UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
[X] Annual Report Pursuant to Section 13 or 15(d) of
The Securities Exchange Act Of 1934
For the fiscal year ended May 31, 2001
or
[ ] Transition Report Under Section 13 or 15(d) of
The Securities Exchange Act Of 1934
For the transition period from__________ to__________
Commission File Number: 0-8656
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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
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(Title of Class)
Securities registered pursuant to Section 12(g) of the Exchange Act:
Common Stock, par value $0.01 per share
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(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. [X] Yes [ ] No
Indicate by check mark if there is no disclosure of delinquent filers in
response to Item 405 of Regulation S-K contained in this form, and no
disclosure will be contained, to the best of Registrant's knowledge, in
definitive proxy or information statements incorporated by reference in Part III
of this Form 10-K or any amendment to this Form 10-K. [X]
The aggregate market value of voting stock held by non-affiliates of the
Registrant based upon the closing price of $5.50 at July 31, 2001 was
$13,412,000.
The number of shares of the Registrant's common stock outstanding as of July 31,
2001 was 4,418,012.
Documents incorporated by Reference:
The information required in Part III, Items 10, 11, 12 and 13 is incorporated by
reference to the Registrant's Proxy Statement in connection with the 2001 Annual
Meeting of Shareholders, which will be filed by the Registrant within 120 days
after the close of its fiscal year.
Page 2
PART I
Item 1. Business.
General
TSR, Inc. (the "Company") is primarily engaged in the business of providing
contract computer programming services to its clients. The Company provides
technical computer personnel to companies to supplement their in-house
information technology ("IT") capabilities. The Company's clients for its
contract computer programming services consist primarily of Fortune 1000
companies with significant technology budgets. These clients are faced with the
problem of maintaining and improving the service level of increasingly complex
information systems. Accelerating technological changes make it increasingly
difficult and expensive for IT managers to maintain the necessary in-house
capabilities. In addition, IT managers are often subject to corporate pressures
to downsize staff levels and reduce expenses relating to IT personnel, which
makes outsourcing of computer personnel requirements an attractive alternative.
In the year ended May 31, 2001, the Company provided IT staffing services to
approximately 120 clients.
The Company was incorporated in Delaware in 1969. The Company's executive
offices are located at 400 Oser Avenue, Hauppauge, NY 11788, and its telephone
number is (631) 231-0333.
Contract Computer Programming Services
STAFFING SERVICES
The Company's contract computer programming services involve the provision of
technical staff to clients to meet the specialized requirements of their IT
operations. The technical personnel provided by the Company generally supplement
the in-house capabilities of the Company's clients. The Company's approach is
to make available to its clients a broad range of technical personnel to meet
their requirements rather than focusing on specific specialized areas. The
Company has staffing capabilities in the areas of main-frame and mid-range
computer operations, personal computers and client-server support, internet and
e-commerce operations, voice and data communications (including local and wide
area networks) and help desk support. The Company's services provide clients
with flexibility in staffing their day-to-day operations, as well as special
projects, on a short-term or long-term basis.
The Company provides technical employees for projects, which usually range from
three months to one year. Generally, clients may terminate projects at any time.
Staffing services are provided at the client's facility and are billed primarily
on an hourly basis based on the actual hours worked by technical personnel
provided by the Company and with reimbursement for out-of-pocket expenses. The
Company pays its technical personnel on a semi-monthly basis and invoices its
clients, not less frequently than monthly.
The Company's success is dependent upon its ability to attract and retain
qualified professional computer personnel. The Company believes that there is
significant competition for, software professionals with the skills and
experience necessary to perform the services offered by the Company. Although
the Company generally has been successful in attracting employees with the
skills needed to fulfill customer engagements, demand for qualified
professionals conversant with certain technologies may outstrip supply as new
and additional skills are required to keep pace with evolving computer
technology or as competition for technical personnel increase. Increasing demand
for qualified personnel could also result in increased expenses to hire and
retain qualified technical personnel and could adversely affect the Company's
profit margins.
Page 3
OPERATIONS
The Company provides contract computer programming services in the New York
metropolitan area, New England, and the Mid-Atlantic region. The Company
provides its services principally through offices located in New York, New York,
Edison, New Jersey, Long Island, New York and Farmington, Connecticut. The
Company does not currently intend to open additional offices, but intends to
seek to grow its business by adding account executives and technical recruiters
in its existing offices. However, due to the economic downturn, the Company is
not currently hiring new account executives and technical recruiters and has not
replaced account executives and technical recruiters who have left the Company.
At these offices, as of May 31, 2001, the Company employed 15 persons who are
responsible for recruiting technical personnel and 17 persons who are account
executives.
MARKETING AND CLIENTS
The Company focuses its marketing efforts on large businesses and institutions
with significant IT budgets and recurring staffing and software development
needs. The Company provided services to approximately 120 clients during the
year ended May 31, 2001 as compared to 130 in the prior fiscal year. The Company
has historically derived a significant percentage of its total revenues from a
relatively small number of clients. In the fiscal year ended May 31, 2001, the
Company had one client which constituted more than 10% of consolidated revenues
(AT&T, 12%). AT&T has been reorganizing its IT departments and is outsourcing
certain parts of its IT function. This could affect, to some extent, its need
for the Company's technical staffing services. Additionally, the Company's top
ten clients accounted for 51% of consolidated revenues in fiscal 2001 as
compared to 49% in fiscal 2000. While continuing its efforts to expand further
its client base, the Company's marketing efforts are focused primarily on
increasing business from its existing accounts.
The Company's marketing is conducted through account executives that are
responsible for customers in an assigned territory. Account executives call on
potential new customers and are also responsible for maintaining existing client
contacts within an assigned territory. Instead of utilizing technical managers
to oversee the services provided by technical personnel to each client, the
account executives are responsible for this role. As a result of the cost
savings due to the combined functions of the account executives, the Company is
able to provide its account executives with significantly higher incentive-based
compensation. In addition, the Company generally pairs each account executive
with a recruiter of technical personnel, who also receives incentive-based
compensation. The Company believes that this approach allows the Company to more
effectively serve its clients' needs for technical personnel, as well as
providing its account executives and recruiters with incentives to maximize
revenues in their territories.
In accordance with industry practice, most of the Company's contracts for
contract computer programming services are terminable by either the client or
the Company on short notice. The Company does not believe that backlog is
material to its business.
PROFESSIONAL STAFF AND RECRUITMENT
The Company maintains a database of over 65,000 technical personnel with a wide
range of skills. The Company uses a sophisticated proprietary computer system to
match a potential employee's skills and experience with client requirements. The
Company periodically contacts personnel in its database to update their
availability, skills, employment interests and other matters and continually
updates its database. This database is made available to the account executives
and recruiters at each of the Company's offices. The Company considers its
database to be a valuable asset.
The Company employs technical personnel primarily on an hourly basis, as
required in order to meet the staffing requirements under particular contracts
or for particular projects. The Company recruits technical personnel by
publishing weekly advertisements in local newspapers and attending job fairs on
a periodic basis. The Company devotes significant resources to recruiting
technical personnel, maintaining 15 recruiters. Potential applicants are
generally interviewed and tested by the Company's recruiting personnel, by third
parties that have the required technical backgrounds to review the
qualifications of the applicants, or by on-line testing services.
Page 4
Competition
The technical staffing industry is highly competitive and fragmented and has low
barriers to entry. The Company competes for potential clients with providers of
outsourcing services, systems integrators, computer systems consultants, other
providers of technical staffing services and, to a lesser extent, temporary
personnel agencies. The Company competes for technical personnel with other
providers of technical staffing services, systems integrators, providers of
outsourcing services, computer systems consultants, clients and temporary
personnel agencies. Many of the Company's competitors are significantly larger
and have greater financial resources than the Company. The Company believes that
the principal competitive factors in obtaining and retaining clients are
accurate assessment of clients' requirements, timely assignment of technical
employees with appropriate skills and the price of services. The principal
competitive factors in attracting qualified technical personnel are
compensation, availability, quality and variety of projects and schedule
flexibility. The Company believes that many of the technical personnel included
in its database may also be pursuing other reemployment opportunities.
Therefore, the Company believes that its responsiveness to the needs of
technical personnel is an important factor in the Company's ability to fill
projects. Although the Company believes it competes favorably with respect to
these factors, it expects competition to increase and there can be no assurance
that the Company will remain competitive.
