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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, 2002
or
[ ] Transition Report Under Section 13 or 15(d) of The Securities Exchange
Act of 1934
For the transition period from________to________
Commission File Number: 0-8656
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TSR, Inc.
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(Exact name of registrant as specified in its charter)
Delaware 13-2635899
- ------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
400 Oser Avenue, Hauppauge, NY 11788
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(Address of principal executive offices)
Registrant's telephone number: 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
- --------------------------------------------------------------------------------
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. [X] Yes [ ] No
Indicate by check mark if there is no disclosure of delinquent filers in
response to Item 405 of Regulation S-K contained in this form, and no disclosure
will be contained, to the best of Registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. [X]
Page 1
The aggregate market value of voting stock held by non-affiliates of the
Registrant based upon the closing price of $5.40 at July 31, 2002 was
$13,305,000.
The number of shares of the Registrant's common stock outstanding as of July 31,
2002 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 2002 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 its
clients with technical computer personnel to supplement their in-house
information technology ("IT") capabilities. The Company's clients for its
contract computer programming services consist primarily of Fortune 1000
companies and state and local government agencies with significant technology
budgets. In the year ended May 31, 2002, the Company provided IT staffing
services to approximately 110 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 mainframe and mid-range computer
operations, personal computers and client-server support, internet and
e-commerce operations, voice and data communications (including local and wide
area networks) and help desk support. The Company's services provide clients
with flexibility in staffing their day-to-day operations, as well as special
projects, on a short-term or long-term basis.
The Company provides technical employees for projects, which usually range from
three months to one year. Generally, clients may terminate projects at any time.
Staffing services are provided at the client's facility and are billed primarily
on an hourly basis based on the actual hours worked by technical personnel
provided by the Company and with reimbursement for out-of-pocket expenses. The
Company pays its technical personnel on a semi-monthly basis and invoices its
clients, not less frequently than monthly.
The Company's success is dependent upon, among other things, its ability to
attract and retain qualified professional computer personnel. The Company
believes that there is significant competition for software professionals with
the skills and experience necessary to perform the services offered by the
Company. Although the Company generally has been successful in attracting
employees with the skills needed to fulfill customer engagements, demand for
qualified professionals conversant with certain technologies may outstrip supply
as new and additional skills are required to keep pace with evolving computer
technology or as competition for technical personnel increase. Increasing demand
for qualified personnel could also result in increased expenses to hire and
retain qualified technical personnel and could adversely affect the Company's
profit margins.
Page 3
OPERATIONS
The Company provides contract computer programming services in the New York
metropolitan area, New England, and the Mid-Atlantic region. The Company
provides its services principally through offices located in New York, New York,
Edison, New Jersey, 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, 2002, the Company employed 7 persons who are
responsible for recruiting technical personnel and 14 persons who are account
executives. As of May 31, 2001 the Company had employed 15 technical personnel
recruiters and 17 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 110 clients during the
year ended May 31, 2002 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, 2002, the
Company had two clients which constituted more than 10% of consolidated revenues
(AT&T, 15% and NYC Board of Education, 12%). A significant portion of the
Company's new placements have been at the NYC Board of Education in recent
months. AT&T has been reorganizing its IT departments and is outsourcing certain
parts of its IT function. The NYC Board of Education is also undergoing
significant organizational changes. This could affect, to some extent, their
need for the Company's technical staffing services. Additionally, the Company's
top ten clients accounted for 61% of consolidated revenues in fiscal 2002 as
compared to 51% in fiscal 2001. While continuing its efforts to expand further
its client base, the Company's marketing efforts are focused primarily on
increasing business from its existing accounts.
The Company's marketing is conducted through account executives that are
responsible for customers in an assigned territory. Account executives call on
potential new customers and are also responsible for maintaining existing client
contacts within an assigned territory. Instead of utilizing technical managers
to oversee the services provided by technical personnel to each client, the
account executives are responsible for this role. As a result of the cost
savings due to the combined functions of the account executives, the Company is
able to provide its account executives with significantly higher incentive-based
compensation. In addition, the Company generally pairs each account executive
with a recruiter of technical personnel, who also receives incentive-based
compensation. The Company believes that this approach allows the Company to more
effectively serve its clients' needs for technical personnel, as well as
providing its account executives and recruiters with incentives to maximize
revenues in their territories.
The Company's marketing has been affected because some major customers have
retained a third party to provide vendor management services and centralize the
consultant hiring process. Under this system, the third party retains the
Company to provide contract computer programming services and the Company bills
the third party and the third party bills the ultimate customer. This process
weakens the relationship the Company has built with its client contacts, the
project managers, who the Company would normally work directly with to place
consultants. Instead the Company is required to interface with the vendor
management provider, making it more difficult to maintain its relationships with
its customers and preserve and expand its business. These changes have also
reduced the Company's profit margins.
In accordance with industry practice, most of the Company's contracts for
contract computer programming services are terminable by either the client or
the Company on short notice. The Company does not believe that backlog is
material to its business.
PROFESSIONAL STAFF AND RECRUITMENT
The Company maintains a database of over 77,000 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 7 recruiters. Potential applicants are
generally interviewed and tested by the Company's recruiting personnel, by third
parties that have the required technical backgrounds to review the
qualifications of the applicants, or by on-line testing services.
Page 4
Competition
The technical staffing industry is highly competitive and fragmented and has low
barriers to entry. The Company competes for potential clients with providers of
outsourcing services, systems integrators, computer systems consultants, other
providers of technical staffing services and, to a lesser extent, temporary
personnel agencies. Many of the Company's competitors are significantly larger
and have greater financial resources than the Company. The Company believes that
the principal competitive factors in obtaining and retaining clients are
accurate assessment of clients' requirements, timely assignment of technical
employees with appropriate skills and the price of services. The principal
competitive factors in attracting qualified technical personnel are
compensation, availability, quality and variety of projects and schedule
flexibility. The Company believes that many of the technical personnel included
in its database may also be pursuing other 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, 2002, the Company employs 191 people including its 3 executive
officers. Of such employees 14 are engaged in sales, 7 are recruiters for
programmers, 156 are technical and programming consultants, and 11 are in
administration and clerical functions.
Item 2. Properties.
The Company leases 8,000 square feet of space in Hauppauge, New York for a term
expiring October 31, 2005, with annual rentals of approximately $100,000. This
space is used as executive and administrative offices as well as by the
Registrant's operating subsidiary.
The Company also leases sales and technical recruiting offices in New York City
(lease expires August, 2007), 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, 2002 and 2001:
JUNE 1, 2001 - MAY 31, 2002
-----------------------------------------------
1ST 2ND 3RD 4TH
QUARTER QUARTER QUARTER QUARTER
------- ------- ------- -------
High Sales Price....... 5.85 5.35 7.00 6.35
Low Sales Price........ 4.50 4.42 5.02 5.01
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 174 holders of record of the Company's Common Stock as of July 31,
2002. Additionally, the Company estimates that there were approximately 1,600
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, 2003.
