets. These clients are faced with the
problem of maintaining and improving the service level of increasingly complex
information systems. Accelerating technological changes make it increasingly
difficult and expensive for IT managers to maintain the necessary in-house
capabilities. In addition, IT managers are often subject to corporate pressures
to downsize staff levels and reduce expenses relating to IT personnel, which
makes outsourcing of computer personnel requirements an attractive alternative.
In the year ended May 31, 2000, the Company provided IT staffing services to
approximately 130 clients.
The Company also provided services to customers to make applications Year 2000
compliant. The Company did not realize the revenue growth it had expected in
Year 2000 services and its revenues from Year 2000 services declined
significantly beginning in the fourth quarter of fiscal 1999. The Company does
not expect to realize material revenues from Year 2000 services in its fiscal
year 2001. Contract computer programming services has been the Company's primary
focus and the Company believes that it will be the primary focus in the future.
The Company was incorporated in Delaware in 1969. The Company's executive
offices are located at 400 Oser Avenue, Hauppauge, NY 11788, and its telephone
number is (631) 231-0333.
Contract Computer Programming Services
STAFFING SERVICES
The Company's contract computer programming services involve the provision of
technical staff to clients to meet the specialized requirements of their IT
operations. The technical personnel provided by the Company generally supplement
the in-house capabilities of the Company's clients. The Company's approach is to
make available to its clients a broad range of technical personnel to meet their
requirements rather than focusing on specific specialized areas. The Company has
staffing capabilities in the areas of main-frame and mid-range computer
operations, personal computers and client-server support, internet and
e-commerce operations, voice and data communications (including local and wide
area networks) and help desk support. The Company's services provide clients
with flexibility in staffing their day-to-day operations, as well as special
projects, on a short-term or long-term basis.
The Company provides technical employees for projects which usually range from
three months to one year. Generally, clients may terminate projects at any time.
Staffing services are provided at the client's facility and are billed primarily
on an hourly basis based on the actual hours worked by technical personnel
provided by the Company and with reimbursement for out-of-pocket expenses. The
Company pays its technical personnel on a semi-monthly basis and invoices its
clients, not less frequently than monthly.
The Company's success is dependent upon its ability to attract and retain
qualified professional computer personnel. The Company believes that there is a
shortage of, and significant competition for, software professionals with the
skills and experience necessary to perform the services offered by the Company.
Although the Company generally has been successful in attracting employees with
the skills needed to fulfill customer engagements, demand for qualified
professionals conversant with certain technologies may outstrip supply as new
and additional skills are required to keep pace with evolving computer
technology or as competition for technical personnel increase. Increasing demand
for qualified personnel could also result in increased expenses to hire and
retain qualified technical personnel and could adversely affect the Company's
profit margins.
-3-
OPERATIONS
The Company provides contract computer programming services in the New York
metropolitan area, New England, and the Mid-Atlantic region. The Company
provides its services principally through offices located in New York, New York,
Edison, New Jersey, Long Island, New York and Farmington, Connecticut. The
Company does not currently intend to open additional offices, but will continue
to seek to grow its business by adding account executives and technical
recruiters in its existing offices. At these offices, as of May 31, 2000, the
Company employed 18 persons who are responsible for recruiting technical
personnel and 20 persons who are account executives.
MARKETING AND CLIENTS
The Company focuses its marketing efforts on large businesses and institutions
with significant IT budgets and recurring staffing and software development
needs. The Company provided services to approximately 130 clients during the
year ended May 31, 2000 as compared to 120 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, 2000, the
Company had one client which constituted more than 10% of consolidated revenues
(AT&T, 17%). AT&T has been reorganizing its IT departments and is outsourcing
certain parts of its IT function. This could affect, to some extent, its need
for the Company's technical staffing services. Additionally, the Company's top
ten clients accounted for 49% of consolidated revenues in fiscal 2000 as
compared to 43% in fiscal 1999. 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. To this end, the Company plans
to expand its sales force by 20% in fiscal 2001. This will give the account
executives more time to spend with each account, as they will have fewer
accounts to cover.
The Company's marketing is conducted through account executives who are
responsible for customers in an assigned territory. Account executives call on
potential new customers and are also responsible for maintaining existing client
contacts within an assigned territory. Instead of utilizing technical managers
to oversee the services provided by technical personnel to each client, the
account executives are responsible for this role. As a result of the cost
savings due to the combined functions of the account executives, the Company is
able to provide its account executives with significantly higher incentive-
based compensation. In addition, the Company generally pairs each account
executive with a recruiter of technical personnel, who also receives
incentive-based compensation. The Company believes that this approach allows the
Company to more effectively serve its clients' needs for technical personnel, as
well as providing its account executives and recruiters with incentives to
maximize revenues in their territories.
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 50,000 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 18 recruiters. Potential applicants are
generally interviewed and tested by the Company's recruiting personnel or by
third parties who have the required technical backgrounds to review the
qualifications of the applicants.
-4-
Competition
The technical staffing industry is highly competitive and fragmented and has low
barriers to entry. The Company competes for potential clients with providers of
outsourcing services, systems integrators, computer systems consultants, other
providers of technical staffing services and, to a lesser extent, temporary
personnel agencies. The Company competes for technical personnel with other
providers of technical staffing services, systems integrators, providers of
outsourcing services, computer systems consultants, clients and temporary
personnel agencies. Many of the Company's competitors are significantly larger
and have greater financial resources than the Company. The Company believes that
the principal competitive factors in obtaining and retaining clients are
accurate assessment of clients' requirements, timely assignment of technical
employees with appropriate skills and the price of services. The principal
competitive factors in attracting qualified technical personnel are
compensation, availability, quality and variety of projects and schedule
flexibility. The Company believes that many of the technical personnel included
in its database may also be pursuing other reemployment opportunities.
Therefore, the Company believes that its responsiveness to the needs of
technical personnel is an important factor in the Company's ability to fill
projects. Although the Company believes it competes favorably with respect to
these factors, it expects competition to increase and there can be no assurance
that the Company will remain competitive.
Intellectual Property Rights
The Company relies primarily upon a combination of trade secret, nondisclosure
and other contractual arrangements to protect its proprietary rights. The
Company generally enters into confidentiality agreements with its employees,
consultants, clients and potential clients and limits access to and distribution
of its proprietary information. There can be no assurance that the steps taken
by the Company in this regard will be adequate to deter misappropriation of its
proprietary information or that the Company will be able to detect unauthorized
use and take appropriate steps to enforce its intellectual property rights.
Personnel
As of June 30, 2000, the Company employs 314 people including its 3 executive
officers. Of such employees 20 are engaged in sales, 18 are recruiters for
programmers, 255 are technical and programming consultants, and 21 are in
administration and clerical functions. Of the 314 employees, approximately 303
are employed by the contract computer programming services subsidiary, and 11
are employed directly by the Company.
Item 2. Properties.
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The Company leases 8,000 square feet of space in Hauppauge, New York for a term
expiring 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 subsidiaries.