Intellectual Property Rights
The Company relies primarily upon a combination of trade secret, nondisclosure
and other contractual arrangements to protect its proprietary rights. The
Company generally enters into confidentiality agreements with its employees,
consultants, clients and potential clients and limits access to and distribution
of its proprietary information. There can be no assurance that the steps taken
by the Company in this regard will be adequate to deter misappropriation of its
proprietary information or that the Company will be able to detect unauthorized
use and take appropriate steps to enforce its intellectual property rights.
Personnel
As of June 30, 2001, the Company employs 255 people including its 3 executive
officers. Of such employees 17 are engaged in sales, 15 are recruiters for
programmers, 200 are technical and programming consultants, and 20 are in
administration and clerical functions. Of the 255 employees, approximately 244
are employed by the contract computer programming services subsidiary, and 11
are employed directly by the Company.
Item 2. Properties.
The Company leases 8,000 square feet of space in Hauppauge, New York for a term
expiring October 31, 2005, with annual rentals of approximately $100,000. This
space is used as executive and administrative offices as well as by the
Registrant's operating subsidiary.
The Company also leases sales and technical recruiting offices in New York City
(lease expires July, 2002), Edison, New Jersey (lease expires August, 2005), and
Farmington, Connecticut (lease expires November, 2002), with aggregate monthly
rentals of approximately $23,000.
The Company believes the present locations are adequate for its current needs as
well as for the future expansion of its existing business.
Item 3. Legal Proceedings.
None
Item 4. Submission of Matters to a Vote of Security Holders.
Not Applicable
Page 5
PART II
Item 5. Market for Common Equity and Related Stockholder Matters.
The Company's shares of Common Stock trade on the NASDAQ National Market System
under the symbol TSRI. The following are the high and low sales prices for each
quarter during the fiscal years ended May 31, 2000 and 2001:
JUNE 1, 1999 - MAY 31, 2000
1ST 2ND 3RD 4TH
QUARTER QUARTER QUARTER QUARTER
-----------------------------------------
High Sales Price .......... 9 3/8 8 3/4 8 7/8 6 1/2
Low Sales Price ........... 7 1/16 6 5 3/4 5 31/64
JUNE 1, 2000 - MAY 31, 2001
1ST 2ND 3RD 4TH
QUARTER QUARTER QUARTER QUARTER
-----------------------------------------
High Sales Price .......... 6 1/8 6 31/32 5 5/16 5 7/8
Low Sales Price ........... 4 1/2 4 9/16 3 7/16 3 25/32
There were 175 holders of record of the Company's Common Stock as of July 31,
2001. Additionally, the Company estimates that there were approximately 2,500
beneficial holders as of that date. The Company has not adopted a policy of
paying cash dividends on a regular periodic basis and does not intend to declare
a cash dividend for the year ending May 31, 2002.
Item 6. Selected Financial Data.
(Amounts in Thousands, Except Per Share Data)
MAY 31, May 31, May 31, May 31, May 31,
2001 2000 1999 1998 1997
------- ------- ------- ------- -------
Revenues* ........................ $78,528 $78,320 $83,774 $70,435 $49,704
Income From Operations ............ 6,294 7,241 8,174 6,604 2,970
Net Income ........................ 3,858 4,402 4,840 3,430 1,796
Diluted Net Income Per
Common Share .................... 0.86 0.88 0.81 0.57 0.31
Working Capital ................... 17,810 15,294 17,303 14,994 9,884
Total Assets ...................... 23,284 20,945 23,191 20,516 14,044
Shareholders' Equity .............. 18,187 15,749 17,765 16,167 10,431
Book Value Per Common Share ....... 4.12 3.36 3.23 2.70 1.79
Note: Net Income and Book Value Per Common Share have been adjusted for a stock
split in the form of 100% stock dividend paid in November 1997.
Page 6
Unaudited Quarterly Financial Data
(Amounts in Thousands, except Per Share Data)
The following is a summary of unaudited quarterly operating results for the
fiscal years ended May 31, 2001 and 2000.
Fiscal 2001
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First Second Third Fourth
------- ------- ------- -------
Revenues* .................. $19,740 $21,048 $19,220 $18,520
Gross Profit ............... 4,506 4,627 4,158 3,830
Net Income ................. 1,058 1,076 799 925
Basic and Diluted Net Income
per Common Share ....... 0.23 0.24 0.18 0.21
Fiscal 2000
-----------
First Second Third Fourth
------- ------- ------- -------
Revenues ................... $20,649 $20,440 $18,266 $18,965
Gross Profit ............... 4,793 5,043 4,377 4,512
Net Income ................. 1,155 1,214 882 1,151
Basic and Diluted Net Income
per Common Share ....... 0.22 0.23 0.18 0.24
* Amounts reported prior to the fourth quarter of fiscal 2001 have been
revised to reflect the Company's adoption of EITF 99-19, "Reporting
Revenue Gross as a Principal Versus Net as an Agent", effective March 1,
2001.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
The following discussion and analysis should be read in conjunction with the
financial statements and the notes to the consolidated financial statements
presented elsewhere in this report.
Results of Operations
The following table sets forth for the periods indicated certain financial
information derived from the Company's consolidated statements of earnings.
There can be no assurance that trends in sales growth or operating results will
continue in the future:
YEAR ENDED MAY 31,
(DOLLAR AMOUNTS IN THOUSANDS)
2001 2000 1999
------------------- ----------------- -----------------
% OF % of % of
AMOUNT REVENUE Amount Revenue Amount Revenue
------- ------- ------- ------- ------- -------
Revenues* ................................... $78,528 100.0 $78,320 100.0 $83,774 100.0
Cost of Sales* .............................. 61,407 78.2 59,595 76.1 61,787 73.8
------- ----- ------- ----- ------- -----
Gross Profit ................................ 17,121 21.8 18,725 23.9 21,987 26.2
Selling, General, and Administrative Expenses 10,827 13.8 11,484 14.7 13,523 16.1
Research and Development Expenses ........... -- -- -- -- 290 0.4
------- ----- ------- ----- ------- -----
Income from Operations ...................... 6,294 8.0 7,241 9.2 8,174 9.7
Other Income ................................ 488 0.6 453 0.6 396 0.5
------- ----- ------- ----- ------- -----
Income Before Income Taxes .................. 6,782 8.6 7,694 9.8 8,570 10.2
Provision for Income Taxes .................. 2,924 3.7 3,292 4.2 3,730 4.4
------- ----- ------- ----- ------- -----
Net Income .................................. $ 3,858 4.9 $ 4,402 5.6 $ 4,840 5.8
======= ===== ======= ===== ======= =====
* For fiscal 2000 and 1999, amounts revised to reflect the Company's adoption
of EITF 99-19, effective March 1, 2001, as discussed above.
Page 7
Revenues
Revenues consist primarily of revenues from contract computer programming
services. In addition, the Company's revenues included revenues from its Year
2000 compliance solution service, which commenced in 1997. Overall, revenues for
fiscal 2001 increased $208,000 over fiscal 2000. For fiscal 2001, 99.9% of
revenues were derived from contract computer programming services and 0.1% of
revenues were from Year 2000 services, as compared with 97.3% and 2.7%
respectively in fiscal 2000.
Contract computer programming services revenues increased $2,291,000 from
$76,170,000 in fiscal 2000 to $78,461,000 in fiscal 2001. Such increase in the
contract computer programming services business resulted from increases in the
billing rates to clients. This was partially offset by the average number of
programmers on billing with clients decreasing from 500 for fiscal 2000 to 475
for fiscal 2001. The year end number of consultants on billing decreased from
470 at May 31, 2000 to 430 at May 31, 2001.
The fiscal year for contract computer programming services was broken in two
very distinct halves. From June to November 2000, new projects increased as the
delay of new projects from lingering Year 2000 effects lifted. During this
period the number of consultants on billing with clients increased from 470 to
520. From December 2000 to May 2001, the number of consultants decreased to 430.
The Company believes that this decline has resulted from the downturn in the
economy. This has resulted in a significant decrease in IT projects and IT
spending that has affected the IT staffing industry generally and has reduced
the demand for the Company's services.