Item 6. Selected Financial Data.
(Amounts in Thousands, Except Per Share Data)
MAY 31, MAY 31, MAY 31, MAY 31, MAY 31,
2002 2001 2000 1999 1998
--------- ---------- -------- -------- --------
Revenues.............................. $ 59,445 $ 78,951 $ 78,493 $ 84,123 $ 70,694
Income From Operations................ 4,424 6,294 7,241 8,174 6,604
Net Income............................ 2,708 3,858 4,402 4,840 3,430
Diluted Net Income Per Common Share... 0.61 0.86 0.88 0.81 0.57
Working Capital....................... 20,518 17,810 15,294 17,303 14,994
Total Assets.......................... 25,597 23,284 20,945 23,191 20,516
Shareholders' Equity.................. 20,896 18,187 15,749 17,765 16,167
Book Value Per Common Share........... 4.73 4.12 3.36 3.23 2.70
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, 2002 and 2001.
Fiscal 2002
----------------------------------------------------
First Second Third Fourth
------- ------- ------- -------
Revenues* ............................. $17,468 $15,381 $12,886 $13,720
Gross Profit .......................... 3,857 3,364 2,679 2,987
Net Income ............................ 861 763 395 690
Basic and Diluted Net Income
per Common Share ........... $ 0.19 $ 0.17 $ 0.09 $ 0.16
Fiscal 2001
----------------------------------------------------
First Second Third Fourth
------- ------- ------- -------
Revenues* ............................. $19,818 $21,173 $19,317 $18,643
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
* Amounts reported prior to the fourth quarter of fiscal 2002 have been
revised to reflect the Company's adoption of EITF 01-14, "Income Statement
Characterization of Reimbursements for `Out-of-Pocket' Expenses Incurred",
effective March 1, 2002.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
The following discussion and analysis should be read in conjunction with the
Company's consolidated financial statements and the notes thereto presented
elsewhere in this report.
Results of Operations
The following table sets forth for the periods indicated certain financial
information derived from the Company's consolidated statements of earnings.
There can be no assurance that historical trends in operating results will
continue in the future:
YEAR ENDED MAY 31,
(DOLLAR AMOUNTS IN THOUSANDS)
--------------------------------------------------------------------
2002 2001 2000
------------------- -------------------- -------------------
% OF % of % of
AMOUNT REVENUE Amount Revenue Amount Revenue
------ ------- ------ ------- ------ -------
Revenues* ....................................... $59,455 100.0 $78,951 100.0 $78,493 100.0
Cost of Sales* .................................. 46,568 78.3 61,830 78.3 59,768 76.1
------- ----- ------- ----- ------- -----
Gross Profit .................................... 12,887 21.7 17,121 21.7 18,725 23.9
Selling, General, and Administrative Expenses ... 8,463 14.2 10,827 13.7 11,484 14.7
------- ----- ------- ----- ------- -----
Income from Operations .......................... 4,424 7.5 6,294 8.0 7,241 9.2
Other Income .................................... 314 0.5 488 0.6 453 0.6
------- ----- ------- ----- ------- -----
Income Before Income Taxes ...................... 4,738 8.0 6,782 8.6 7,694 9.8
Provision for Income Taxes ...................... 2,030 3.4 2,924 3.7 3,292 4.2
------- ----- ------- ----- ------- -----
Net Income ...................................... $ 2,708 4.6 $ 3,858 4.9 $ 4,402 5.6
======= ===== ======= ===== ======= =====
* For fiscal 2001 and 2000, amounts revised to reflect the Company's adoption
of EITF 01-14, effective March 1, 2002, as discussed above.
Page 7
Revenues
Revenues consist primarily of revenues from computer programming consulting
services. Revenues for the fiscal year ended May 31, 2002 decreased $19,496,000
or 24.7% from fiscal 2001. This decrease resulted from an overall decrease in
the number of programmers on billing with clients from approximately 430 at May
31, 2001 to approximately 340 at May 31, 2002. The continuing weak economic
environment has significantly reduced the IT spending levels of many of our
major customers, limiting opportunities to place new consultants on billing.
The calendar year end budget and planning process at many of our clients
normally results in projects ending at year end, resulting in a reduction in
programmers on billing. In previous years, much of this effect was offset by
consultants starting new projects. At the end of calendar 2001, however, new
starts were down significantly as a result of the economic condition referred to
above, resulting in the number of consultants on billing being reduced. Although
the level of consultants on billing has stabilized, new placements have been
concentrated at one major account. It is still uncertain what further impact the
current economic conditions will have on our operations.
The Company's revenues from programmers on billing have also been affected by
discounts required by major customers as a condition to remaining on their
approved vendor lists, such as discounts for prompt payment and volume
discounts. In addition, some major customers have retained third parties to
provide vendor management services and centralize the consultant hiring process.
Under this system, the third party retains the Company to provide contract
computer programming services and the Company bills the third party and the
third party bills the ultimate customer. This process weakens the relationship
the Company has built with its client contacts, the project managers, who the
Company would normally work directly with to place consultants. Instead the
Company is required to interface with the vendor management provider, making it
more difficult to maintain its relationships with its customers and preserve and
expand its business. These changes have also reduced the Company's profit
margins. The Company is unable to predict the long-term effects of these
changes.
Revenues for fiscal 2001 increased $458,000 over fiscal 2000. Contract computer
programming services revenues increased $2,541,000 resulting from an increase in
the number of consultants on billing with the clients, while Year 2000
compliance solution services revenues decreased $2,083,000. The Company believes
that the increase in revenues from contract computer programming services in the
year ended May 31, 2001 resulted primarily from an increase in billing rates to
clients.
Cost of Sales
Cost of sales decreased by $15,262,000 or 24.7% in fiscal 2002 from fiscal 2001.
The decrease in costs resulted primarily from the decrease in amounts paid to
technical personnel resulting primarily from the decrease in contract computer
programming services revenues.
Cost of sales as a percentage of revenues remained steady at 78.3% in fiscal
2002. This resulted primarily from decreased amounts paid to programmers as a
result of price rollbacks and discounts required by several clients, as
discussed above.
Fiscal 2001 cost of sales increased $2,062,000 or 3.5% compared to fiscal 2000.
The increase included additional costs of $2,598,000 from contract computer
programming, which primarily resulted from the above mentioned revenue increase.
Year 2001 services costs declined by $536,000 in fiscal 2001 compared to fiscal
2000.