The Company also leases sales and technical recruiting offices in New York City
(lease expires July, 2002), Edison, New Jersey (lease expires August, 2005), and
Farmington, Connecticut (lease expires November, 2002), with aggregate monthly
rentals of approximately $23,000.
The Company believes the present locations are adequate for its current needs as
well as for the future expansion of its existing business.
Item 3. Legal Proceedings.
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None
Item 4. Submission of Matters to a Vote of Security Holders.
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Not Applicable
-5-
PART II
Item 5. Market for Common Equity and Related Stockholder Matters.
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The Company's shares of Common Stock trade on the NASDAQ National Market System
under the symbol TSRI. The following are the high and low sales prices for each
quarter during the fiscal years ended May 31, 2000 and 1999:
JUNE 1, 1999 - MAY 31, 2000
1ST 2ND 3RD 4TH
QUARTER QUARTER QUARTER QUARTER
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High Sales Price .................. 9 3/8 8 3/4 8 7/8 6 1/2
Low Sales Price ................... 7 1/16 6 5 3/4 5 31/64
JUNE 1, 1998 - MAY 31, 1999
1ST 2ND 3RD 4TH
QUARTER QUARTER QUARTER QUARTER
----------------------------------------
High Sales Price .................. 14 1/2 9 5/8 13 7/8 9
Low Sales Price ................... 6 1/8 5 7 1/16 5 5/8
There were 190 holders of record of the Company's Common Stock as of July 31,
2000. Additionally, the Company estimates that there were approximately 4,000
beneficial holders as of that date. The Company has not adopted a policy of
paying cash dividends on a regular periodic basis and does not intend to declare
a cash dividend for fiscal 2001.
Item 6. Selected Financial Data.
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(Amounts in Thousands, Except Per Share Data)
MAY 31, May 31, May 31, May 31, May 31,
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
Revenues............................................. $ 79,243 $ 84,700 $ 70,435 $ 49,704 $ 31,810
Income From Operations............................... 7,241 8,174 6,604 2,970 1,456
Net Income........................................... 4,402 4,840 3,430 1,796 964
Diluted Net Income Per Common Share.................. 0.88 0.81 0.57 0.31 0.16
Working Capital...................................... 15,294 17,303 14,994 9,884 8,358
Total Assets......................................... 20,945 23,191 20,516 14,044 11,167
Shareholders' Equity................................. 15,749 17,765 16,167 10,431 8,635
Book Value Per Common Share.......................... 3.36 3.23 2.70 1.79 1.48
Cash Dividends Declared
Per Common Share................................... - - - - 0.10
Note: Net Income, Book Value and Cash Dividends Per Common Share have been
adjusted for stock splits in the form of 100% stock dividends paid in
November 1996 and November 1997.
-6-
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
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The following discussion and analysis should be read in conjunction with the
financial statements and the notes to the consolidated financial statements
presented elsewhere in this report.
Overview
The Company is primarily engaged in providing contract computer programming
services to its clients. The Company provides technical computer personnel to
companies to supplement their in-house IT capabilities. In addition, in its
fiscal year ended May 31, 1997 the Company commenced providing services to
customers to make applications Year 2000 compliant. The Company did not realize
the revenue growth it had expected in Year 2000 services and its revenues from
Year 2000 services declined significantly in the fourth quarter of its 1999
fiscal year. The Company's revenues for Year 2000 services declined
significantly in fiscal 2000 from fiscal 1999. The Company ceased providing such
services in the third quarter of the fiscal 2000. Therefore, the Company does
not expect to realize material revenues from Year 2000 services in its fiscal
year ended May 31, 2001. Contract computer programming services has been the
Company's primary focus and the Company believes that this will be the Company's
primary source of growth in the future.
In the year ended May 31, 2000, the Company provided IT staffing services to
approximately 130 clients as compared to 120 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,
2000, the Company had one client who constituted more than 10% of consolidated
revenues (AT&T, 17%). Additionally, the Company's top ten clients accounted for
49% of consolidated revenues in fiscal 2000 as compared to 43% in fiscal 1999.
While continuing its efforts to expand further its client base, the Company's
marketing efforts are focused primarily on increasing business with its existing
accounts.
The Company's Year 2000 compliance solution services represented approximately
3% of consolidated revenues and 20% of income from operations in fiscal 2000.
The Company does not presently anticipate material revenues or income from
operations from Year 2000 services in its fiscal year ended May 31, 2001.
-7-
Results of Operations
The following table sets forth for the periods indicated certain financial
information derived from the Company's consolidated statements of earnings.
There can be no assurance that trends in sales growth or operating results will
continue in the future:
YEAR ENDED MAY 31,
(DOLLAR AMOUNTS IN THOUSANDS)
2000 1999 1998
----- ---- ----
% OF % of % of
AMOUNT REVENUE Amount Revenue Amount Revenue
------- ------- ------ ------- -------- -------
Revenues........................................... $79,243 100.0 $84,700 100.0 $70,435 100.0
Cost of Sales...................................... 60,518 76.4 62,713 74.0 51,332 72.9
------- ------- ------- ------- ------- -------
Gross Profit....................................... 18,725 23.6 21,987 26.0 19,103 27.1
Selling, General, and Administrative expenses...... 11,484 14.5 13,523 16.0 12,208 17.3
Research and Development expenses ................. - - 290 0.4 831 1.2
------- ------- ------- ------- -------- -------
Income from Operations............................. 7,241 9.1 8,174 9.6 6,064 8.6
Other Income ...................................... 453 0.6 396 0.5 164 0.3
------- ------- ------- ------- -------- -------
Income Before Income Taxes......................... 7,694 9.7 8,570 10.1 6,228 8.9
Provision for Income Taxes......................... 3,292 4.1 3,730 4.4 2,798 4.0
------- ------- ------- ------- -------- -------
Net Income......................................... $ 4,402 5.6 $ 4,840 5.7 $ 3,430 4.9
======= ======= ======= ======= ======= =======
Revenues
Revenues consist primarily of revenues from contract computer programming
services. In addition, the Company's revenues included revenues from its Year
2000 compliance solution services which commenced in 1997. Overall, revenues for
fiscal 2000 decreased $5,457,000 or 6.4% from fiscal 1999. For fiscal 2000,
97.3% of revenues were derived from contract computer programming services and
2.7% of revenues were from Year 2000 services, as compared with 91.5% and 8.5%
respectively in fiscal 1999.
Contract computer programming services revenues decreased $370,000 from
$77,463,000 in fiscal 1999 to $77,093,000 in fiscal 2000. Such decrease in the
contract computer programming services business resulted from the number of
programmers on billing with clients decreasing from 550 at May 31, 1999 to 470
at May 31, 2000.
The Company attributes the decline in revenues from contract computer
programming services in the year ended May 31, 2000 to a slow down in new
projects commenced by clients in the 1999 calendar year. The Company believes
that the slow down was attributable to a delay in new IT projects due to
lingering Year 2000 effects. It had been expected that the number of new IT
projects would increase at the beginning of calendar year 2000. However, as part
of an industry wide trend new IT projects have been later and slower than
expected. The Company continues to believe that the consulting business will
strengthen during the remainder of the 2000 calendar year, although no
assurances can be made as to the timing of such strengthening.