The Company's revenues from programmers on billing have also been affected by
discounts required by major customers as a condition to remaining on their
approved vendor lists, such as discounts for prompt payment and volume
discounts. In addition, some major customers have retained a third party to
provide vendor management services. Under this system, the third party retains
the Company to provide contract computer programming services and the Company
bills the third party and the third party bills the ultimate customer. These
changes have reduced the Company's profit margins.
Revenues from the Company's Catch/21 Year 2000 compliance services, which
commenced in fiscal 1997, were $67,000 for the year versus $2,150,000 in fiscal
2000. The Company expects to recognize no further Year 2000 revenues.
Revenues for fiscal 2000 decreased $5,454,000 or 6.5% from fiscal 1999. Contract
computer programming services revenues decreased $367,000 resulting from a
decrease in the number of consultants on billing with the clients, while Year
2000 compliance solution services revenues decreased $5,087,000. The Company
believes that the decline in revenues from contract computer programming
services in the year ended May 31, 2000 resulted from a slow down in new
projects commenced by clients in the 1999 calendar year. The Company believes
that the slow down was attributable to a delay in new IT projects due to
lingering Year 2000 effects.
Cost of Sales
Cost of sales increased by $1,812,000 or 3.0% in fiscal 2001 over fiscal 2000.
This increase included an increase in cost of sales in contract computer
programming of $2,348,000 from $59,029,000 in fiscal 2000 to $61,377,000 for
fiscal 2001. The increase in costs resulted primarily from the increase in
amounts paid to technical personnel resulting primarily from the increase in
contract computer programming services revenues. Year 2000 services incurred
cost of sales of $30,000 in fiscal 2001 versus $566,000 in fiscal 2000.
Cost of sales as a percentage of revenues increased to 78.2% in fiscal 2001 from
76.1% in fiscal 2000. This increase is primarily attributable to the higher cost
of sales as a percentage of revenue in contract computer programming services as
compared to the Year 2000 services. Costs of sales in contract computer
programming services as a percentage of revenue increased to 78.2% in fiscal
2001 from 77.5% in fiscal 2000. This resulted primarily from increased amounts
paid to programmers outpacing the Company's ability to pass increases on to
customers and discounts required by several clients, as discussed above.
Fiscal 2000 cost of sales decreased $2,192,000 or 3.5% compared to fiscal 1999.
The decrease included reduced costs of $163,000 from contract computer
programming, which primarily resulted from the above mentioned revenue decrease.
Year 2000 services costs declined by $2,029,000 in fiscal 2000 compared to
fiscal 1999.
Page 8
Cost of sales as a percentage of revenues increased to 76.1% in fiscal 2000 from
73.8% in fiscal 1999. This increase is primarily attributable to the higher cost
of sales as a percentage of revenue in contract computer programming services as
compared to the Year 2000 services. Costs of sales in contract computer
programming services as a percentage of revenue increased to 77.5% in fiscal
2000 from 77.3% in fiscal 1999. This resulted primarily from increased amounts
paid to programmers outpacing the Company's ability to pass increases on to
customers. The cost of sales for the Company's contract computer programming
services are variable because technical personnel are generally hired on a per
diem basis to staff particular projects for clients. Due to slower than
anticipated growth in its Year 2000 compliance services, the Company
significantly reduced the number of employees in its Year 2000 services during
fiscal year 1999, and provided such services in fiscal 2000 through contractual
arrangement with certain former employees.
Selling, General and Administrative Expenses
Selling, general and administrative expenses consist primarily of expenses
relating to account executives, technical recruiters, facilities costs,
management and corporate overhead. These expenses decreased $657,000 or 5.7%
from $11,484,000 in fiscal 2000 to $10,827,000 in fiscal 2001. Selling, general
and administrative expenses attributable to contract computer programming
services expenses decreased $544,000 from the prior year to $10,811,000.
Commissions relating to revenues from contract computer programming services
decreased, and there was an overall decrease in expenses as a result of the
turnover of account executives and technical recruiting professionals. In fiscal
2001 approximately $16,000 in selling, general and administrative expenses were
attributable to the Catch/21 compliance services as compared to $129,000 in
fiscal 2000. These expenses consisted primarily of management and facilities
expenses.
Selling, general and administrative expenses decreased $2,039,000 or 15.1% from
$13,523,000 in fiscal 1999 to $11,484,000 in fiscal 2000, primarily from the
reduction in expenses related to Year 2000 services. Contract computer
programming services expenses in fiscal 2000 increased $72,000 over the prior
year to $11,355,000. Although commissions relating to revenues from contract
computer programming services decreased, there was an overall increase in
expenses as a result of the hiring of additional account executives and
technical recruiting professionals in fiscal 2000 to broaden the Company's
client base in connection with the continuation of the Company's planned
expansion. In fiscal 2000 approximately $129,000 in selling, general and
administrative expenses were attributable to the Catch/21 compliance services as
compared to $2,240,000 in fiscal 1999. These expenses consisted primarily of
marketing, advertising, and management and facilities expenses.
Research and Development
Research and development costs of $290,000 in the fiscal 1999 represent amounts
expended to expand Catch/21, the Company's Year 2000 compliance solution, and
product offerings into additional computer platforms and languages. There were
no research and development costs in fiscal 2001 or 2000 as a result of the
phase out of the Year 2000 services.
Income from Operations
In the fiscal year ended May 31, 2001 contract computer programming services
contributed $6,273,000 or 99.7% of income from operations, while Year 2000
services contributed the remaining $21,000 or 0.3%. In the fiscal year ended May
31,2000, contract computer programming services contributed $5,786,000 or 79.9%
of income from operations, Year 2000 services contributed $1,455,000 or 20.1%.
The increased income from operations from contract computer programming services
resulted primarily from a reduction in selling, general and administrative
expenses. Although revenues in this area increased over $2 million, there was a
corresponding increase in the cost of sales.
Other Income
Fiscal 2001 other income resulted primarily from interest and dividend income of
$466,000, which increased due to a higher investable base. The Company also had
a net gain of $22,000 from marketable securities due to a gain of $23,000 from a
sale of trading securities partially offset by the mark to market adjustments of
its equity portfolio.
Fiscal 2000 other income also resulted primarily from interest and dividend
income of $421,000. The Company also had a net gain of $8,000 from marketable
securities due to mark to market adjustments of its equity portfolio and $24,000
in gains from sales of fixed assets.
Page 9
Income Taxes
The effective income tax rate increased from 42.8% in fiscal 2000 to 43.1% in
fiscal 2001 because of higher state and local taxes.
The effective income tax rate decreased from 43.5% in fiscal 1999 to 42.8% in
fiscal 2000 because of lower state and local taxes and non-deductible expenses.
Liquidity, Capital Resources and Changes in Financial Condition
The Company expects that cash flow generated from operations together with its
cash and marketable securities and available credit facilities will be
sufficient to provide the Company with adequate resources to meet its cash
requirements.
At May 31, 2001, the Company had working capital of $17,810,000 and cash and
cash equivalents of $6,208,000 as compared to working capital of $15,294,000 and
cash and cash equivalents of $4,110,000 at May 31, 2000. Working capital and
cash and cash equivalents increased primarily due to the Company's net income.
Net cash flow of $4,712,000 was provided by operations during fiscal 2001 as
compared to $5,808,000 of net cash flow from in operations in fiscal 2000. The
cash flow from operations primarily resulted from net income of $3,858,000 in
fiscal 2001 and as a result of a decrease in accounts receivable of $881,000
from $12,817,000 at May 31, 2000 to $11,936,000 at May 31, 2001. This decrease
in accounts receivable occurred primarily because of earlier payments from some
larger clients, which have instituted prompt payment discounts, thereby
shortening the payment cycle.
Cash flow used in investing activities resulted primarily because the Company
used excess cash to buy additional United States Treasury Bills with maturities
in excess of three months.
Cash flow used in financing activities resulted from the purchase of 262,400
shares of common stock for $1,419,000. As of July 31, 2001, the Company has
repurchased a cumulative total of 1,660,314 shares at an average price of $7.25
or a total cost of $12,031,000. The Company completed the initial buy back
authorization of 600,000 shares and the Company's board of directors has
authorized three additional repurchases totaling up to an additional 1,250,000
shares of its common stock. No time limit has been placed on the duration of the
share repurchases. Subject to applicable securities laws, such purchases will be
at times and in amounts as the Company deems appropriate and may be discontinued
at any time. The Company has no obligation or commitment to repurchase all or
any portion of the shares covered by the authorizations.