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 $2,364,000 or 21.8%
from $10,827,000 in fiscal 2001 to $8,463,000 in fiscal 2002. Commissions
relating to revenues from contract computer programming services decreased, and
there was an overall decrease in expenses as a result of the reduction of
account executives, technical recruiting professionals and administrative
assistants. Included in selling, general and administrative expenses are
provisions for bad debts of $200,000 and $100,000 in fiscal 2002 and 2001,
respectively. These amounts reflect an anticipated increase in credit losses on
our accounts receivable due to the changes in the economic environment.
Page 8
Selling, general and administrative 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.
Other Income
Fiscal 2002 other income resulted primarily from interest and dividend income of
$323,000, which decreased due to lower interest rates. The Company also had a
net loss of $6,000 from marketable securities due to mark to market adjustments
of its equity portfolio.
Fiscal 2001 other income also 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.
Income Taxes
The effective income tax rate decreased to 42.8% in fiscal 2002 from 43.1% in
fiscal 2001 because of lower state and local taxes.
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.
Liquidity, Capital Resources and Changes in Financial Condition
The Company expects that cash flow generated from operations together with its
available cash and marketable securities and available credit facilities will be
sufficient to provide the Company with adequate resources to meet its liquidity
requirements for the foreseeable future.
At May 31, 2002, the Company had working capital of $20,518,000 and cash and
cash equivalents of $5,794,000 as compared to working capital of $17,810,000 and
cash and cash equivalents of $6,208,000 at May 31, 2001.
Net cash flow of $4,380,000 was provided by operations during fiscal 2002 as
compared to $4,712,000 of net cash flow from in operations in fiscal 2001. The
cash flow from operations primarily resulted from net income of $2,708,000 in
fiscal 2002 and as a result of a decrease in accounts receivable of $1,804,000
from $11,936,000 at May 31, 2001 to $10,132,000 at May 31, 2002.
Net cash used in investing activities amounted to $4,795,000 for fiscal 2002,
compared to $1,195,000 for fiscal 2001. The net cash flows used in investing
activities primarily resulted from purchases of marketable securities in excess
of sales and proceeds from maturities of marketable securities compared to the
prior year and the purchase of the net assets of an acquired business in August
2001.
Cash provided by financing activities resulted from the sale of a minority
interest in a subsidiary for $1,000 during the fiscal year ended May 31, 2002.
Cash used in financing activities for fiscal 2001 consisted of purchases of
treasury stock amounting to $1,419,000.
The Company's capital resource commitments at May 31, 2002 consisted of lease
obligations on its branch and corporate facilities. The Company intends to
finance these lease commitments from cash flow provided by operations, available
cash and short-term marketable securities. A summary of noncancelable long-term
operating lease commitments as of May 31, 2002 follows:
FY 03 FY 04 FY 05 FY 06 Thereafter Total
-------- -------- -------- -------- ---------- ----------
Operating Leases ................ $353,000 $343,000 $349,000 $170,000 $118,000 $1,333,000
The Company's cash and marketable securities were sufficient to enable it to
meet its liquidity requirements during fiscal 2002. The Company has available a
revolving line of credit of $5,000,000 with a major money center bank through
October 6, 2003. As of May 31, 2002, no amounts were outstanding under this line
of credit.
Page 9
Impact of New Accounting Standards
In June 2001, the Financial Accounting Standards Board issued Statement of
Financial Account Standards No. 142 "Goodwill and Other Intangible Assets" (SFAS
No. 142), which is effective for fiscal years beginning after June 15, 2001.
SFAS No. 142 establishes accounting and reporting standards for goodwill and
intangible assets. Under SFAS No. 142, amortization of goodwill will be
terminated. However, goodwill will be subject to periodic assessments for
impairment by applying a fair-value-based test. Intangible assets must be
separately recognized and amortized over their useful lives. The Company does
not expect the adoption of SFAS No. 142 (effective, June 1, 2002) to have any
impact on its consolidated financial statements.
In July 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 143, "Accounting for Asset Retirement
Obligations" (SFAS No. 143). SFAS No. 143 addresses financial accounting
requirements for retirement obligations associated with retirement of tangible
long-lived assets and for the associated asset retirement costs. SFAS No. 143
requires a company to record the fair value of an asset retirement obligation in
the period in which it incurred a legal obligation associated with the
retirement of tangible long-lived assets that results from the acquisition,
construction, development and/or normal use of the asset. The company is also to
record a corresponding increase to the carrying amount of the related asset and
to depreciate that cost over the life of the asset. The amount of the liability
is changed at the end of each period to reflect the passage of time and changes
in estimated future cash flows. SFAS No. 143 is effective for fiscal years
beginning after June 15, 2002. The Registrant has not yet determined the impact
of its planned adoption of SFAS No. 143 (anticipated for June 1, 2003).
In August 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets" (SFAS No. 144), which became effective for the
Company on June 1, 2002. As applicable to the Company, SFAS No. 144 replaces
SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of, and provides guidelines on how long-lived
assets should be evaluated for impairment and establishes criteria for when
long-lived assets are held for sale, and prescribes the accounting for
long-lived assets that will be disposed of other than by sale. Unlike SFAS No.
121, an impairment assessment under SFAS No. 144 will never result in a
write-down of goodwill. Rather, goodwill will be evaluated for impairment under
SFAS No. 142, Goodwill and Other Intangible Assets. The Company does not expect
the adoption of SFAS No. 144 to have a material impact on its consolidated
financial statements, because the impairment assessment under SFAS no. 144 is
largely unchanged from SFAS No. 121.
Critical Accounting Policies
The Securities and Exchange Commission ("SEC") recently issued disclosure
guidance for "critical accounting policies." The SEC defines "critical
accounting policies" as those that require the application of management's most
difficult, subjective or complex judgments, often as a result of the need to
make estimates about the effect of matters that are inherently uncertain and may
change in subsequent periods.
The Company's significant accounting policies are described in Note 1 to its
consolidated financial statements, contained elsewhere in this report. The
Company believes that the following accounting policies require the application
of management's most difficult, subjective or complex judgments:
Estimating Allowances for Doubtful Accounts Receivable
We perform ongoing credit evaluations of our customers and adjust credit limits
based upon payment history and the customer's current credit worthiness, as
determined by our review of their current credit information. We continuously
monitor collections and payments from our customers and maintain a provision for
estimated credit losses based upon our historical experience and any specific
customer collection issues that we have identified. While such credit losses
have historically been within our expectations and the provisions established,
we cannot guarantee that we will continue to experience the same credit loss
rates that we have in the past. A significant change in the liquidity or
financial position of any of our significant customers could have a material
adverse effect on the collectibility of our accounts receivable and our future
operating results.
Valuation of Deferred Tax Assets
We regularly evaluate our ability to recover the reported amount of our deferred
income taxes considering several factors, including our estimate of the
likelihood of the Company generating sufficient taxable income in future years
during the period over which temporary differences reverse. Presently, the
Company believes that it is more likely than not that it will realize the
benefits of its deferred tax assets based primarily on the Company's history of
and projections for taxable income in the future. In the event that actual
results differ from our estimates or we adjust these estimates in future
periods, we may need to establish a valuation allowance against a portion or all
of our deferred tax assets, which could materially impact our financial position
or results of operations.