Revenues from the Company's Catch/21 Year 2000 compliance services, which
commenced in fiscal 1997, were $2,150,000 for the year versus $7,237,000 in
fiscal 1999. The Company expects to recognize no significant Year 2000 revenues
in fiscal 2001.
Revenues for fiscal 1999 increased $14,265,000 or 20.3% over fiscal 1998.
Contract computer programming services revenues contributed an increase of
$14,345,000 resulting from an increase in the number of consultants on billing
with the clients, while Year 2000 compliance solution services revenues
decreased $31,000 and revenues from other sources decreased $49,000.
-8-
Cost of Sales
Cost of sales decreased by $2,195,000 or 3.5% in fiscal 2000 from fiscal 1999.
This decrease included a decrease in cost of sales in contract computer
programming of $166,000 from $60,118,000 in fiscal 1999 to $59,952,000 for
fiscal 2000. The decrease in costs resulted primarily from the decrease in
amounts paid to technical personnel resulting primarily from the decrease in
technical personnel assigned to client projects and was related to the
above-mentioned revenue decrease. Year 2000 services incurred cost of sales of
$566,000 in fiscal 2000 versus $2,595,000 in fiscal 1999.
Cost of sales as a percentage of revenues increased to 76.4% in fiscal 2000 from
74.0% in fiscal 1999. This increase is primarily attributable to the higher cost
of sales as a percentage of revenue in contract computer programming services as
compared to the Year 2000 services. Costs of sales in contract computer
programming services as a percentage of revenue increased to 77.8% in fiscal
2000 from 77.6% in fiscal 1999. This resulted primarily from increased amounts
paid to programmers outpacing the Company's ability to pass increases on to
customers. The cost of sales for the Company's contract computer programming
services are variable because technical personnel are generally hired on a per
diem basis to staff particular projects for clients. Due to slower than
anticipated growth in its Year 2000 compliance services, the Company
significantly reduced the number of employees in its Year 2000 services during
fiscal year 1999, and provided such services in fiscal 2000 through contractual
arrangements with certain former employees. The Company is no longer providing
Year 2000 compliance services.
Fiscal 1999 cost of sales increased $11,381,000 or 22.2% over fiscal 1998. The
increase included additional costs of $11,599,000 from contract computer
programming which primarily resulted from the above mentioned revenue increase.
Year 2000 services reduced costs by $218,000 in fiscal 1999 from fiscal 1998.
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 $2,039,000 or 15.1%
from $13,523,000 in fiscal 1999 to $11,484,000 in fiscal 2000, primarily from
the reduction in Year 2000 services. Contract computer programming services
expenses increased $72,000 over the prior year to $11,355,000. Although
commissions relating to revenues from contract computer programming services
decreased, there was an overall increase in expenses as a result of the hiring
of additional account executives and technical recruiting professionals to
broaden the Company's client base in connection with the continuation of the
Company's planned expansion. In fiscal 2000 approximately $129,000 in selling,
general and administrative expenses were attributable to the Catch/21 compliance
services as compared to $2,240,000 in fiscal 1999. These expenses consisted
primarily of marketing, advertising, management and facilities expenses.
In fiscal 1999, selling, general and administrative expenses increased
$1,315,000 or 10.8% over the prior year. Contract computer programming services
incurred increases amounting to $1,816,000 which resulted primarily from
increased personnel in recruiting and sales. The increase also included
additional commission-based compensation due to the increased revenues. The
Catch/21 compliance services incurred expenses of $2,240,000 in fiscal 1999
versus $2,741,000 in fiscal 1998.
Research and Development
Research and development costs of $290,000 in the prior year represent amounts
expended to expand Catch/21, the Company's Year 2000 compliance solution,
product offerings into additional computer platforms and languages. Fiscal 1998
expenditures were $831,000. Research and development costs declined in fiscal
1999 as the demand for compliance services decreased. There were no research and
development costs in fiscal 2000 as a result of the phase out of the Year 2000
services.
Income from Operations
In the fiscal year ended May 31, 2000 contract computer programming services
contributed $5,786,000 or 79.9% of income from operations, while Year 2000
services contributed the remaining $1,455,000 or 20.1%. In the fiscal year ended
May 31,1999 contract computer programming services contributed $6,062,000 or
74.2% of income from operations, Year 2000 services contributed $2,112,000 or
25.8%.
-9-
Other Income
Fiscal 2000 other income resulted primarily from interest and dividend income of
$421,000, which increased due to a higher investable base. The Company also had
a net gain of $8,000 from marketable securities due to mark to market
adjustments of its equity portfolio and $24,000 in gains from sales of fixed
assets.
Fiscal 1999 other income also resulted primarily from interest and dividend
income of $370,000. The Company also had a net gain of $3,000 from marketable
securities due to mark to market adjustments of its equity portfolio and $23,000
in gains from sales of fixed assets.
Income Taxes
The effective income tax rate decreased from 43.5% in fiscal 1999 to 42.8% in
fiscal 2000 because of lower state and local taxes and non-deductible expenses.
The effective income tax rate decreased from 44.9% in fiscal 1998 to 43.5% in
fiscal 1999 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
cash and marketable securities and available credit facilities will be
sufficient to provide the Company with adequate resources to meet its cash
requirements.
At May 31, 2000, the Company had working capital of $15,294,000 and cash and
cash equivalents of $4,110,000 as compared to working capital of $17,303,000 and
cash and cash equivalents of $2,235,000 at May 31, 1999. Working capital
decreased primarily due to the Company's purchases of treasury stock. Cash and
cash equivalents increased because the Company did not roll over all of its
United States Treasury Bills with maturities in excess of 90 days.
Net cash flow of $5,808,000 was provided by operations during fiscal 2000 as
compared to $7,593,000 of net cash flow from in operations in fiscal 1999. The
cash flow from operations primarily resulted from net income of $4,402,000 in
fiscal 2000 and as a result of a decrease in accounts receivable of $1,409,000
from $14,226,000 at May 31, 1999 to $12,817,000 at May 31, 2000. The decrease in
accounts receivable occurred primarily because of the decline in revenues. Also
cash flow was provided from the collection of Year 2000 receivables which cash
was not offset by expenses related to the generation of new revenues.
Cash flow provided by investing activities resulted primarily because the
Company did not roll over all of its United States Treasury Bills with a
maturity in excess of three months.
Cash flow used in financing activities of $6,418,000 resulted from the purchase
of 821,414 shares of common stock for $6,417,782. As of July 31, 2000, the
Company has repurchased a cumulative total of 1,483,614 shares at an average
price of $7.49 or a total cost of $11,106,000. The Company completed the initial
buy back authorization of 600,000 shares and the Company's board of directors
has twice authorized the repurchase of up to an additional 500,000 shares of its
common stock. No time limit has been placed on the duration of the share
repurchases. Subject to applicable securities laws, such purchases will be at
times and in amounts as the Company deems appropriate and may be discontinued at
any time. The Company has no obligation or commitment to repurchase all or any
portion of the shares covered by the authorizations.