The Company's capital resource commitments at May 31, 2001 consisted of lease
obligations on its branch and corporate facilities amounting to $1,238,000 over
the next five years. The Company intends to meet these commitments from cash
flow provided by operations, available cash and short-term marketable
securities.
The Company's cash and marketable securities were sufficient to enable it to
meet its cash requirements during fiscal 2001. The Company has available a
revolving line of credit of $5,000,000 with a major money center bank which the
Company believes provides sufficient financing if the need arose. As of May 31,
2001 there were no amounts outstanding under this line of credit.
Impact of New Accounting Standards
Statement of Financial Accounting Standards No. 133 "Accounting for Derivative
Instruments and Hedging Activities", as amended ("SFAS No. 133") establishes
accounting and reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts, and for hedging activities.
In accordance with SFAS No. 133, an entity is required to recognize all
derivatives as either assets or liabilities in the statement of financial
position and measure those instruments at fair value. SFAS No. 133 requires that
changes in the derivative's fair value be recognized currently in earnings
unless specific hedge accounting criteria are met. Special accounting for
qualifying hedges allows a derivative's gains and losses to offset related
results on the hedged item in the income statement and requires that a company
formally document, designate and assess the effectiveness of transactions that
receive hedge accounting. SFAS No. 133 is effective for all fiscal quarters of
all fiscal years beginning after June 15, 2000. The Company has not yet
completed its evaluation of the impact of SFAS No. 133 on its consolidated
financial statements.
Page 10
Item 7A. Quantitative and Qualitative Disclosure About Market Risk
The Company's earnings and cash flows are subject to fluctuations due to changes
in interest rates primarily from its investment of available cash balances in
money market funds and marketable securities. Under its current policies, the
Company does not use interest rate derivative instruments to manage exposure to
interest rate changes.
Forward-Looking Statements; Factors that Affect Future Results
Certain statements contained in "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and "Business", including
statements concerning the Company's, future prospects and the Company's future
cash flow requirements are forward looking statements, as defined in the Private
Securities Litigation Reform Act of 1995. Actual results may differ materially
from those projections in the forward looking statements which statements
involve risks and uncertainties, including but not limited to the factors set
forth below.
Dependence Upon Key Personnel.
The Company is dependent on its Chairman of the Board, Chief Executive Officer
and President, Joseph Hughes, and Ernest Bago, the President of TSR's contract
computer programming services subsidiary. The Company has entered into
employment agreements with Mr. Hughes and Mr. Bago for terms expiring on May 31,
2002. The Company is also dependent on certain of its account executives who are
responsible for servicing its principal customers and attracting new customers.
The Company does not have employment contracts with these persons. There can be
no assurance that the Company will be able to retain its existing personnel or
find and attract additional qualified employees. The loss of the services of any
of these personnel could have a material adverse effect on the Company.
Dependence on Significant Relationships.
In the fiscal year, ended May 31, 2001, the Company's largest client, AT&T Corp.
("AT&T") accounted for 12% of the Company's consolidated revenues. AT&T has
reorganized its IT department and is outsourcing more of its IT functions.
Additionally, AT&T is in the process of spinning off several of its business
units. This restructuring may reduce, to some extent, AT&T'S requirements for
temporary personnel. Client contract terms vary depending on the nature of the
engagement, and there can be no assurance that a client will renew a contract
when it terminates. In addition, the Company's contracts, including those with
AT&T, are generally cancelable by the client at any time on short notice, and
clients may unilaterally reduce their use of the Company's services under such
contracts without penalty. The termination or significant reduction of its
business relationship with any of its significant clients would have a material
adverse effect on the Company's financial condition and results of operations.
Competitive Market for Technical Personnel.
The Company's success is dependent upon its ability to attract and retain
qualified computer professionals to provide as temporary personnel to its
clients. Competition for the limited number of qualified professionals with a
working knowledge of certain sophisticated computer languages, which the Company
requires for its contract computer services business, is intense. The Company
believes that there is a shortage of, and significant competition for, software
professionals with the skills and experience necessary to perform the services
offered by the Company.
The Company's ability to maintain and renew existing engagements and obtain new
business in its contract computer programming business depends, in large part,
on its ability to hire and retain technical personnel with the IT skills that
keep pace with continuing changes in software evolution, industry standards and
technologies, and client preferences. Although the Company generally has been
successful in attracting employees with the skills needed to fulfill customer
engagements, demand for qualified professionals conversant with certain
technologies may outstrip supply as new and additional skills are required to
keep pace with evolving computer technology or as competition for technical
personnel increases. Increasing demand for qualified personnel could also result
in increased expenses to hire and retain qualified technical personnel and could
adversely affect the Company's profit margins.
Page 11
Rapidly Changing Industry
The computer industry is characterized by rapidly changing technology and
evolving industry standards. In recent years, there have been certain trends in
the computer industry which have increased the demand for technical staffing
services. These include the overall increase in the sophistication and
interdependency of computer technology and a focus by IT managers on
cost-efficient solutions. Recently, there has been an increased focus on the
Internet and e-Commerce and there has been a shift away from mainframe legacy
systems. Historically, much of the Company's staffing services has related to
mainframe legacy systems. There can be no assurance that these changes will not
adversely affect demand for technical staffing services. Organizations may elect
to perform such services in-house or outsource such functions to companies that
do not utilize temporary staffing, such as that provided by the Company.
There have also been recent changes in the industry, which could potentially
affect the Company's operating results. Many customers have begun retaining
third parties to provide vendor management services. The third party is then
responsible for retaining companies to provide temporary IT personnel. This
results in the Company contracting with such third parties and not directly with
the ultimate customer. Additionally, a number of companies have begun limiting
the number of companies on their approved vendor lists, and in some cases this
has required the Company to sub-contract with a company on the approved vendor
list to provide services to customers. The Company can not predict at this time
what long-term effect these changes will have on the Company's business and
results of operations.
Effect of Fluctuations in Economic Conditions
Demand for the Company's IT staffing services is significantly affected by the
general economic environment. During periods of slowing economic activity,
customers may reduce their IT projects and their demand for outside consultants.
As a result, any significant economic downturn could have material adverse
affect on the Company's results of operations. Beginning with the second half of
the Company's 2001 fiscal year, the Company has experienced a decline in demand
for its IT staffing services. The Company attributes this decline to customers
reducing their spending on IT projects as a result of the current economic
environment.
Fluctuations in Quarterly Operating Results.
The Company's revenues and operating results are subject to significant
variations from quarter to quarter. Revenues are subject to fluctuation based
upon a number of factors, including the timing and number of client projects
commenced and completed during the quarter, delays incurred in connection with
projects, the growth rate of the market for contract computer programming
services and general economic conditions. Unanticipated termination of a project
or the decision by a client not to proceed to the next stage of a project
anticipated by the Company could result in decreased revenues and lower
utilization rates which could have a material adverse effect on the Company's
business, operating results and financial condition. Compensation levels can be
impacted by a variety of factors, including competition for highly skilled
employees and inflation. The Company's operating results are also subject to
fluctuation as a result of other factors.
Intellectual Property Rights.
The Company relies primarily upon a combination trade secret, nondisclosure and
other contractual agreements to protect its proprietary rights. The Company
generally enters into confidentiality agreements with its employees,
consultants, clients and potential clients and limits access to and distribution
of its proprietary information. There can be no assurance that the steps taken
by the Company in this regard will be adequate to deter misappropriation of its
proprietary information or that the Company will be able to detect unauthorized
use and take appropriate steps to enforce its intellectual property rights.
Page 12
Competition.
The technical staffing industry is highly competitive and fragmented and has low
barriers to entry. The Company competes for potential clients with providers of
outsourcing services, systems integrators, computer systems consultants, other
providers of technical staffing services and, to a lesser extent, temporary
personnel agencies. The Company competes for technical personnel with other
providers of technical staffing services, systems integrators, providers of
outsourcing services, computer systems consultants, clients and temporary
personnel agencies. Many of the Company's competitors are significantly larger
and have greater financial resources than the Company. The Company believes that
the principal competitive factors in obtaining and retaining clients are
accurate assessment of clients' requirements, timely assignment of technical
employees with appropriate skills and the price of services. The principal
competitive factors in attracting qualified technical personnel are
compensation, availability, quality and variety of projects and schedule
flexibility. The Company believes that many of the technical personnel included
in its database may also be pursuing other employment opportunities. Therefore,
the Company believes that its responsiveness to the needs of technical personnel
is an important factor in the Company's ability to fill projects. Although the
Company believes it competes favorably with respect to these factors, it expects
competition to increase, and there can be no assurance that the Company will
remain competitive.