Page 10
Valuation of Long-Lived Assets
We assess the recoverability of long-lived assets and intangible assets whenever
we determine that events or changes in circumstances indicate that their
carrying amount may not be recoverable. Our assessment is primarily based upon
our estimate of future cash flows associated with these assets. Although there
has been a sustained weakness in our operating results, through May 31, 2002, we
have continued to generate net income. Accordingly, we have not determined that
there has been an indication of impairment of any of our assets. However, should
our operating results deteriorate, we may determine that some portions of our
long-lived assets or intangible assets are impaired. Such determination could
result in non-cash charges to income that could materially affect our financial
position or results of operations for that period.
Item 7A. Quantitative and Qualitative Disclosure About Market Risk
The Company's earnings and cash flows are subject to fluctuations due to (i)
changes in interest rates primarily affecting its income from the investment of
available cash balances in money market funds and (ii) changes in market values
of its investments in trading equity securities. Under its current policies, the
Company does not use interest rate derivative instruments to manage exposure to
interest rate changes. The Company's present exposure to changes in the market
value of its investments in equity securities is not significant.
Forward-Looking Statements; Factors that Affect Future Results
Certain statements contained in "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and "Business", including
statements concerning the Company's future prospects and the Company's future
cash flow requirements are forward looking statements, as defined in the Private
Securities Litigation Reform Act of 1995. Actual results may differ materially
from those projections in the forward looking statements which statements
involve risks and uncertainties, including but not limited to the factors set
forth below.
Dependence Upon Key Personnel
The Company is dependent on its Chairman of the Board, Chief Executive Officer
and President, Joseph Hughes, and Ernest Bago, the President of TSR's contract
computer programming services subsidiary. The Company has entered into
employment agreements with Mr. Hughes and Mr. Bago for terms expiring on May 31,
2007 and 2005, respectively. The Company is also dependent on certain of its
account executives who are responsible for servicing its principal customers and
attracting new customers. The Company does not have employment contracts with
these persons. There can be no assurance that the Company will be able to retain
its existing personnel or find and attract additional qualified employees. The
loss of the services of any of these personnel could have a material adverse
effect on the Company.
Dependence on Significant Relationships
In the fiscal year, ended May 31, 2002, the Company's largest clients, AT&T
Corp. ("AT&T") and the NYC Board of Education accounted for 15% and 12% of the
Company's consolidated revenues, respectively. A significant portion of the
Company's new placements have been at the NYC Board of Education in recent
months. 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. The NYC Board of Education is also
undergoing a significant amount of organizational changes. These changes may
also reduce the number of contract programmers used. Client contract terms vary
depending on the nature of the engagement, and there can be no assurance that a
client will renew a contract when it terminates. In addition, the Company's
contracts, are generally cancelable by the client at any time on short notice,
and clients may unilaterally reduce their use of the Company's services under
such contracts without penalty. The termination or significant reduction of its
business relationship with any of its significant clients would have a material
adverse effect on the Company's financial condition and results of operations.
Page 11
Competitive Market for Technical Personnel
The Company's success is dependent upon its ability to attract and retain
qualified computer professionals to provide as temporary personnel to its
clients. Competition for the limited number of qualified professionals with a
working knowledge of certain sophisticated computer languages, which the Company
requires for its contract computer services business, is intense. The Company
believes that there is a shortage of, and significant competition for, software
professionals with the skills and experience necessary to perform the services
offered by the Company.
The Company's ability to maintain and renew existing engagements and obtain new
business in its contract computer programming business depends, in large part,
on its ability to hire and retain technical personnel with the IT skills that
keep pace with continuing changes in software evolution, industry standards and
technologies, and client preferences. Although the Company generally has been
successful in attracting employees with the skills needed to fulfill customer
engagements, demand for qualified professionals conversant with certain
technologies may outstrip supply as new and additional skills are required to
keep pace with evolving computer technology or as competition for technical
personnel increases. Increasing demand for qualified personnel could also result
in increased expenses to hire and retain qualified technical personnel and could
adversely affect the Company's profit margins.
Rapidly Changing Industry
The computer industry is characterized by rapidly changing technology and
evolving industry standards. 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. This change weakens the Company's relationship with its
customer, which makes it more difficult for the Company to maintain and expand
its business. It also reduces the Company's profit margins. Additionally, a
number of companies have begun limiting the number of companies on their
approved vendor lists, and in some cases this has required the Company to
sub-contract with a company on the approved vendor list to provide services to
customers. The Company can not predict at this time what long-term effect these
changes will have on the Company's business and results of operations.
Effect of Fluctuations in Economic Conditions
Demand for the Company's IT staffing services is significantly affected by the
general economic environment. During periods of slowing economic activity,
customers may reduce their IT projects and their demand for outside consultants.
As a result, any significant economic downturn could have material adverse
affect on the Company's results of operations. Beginning with the second half of
the Company's 2001 fiscal year, the Company has experienced a decline in demand
for its IT staffing services. The Company attributes a significant portion to
this decline to customers reducing their spending on IT projects as a result of
the current economic environment.
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.
Page 12
Intellectual Property Rights
The Company relies primarily upon a combination of trade secret, nondisclosure
and other contractual agreements to protect its proprietary rights. The Company
generally enters into confidentiality agreements with its employees,
consultants, clients and potential clients and limits access to and distribution
of its proprietary information. There can be no assurance that the steps taken
by the Company in this regard will be adequate to deter misappropriation of its
proprietary information or that the Company will be able to detect unauthorized
use and take appropriate steps to enforce its intellectual property rights.
Competition
The technical staffing industry is highly competitive and fragmented and has low
barriers to entry. The Company competes for potential clients with providers of
outsourcing services, systems integrators, computer systems consultants, other
providers of technical staffing services and, to a lesser extent, temporary
personnel agencies. The Company competes for technical personnel with other
providers of technical staffing services, systems integrators, providers of
outsourcing services, computer systems consultants, clients and temporary
personnel agencies. Many of the Company's competitors are significantly larger
and have greater financial resources than the Company. The Company believes that
the principal competitive factors in obtaining and retaining clients are
accurate assessment of clients' requirements, timely assignment of technical
employees with appropriate skills and the price of services. The principal
competitive factors in attracting qualified technical personnel are
compensation, availability, quality and variety of projects and schedule
flexibility. The Company believes that many of the technical personnel included
in its database may also be pursuing other employment opportunities. Therefore,
the Company believes that its responsiveness to the needs of technical personnel
is an important factor in the Company's ability to fill projects. Although the
Company believes it competes favorably with respect to these factors, it expects
competition to increase, and there can be no assurance that the Company will
remain competitive.