The Company's capital resource commitments at May 31, 2000 consisted of lease
obligations on its branch and corporate facilities amounting to $1,493,000 over
the next five years. The Company intends to finance these commitments from cash
flow provided by operations, available cash and short-term marketable
securities.
The Company's cash and marketable securities were sufficient to enable it to
meet its cash requirements during fiscal 2000. The Company has available a
revolving line of credit of $5,000,000 with a major money center bank which the
Company believes provides sufficient financing if the need arose. As of May 31,
2000 there were no amounts outstanding under this line of credit.
Item 7A. Quantitative and Qualitative Disclosure About Market Risk
The Company's earnings and cash flows are subject to fluctuations due to changes
in interest rates primarily from its investment of available cash balances in
money market funds and marketable securities. Under its current policies, the
Company does not use interest rate derivative instruments to manage exposure to
interest rate changes.
-10-
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 and Need for Additional Management Personnel.
The Company is dependent on its Chairman of the Board, Chief Executive Officer
and President, Joseph Hughes, and Ernest Bago, the President of TSR's contract
computer programming services subsidiary. The Company has entered into
employment agreements with Mr. Hughes and Mr. Bago for terms expiring on May 31,
2002. The Company is also dependent on certain of its account executives who are
responsible for its principal customers and attracting new customers. The
Company does not have employment contracts with these persons. There can be no
assurance that the Company will be able to retain its existing personnel or find
and attract additional qualified employees. The loss of the services of any of
these personnel could have a material adverse effect on the Company.
Dependence on Significant Relationships.
In the fiscal year, ended May 31, 2000, the Company's largest client, AT&T Corp.
("AT&T") accounted for 17% of the Company's consolidated revenues. AT&T recently
reorganized its IT department and is outsourcing more of its IT functions. This
restructuring may reduce, to some extent, AT&T'S requirements for temporary
personnel. Client contract terms vary depending on the nature of the engagement,
and there can be no assurance that a client will renew a contract when it
terminates. In addition, the Company's contracts, including those with AT&T, are
generally cancelable by the client at any time on short notice, and clients may
unilaterally reduce their use of the Company's services under such contracts
without penalty. The termination or significant reduction of its business
relationship with any of its significant clients would have a material adverse
effect on the Company's financial condition and results of operations.
Competitive Market for Technical Personnel.
The Company's success is dependent upon its ability to attract and retain
qualified computer professionals to provide as temporary personnel to its
clients. Competition for the limited number of qualified professionals with a
working knowledge of certain sophisticated computer languages, which the Company
requires for its contract computer services business, is intense. The Company
believes that there is a shortage of, and significant competition for, software
professionals with the skills and experience necessary to perform the services
offered by the Company.
The Company's ability to maintain and renew existing engagements and obtain new
business in its contract computer programming business depends, in large part,
on its ability to hire and retain technical personnel with the IT skills that
keep pace with continuing changes in software evolution, industry standards and
technologies, and client preferences. Although the Company generally has been
successful in attracting employees with the skills needed to fulfill customer
engagements, demand for qualified professionals conversant with certain
technologies may outstrip supply as new and additional skills are required to
keep pace with evolving computer technology or as competition for technical
personnel increases. Increasing demand for qualified personnel could also result
in increased expenses to hire and retain qualified technical personnel and could
adversely affect the Company's profit margins.
Rapid Technological Change.
The computer industry is characterized by rapidly changing technology and
evolving industry standards. In recent years, there have been certain trends in
the computer industry which have increased the demand for technical staffing
services. These include the overall increase in the sophistication and
interdependency of computer technology and a focus by IT managers on
cost-efficient solutions. Recently, there has been an increased focus on the
Internet and e-Commerce and there has been a shift away from Mainframe legacy
systems. There can be no assurance that these changes will not 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.
The Company experienced a decline in demand for its staffing services, which it
attributes to the customers devoting their resources to Year 2000 testing and
delaying new IT projects. While the Company expects an increase in new IT
projects there can be no assurances as to the time or magnitude of such an
increase.
-11-
Fluctuations in Quarterly Operating Results.
The Company's revenues and operating results are subject to significant
variations from quarter to quarter. Revenues are subject to fluctuation based
upon a number of factors, including the timing and number of client projects
commenced and completed during the quarter, delays incurred in connection with
projects, the growth rate of the market for contract computer programming
services and general economic conditions. Unanticipated termination of a project
or the decision by a client not to proceed to the next stage of a project
anticipated by the Company could result in decreased revenues and lower
utilization rates which could have a material adverse effect on the Company's
business, operating results and financial condition. Compensation levels can be
impacted by a variety of factors, including competition for highly skilled
employees and inflation. The Company's operating results are also subject to
fluctuation as a result of other factors.
Intellectual Property Rights.
The Company relies primarily upon a combination trade secret, nondisclosure and
other contractual agreements to protect its proprietary rights. The Company
generally enters into confidentiality agreements with its employees,
consultants, clients and potential clients and limits access to and distribution
of its proprietary information. There can be no assurance that the steps taken
by the Company in this regard will be adequate to deter misappropriation of its
proprietary information or that the Company will be able to detect unauthorized
use and take appropriate steps to enforce its intellectual property rights.
Competition.
The technical staffing industry is highly competitive and fragmented and has low
barriers to entry. The Company competes for potential clients with providers for
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, misuse of client
proprietary information or theft of client property. To reduce such exposures,
the Company maintains insurance policies and a fidelity bond covering general
liability, worker's compensation claims, errors and omissions and employee
theft. In certain instances, the Company indemnifies its clients from the
foregoing. There can be no assurance that insurance coverage will continue to be
available and at its current price or that it will be adequate to cover any such
liability.
-12-
Item 8. Financial Statements.
--------------------
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
----
Independent Auditors' Report................................... 14
Consolidated Financial Statements:
Consolidated Balance Sheets as of May 31, 2000 and 1999........ 15
Consolidated Statements of Earnings for the
years ended May 31, 2000, 1999 and 1998................... 17
Consolidated Statements of Shareholders' Equity
for the years ended May 31, 2000, 1999 and 1998........... 18
Consolidated Statements of Cash Flows for the
years ended May 31, 2000, 1999 and 1998................... 19
Notes to Consolidated Financial Statements..................... 20
-13-
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
TSR, Inc.:
We have audited the accompanying consolidated balance sheets of TSR, Inc. and
subsidiaries as of May 31, 2000 and 1999, and the related consolidated
statements of earnings, shareholders' equity and cash flows for each of the
years in the three-year period ended May 31, 2000. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with 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, 2000 and 1999, and the results of their operations
and their cash flows for each of the years in the three-year period ended May
31, 2000, in conformity with accounting principles generally accepted in the
United States of America.