Potential for Contract and Other Liability.
The personnel provided by the Company to clients provide services involving key
aspects of its clients' software applications. A failure in providing these
services could result in a claim for substantial damages against the Company,
regardless of the Company's responsibility for such failure. The Company
attempts to limit, contractually, its liability for damages arising from
negligence or omissions in rendering services. Despite this precaution, there
can be no assurance that the limitations of liability set forth in its contracts
would be enforceable or would otherwise protect the Company from liability for
damages.
The Company's contract computer programming services business involves assigning
technical personnel to the workplace of the client, typically under the client's
supervision. Although the Company has little control over the client's
workplace, the Company may be exposed to claims of discrimination and harassment
and other similar claims as a result of inappropriate actions allegedly taken
against technical personnel by clients. As an employer, the Company is also
exposed to other possible employment-related claims. The Company is exposed to
liability with respect to actions taken by its technical personnel while on a
project, such as damages caused by technical personnel, errors, and misuse of
client proprietary information or theft of client property. To reduce such
exposures, the Company maintains insurance policies and a fidelity bond covering
general liability, worker's compensation claims, errors and omissions and
employee theft. In certain instances, the Company indemnifies its clients from
the foregoing. There can be no assurance that insurance coverage will continue
to be available and at its current price or that it will be adequate to cover
any such liability.
Page 13
Item 8. Financial Statements.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
Independent Auditors' Report .............................................. 15
Consolidated Financial Statements:
Consolidated Balance Sheets as of May 31, 2001 and 2000 ................... 16
Consolidated Statements of Earnings for the
years ended May 31, 2001, 2000 and 1999 ................................... 18
Consolidated Statements of Shareholders' Equity
for the years ended May 31, 2001, 2000 and 1999 ........................... 19
Consolidated Statements of Cash Flows for the
years ended May 31, 2001, 2000 and 1999 ................................... 20
Notes to Consolidated Financial Statements ................................ 21
Page 14
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
TSR, Inc.:
We have audited the accompanying consolidated balance sheets of TSR, Inc. and
subsidiaries as of May 31, 2001 and 2000, and the related consolidated
statements of earnings, shareholders' equity and cash flows for each of the
years in the three-year period ended May 31, 2001. In connection with our audits
of the consolidated financial statements, we have also audited the financial
statement schedule as listed in Item 14(a)2. These consolidated financial
statements and the financial statement schedule are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements and the financial statement schedule based on
our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of TSR, Inc. and
subsidiaries as of May 31, 2001 and 2000, and the results of their operations
and their cash flows for each of the years in the three-year period ended May
31, 2001, in conformity with accounting principles generally accepted in the
United States of America. Also, in our opinion, the related financial statement
schedule referred to above, when considered in relation to the basic
consolidated financial statements taken as a whole, presents fairly, in all
material respects, the information set forth therein.
/s/ KPMG LLP
Melville, New York
July 16, 2001
Page 15
TSR, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
MAY 31, 2001 AND 2000
ASSETS
2001 2000
----------- -----------
CURRENT ASSETS:
Cash and cash equivalents (note 1(e)) ............. $ 6,208,361 $ 4,110,283
Marketable securities (note 1 (f)) ................ 4,432,978 3,279,232
Accounts receivable:
Trade (net of allowance for doubtful accounts
of $273,000 in 2001 and $173,000 in 2000) ....... 11,935,795 12,816,762
Other ............................................ 59,016 146,318
----------- -----------
11,994,811 12,963,080
Prepaid expenses .................................. 33,727 39,700
Prepaid and recoverable income taxes .............. 144,363 39,158
Deferred income taxes (note 2) .................... 93,000 59,000
----------- -----------
TOTAL CURRENT ASSETS .............................. 22,907,240 20,490,453
----------- -----------
EQUIPMENT AND LEASEHOLD IMPROVEMENTS, AT COST:
Equipment ......................................... 433,250 435,692
Furniture and fixtures ............................ 126,404 103,237
Automobiles ....................................... 128,859 128,859
Leasehold improvements ............................ 69,386 92,215
----------- -----------
757,899 760,003
Less accumulated depreciation and amortization .... 616,386 576,647
----------- -----------
141,513 183,356
OTHER ASSETS ....................................... 46,145 40,302
DEFERRED INCOME TAXES (NOTE 2) ..................... 189,000 231,000
----------- -----------
$23,283,898 $20,945,111
=========== ===========
See accompanying notes to consolidated financial statements.
(Continued)
Page 16
TSR, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS, CONTINUED
MAY 31, 2001 AND 2000
LIABILITIES AND SHAREHOLDERS' EQUITY
2001 2000
---- ----
CURRENT LIABILITIES:
Accounts and other payables ....................................... $ 123,852 $ 178,077
Accrued and other liabilities:
Salaries, wages and commissions .................................. 2,839,049 3,222,932
Legal and professional fees ...................................... 142,597 110,284
Other ............................................................ 89,262 229,808
----------- -----------
3,070,908 3,563,024
Advances from customers ........................................... 1,688,150 1,234,660
Income taxes payable .............................................. 213,955 220,823
----------- -----------
TOTAL CURRENT LIABILITIES ......................................... 5,096,865 5,196,584
----------- -----------
COMMITMENTS AND CONTINGENCIES (NOTES 6 AND 7)
SHAREHOLDERS' EQUITY (NOTES 4 AND 8):
Preferred stock, $1.00 par value,
Authorized 1,000,000 shares; none issued ......................... -- --
Common stock, $.01 par value authorized
25,000,000 shares; issued 6,078,326 shares ....................... 60,783 60,783
Additional paid-in capital ........................................ 4,134,053 4,134,053
Retained earnings ................................................. 26,023,498 22,165,851
----------- -----------
30,218,334 26,360,687
Less: Treasury stock, 1,660,314 and 1,397,914 shares, at cost ..... 12,031,301 10,612,160
----------- -----------
TOTAL SHAREHOLDERS' EQUITY ........................................ 18,187,033 15,748,527
----------- -----------
$23,283,898 $20,945,111
=========== ===========
See accompanying notes to consolidated financial statements.
Page 17
TSR, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
YEARS ENDED MAY 31, 2001, 2000 AND 1999
2001 2000 1999
----------- ----------- -----------
REVENUES ....................................... $78,527,731 $78,320,755 $83,773,531
COST OF SALES .................................. 61,407,090 59,595,087 61,786,271
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES ... 10,826,855 11,484,803 13,523,290
RESEARCH AND DEVELOPMENT EXPENSES .............. -- -- 289,498
----------- ----------- -----------
72,233,945 71,079,890 75,599,059
----------- ----------- -----------
INCOME FROM OPERATIONS ......................... 6,293,786 7,240,865 8,174,472
----------- ----------- -----------
OTHER INCOME:
Interest and dividend income .................. 466,006 421,139 369,736
Gain from marketable securities, net .......... 21,855 7,810 3,300
Gain from sales of assets ..................... -- 23,950 22,861
----------- ----------- -----------
487,861 452,899 395,897
----------- ----------- -----------
INCOME BEFORE INCOME TAXES ..................... 6,781,647 7,693,764 8,570,369
PROVISION FOR INCOME TAXES (NOTE 2) ............ 2,924,000 3,292,000 3,730,000
----------- ----------- -----------
NET INCOME ................................. $ 3,857,647 $ 4,401,764 $ 4,840,369
=========== =========== ===========
BASIC NET INCOME PER COMMON SHARE .............. $ 0.86 $ 0.88 $ 0.81
=========== =========== ===========
WEIGHTED AVERAGE NUMBER OF COMMON SHARES
OUTSTANDING ................................... 4,494,495 5,022,948 5,951,274
=========== =========== ===========
DILUTED NET INCOME PER COMMON SHARE ............ $ 0.86 $ 0.88 $ 0.81
=========== =========== ===========
WEIGHTED AVERAGE NUMBER OF DILUTED COMMON SHARES
OUTSTANDING ................................... 4,494,495 5,022,948 5,951,274
=========== =========== ===========
See accompanying notes to consolidated financial statements.