Potential for Contract and Other Liability
The personnel provided by the Company to clients provide services involving key
aspects of its clients' software applications. A failure in providing these
services could result in a claim for substantial damages against the Company,
regardless of the Company's responsibility for such failure. The Company
attempts to limit, contractually, its liability for damages arising from
negligence or omissions in rendering services. Despite this precaution, there
can be no assurance that the limitations of liability set forth in its contracts
would be enforceable or would otherwise protect the Company from liability for
damages.
The Company's contract computer programming services business involves assigning
technical personnel to the workplace of the client, typically under the client's
supervision. Although the Company has little control over the client's
workplace, the Company may be exposed to claims of discrimination and harassment
and other similar claims as a result of inappropriate actions allegedly taken
against technical personnel by clients. As an employer, the Company is also
exposed to other possible employment-related claims. The Company is exposed to
liability with respect to actions taken by its technical personnel while on a
project, such as damages caused by technical personnel, errors, and misuse of
client proprietary information or theft of client property. To reduce such
exposures, the Company maintains insurance policies and a fidelity bond covering
general liability, worker's compensation claims, errors and omissions and
employee theft. In certain instances, the Company indemnifies its clients from
the foregoing. 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, 2002 and 2001.......... 16
Consolidated Statements of Earnings for the
years ended May 31, 2002, 2001 and 2000..................... 18
Consolidated Statements of Shareholders' Equity
for the years ended May 31, 2002, 2001 and 2000............. 19
Consolidated Statements of Cash Flows for the
years ended May 31, 2002, 2001 and 2000..................... 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, 2002 and 2001, 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, 2002. 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, 2002 and 2001, and the results of their operations
and their cash flows for each of the years in the three-year period ended May
31, 2002, in conformity with accounting principles generally accepted in the
United States of America. Also, in our opinion, the related financial statement
schedule referred to above, when considered in relation to the basic
consolidated financial statements taken as a whole, presents fairly, in all
material respects, the information set forth therein.
/s/ KPMG LLP
Melville, New York
July 18, 2002
Page 15
TSR, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
MAY 31, 2002 AND 2001
ASSETS
2002 2001
----------- -----------
CURRENT ASSETS:
Cash and cash equivalents (note 1 (d)) .............. $ 5,793,896 $ 6,208,361
Marketable securities (note 1 (e)) .................. 8,941,535 4,432,978
Accounts receivable:
Trade (net of allowance for doubtful accounts
of $430,000 in 2002 and $273,000 in 2001) ..... 10,131,579 11,935,795
Other ........................................... 49,819 59,016
----------- -----------
10,181,398 11,994,811
Prepaid expenses .................................... 50,926 33,727
Prepaid and recoverable income taxes ................ 69,357 144,363
Deferred income taxes (note 2) ...................... 180,000 93,000
----------- -----------
TOTAL CURRENT ASSETS .......................... 25,217,112 22,907,240
----------- -----------
EQUIPMENT AND LEASEHOLD IMPROVEMENTS, AT COST:
Equipment ........................................... 455,325 433,250
Furniture and fixtures .............................. 126,404 126,404
Automobiles ......................................... 128,859 128,859
Leasehold improvements .............................. 69,386 69,386
----------- -----------
779,974 757,899
Less accumulated depreciation and amortization ...... 703,930 616,386
----------- -----------
76,044 141,513
OTHER ASSETS ............................................ 52,182 46,145
DEFERRED INCOME TAXES (NOTE 2) .......................... 123,000 189,000
ACQUIRED CLIENT RELATIONSHIPS, NET OF ACCUMULATED
AMORTIZATION OF $42,902 (NOTE 3) .................. 128,706 --
----------- -----------
$25,597,044 $23,283,898
=========== ===========
See accompanying notes to consolidated financial statements.
(Continued)
Page 16
TSR, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS, CONTINUED
MAY 31, 2002 AND 2001
LIABILITIES AND SHAREHOLDERS' EQUITY
2002 2001
----------- -----------
CURRENT LIABILITIES:
Accounts and other payables ........................ $ 119,176 $ 123,852
Accrued and other liabilities:
Salaries, wages and commissions ................ 2,333,507 2,839,049
Legal and professional fees .................... 81,426 142,597
Other .......................................... 114,331 89,262
----------- -----------
2,529,264 3,070,908
Advances from customers ............................ 1,814,611 1,688,150
Income taxes payable ............................... 235,888 213,955
----------- -----------
TOTAL CURRENT LIABILITIES ............... 4,698,939 5,096,865
----------- -----------
MINORITY INTEREST ...................................... 2,578 --
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 .................................. 28,731,992 26,023,498
----------- -----------
32,926,828 30,218,334
Less: Treasury stock, 1,660,314 shares, at cost ... 12,031,301 12,031,301
----------- -----------
TOTAL SHAREHOLDERS' EQUITY .............. 20,895,527 18,187,033
----------- -----------
$25,597,044 $23,283,898
=========== ===========
See accompanying notes to consolidated financial statements.
Page 17
TSR, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
YEARS ENDED MAY 31, 2002, 2001 AND 2000
2002 2001 2000
------------ ------------ ------------
REVENUES, NET ........................................... $ 59,455,162 $ 78,950,548 $ 78,493,271
COST OF SALES ........................................... 46,568,053 61,829,907 59,767,603
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES ............ 8,463,186 10,826,855 11,484,803
------------ ------------ ------------
55,031,239 72,656,762 71,252,406
------------ ------------ ------------
INCOME FROM OPERATIONS .................................. 4,423,923 6,293,786 7,240,865
------------ ------------ ------------
OTHER INCOME:
Interest and dividend income ....................... 322,520 466,006 421,139
Gain (loss) marketable securities, net ............. (6,371) 21,855 7,810
Gain from sales of assets .......................... -- -- 23,950
Minority interest in subsidiary operating profit ... (1,578) -- --
------------ ------------ ------------
314,571 487,861 452,899
------------ ------------ ------------
INCOME BEFORE INCOME TAXES .............................. 4,738,494 6,781,647 7,693,764
PROVISION FOR INCOME TAXES (NOTE 2) ..................... 2,030,000 2,924,000 3,292,000
------------ ------------ ------------
NET INCOME ......................................... $ 2,708,494 $ 3,857,647 $ 4,401,764
============ ============ ============
BASIC NET INCOME PER COMMON SHARE ....................... $ 0.61 $ 0.86 $ 0.88
============ ============ ============
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING .... 4,418,012 4,494,495 5,022,948
============ ============ ============
DILUTED NET INCOME PER COMMON SHARE ..................... $ 0.61 $ 0.86 $ 0.88
============ ============ ============
WEIGHTED AVERAGE NUMBER OF DILUTED COMMON SHARES
OUTSTANDING ......................... 4,422,348 4,494,495 5,022,948
============ ============ ============
See accompanying notes to consolidated financial statements.
