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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
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FORM 10-K
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[X] Annual Report Pursuant to Section 13 or 15(d) of
The Securities Exchange Act Of 1934
For the fiscal year ended May 31, 1997
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: 516-231-0333
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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]
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State the aggregate market value of the voting stock held by non-affiliates of
the Registrant. The aggregate market value shall be computed by reference to the
price at which the stock was sold, or the average bid and asked prices of such
stock, as of a specified date within 60 days prior to the date of filing. (See
definition of affiliate in Rule 12b-2 of the Exchange Act).
The aggregate market value was approximately $15,824,000 based on the market
price of the Registrant's Common Stock at July 31, 1997 of $25.13 and excluding
shares of common stock held by officers, directors and beneficial holders of 5%
of the outstanding common stock of the Registrant, many of which persons may not
be affiliates of the Registrant.
State the number of shares outstanding of each of the Registrant's classes of
common equity, as of the latest practicable date.
2,914,138 shares of Common Stock, par value $0.01 per share, as of July 31,
1997.
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 1997 Annual
Meeting of Shareholders, which will be filed by the Registrant within 120 days
after the close of its fiscal year.
-2-
PART I
Item 1. Business.
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General
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TSR, Inc. (the "Company") is engaged in the business of providing contract
computer programming services to its clients. The Company provides technical
computer personnel to companies that desire to supplement their in-house
information technology ("IT") capabilities. In addition, the Company has
developed Catch/21, a Year 2000 compliance solution ("Catch/21") which enables
the Company to correct on a substantially automated basis problems which may
occur in computer software as a result of the century change in the year 2000.
The Company has recently commenced providing services to customers to make
applications Year 2000 compliant.
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, 1997, the Company provided IT
staffing services to approximately 85 clients.
In recent years, there has been increased awareness of the problems resulting
from the inability of many existing software applications to properly interpret
dates after the year 1999. The Company has developed a software solution, called
Catch/21, which automates to a significant extent the conversion process. Using
Catch/21, the Company provides the full range of services necessary to make a
software application Year 2000 compliant, including analysis of the client's
code, construction of a data base, implementation of the solution and testing.
The Company believes its Catch/21 solution allows the Company to convert
software to be Year 2000 compliant at a lower cost and more rapidly than other
approaches known to the Company. Catch/21 utilizes a Sliding Century approach,
which dynamically adjusts the dates in the software application using a separate
subroutine and then reinserts the information into the application without
changing the program logic. Currently, Catch/21 can be used to convert COBOL and
RPG applications. The Company has recently commenced providing Year 2000
conversion services to several companies and a number of other potential clients
are engaged in pilot projects pursuant to which they are testing the
effectiveness of the Company's approach, or are engaged in discussions with the
Company concerning the Company's Year 2000 conversion services.
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 (516) 231-0333.
Contract Computer Programming Services
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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, 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.
-3-
The Company's success is dependent upon its ability to attract and retain
qualified professional computer personnel. The Company believes that there is a
shortage of, and significant competition for, software professionals with the
skills and experience necessary to perform the services offered by the Company.
Although the Company generally has been successful in attracting employees with
the skills needed to fulfill customer engagements, demand for qualified
professionals conversant with certain technologies may outstrip supply as new
and additional skills are required to keep pace with evolving computer
technology or as competition for technical personnel increase. Increasing demand
for qualified personnel could also result in increased expenses to hire and
retain qualified technical personnel and could adversely affect the Company's
profit margins.
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 an office located in New York, New
York and also maintains branch offices in Edison, New Jersey, Long Island, New
York and Farmington, Connecticut. The Company does not currently intend to open
additional offices, but will continue to seek to grow its business by adding
account executives and technical recruiters in its existing offices. At these
offices, the Company maintains 16 persons who are responsible for recruiting
technical personnel and 18 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 85 clients during the year
ended May 31, 1997. 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, 1997, the Company's two largest clients, American
Telephone and Telegraph ("AT&T") and International Business Machines Corporation
("IBM"), accounted for 16.3% and 10.3%, respectively, of the Company's
consolidated revenues. The services provided by IBM related primarily to
projects outsourced by Lucent Technologies, Inc. ("Lucent"), which was formed as
part of the split-up of AT&T. The Company is focusing its marketing efforts on
broadening its client base and reducing its client concentration, although there
can be no assurance that these efforts will be successful.