KPMG LLP
Melville, New York
July 14, 2000
-14-
TSR, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
MAY 31, 2000 AND 1999
ASSETS
2000 1999
---- ----
CURRENT ASSETS:
Cash and cash equivalents (note 1(e)) ............ $ 4,110,283 $ 2,234,723
Marketable securities (note 1(f)) ................ 3,279,232 5,898,272
Accounts receivable:
Trade (net of allowance for doubtful accounts
of $173,000 in 2000 and 1999) ............. 12,816,762 14,226,289
Other ....................................... 146,318 167,415
----------- -----------
12,963,080 14,393,704
Prepaid expenses ................................. 39,700 44,731
Prepaid and recoverable income taxes ............. 39,158 98,789
Deferred income taxes (note 2) ................... 59,000 59,000
----------- -----------
TOTAL CURRENT ASSETS ................... 20,490,453 22,729,219
----------- -----------
EQUIPMENT AND LEASEHOLD IMPROVEMENTS, AT COST:
Equipment ........................................ 435,692 1,319,244
Furniture and fixtures ........................... 103,237 236,555
Automobiles ...................................... 128,859 192,941
Leasehold improvements ........................... 92,215 245,339
----------- -----------
760,003 1,994,079
Less accumulated depreciation and amortization ... 576,647 1,832,764
----------- -----------
183,356 161,315
OTHER ASSETS .......................................... 40,302 35,276
DEFERRED INCOME TAXES (NOTE 2) ........................ 231,000 265,000
----------- -----------
$20,945,111 $23,190,810
=========== ===========
See accompanying notes to consolidated financial statements.
(Continued)
-15-
TSR, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS, CONTINUED
MAY 31, 2000 AND 1999
LIABILITIES AND SHAREHOLDERS' EQUITY
2000 1999
---- ----
CURRENT LIABILITIES:
Accounts and other payables ............................... $ 178,077 $ 305,067
Accrued and other liabilities:
Salaries, wages and commissions ...................... 3,222,932 3,391,748
Legal and professional fees .......................... 110,284 106,854
Other ................................................ 229,808 275,911
----------- -----------
3,563,024 3,774,513
Advances from customers ................................... 1,234,660 1,206,137
Income taxes payable ...................................... 220,823 140,548
----------- -----------
TOTAL CURRENT LIABILITIES ....................... 5,196,584 5,426,265
----------- -----------
COMMITMENTS AND CONTINGENCIES (NOTES 6 AND 7)
SHAREHOLDERS' EQUITY (NOTES 4, 8, 9 AND 10):
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 ......................................... 22,165,851 17,764,087
----------- -----------
26,360,687 21,958,923
Less: Treasury stock, 1,397,914 and 576,500 shares, at cost 10,612,160 4,194,378
----------- -----------
TOTAL SHAREHOLDERS' EQUITY ...................... 15,748,527 17,764,545
----------- -----------
$20,945,111 $23,190,810
=========== ===========
See accompanying notes to consolidated financial statements.
-16-
TSR, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
YEARS ENDED MAY 31, 2000, 1999 AND 1998
2000 1999 1998
------------ ------------ ------------
REVENUES ....................................... $ 79,243,448 $ 84,699,653 $ 70,434,925
COST OF SALES .................................. 60,517,780 62,712,393 51,332,267
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES ... 11,484,803 13,523,290 12,208,090
RESEARCH AND DEVELOPMENT EXPENSES .............. -- 289,498 830,441
------------ ------------ ------------
72,002,583 76,525,181 64,370,798
------------ ------------ ------------
INCOME FROM OPERATIONS ......................... 7,240,865 8,174,472 6,064,127
------------ ------------ ------------
OTHER INCOME:
Interest and dividend income .............. 421,139 369,736 158,155
Gain (loss) from marketable securities, net 7,810 3,300 (3,377)
Gain from sales of assets ................. 23,950 22,861 8,600
------------ ------------ ------------
452,899 395,897 163,378
------------ ------------ ------------
INCOME BEFORE INCOME TAXES ..................... 7,693,764 8,570,369 6,227,505
PROVISION FOR INCOME TAXES (NOTE 2) ............ 3,292,000 3,730,000 2,798,000
------------ ------------ ------------
NET INCOME ................................ $ 4,401,764 $ 4,840,369 $ 3,429,505
============ ============ ============
BASIC NET INCOME PER COMMON SHARE .............. $ 0.88 $ 0.81 $ 0.58
============ ============ ============
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING ..................... 5,022,948 5,951,274 5,881,609
============ ============ ============
DILUTED NET INCOME PER COMMON SHARE ............ $ 0.88 $ 0.81 $ 0.57
============ ============ ============
WEIGHTED AVERAGE NUMBER OF
DILUTED COMMON SHARES OUTSTANDING ............. 5,022,948 5,951,274 6,035,038
============ ============ ============
See accompanying notes to consolidated financial statements.
-17-
TSR, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED MAY 31, 2000, 1999 AND 1998
TOTAL
ADDITIONAL SHARE-
COMMON PAID-IN RETAINED TREASURY HOLDERS'
STOCK* CAPITAL* EARNINGS STOCK EQUITY
------------ ------------ ------------ ------------ ------------
BALANCE AT MAY 31, 1997 ..................... $ 58,283 $ 878,446 $ 9,494,213 $ -- $ 10,430,942
SALE OF COMMON STOCK ........................ 1,600 2,304,800 -- -- 2,306,400
NET INCOME .................................. -- -- 3,429,505 -- 3,429,505
------------ ------------ ------------ ------------ ------------
BALANCE AT MAY 31, 1998 ..................... 59,883 3,183,246 12,923,718 -- 16,166,847
EXERCISE OF STOCK OPTIONS ................... 900 820,807 -- -- 821,707
TAX BENEFIT RELATING TO STOCK OPTIONS ....... -- 130,000 -- -- 130,000
PURCHASE OF TREASURY STOCK .................. -- -- -- (4,194,378) (4,194,378)
NET INCOME .................................. -- -- 4,840,369 -- 4,840,369
------------ ------------ ------------ ------------ ------------
BALANCE AT MAY 31, 1999 ..................... 60,783 4,134,053 17,764,087 (4,194,378) 17,764,545
PURCHASE OF TREASURY STOCK .................. -- -- -- (6,417,782) (6,417,782)
NET INCOME .................................. -- -- 4,401,764 -- 4,401,764
------------ ------------ ------------ ------------ ------------
BALANCE AT MAY 31, 2000 ..................... $ 60,783 $ 4,134,053 $ 22,165,851 $(10,612,160) $ 15,748,527
============ ============ ============ ============ ============
* Adjusted for a stock split in the form of a 100% stock dividend on
November 17, 1997.
See accompanying notes to consolidated financial statements.