Page 18
TSR, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED MAY 31, 2002, 2001 AND 2000
SHARES OF ADDITIONAL TOTAL SHARE-
COMMON COMMON PAID-IN RETAINED TREASURY HOLDERS'
STOCK STOCK CAPITAL EARNINGS STOCK EQUITY
--------- ------- ---------- ----------- ------------ -----------
BALANCE AT MAY 31, 1999 ... 6,078,326 $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 OF MAY 31, 2000 ... 6,078,326 60,783 4,134,053 22,165,851 (10,612,160) 15,748,527
PURCHASE OF TREASURY
STOCK .............. -- -- -- -- (1,419,141) (1,419,141)
NET INCOME ................ -- -- -- 3,857,647 -- 3,857,647
--------- ------- ---------- ----------- ------------ -----------
BALANCE AT MAY 31, 2001 ... 6,078,326 60,783 4,134,053 26,023,498 (12,031,301) 18,187,033
NET INCOME ................ -- -- -- 2,708,494 -- 2,708,494
--------- ------- ---------- ----------- ------------ -----------
BALANCE AT MAY 31, 2002 ... 6,078,326 $60,783 $4,134,053 $28,731,992 $(12,031,301) $20,895,527
========= ======= ========== =========== ============ ===========
See accompanying notes to consolidated financial statements.
Page 19
TSR, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED MAY 31, 2002, 2001 AND 2000
2002 2001 2000
------------ ------------ ------------
Cash flows from operating activities:
Net Income ......................................................... $ 2,708,494 $ 3,857,647 $ 4,401,764
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization .................................. 130,446 104,626 143,618
Provision for doubtful accounts ................................ 200,000 100,000 --
Loss (Gain) from marketable securities, net .................... 6,371 (21,855) (7,810)
Gain on sale of fixed assets ................................... -- -- (23,950)
Deferred income taxes .......................................... (21,000) 8,000 34,000
Minority interest in subsidiary operating profit ............... 1,578 -- --
Changes in operating assets and liabilities:
Accounts receivable-trade ............................... 1,900,911 780,967 1,409,527
Other accounts receivable ............................... 16,022 87,302 21,097
Prepaid expenses ........................................ (17,199) 5,973 5,031
Prepaid and recoverable income taxes .................... 75,006 (105,205) 59,631
Other assets ............................................ (6,037) (5,843) (5,026)
Accounts payable and accrued expenses ................... (763,119) (546,341) (338,479)
Advances from customers ................................. 126,461 453,490 28,523
Income taxes payable .................................... 21,933 (6,868) 80,275
------------ ------------ ------------
Net cash provided by operating activities .......................... 4,379,867 4,711,893 5,808,201
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturities and sales of marketable securities ... 10,312,027 5,692,241 6,985,767
Purchases of marketable securities ............................ (14,826,955) (6,824,132) (4,358,917)
Proceeds from sales of fixed assets ........................... -- -- 23,950
Purchases of fixed assets ..................................... (5,840) (62,783) (165,659)
Purchase of net assets, net of cash acquired .................. (274,564) -- --
------------ ------------ ------------
Net cash provided by (used in) investing activities ................ (4,795,332) (1,194,674) 2,485,141
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from sale of minority interest ....................... 1,000 -- --
Purchases of treasury stock ................................... -- (1,419,141) (6,417,782)
------------ ------------ ------------
Net cash provided by (used) in financing activities ................ 1,000 (1,419,141) (6,417,782)
------------ ------------ ------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS ................... (414,465) 2,098,078 1,875,560
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR ......................... 6,208,361 4,110,283 2,234,723
------------ ------------ ------------
CASH AND CASH EQUIVALENTS AT END OF YEAR ............................... $ 5,793,896 $ 6,208,361 $ 4,110,283
============ ============ ============
SUPPLEMENTAL DISCLOSURE:
Income taxes paid .................................................. $ 1,954,000 $ 3,028,000 $ 3,118,000
============ ============ ============
See accompanying notes to consolidated financial statements.
Page 20
TSR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 2002, 2001 AND 2000
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(A) BUSINESS AND NATURE OF OPERATIONS
TSR, Inc. and subsidiaries ("the Company") are primarily engaged in
providing contract computer programming services to commercial customers
and state and local government agencies located primarily in the
Metropolitan New York area. The Company provides its clients with technical
computer personnel to supplement their in-house information technology
capabilities. In fiscal 2002 two customers accounted for more than 10% of
the Company's revenues, aggregating 26.9% of revenues. In fiscal 2001 and
2000, one customer accounted for 12.1% and 17.4% of revenues, respectively.
The Company operates in one business segment, computer programming
services.
(B) PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of TSR, Inc. and
its subsidiaries. All significant intercompany balances and transactions
have been eliminated in consolidation.
(C) REVENUE RECOGNITION
The Company's contract computer programming services are generally provided
under time and materials arrangements with its customers. Accordingly, such
revenues are recognized as services are provided. Advances from customers
represent amounts received from customers prior to the Company's provision
of the related services. Such amounts are expected to be settled within the
next fiscal year.
Effective March 1, 2002, the Company adopted Emerging Issues Task Force
Issue No. 01-14 "Income Statement Characterization of Reimbursements
Received for `Out-of-Pocket' Expenses Incurred." Accordingly,
reimbursements received by the Company for out-of-pocket expenses are
characterized as revenue. Prior to adoption of EITF 01-14, the Company
characterized such amounts as a reduction of cost of sales. Accordingly,
amounts previously reported for revenues and cost of sales have been
increased by $422,817 and $172,516, for fiscal year 2001 and 2000,
respectively.
(D) CASH AND CASH EQUIVALENTS
The Company considers short-term highly liquid investments with maturities
of three months or less at the time of purchase to be cash equivalents.
Cash and cash equivalents were comprised of the following as of May 31,
2002 and 2001:
2002 2001
---------- ----------
Cash in banks ........ $ 229,889 $2,547,391
Money Market Funds ... 5,564,007 2,671,275
US Treasury Bills .... -- 989,695
---------- ----------
$5,793,896 $6,208,361
========== ==========
(Continued)
Page 21
TSR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
MAY 31, 2002, 2001 AND 2000
(E) MARKETABLE SECURITIES
The Company accounts for its marketable securities in accordance with
Statement of Financial Accounting Standards ("SFAS") No. 115 "Accounting
for Certain Investments in Debt and Equity Securities." Accordingly, the
Company classifies its marketable securities at acquisition as either (i)
held-to-maturity, (ii) trading, or (iii) available-for-sale. Based upon the
Company's intent and ability to hold its US Treasury securities to maturity
(which maturities range between three months and 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 securities, which
are carried at fair value with unrealized gains and losses, included in
earnings. The Company's marketable securities are summarized as follows:
Gross Gross
Unrealized Unrealized
Amortized Holding Holding
Cost Gains Losses Fair Value
----------- ------- -------- -----------
2002: US TREASURY SECURITIES ....... $ 8,915,149 $ -- $ -- $ 8,915,149
EQUITY SECURITIES ............ 28,287 5,229 (7,130) 26,386
----------- ------- -------- -----------
$ 8,943,436 $ 5,229 $ (7,130) $ 8,941,535
=========== ======= ======== ===========
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
=========== ======= ======== ===========
(F) 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
(G) 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 185,664 have been
omitted from the calculation of diluted net income per common share for the
fiscal year ended May 31, 2002.