Page 18
TSR, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED MAY 31, 2001, 2000 AND 1999
ADDITIONAL TOTAL SHARE-
COMMON PAID-IN RETAINED TREASURY HOLDERS'
STOCK CAPITAL EARNINGS STOCK EQUITY
------------ ------------ ------------ ---------- ------------
BALANCE AT MAY 31, 1998 ..... $ 59,883 $ 3,183,246 $ 12,923,718 $ -- $ 16,166,847
EXERCISE OF STOCK OPTIONS ... 900 820,807 -- -- 821,707
TAX BENEFIT RELATING TO STOCK
OPTIONS ..................... -- 130,000 -- -- 130,000
PURCHASE OF TREASURY STOCK .. -- -- -- (4,194,378) (4,194,378)
NET INCOME .................. -- -- 4,840,369 -- 4,840,369
------------ ------------ ------------ ----------- ------------
BALANCE OF MAY 31, 1999 ..... 60,783 4,134,053 17,764,087 (4,194,378) 17,764,545
PURCHASE OF TREASURY STOCK .. -- -- -- (6,417,782) (6,417,782)
NET INCOME .................. -- -- 4,401,764 -- 4,401,764
------------ ------------ ------------ ----------- ------------
BALANCE AT MAY 31, 2000 ..... 60,783 4,134,053 22,165,851 (10,612,160) 15,748,527
PURCHASE OF TREASURY STOCK .. -- -- -- (1,419,141) (1,419,141)
NET INCOME .................. -- -- 3,857,647 -- 3,857,647
------------ ------------ ------------ ----------- ------------
BALANCE AT MAY 31, 2001 ..... $ 60,783 $ 4,134,053 $ 26,023,498 $(12,031,301) $ 18,187,033
============ ============ ============ ============ ============
See accompanying notes to consolidated financial statements.
Page 19
TSR, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED MAY 31, 2001, 2000 AND 1999
2001 2000 1999
----------- ----------- -----------
Cash flows from operating activities:
Net Income ........................................ $ 3,857,647 $ 4,401,764 $ 4,840,369
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization ................... 104,626 143,618 1,037,103
Provision for doubtful accounts ................. 100,000 -- --
Gain from marketable securities, net ............ (21,855) (7,810) (3,300)
Gain on sale of fixed assets .................... -- (23,950) (22,861)
Deferred income taxes ........................... 8,000 34,000 (192,000)
Changes in assets and liabilities
Accounts receivable-trade ........................ 780,967 1,409,527 811,706
Other accounts receivable ........................ 87,302 21,097 (80,643)
Prepaid expenses ................................. 5,973 5,031 22,718
Prepaid and recoverable income taxes ............. (105,205) 59,631 (7,966)
Other assets ..................................... (5,843) (5,026) (19,281)
Accounts payable and accrued expenses ............ (546,341) (338,479) 850,184
Advances from customers .......................... 453,490 28,523 259,880
Income taxes payable ............................. (6,868) 80,275 97,171
----------- ----------- -----------
Net cash provided by operating activities ......... 4,711,893 5,808,201 7,593,080
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturities and sales of
marketable securities ............................ 5,692,241 6,985,767 2,426,364
Purchases of marketable securities ................ (6,824,132) (4,358,917) (6,745,391)
Proceeds from sales of fixed assets ............... -- 23,950 25,000
Purchases of fixed assets ......................... (62,783) (165,659) (116,781)
----------- ----------- -----------
Net cash provided by (used in) investing activities (1,194,674) 2,485,141 (4,410,808)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercises of stock options .......... -- -- 821,707
Purchases of treasury stock ....................... (1,419,141) (6,417,782) (4,194,378)
----------- ----------- -----------
Net cash used in financing activities ............. (1,419,141) (6,417,782) (3,372,671)
----------- ----------- -----------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS .................................. 2,098,078 1,875,560 (190,399)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR ..... 4,110,283 2,234,723 2,425,122
----------- ----------- -----------
CASH AND CASH EQUIVALENTS AT END OF YEAR ........... $ 6,208,361 $ 4,110,283 $ 2,234,723
=========== =========== ===========
SUPPLEMENTAL DISCLOSURE:
Income taxes paid ................................. $ 3,028,000 $ 3,118,000 $ 3,833,000
=========== =========== ===========
See accompanying notes to consolidated financial statements.
Page 20
TSR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 2001, 2000 AND 1999
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(A) BUSINESS
TSR, Inc. and subsidiaries ("the Company") is primarily engaged in
providing contract computer programming services. The Company provides
technical computer personnel to companies to supplement their in-house
information technology capabilities. In addition, the Company provided
services converting software applications to be Year 2000 compliant
utilizing Catch/21, a Year 2000 compliance software solution which
automated to a significant extent, the conversion process.
(B) PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of TSR, Inc. and
its wholly-owned subsidiaries. All significant intercompany balances and
transactions have been eliminated in consolidation.
(C) REVENUE RECOGNITION
The Company's contract computer programming services are generally provided
under time and materials arrangements with its customers. Accordingly, such
revenues are recognized as services are provided. Provided that acceptance
was probable, revenue from Catch/21 code conversion was recognized when the
converted code was delivered. Advances from customers represent amounts
received from customers prior to the Company's provision of the related
services. Such amounts are expected to be settled within the next fiscal
year.
Effective March 1, 2001, the Company adopted Emerging Issues Task Force
Issue No. 99-19, "Reporting Revenue Gross as a Principal Versus Net as an
Agent." Accordingly, prior years' revenues and cost of sales have been
revised to conform to the fiscal 2001 presentation.
(D) RESEARCH AND DEVELOPMENT
Research and development expenses in fiscal 1999 consisted of expenditures
to expand Catch/21, the Company's Year 2000 compliance solution. There were
no such expenses in fiscal 2000 or 2001.
(E) CASH AND CASH EQUIVALENTS
The Company considers short-term highly liquid investments with maturities
of three months or less at the time of purchase to be cash equivalents.
Cash and cash equivalents were comprised of the following as of May 31,
2001 and 2000:
2001 2000
---------- ----------
Cash in banks .... $2,547,391 $ 701,838
Money Market Funds 2,671,275 2,423,235
US Treasury Bills 989,695 985,210
---------- ----------
$6,208,361 $4,110,283
========== ==========
(Continued)
Page 21
TSR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
MAY 31, 2001, 2000 AND 1999
(F) MARKETABLE SECURITIES
The Company accounts for its marketable securities in accordance with
Statement of Financial Accounting Standards ("SFAS") No. 115 "Accounting
for Certain Investments in Debt and Equity Securities." Accordingly, the
Company classifies its marketable securities at acquisition as either (i)
held-to-maturity, (ii) trading or, (iii) available-for-sale. Based upon the
Company's intent and ability to hold its US Treasury securities to maturity
(which maturities range between three months and one year), such securities
have been classified as held-to-maturity and are carried at amortized cost.
The Company's equity securities are classified as trading. Trading
securities are carried at fair value with unrealized holding gains and
losses included in earnings. The Company's marketable securities are
summarized as follows:
Gross Gross
Unrealized Unrealized
Amortized Holding Holding
Cost Gains Losses Fair Value
----------- ----------- ----------- -----------
2001: US TREASURY SECURITIES $ 4,400,221 $ -- $ -- $ 4,400,221
EQUITY SECURITIES .... 28,287 6,413 (1,943) 32,757
----------- ----------- ----------- -----------
$ 4,428,508 $ 6,413 $ (1,943) $ 4,432,978
=========== =========== =========== ===========
2000: US Treasury Securities $ 3,140,322 $ -- $ -- $ 3,140,322
Equity Securities .... 133,290 34,123 (28,503) 138,910
----------- ----------- ----------- -----------
$ 3,273,612 $ 34,123 $ (28,503) $ 3,279,232
=========== =========== =========== ===========
(G) DEPRECIATION AND AMORTIZATION
Depreciation and amortization of equipment and leasehold improvements has
been computed using the straight-line method over the following useful
lives:
Equipment ............ 3 years
Furniture and fixtures 3 years
Automobiles .......... 3 years
Leasehold improvements Lesser of lease term or useful life
(H) NET INCOME PER COMMON SHARE
Basic net income per common share is computed by dividing income available
to common shareholders (which for the Company equals its net income) by the
weighted average number of common shares outstanding, and diluted net
income per common share adds the dilutive effect of stock options and other
common stock equivalents. Antidilutive shares aggregating 190,000 have been
omitted from the calculation of diluted net income per common share for the
fiscal year ended May 31, 2001. Therefore, the weighted average number of
common shares outstanding is the same for the basic and diluted net income
per share calculations.