-18-
TSR, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED MAY 31, 2000, 1999 AND 1998
2000 1999 1998
----------- ----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ..................................................................... $ 4,401,764 $ 4,840,369 $ 3,429,505
Adjustments to reconcile net income to
net cash provided by (used in) operating activities:
Depreciation and amortization .............................................. 143,618 1,037,103 436,519
Unrealized loss (gain) from marketable securities, net ..................... (7,810) (3,300) 3,377
Gain on sale of fixed assets ............................................... (23,950) (22,861) (8,600)
Deferred income taxes ...................................................... 34,000 (192,000) (44,000)
Changes in assets and liabilities:
Accounts receivable-trade ............................................... 1,409,527 811,706 (4,629,453)
Other accounts receivable ............................................... 21,097 (80,643) (29,439)
Prepaid expenses ........................................................ 5,031 22,718 (63,589)
Prepaid and recoverable income taxes .................................... 59,631 (7,966) (79,728)
Other assets ............................................................ (5,026) (19,281) (58,213)
Accounts payable and accrued expenses ................................... (338,479) 850,184 535,534
Advances from customers ................................................. 28,523 259,880 162,365
Income taxes payable .................................................... 80,275 97,171 38,204
----------- ----------- -----------
Net cash provided by (used in) operating activities ............................ 5,808,201 7,593,080 (307,518)
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturities and sales of marketable securities ................ 6,985,767 2,426,364 --
Purchases of marketable securities ......................................... (4,358,917) (6,745,391) (1,553,147)
Proceeds from sales of fixed assets ........................................ 23,950 25,000 8,600
Purchases of fixed assets .................................................. (165,659) (116,781) (960,393)
----------- ----------- -----------
Net cash provided by (used) in investing activities ............................ 2,485,141 (4,410,808) (2,504,940)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from sale of common stock ......................................... -- -- 2,306,400
Proceeds from exercises of stock options ................................... -- 821,707 --
Purchases of treasury stock ................................................ (6,417,782) (4,194,378) --
----------- ----------- -----------
Net cash provided by (used in) financing activities ............................ (6,417,782) (3,372,671) 2,306,400
----------- ----------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS ............................... 1,875,560 (190,399) (506,058)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR ..................................... 2,234,723 2,425,122 2,931,180
----------- ----------- -----------
CASH AND CASH EQUIVALENTS AT END OF YEAR ........................................... $ 4,110,283 $ 2,234,723 $ 2,425,122
=========== =========== ===========
SUPPLEMENTAL DISCLOSURE:
Income taxes paid .............................................................. $ 3,118,000 $ 3,833,000 $ 2,884,000
=========== =========== ===========
Interest paid................................................................... $ -- $ -- $ --
=========== =========== ===========
See accompanying notes to consolidated financial statements.
-19-
TSR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 2000, 1999 AND 1998
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(A) BUSINESS
The Company is primarily engaged in providing contract computer
programming services. The Company provides technical computer
personnel to companies to supplement their in-house information
technology capabilities. In addition, the Company provided services
converting software applications to be Year 2000 compliant utilizing
Catch/21, a Year 2000 compliance software solution which automates to
a significant extent, the conversion process.
(B) PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of TSR,
Inc. and its wholly-owned subsidiaries. All significant intercompany
balances and transactions have been eliminated in consolidation.
(C) REVENUE RECOGNITION
The Company recognizes contract computer programming services
revenues as services are provided. Provided that acceptance is
probable, revenue from Catch/21 code conversion was recognized when
the converted code was delivered.
(D) RESEARCH AND DEVELOPMENT
In fiscal 1997 the Company commenced efforts to develop an automated
solution to the Year 2000 compliance problem. The resultant software,
Catch/21, has been used successfully to convert legacy IBM mainframe
applications to attain Year 2000 compliance. These expenditures,
which are expensed as incurred, increased in fiscal 1998 as the
Company expanded its product offerings into additional computer
platforms and languages and decreased in fiscal 1999 due to a lack of
demand for compliance services. There were no such expenses in fiscal
2000.
(E) CASH AND CASH EQUIVALENTS
The Company considers short-term highly liquid investments with
maturities of three months or less at the time of purchase to be cash
equivalents. Cash and cash equivalents were comprised of the
following as of May 31, 2000 and 1999:
2000 1999
---------- ----------
Cash in banks ........ $ 701,838 $ 844,057
Money Market Funds ... 2,423,235 1,390,666
US Treasury Bills .... 985,210 --
---------- ----------
$4,110,283 $2,234,723
========== ==========
(Continued)
-20-
TSR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
MAY 31, 2000, 1999 AND 1998
(F) MARKETABLE SECURITIES
The Company's marketable debt securities primarily consisting of U.S.
Treasury Bills with a maturity at acquisition in excess of 90 days
are classified as held to maturity securities and its equity
securities are classified as trading securities. The Company
classifies debt securities as held to maturity and carries them at
amortized cost only if it has a positive intent and ability to hold
those securities to maturity. If not classified as held to maturity,
such securities are classified as trading securities or securities
available for sale. Unrealized gains or losses from securities
available for sale are excluded from earnings and reported as a net
amount as a separate component of stockholders' equity. Unrealized
holding gains and losses from trading securities are included in
earnings. The amortized cost, gross unrealized holding gains, gross
unrealized holding losses and fair value for marketable securities by
major security type at May 31, 2000 and 1999, are as follows:
Gross Gross
Unrealized Unrealized
Amortized Holding Holding
Cost Gains Losses Fair Value
----------- ----------- ----------- -----------
2000: US TREASURY SECURITIES ......... $ 3,140,322 $ -- $ -- $ 3,140,322
EQUITY SECURITIES .............. 133,290 34,123 (28,503) 138,910
----------- ----------- ----------- -----------
$ 3,273,612 $ 34,123 $ (28,503) $ 3,279,232
=========== =========== =========== ===========
1999: US Treasury Securities ......... $ 5,767,172 $ -- $ -- $ 5,767,172
Equity Securities .............. 133,290 18,313 (20,503) 131,100
----------- ----------- ----------- -----------
$ 5,900,462 $ 18,313 $ (20,503) $ 5,898,272
=========== =========== =========== ===========
(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 has been computed based on the
weighted average number of shares outstanding during the year of
5,022,948, in 2000, 5,951,274 in 1999, and 5,881,609 in 1998. Diluted
net income per common share has been computed by increasing the above
amounts by the weighted average number of common stock equivalents
from employee stock options. The shares outstanding for the diluted
calculations are 5,022,948 in 2000, 5,951,274 in 1999, and 6,035,038
in 1998.
(I) INCOME TAXES
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to temporary differences between the
financial reporting bases and the tax bases of the Company's assets
and liabilities at enacted rates expected to be in effect when such
amounts are realized or settled. The effect of enacted tax law or
rate changes is reflected in income in the period of enactment.
(Continued)
-21-
TSR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
MAY 31, 2000, 1999 AND 1998
(J) FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards (SFAS) No. 107,
"Disclosures About Fair Value of Financial Instruments," requires
disclosure of the fair value of certain financial instruments. Cash
and cash equivalents, accounts receivable, accounts and other
payables, accrued liabilities and advances from customers are
reflected in the financial statements at fair value because of the
short-term maturity of these instruments. The fair value of
marketable securities is based upon quoted market values at May 31,
2000.
(K) USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities, and disclosure of contingent assets and liabilities at
the date of the financial statements, and the reported amounts of
revenues and expenses during the reporting period. Actual results
could differ from those estimates.