(H) 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, 2002, 2001 AND 2000
(I) 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, 2002.
(J) USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities, and
disclosure of contingent assets and liabilities at the date of the
financial statements, and the reported amounts of revenues and expenses
during the reporting period. Such estimates include, but are not limited to
provisions for doubtful accounts receivable, and assessments of the
recoverability of the Company's deferred tax assets and intangible assets.
Actual results could differ from those estimates.
(K) 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.
(L) LONG-LIVED ASSETS
The Company reviews its long-lived assets, including intangibles, for
possible impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. If the sum of
the expected cash flows undiscounted and without interest, is less than the
carrying amount of the asset, an impairment loss is recognized for the
amount by which the carrying amount of the asset exceeds its fair value.
(M) COMPREHENSIVE INCOME
The Company's net income equaled comprehensive income in fiscal 2000, 2001
and 2002.
(N) IMPACT OF NEW ACCOUNTING STANDARDS
In fiscal 2002, the Company adopted Statement of Financial Accounting
Standards No. 141, "Business Combinations" (SFAS No. 141) which requires
all business combinations to be accounted for using the purchase method.
The Company's adoption of SFAS No. 141 did not have any impact on its
consolidated financial statements.
In June 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 142 "Goodwill and Other Intangible
Assets" (SFAS No. 142), which is effective for fiscal years beginning after
June 15, 2001. SFAS No. 142 establishes accounting and reporting standards
for goodwill and intangible assets. Under SFAS No. 142, amortization of
goodwill will be terminated. However, goodwill will be subject to periodic
assessments for impairment by applying a fair-value-based test. Intangible
assets must be separately recognized and amortized over their useful lives.
The Company does not expect the adoption of SFAS No. 142 (effective, June
1, 2002) to have any impact on its consolidated financial statements.
In July 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 143, "Accounting for Asset Retirement
Obligations" (SFAS No. 143). SFAS No. 143 addresses financial accounting
requirements for retirement obligations associated with retirement of
tangible long-lived assets and for the associated asset retirement costs.
SFAS No. 143 requires a company to record the fair value of an asset
retirement obligation in the period in which it incurred a legal obligation
associated with the retirement of tangible long-lived assets that results
from the acquisition, construction, development and/or normal use of the
asset. The company is also to record a corresponding increase to the
carrying amount of the related asset and to depreciate that cost over the
life of the asset. The amount of the liability is changed at the end of
each period to reflect the passage of time and changes in estimated future
cash flows. SFAS No. 143 is effective for fiscal years beginning after June
15, 2002. The Registrant has not yet determined the impact of its planned
adoption of SFAS No. 143 (anticipated for June 1, 2003).
(Continued)
Page 23
TSR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
MAY 31, 2002, 2001 AND 2000
In August 2001, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 144, "Accounting for the Impairment
or Disposal of Long-Lived Assets" (SFAS No. 144), which became effective
for the Company on June 1, 2002. As applicable to the Company, SFAS No. 144
replaces SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to be Disposed Of", and provides guidelines on
how long-lived assets should be evaluated for impairment and establishes
criteria for when long-lived assets are held for sale, and prescribes the
accounting for long-lived assets that will be disposed of other than by
sale. Unlike SFAS No. 121, an impairment assessment under SFAS No. 144 will
never result in a write-down of goodwill. Rather goodwill will be evaluated
for impairment under SFAS No. 142, "Goodwill and Other Intangible Assets".
The Company does not expect the adoption of SFAS No. 144 to have a material
impact on its consolidated financial statements, because the impairment
assessment under SFAS No. 144 is largely unchanged from SFAS No. 121.
(2) INCOME TAXES
A reconciliation of the provisions for income taxes computed at the federal
statutory rates for fiscal 2002, 2001, and 2000 to the reported amounts is
as follows:
2002 2001 2000
------------------ ------------------ ------------------
AMOUNT % Amount % Amount %
---------- ---- ---------- ---- ---------- ----
Amounts at statutory federal tax rate ... $1,611,000 34.0% $2,306,000 34.0% $2,616,000 34.0%
State and local taxes, net of
federal income tax effect ........... 340,000 7.2 574,000 8.5 624,000 8.1
Non-deductible expenses, and other ...... 79,000 1.6 44,000 0.6 52,000 0.7
---------- ---- ---------- ---- ---------- ----
$2,030,000 42.8% $2,924,000 43.1% $3,292,000 42.8%
========== ==== ========== ==== ========== ====
The components of the provision for income taxes are as follows:
Federal State Total
----------- --------- -----------
2002: CURRENT ............ $ 1,449,000 $ 602,000 $ 2,051,000
DEFERRED ........... 66,000 (87,000) (21,000)
----------- --------- -----------
$ 1,515,000 $ 515,000 $ 2,030,000
=========== ========= ===========
2001: Current ............ $ 2,047,000 $869,000 $ 2,916,000
Deferred ...........
8,000 -- 8,000
----------- --------- -----------
$ 2,055,000 $ 869,000 $ 2,924,000
=========== ========= ===========
2000: Current ............ $ 2,313,000 $ 945,000 $ 3,258,000
Deferred ........... 34,000 -- 34,000
----------- --------- -----------
$ 2,347,000 $ 945,000 $ 3,292,000
=========== ========= ===========
The tax effects of temporary differences that give rise to significant
portions of the deferred income tax assets at May 31, 2002 and 2001 are as
follows:
2002 2001
-------- --------
Allowance for doubtful accounts receivable .... $180,000 $ 93,000
Equipment and leasehold improvement
Depreciation and amortization .............. 109,000 189,000
Acquired client relationships ................. 14,000 --
-------- --------
Total deferred income tax assets ....... $303,000 $282,000
======== ========
The Company believes that it is more likely than not that it will realize
the benefits of its deferred tax assets based primarily on the Company's
history of and projections for taxable income in the future.
(Continued)
Page 24
TSR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
MAY 31, 2002, 2001 AND 2000
(3) ACQUISITION
In August 2001, the Company capitalized a newly formed subsidiary with
$4,000 and simultaneously sold a 20% interest to a third party for $1,000.