The Company's marketing is conducted through account executives who are
responsible for customers in an assigned territory. Account executives call on
potential new customers and are also responsible for maintaining existing client
contacts within an assigned territory. Instead of utilizing technical managers
to oversee the services provided by technical personnel to each client, the
account executives are responsible for this role. As a result of the cost
savings due to the combined functions of the account executives, the Company is
able to provide its account executives with significantly higher incentive-based
compensation. In addition, the Company generally pairs each account executive
with a recruiter of technical personnel, who also receives incentive-based
compensation. The Company believes that this approach allows the Company to more
effectively serve its clients' needs for technical personnel, as well as
providing its account executives and recruiters with incentives to maximize
revenues in their territories. Currently, account executives for the contract
computer programming services business are also engaged in marketing the
Company's Catch/21 solution. The Company intends to hire new marketing personnel
who will be responsible solely for marketing the Catch/21 solution.
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 25,000 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 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 16 recruiters. Potential applicants are generally interviewed and
tested by the Company's recruiting personnel or by third parties who have the
required technical backgrounds to review the qualifications of the applicants.
-4-
Year 2000 Compliance Solution Services
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The Company recently commenced providing services to correct problems in
software applications which occur as a result of the inability of software
applications to correctly interpret date information after 1999. The Company
uses an innovative approach through its proprietary Catch/21 Year 2000
compliance solution. The Company's Catch/21 solution does not modify the
software application. Instead of expanding the date, changing the date format or
otherwise modifying the program logic, the Catch/21 software uses a separate
subroutine that dynamically adjusts the date information within the application.
A command which calls up the separate subroutine is inserted into the source
code by the Catch/21 software each time a date is required to be calculated. The
subroutine shifts the dates in the application by designated number of years,
referred to as the base year. The shifted dates are then used to calculate the
date-related information and after such calculations are completed, the dates
are restored to their original value and restored to the program. In those
instances where dates used in calculations span more than one century, those
specific date fields are manually expanded.
The Company believes that its approach represents a total solution to making
COBOL and RPG software applications Year 2000 compliant. The Catch/21 software
first examines the software application's source code, and, with the assistance
of an analyst, locates all date fields and builds a database. In certain cases,
a software developer also needs to add enhancements to provide additional
software to enable the Catch/21 software to recognize date fields due to unique
features of a client's software application. The Year 2000 compliance solution
is then implemented by inserting into the client's software application at each
place where date information needs to be calculated a call command which calls
up the separate subroutine to calculate the date information. The converted
software application is then made available to the client for testing to verify
that it is Year 2000 compliant using mutually agreed upon acceptance criteria.
The Company believes that, due to the extent of the automation of its conversion
process and the fact that the program logic is not modified, both the conversion
time and testing time are reduced significantly. As a result, the Company
believes that its approach reduces the time and cost of converting applications
to be Year 2000 compliant. The Company believes that its cost structure for
providing conversion services using Catch/21 permits it to charge less than
other parties providing conversion services. The Company currently charges a
fixed price of $0.25 per line of code, and anticipates increasing its charges to
$0.30 per line of code, subject to prevailing market conditions. Currently, the
Company's Catch/21 conversion software is designed for conversion of COBOL and
RPG programs. The Company is currently developing new versions of its Catch/21
software for conversion of PL/1, Assembler and several fourth generation
languages.
The Company uses a team of three analysts and an employee responsible for
quality assurance on each conversion project. The Company estimates that
presently each such team can analyze and convert approximately 300,000 lines of
code per week, although there can be no assurance that the Company will be able
to continue to achieve these levels. The Company currently has 30 employees
(consisting of analysts, personnel responsible for quality assurance, and
developers) directly involved in the Year 2000 conversion process and has the
capacity at its current facility to double the number of such personnel.
The Company currently is converting an aggregate of fifteen software
applications consisting of 10,000,000 lines of code pursuant to agreements with
six companies. These projects are in the preliminary stages and the Company
believes that, assuming successful completion of these projects, it will receive
additional conversion projects from these companies. In addition, the Company is
having discussions with other companies relating to its retention to convert
applications to be Year 2000 compliant or performing pilot projects to permit
such companies to evaluate the Catch/21 solution. There can be no assurance that
these discussions or pilot projects will result in additional contracts. The
Company is expanding its capacity to perform Year 2000 conversions. However,
this business is still in the early stages and the Company is unable to predict
the extent to which it will obtain additional applications for Year 2000
conversion or the receipt of revenues from this business.