(L) ACCOUNTING FOR STOCK-BASED COMPENSATION
The Company records compensation expense for employee stock options
only if the current market price of the underlying stock exceeds the
exercise price on the date of the grant. The Company applies the
provisions of SFAS No. 123, "Accounting for Stock-Based
Compensation." The Company has elected not to implement the fair
value based accounting method for employee stock options, but has
elected to disclose the pro forma net earnings and pro forma earnings
per share for employee stock option grants as if such method had been
used to account for stock-based compensation cost as described in
SFAS No. 123.
(M) LONG-LIVED ASSETS
The Company reviews its long-lived assets for possible impairment
whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. The assessment of
impairment is based on a comparison of the carrying amount of the
asset to the related projected undiscounted future cash flows. Due to
a lack of demand for its Catch/21 compliance services, the Company
accelerated the depreciation and amortization of property and
equipment relating to such services which resulted in incremental
depreciation and amortization expense in fiscal 1999 of approximately
$450,000.
(N) COMPREHENSIVE INCOME
In fiscal 1999, the Company adopted SFAS No. 130 "Reporting
Comprehensive Income", which establishes standards for the reporting
and display of comprehensive income and its components. The Company's
net income equaled comprehensive income in fiscal 1998, 1999, and
2000.
(Continued)
-22-
TSR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
MAY 31, 2000, 1999 AND 1998
(2) INCOME TAXES
A reconciliation of the provisions for income taxes computed at the
federal statutory rates for fiscal 2000, 1999, and 1998 to the reported
amounts is as follows:
2000 1999 1998
AMOUNT % Amount % Amount %
---------- ---- ---------- ---- ---------- ----
Amounts at statutory federal tax rate .......... $2,616,000 34.0% $2,914,000 34.0% $2,117,000 34.0%
State and local taxes, net of
federal income tax effect ................... 624,000 8.1 734,000 8.5 616,000 9.9
Non-deductible expenses ........................ 52,000 0.7 82,000 1.0 65,000 1.0
---------- ---- ---------- ---- ---------- ----
$3,292,000 42.8% $3,730,000 43.5% $2,798,000 44.9%
========== ==== ========== ==== ========== ====
The components of the provision for income taxes are as follows:
Federal State Total
----------- ----------- -----------
2000: CURRENT .................... $ 2,313,000 $ 945,000 $ 3,258,000
DEFERRED ................... 34,000 -- 34,000
----------- ----------- -----------
$ 2,347,000 $ 945,000 $ 3,292,000
=========== =========== ===========
1999: Current .................... $ 2,810,000 $ 1,112,000 $ 3,922,000
Deferred ................... (192,000) -- (192,000)
----------- ----------- -----------
$ 2,618,000 $ 1,112,000 $ 3,730,000
=========== =========== ===========
1998: Current .................... $ 1,908,000 $ 934,000 $ 2,842,000
Deferred ................... (44,000) -- (44,000)
----------- ----------- -----------
$ 1,864,000 $ 934,000 $ 2,798,000
=========== =========== ===========
The tax effects of temporary differences that give rise to significant
portions of the deferred income tax assets at May 31, 2000 and 1999 are as
follows:
2000 1999
-------- --------
Allowance for doubtful accounts receivable ......... $ 59,000 $ 59,000
Equipment and leasehold improvement
depreciation and amortization ................. 231,000 265,000
-------- --------
Total deferred income tax assets ............. $290,000 $324,000
======== ========
The Company believes that it is more likely than not that it will realize
its deferred tax asset of $290,000 at May 31, 2000 based on the Company's
history of earnings in recent years.
(3) SEGMENT REPORTING AND MAJOR CUSTOMERS
The Company currently operates in one business segment, computer software,
and is engaged primarily in the business of providing contract computer
programming services.
In fiscal 2000 and 1999 the Company derived 17.4% and 13.8%, respectively,
of consolidated revenues from one customer for contract computer
programming services. In fiscal 1998 the Company did not derive more than
10% of consolidated revenues from any one customer.
(Continued)
-23-
TSR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
MAY 31, 2000, 1999 AND 1998
(4) STOCK OPTIONS
The 1997 Employee Stock Option Plan provides for the granting of options to
purchase up to 800,000 shares of the Company's common stock at prices equal
to fair market values at the grant dates. Options are exercisable as
determined on the date of the grant and expire on the third anniversary of
the date of grant.
STOCK OPTIONS OUTSTANDING
WEIGHTED
EXERCISE AVERAGE
SHARES PRICE PRICE
-------- ------------- -------
Outstanding at May 31, 1997 .............. 220,000 $ 9.125 $ 9.125
Options granted .......................... 390,000 11.75-14.75 12.65
-------- ------------- -------
Outstanding at May 31, 1998 .............. 610,000 9.125-14.75 11.38
Options exercised ........................ (90,050) 9.125 9.125
Options canceled ......................... (140,000) 13.50-14.75 13.84
-------- ------------- -------
Outstanding at May 31, 1999 .............. 379,950 9.125-14.625 11.00
Options expired and canceled ............. (149,950) 9.125-14.625 9.86
-------- ------------- -------
OUTSTANDING AT MAY 31, 2000 .............. 230,000 $ 11.75 $ 11.75
======== ============= =======
Exercisable at May 31, 2000 .............. 230,000 $ 11.75 $ 11.75
======== ============= =======
The per share weighted-average fair value of stock options granted during
1998 was approximately $5.80 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 80%, and an expected option life of two years. There were no
options granted in fiscal 1999 or 2000.
The Company applies APB Opinion No. 25 in accounting for its stock option
grants and accordingly, no compensation cost has been recognized in the
financial statements for its stock options which have an exercise price
equal to or greater than the fair value of the stock on the date of the
grant. Had the Company determined compensation cost based on the fair value
at the grant date for its stock options under SFAS No. 123, the Company's
net income and diluted net income per common share in fiscal 2000, 1999,
and 1998 would have been reduced to the pro forma amounts indicated below:
2000 1999 1998
---------- ---------- ----------
Net Income: As reported ..... $4,401,764 $4,840,369 $3,429,505
Pro forma ....... 4,401,764 4,642,000 1,832,000
Diluted net income
Per common share: As reported ..... $ 0.88 $ 0.81 $ 0.57
Pro forma ....... $ 0.88 $ 0.78 $ 0.30
(5) LINE OF CREDIT
The Company has an available line of credit of $5,000,000 with a major
money center bank. As of May 31, 2000, no amounts were outstanding under
this line of credit. The rate of interest on amounts drawn against the line
of credit will be either the Eurodollar Rate plus 1% or the Prime Rate,
determined at the time of the advance.
(Continued)
-24-
TSR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
MAY 31, 2000, 1999 AND 1998
(6) COMMITMENTS
A summary of noncancellable long-term operating lease commitments for
facilities as of May 31, 2000 follows:
FISCAL YEAR AMOUNT
----------- ---------
2001.................. $ 327,000
2002.................. 381,000
2003.................. 278,000
2004.................. 252,000
Thereafter............ 328,000
Total rent expenses under all lease agreements amounted to $ 311,000,
$355,000, and $360,000, in fiscal 2000, 1999, and 1998 respectively.