(I) INCOME TAXES
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to temporary differences between the financial
reporting bases and the tax bases of the Company's assets and liabilities
at enacted rates expected to be in effect when such amounts are realized or
settled. The effect of enacted tax law or rate changes is reflected in
income in the period of enactment.
(Continued)
Page 22
TSR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
MAY 31, 2001, 2000 AND 1999
(J) FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS No. 107, "Disclosures About Fair Value of Financial Instruments"
requires disclosure of the fair value of certain financial instruments. For
cash and cash equivalents, accounts receivable, accounts and other
payables, accrued liabilities and advances from customers, the amounts
presented in the financial statements approximate fair value because of the
short-term maturity of these instruments. The fair value of marketable
securities is based upon quoted market values at May 31, 2001.
(K) USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities, and
disclosure of contingent assets and liabilities at the date of the
financial statements, and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
(L) STOCK-BASED COMPENSATION
The Company applies Accounting Principles Board Opinion No. 25, "Accounting
for Stock Issued to Employees" and related interpretations, in accounting
for employee stock-based compensation and makes pro forma disclosures of
net income and net income per share as if the fair value method under SFAS
No. 123, "Accounting for Stock Based Compensation", had been applied.
(M) LONG-LIVED ASSETS
The Company reviews its long-lived assets for possible impairment whenever
events or changes in circumstances indicate that the carrying amount of an
asset may not be recoverable. The assessment of impairment is based on a
comparison of the carrying amount of the asset to the related projected
undiscounted future cash flows. Due to a lack of demand for its Catch/21
compliance services, the Company accelerated the depreciation and
amortization of property and equipment relating to such services which
resulted in incremental depreciation and amortization expense in fiscal
1999 of approximately $450,000.
(N) COMPREHENSIVE INCOME
In fiscal 1999, the Company adopted SFAS No. 130, "Reporting Comprehensive
Income", which establishes standards for the reporting and display of
comprehensive income and its components. The Company's net income equaled
comprehensive income in fiscal 1999, 2000, and 2001.
(O) IMPACT OF NEW ACCOUNTING STANDARDS
SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities", as amended ("SFAS No. 133") establishes accounting and
reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts, and for hedging
activities. In accordance with SFAS No. 133, an entity is required to
recognize all derivatives as either assets or liabilities in the statement
of financial position and measure those instruments at fair value. SFAS No.
133 requires that changes in the derivative's fair value be recognized
currently in earnings unless specific hedge accounting criteria are met.
Special accounting for qualifying hedges allows a derivative's gains and
losses to offset related results on the hedged item in the income statement
and requires that a company formally document, designate and assess the
effectiveness of transactions that receive hedge accounting. SFAS No. 133
is effective for all fiscal quarters of all fiscal years beginning after
June 15, 2000. The Company has not yet completed its evaluation of the
impact of SFAS No. 133 on its consolidated financial statements.
(Continued)
Page 23
TSR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
MAY 31, 2001, 2000 AND 1999
(2) INCOME TAXES
A reconciliation of the provisions for income taxes computed at the federal
statutory rates for fiscal 2001, 2000, and 1999 to the reported amounts is
as follows:
2001 2000 1999
AMOUNT % Amount % Amount %
---------- ---- ---------- ---- ---------- ----
Amounts at statutory federal tax rate $2,306,000 34.0% $2,616,000 34.0% $2,914,000 34.0%
State and local taxes, net of
federal income tax effect .......... 574,000 8.5 624,000 8.1 734,000 8.5
Non-deductable expenses ............. 44,000 0.6 52,000 0.7 82,000 1.0
---------- ---- ---------- ---- ---------- ----
$2,924,000 43.1% $3,292,000 42.8% $3,730,000 43.5%
========== ==== ========== ==== ========== ====
The components of the provision for income taxes are as follows:
Federal State Total
----------- ----------- -----------
2001: CURRENT ............. $ 2,047,000 $ 897,000 $ 2,916,000
DEFERRED ............ 8,000 -- 8,000
----------- ----------- -----------
$ 2,055,000 $ 869,000 $ 2,924,000
=========== =========== ===========
2000: Current ............. $ 2,313,000 $ 945,000 $ 3,258,000
Deferred ............ 34,000 -- 34,000
----------- ----------- -----------
$ 2,347,000 $ 945,000 $ 3,292,000
=========== =========== ===========
1999: Current ............. $ 2,810,000 $ 1,112,000 $ 3,922,000
Deferred ............ (192,000) -- (192,000)
----------- ----------- -----------
$ 2,618,000 $ 1,112,000 $ 3,730,000
=========== =========== ===========
The tax effects of temporary differences that give rise to significant
portions of the deferred income tax assets at May 31, 2001 and 2000 are as
follows:
2001 2000
-------- --------
Allowance for doubtful accounts receivable $ 93,000 $ 59,000
Equipment and leasehold improvement
depreciation and amortization ......... 189,000 231,000
-------- --------
Total deferred income tax assets ... $282,000 $290,000
======== ========
The Company believes that it is more likely than not that it will realize
the benefits of its deferred tax assets based primarily on the Company's
history of and projections for taxable income in the future.
(3) SEGMENT REPORTING AND MAJOR CUSTOMERS
The Company currently operates in one business segment, computer
programming services.
In fiscal 2001, 2000 and 1999 the Company derived 12.1%, 17.4% and 13.8%,
respectively, of consolidated revenues from one customer for contract
computer programming services.
(Continued)
Page 24
TSR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
MAY 31, 2001, 2000 AND 1999
(4) STOCK OPTIONS
The 1997 Employee Stock Option Plan provides for the granting of options to
purchase up to 800,000 shares of the Company's common stock at prices equal
to fair market values at the grant dates. Options are exercisable as
determined on the date of the grant and expire on the third anniversary of
the date of grant.
Stock Options Outstanding
WEIGHTED
EXERCISE AVERAGE
SHARES PRICE PRICE
-------- ------------ ---------
Outstanding at May 31, 1998 ........... 610,000 $9.125-14.75 $ 11.38
Options exercised ..................... (90,050) 9.125 9.125
Options canceled ...................... (140,000) 13.50-14.75 13.84
-------- ------------ ---------
Outstanding at May 31, 1999 ........... 379,950 9.125-14.625 11.00
Options expired and canceled .......... (149,950) 9.125-14.625 9.86
-------- ------------ ---------
Outstanding at May 31, 2000 ........... 230,000 11.75 11.75
Options expired and canceled .......... (230,000) 11.75 11.75
Options granted ....................... 190,000 5.53 5.53
-------- ------------ ---------
OUTSTANDING AT MAY 31, 2001 ........... 190,000 $ 5.53 $ 5.53
======== ============ =========
Exercisable at May 31, 2001 ........... 170,000 $ 5.53 $ 5.53
======== ============ =========
The per share weighted-average fair value of stock options granted during
2001 was approximately $2.11 on the date of grant using the Black-Scholes
option pricing model with the following weighted-average assumptions:
expected dividend yield of 0%, risk free interest rate of 6%,expected stock
volatility of 48%, and an expected option life of three years. There were
no options granted in fiscal 1999 or 2000.
The Company applies APB Opinion No. 25 in accounting for its stock option
grants and accordingly, no compensation cost has been recognized in the
financial statements for its stock options which have an exercise price
equal to or greater than the fair value of the stock on the date of the
grant. Had the Company determined compensation cost based on the fair value
at the grant date for its stock options under SFAS No. 123, the Company's
net income and diluted net income per common share in fiscal 2001, 2000,
and 1999 would have been reduced to the pro forma amounts indicated below:
2001 2000 1999
---- ---- ----
Net Income
----------
As reported ........................ $ 3,857,647 $ 4,401,764 $ 4,840,369
Pro Forma .......................... $ 3,643,000 $ 4,401,764 $ 4,642,000
Diluted Net Income Per Common Share
-----------------------------------
As reported ........................ $ 0.86 $ 0.88 $ 0.81
Pro Forma .......................... $ 0.81 $ 0.88 $ 0.78
(5) LINE OF CREDIT
The Company has an available line of credit of $5,000,000 with a major
money center bank. As of May 31, 2001, no amounts were outstanding under
this line of credit. The rate of interest on amounts drawn against the line
of credit will be either the Eurodollar Rate plus 1% or the Prime Rate,
determined at the time of the advance.