On August 14, 2001, this subsidiary acquired substantially all of the
assets and assumed certain liabilities of a computer consulting firm for
cash of $286,500 (including cash acquired of $11,936). In accordance with
SFAS No. 141, this transaction is being accounted for as a purchase
business combination. Accordingly, the purchase price has been allocated to
the assets acquired and liabilities assumed based on their estimated fair
value, summarized as follows:
Cash ........................................... $ 11,936
Other current assets ........................... 303,520
Equipment ...................................... 16,235
Acquired client relationships .................. 171,608
Current liabilities ........................... (216,799)
--------
$286,500
========
In connection with the acquisition, the Company acquired certain
contractual client relationships. The related intangible asset is being
amortized over a three-year period, reflecting the estimated average life
of the underlying client relationships. Amortization expense for the year
ended May 31, 2002 was $42,902.
The results of operations of the acquired business have been included in
the Company's consolidated financial statements from the date of
acquisition. Had the acquisition been completed as of June 1, 2000,
unaudited pro forma consolidated revenues, net income and net income per
common share would have been $59,938,000, $2,719,000, and $0.61,
respectively, for the fiscal year ended May 31, 2002. The impact on
reported fiscal 2001 results would not have been material.
(Continued)
Page 25
TSR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
MAY 31, 2002, 2001 AND 2000
(4) STOCK OPTIONS
The 1997 Employee Stock Option Plan provides for the granting of options to
purchase up to 800,000 shares of the Company's common stock at prices equal
to fair market values at the grant dates. Options are exercisable as
determined on the date of the grant and expire on the fifth anniversary of
the date of grant. There are 709,950 shares of common stock reserved for
issuance under the Plan.
STOCK OPTIONS OUTSTANDING
------------------------------------
WEIGHTED
EXERCISE AVERAGE
SHARES PRICE PRICE
------- ------------ ---------
Outstanding at May 31, 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 AND 2002 ... 190,000 $ 5.53 $ 5.53
======= =========== =========
Exercisable at May 31, 2002 ............ 180,000 $ 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 2002 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 2002, 2001,
and 2000 would have been reduced to the pro forma amounts indicated below:
2002 2001 2000
---------- ---------- ----------
Net Income
----------
As reported ........................... $2,708,494 $3,857,647 $4,401,764
Pro Forma ............................. $2,696,000 $3,643,000 $4,401,764
Diluted Net Income Per Common Share
-----------------------------------
As reported ........................... $ 0.61 $ 0.86 $ 0.88
Pro Forma ............................. $ 0.61 $ 0.81 $ 0.88
(5) LINE OF CREDIT
The Company has an available line of credit of $5,000,000 with a major
money center bank through October 6, 2003. As of May 31, 2002, 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 26
TSR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
MAY 31, 2002, 2001 AND 2000
(6) COMMITMENTS AND CONTINGENCIES
A summary of noncancellable long-term operating lease commitments for
facilities as of May 31, 2002 follows:
FISCAL YEAR AMOUNT
----------- ------
2003 .............. $353,000
2004 .............. 343,000
2005 .............. 349,000
2006 .............. 170,000
Thereafter ........ 118,000
Total rent expenses under all lease agreements amounted to $393,000,
$350,000, and $311,000, in fiscal 2002, 2001, and 2000 respectively.
The Company is party to various lawsuits, some involving substantial
amounts. Management does not believe that the resolution of these lawsuits
will have a material adverse impact on the financial position of the
Company.
(7) EMPLOYMENT AGREEMENTS
In June 2001, an employment agreement was entered into with the President
of the contract computer programming services subsidiary providing for an
annual base salary 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 2002, $277,000 was paid as incentive
compensation. Additionally, during fiscal 2001 and 2000, $282,000 and
$373,000 were paid as incentive compensation based upon the executive's
prior agreement. This agreement is for a four-year term ending May 31, 2005
and provides for severance, in the event of termination, of a maximum of
one year's salary. In the event of a change in control of the Corporation,
the executive would be entitled to a severance payment of 2.99 times his
average total compensation but not in excess of $250,000 times the
remaining years in the contract term.
In June 2002, an employment agreement was entered into with the Chairman of
the Board, Chief Executive Officer, President and Treasurer, which
terminates May 31, 2007. This agreement provides for an initial base salary
of $437,000 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 2002, 2001, and 2000, the minimum
bonus of 7.5% of pre-tax profit was awarded, which amounted to $384,000,
$550,000, and $624,000, respectively under this executive's prior
agreement.
(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. In fiscal 2002, there were no repurchases.
Page 27
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 2002 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 2002 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 2002 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 2002 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 ..... 28
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 30.
(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, 2002:
Allowance for doubtful accounts ...... $ 273,000 $ 200,000 $ 43,000 $ 430,000
========= ========= ======== =========
Year ended May 31, 2001:
Allowance for doubtful accounts ...... $ 173,000 $ 100,000 $ -- $ 273,000
========= ========= ======== =========
Year ended May 31, 2000:
Allowance for doubtful accounts ...... $ 173,000 $ -- $ -- $ 173,000
========= ========= ======== =========
Page 28
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 9, 2002
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Company and in
the capacities and on the dates indicated.
/s/ J.F. HUGHES
---------------------------------------------------------------------
J. F. Hughes, President, Treasurer and Director
/s/ JOHN G. SHARKEY
---------------------------------------------------------------------
John G. Sharkey, Vice President, Finance, Controller and Secretary
/s/ ERNEST G. BAGO
---------------------------------------------------------------------
Ernest G. Bago, President, TSR Consulting Services, Inc. and Director
/s/ JOHN H. HOCHULI, JR
---------------------------------------------------------------------
John H. Hochuli, Jr., Director
/s/ JAMES J. HILL
---------------------------------------------------------------------
James J. Hill, Director
/s/ CHRISTOPHER HUGHES
---------------------------------------------------------------------
Christopher Hughes, Director
/s/ ROBERT A. ESERNIO
---------------------------------------------------------------------
Robert A. Esernio, Director
Dated: August 9, 2002
Page 29
TSR, INC. AND SUBSIDIARIES
EXHIBIT INDEX
FORM 10-K, MAY 31, 2002
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,
2001 incorporated by reference to Exhibit 10.1 to the Quarterly Report on Form 10-Q
filed by the Company for the quarter ended August 31, 2001. ................................... 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 June 1, 2002 between the Company and Joseph F. Hughes .............. 31
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, 2002 between the Company and John G. Sharkey
incorporated by reference to Exhibit 10.1 to the Quarterly Report on Form 10-Q filed by the
Company for the quarter ended February 28, 2002 ............................................... N/A
21 List of Subsidiaries .......................................................................... 36
23 Consent of KPMG LLP ........................................................................... 37
Page 30