(7) EMPLOYMENT AGREEMENTS
In June 1998, an employment agreement was entered into with the President
of the contract computer programming services subsidiary providing for an
annual base salary of $200,000 and additional incentive compensation based
upon a formula which is agreed upon from time to time and is currently
based on the profitability of the Company's contract computer programming
services subsidiary. During fiscal 2000, 1999, and 1998, $373,000,
$675,000, and $456,000, was paid as incentive compensation. The fiscal 1998
amount was awarded under a similar plan in this executive's prior contract.
This agreement is for a four year term ending May 31, 2002 and provides for
severance, in the event of termination, of a maximum of one year's salary.
In the event of a change in control of the Corporation, the executive would
be entitled to a severance payment of 2.99 times his average total
compensation but not in excess of $250,000 times the remaining years in the
contract term.
In June 1997, an employment agreement was entered into with the Chairman of
the Board, Chief Executive Officer, President and Treasurer which
terminates May 31, 2002. This agreement provides for an initial base salary
of $375,000 with annual adjustments based upon increases in the Consumer
Price Index, such increases to be no less than 3% and no more than 8% per
year. Additionally, the agreement provides for an annual discretionary
bonus for each fiscal year, the maximum to be $50,000 if pre-tax profits
are less than $1,000,000 and a minimum of 7.5% of pre-tax profit if such
profits exceed $1,000,000. In fiscal 2000, 1999, and 1998, the minimum
bonus of 7.5% of pre-tax profit was awarded, which amounted to $624,000,
$694,000, and $512,000, respectively.
(8) COMMON STOCK
On January 30, 1998, the Company sold 160,000 shares of common stock at $16
per share in a private placement. The proceeds to the Company, net of
expenses were $2,306,400.
(9) TREASURY STOCK
During fiscal 1999, under a buy-back plan authorized by the Board of
Directors to repurchase up to 600,000 shares of the Company's common stock,
the Company purchased for $4,194,378, 576,500 shares of its common stock at
the market value of the stock on the purchase date. Additionally, in June
1999 and January 2000 the Board of Directors authorized additional buy
backs of up to 500,000 shares of common stock each. In fiscal 2000, the
Company repurchased for $6,417,782, 821,414 shares of its common stock at
the market value of the stock at the purchase date.
(10)STOCK DIVIDENDS
On October 22, 1997 the Board of Directors of the Company declared a stock
split in the form of a 100% stock dividend on the shares of Common Stock
payable November 17, 1997 to stockholders of record as of November 3, 1997.
All data for prior periods has been adjusted accordingly.
-25-
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure - None
---------------------------------------------------------------
Part III
Item 10. Directors and Executive Officers of the Company.
-----------------------------------------------
The information required by this Item 10 is incorporated by reference to the
Company's definitive proxy statement in connection with the 2000 Annual Meeting
of Shareholders.
Item 11. Executive Compensation.
----------------------
The information required by this Item 11 is incorporated by reference to the
Company's definitive proxy statement in connection with the 2000 Annual Meeting
of Shareholders.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
--------------------------------------------------------------
The information required by this Item 12 is incorporated by reference to the
Company's definitive proxy statement in connection with the 2000 Annual Meeting
of Shareholders.
Item 13. Certain Relationships and Related Transactions.
----------------------------------------------
The information required by this Item 13 is incorporated by reference to the
Company's definitive proxy statement in connection with the 2000 Annual Meeting
of Shareholders.
PART IV
Item 14. Exhibits; Financial Statement Schedules, and Reports on Form 8-K.
----------------------------------------------------------------
(a) Exhibits:
--------
3.1 Articles of Incorporation of the Company, as amended.
Incorporated by reference to Exhibit 3.1 to the Annual Report on
Form 10-K filed by the Company for the fiscal year ended May 31,
1998
3.2 Bylaws of the Company, as amended. Incorporated by reference to
Exhibit 3.2 to the Annual Report on Form 10-K filed by the
Company for the fiscal year ended May 31, 1998
10.1 Employment Agreement between TSR, Inc. and Ernest G. Bago, dated
as of June 1, 1998, incorporated by reference to Exhibit 10.1 to
the Quarterly Report on Form 10-Q filed by the Company for the
quarter ended August 31, 1998.
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, 1997 between the Company and
Joseph F. Hughes, incorporated by reference to Exhibit 10.4 to
the Annual Report on Form 10-K filed by the Company for the
fiscal year ended May 31, 1997.
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 between TSR, Inc. and John G. Sharkey dated
as of January 1, 2000 incorporated by reference to Exhibit 10.1
to the Quarterly report on Form 10-Q filed by the Company for
the quarter ended November 30, 1999.
-26-
21 List of Subsidiaries.
23 Consent of KPMG LLP, Independent Auditors
27 Financial Data Schedule.
(b) Reports on Form 8-K: None
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 11, 2000
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
Dated: August 11, 2000
-27-
TSR, INC. AND SUBSIDIARIES
EXHIBIT INDEX
FORM 10-K, MAY 31, 2000
EXHIBIT SEQUENTIAL
NUMBER EXHIBIT PAGE #
------ ------- ------
3.1 Articles of Incorporation of the Company, as amended. Incorporated by reference
to Exhibit 3.1 to the Annual Report on Form 10-K filed by the Company for the
fiscal year ended May 31, 1998. N/A
3.2 Bylaws of the Company, as amended incorporated by reference to
Exhibit 3.2 to the Annual Report on Form 10-K filed by the
Company for the fiscal year ended
May 31, 1998. N/A
10.1 Employment Agreement between TSR, Inc. and Ernest G. Bago, dated as of June 1,
1998 incorporated by reference to Exhibit 10.1 to the Quarterly Report on Form 10-Q
filed by the Company for the quarter ended August 31, 1998. N/A
10.2 1997 Employee Stock Option Plan, incorporated by reference to Exhibit 10.2 to the
Annual Report on Form 10-K filed by the Company for the fiscal year ended May 31, 1997. N/A
10.3 Form of Employee Stock Option Agreement, incorporated by reference to Exhibit 10.3 to
the Annual Report on Form 10-K filed by the Company for the fiscal year ended
May 31, 1997. N/A
10.4 Employment Agreement dated July 1, 1997 between the Company and Joseph F.
Hughes, incorporated by reference to Exhibit 10.4 to the Annual Report on Form
10-K filed by the Company for the fiscal year ended May 31, 1997. N/A
10.5 Revolving Credit Agreement dated October 6, 1997 among TSR
Consulting Services, Inc., N/A TSR, Inc., Catch/21 Enterprises
Incorporated and the Chase Manhattan Bank, incorporated by
reference to Exhibit 10.3 to the Quarterly Report on Form 10-Q
filed by the Company for the quarter ended August 31, 1997. N/A
10.6 Employment Agreement dated January 1, 2000 between the Company
and John G. Sharkey N/A Incorporated by reference to Exhibit
10.1 to the Quarterly Report on Form 10-Q filed by the Company
for the quarter ended November 30, 1999. N/A
21 List of Subsidiaries 29
23 Consent of KPMG LLP, Independent Auditors. 30
27 Financial Data Schedule 31
-28-