(Continued)
Page 25
TSR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
MAY 31, 2001, 2000 AND 1999
(6) COMMITMENTS
A summary of noncancellable long-term operating lease commitments for
facilities as of May 31, 2001 follows:
FISCAL YEAR AMOUNT
----------- ------
2002 ............ $ 381,000
2003 ............ 278,000
2004 ............ 252,000
2005 ............ 256,000
Thereafter ...... 72,000
Total rent expenses under all lease agreements amounted to $350,000,
$311,000, and $355 000, in fiscal 2001, 2000, and 1999 respectively.
(7) EMPLOYMENT AGREEMENTS
In June 1998, an employment agreement was entered into with the President
of the contract computer programming services subsidiary providing for an
annual base salary of $200,000 and additional incentive compensation based
upon a formula which is agreed upon from time to time and is currently
based on the profitability of the Company's contract computer programming
services subsidiary. During fiscal 2001, 2000, and 1999, $282,000, $373,000
and $675,000, was paid as incentive compensation. This agreement is for a
four-year term ending May 31, 2002 and provides for severance, in the event
of termination, of a maximum of one year's salary. In the event of a change
in control of the Corporation, the executive would be entitled to a
severance payment of 2.99 times his average total compensation but not in
excess of $250,000 times the remaining years in the contract term.
In June 1997, an employment agreement was entered into with the Chairman of
the Board, Chief Executive Officer, President and Treasurer, which
terminates May 31, 2002. This agreement provides for an initial base salary
of $375,000 with annual adjustments based upon increases in the Consumer
Price Index, such increases to be no less than 3% and no more than 8% per
year. Additionally, the agreement provides for an annual discretionary
bonus for each fiscal year, the maximum to be $50,000 if pre-tax profits
are less than $1,000,000 and a minimum of 7.5% of pre-tax profit if such
profits exceed $1,000,000. In fiscal 2001, 2000, and 1999, the minimum
bonus of 7.5% of pre-tax profit was awarded, which amounted to $550,000,
$624,000, and $694,000, respectively.
(8) TREASURY STOCK
During fiscal 1999, under a buy-back plan authorized by the Board of
Directors to repurchase up to 600,000 shares of the Company's common stock,
the Company purchased for $4,194,378, 576,500 shares of its common stock at
the market value of the stock on the purchase date. Additionally, in June
1999 and January 2000 the Board of Directors authorized additional buy
backs of up to 500,000 shares of common stock each. In fiscal 2000, the
Company repurchased for $6,417,782, 821,414 shares of its common stock at
the market value of the stock at the purchase date. In October 2000, the
Board of Directors authorized an additional buyback of up to 250,000 shares
of common stock. In fiscal 2001, the Company repurchased for $1,419,141,
262,400 shares of its common stock at the market value of the stock at the
purchase date.
Page 26
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure- None
Part III
Item 10. Directors and Executive Officers of the Company.
The information required by this Item 10 is incorporated by reference to the
Company's definitive proxy statement in connection with the 2001 Annual Meeting
of Shareholders.
Item 11. Executive Compensation.
The information required by this Item 11 is incorporated by reference to the
Company's definitive proxy statement in connection with the 2001 Annual Meeting
of Shareholders.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
The information required by this Item 12 is incorporated by reference to the
Company's definitive proxy statement in connection with the 2001 Annual Meeting
of Shareholders.
Item 13. Certain Relationships and Related Transactions.
The information required by this Item 13 is incorporated by reference to the
Company's definitive proxy statement in connection with the 2001 Annual Meeting
of Shareholders.
PART IV
Item 14. Exhibits, Financial Statements, Financial Statement Schedules, and
Reports on Form 8-K.
(a) The following documents are filed as part of this report:
1. The financial statements as indicated in the index set forth on
page 14.
2. Financial statement schedule:
Schedule supporting consolidated financial statements: Page
----
Schedule II - Valuation and Qualifying Accounts 27
Schedules other than those listed above have been omitted, since they are
either not applicable, not required or the information is included
elsewhere herein.
3. Exhibits as listed in Exhibit Index on page 29.
(b) Reports on Form 8-K: None
TSR, INC. AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
Balance at Charged to
Beginning Cost and Deductions/ Balance at
of Period Expense Write-Offs End of Period
--------- ------- ---------- -------------
Year ended May 31, 2001:
Allowance for doubtful accounts ... $173,000 $ 100,000 $ -- $273,000
======== ========= ====== ========
Year ended May 31, 2000:
Allowance for doubtful accounts ... $173,000 $ -- $ -- $173,000
======== ========= ====== ========
Year ended May 31, 1999:
Allowance for doubtful accounts ... $173,000 $ -- $ -- $173,000
======== ========= ====== ========
Page 27
Signatures
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Company has duly caused this report to be signed on its behalf
by the Undersigned, thereunto duly authorized.
TSR, INC.
By: /s/ J.F. Hughes
- -----------------------------
J.F. Hughes, Chairman
Dated: August 14, 2001
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Company and in
the capacities and on the dates indicated.
/s/ J.F. Hughes
- ----------------------------------------------------------------------
J. F. Hughes, President, Treasurer and Director
/s/ John G. Sharkey
- ----------------------------------------------------------------------
John G. Sharkey, Vice President, Finance, Controller and Secretary
/s/ Ernest G. Bago
- ----------------------------------------------------------------------
Ernest G. Bago, President, TSR Consulting Services, Inc. and Director
/s/ John H. Hochuli, Jr
- ----------------------------------------------------------------------
John H. Hochuli, Jr., Director
/s/ James J. Hill
- ----------------------------------------------------------------------
James J. Hill, Director
/s/ Christopher Hughes
- ----------------------------------------------------------------------
Christopher Hughes, Director
/s/ Robert A. Esernio
- ----------------------------------------------------------------------
Robert Esernio, Director
Dated: August 14, 2001
Page 28
TSR, INC. AND SUBSIDIARIES
EXHIBIT INDEX
FORM 10-K, MAY 31, 2001
EXHIBIT SEQUENTIAL
NUMBER EXHIBIT PAGE #
------ ----------
3.1 Articles of Incorporation for the Company, as amended.
Incorporated by reference to Exhibit 3.1 to the Annual
Report on Form 10-K filed by the Company for the fiscal year
ended May 31, 1998. N/A
3.2 Bylaws of the Company, as amended incorporated by reference
to Exhibit 3.2 to the Annual Report of Form 10-K filed by
the Company for the fiscal year ended May 31, 1998. N/A
10.1 Employment Agreement between TSR, Inc. and Ernest G. Bago,
dated as of June 1, 1998 incorporated by reference to
Exhibit 10.1 to the Quarterly Report on Form 10-Q filed by
the Company for the quarter ended August 31, 1998. N/A
10.2 1997 Employee Stock Option Plan, incorporated by reference
to Exhibit 10.2 to the Annual Report on Form 10-K filed by
the Company for the fiscal year ended May 31, 1997. N/A
10.3 Form of Employee Stock Option Agreement, incorporated by
reference to Exhibit 10.3 to the Annual Report on Form 10-K
filed by the Company for the fiscal year ended May 31, 1997. N/A
10.4 Employment Agreement dated July 1, 1997 between the Company
and Joseph F. Hughes, incorporated by reference to Exhibit
10.4 to the Annual Report on Form 10-K filed by the Company
for the fiscal year ended May 31, 1997. N/A
10.5 Revolving Credit Agreement dated October 6, 1997 among TSR
Consulting Services, Inc., TSR, Inc., Catch/21 Enterprises
Incorporated and the Chase Manhattan Bank, incorporated by
reference to Exhibit 10.3 to the Quarterly Report on Form
10-Q filed by the Company for the quarter ended August 31,
1997. N/A
10.6 Employment Agreement dated January 1, 2000 between the
Company and John G. Sharkey incorporated by reference to
Exhibit 10.1 to the Quarterly Report on Form 10-Q filed by
the Company for the quarter ended November 30, 1999. N/A
21 List of Subsidiaries 30
23 Consent of KPMG LLP 31
Page 29