The Company's agreements relating to Year 2000 conversion projects generally do
not provide for a minimum number of lines of code or applications to be
converted by the Company. The agreements generally provide that the Company will
convert applications that are agreed to by the Company and the client. In
addition, the agreements are generally terminable by the client after short
notice periods. The Company's revenues under these agreements with respect to
each application are subject to satisfactory acceptance testing of such
converted application. In addition, The Company has agreed to refund any amounts
paid if the converted application does not perform in accordance with mutually
agreed upon acceptance criteria.
-5-
Other Business
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CONSTRUCTION SPECIFICATIONS
In 1983, the Company acquired certain of the operating assets of Bowne
Information Systems, Inc. (a subsidiary of Bowne & Co.) through a wholly-owned
subsidiary, Construction Data Services, Inc. (formerly BIS, Inc.). As a result
of such acquisition, the Company succeeded to certain contractual rights to
market construction specification databases on magnetic media that are useful to
the engineering, architectural and building contractors fields in both the
public and private sectors. This subsidiary provided all of its products and
services under an exclusive license agreement dated December 1, 1983, as
amended, with the Construction Sciences Research Foundation, Inc. (CSRF), which
terminated March 1, 1996. In June 1996, the Company entered into a termination
arrangement under which it received $76,850 recorded as non-operating income in
the first quarter of fiscal 1997.
HEALTH CARE SERVICES
The Company, through its wholly-owned subsidiary TSR Health Care Services, Inc.,
provided temporary nurses and nurses' aides to health care facilities and home
care patients. In the second quarter of fiscal 1996, the Company determined to
discontinue this business and the existing caseload was transferred to another
licensed home care agency in October 1995. The agreement to transfer the account
base provided that the purchaser would pay the Company 50% of the gross profit
generated from the Company's accounts for a period of two years. The Company
received approximately $132,000 and $46,000 in such payments which were included
in revenues during fiscal 1997 and 1996, respectively.
OTHER PROGRAMMING SERVICES
The Company has entered into maintenance agreements to service its conversion
software which moved customer applications from one computer platform to
another. Pursuant to these agreements, the Company provides maintenance and
support for its existing installed base of conversion software customers. As a
result of a consensual settlement of certain legal proceedings, the Company
ceased marketing the services in 1988. Subsequent to 1988, the Company's
revenues have been declining as the service contracts with existing customers
expire. Unless expiring contracts are renewed, this revenue base will further
decline.
Competition
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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.
The market for IT services addressing the Year 2000 problem is highly
competitive and is expected to become more competitive as others enter this
segment of the business. The Company's competitors include systems consulting
and implementation firms, application software firms, service groups of computer
equipment companies, general management consulting firms and programming
companies. Many of these competitors have significantly greater financial,
technical and marketing resources and greater name recognition than the Company.
In addition, the Company competes with its clients' internal IT personnel. Such
competition may impose additional pricing pressures on the Company. The
principal competitive factors involve speed and reliability in the conversion
process and the price charged for the services. There can be no assurance that
the Company can compete successfully with its existing competitors or with any
new competitors.
-6-
Intellectual Property Rights
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The Company's success in the Year 2000 compliance solution services business is
dependent upon its Catch/21 Year 2000 solution and other proprietary
intellectual property rights. The Company has filed a patent application
covering certain aspects of Catch/21. There can be no assurance that this patent
application will result in patents being issued. Even if the Company obtains
patent rights, the Company believes that the protection of its rights will
depend primarily on its proprietary technology and techniques which constitute
"trade secrets." There can be no assurance that any patents which may be issued
to the Company will afford adequate protection to the Company or not be
challenged, invalidated, infringed or circumvented. The Company is aware of
other patent applications that have been filed with respect to Year 2000
compliance software programs. It is possible that others may have or be granted
patents claiming products or processes that are necessary for or useful to the
development or continued use of Catch/21 and that legal actions could be brought
against the Company claiming infringement. In the event that the Company is
unsuccessful against such a claim, it may be required to obtain licenses to such
patents or to other patents or proprietary technology in order to continue to
utilize Catch/21. There can be no assurance the Company will be able to obtain
such licenses on commercially reasonable terms, if at all.
The Company relies primarily upon a combination of trade secret, nondisclosure
and other contractual arrangements, technical measures and copyright and
trademark laws 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
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The Company presently employs 347 people including its 3 executive officers. Of
such employees 18 are engaged in sales, 16 are recruiters for programmers, 290
are technical and programming consultants, and 20 are in administration and
clerical functions. Of the 347 employees, approximately 302 are employed by the
contract computer programming subsidiary, 35 by the Year 2000 subsidiary and 10
are employed directly by the Company.
Item 2. Properties.
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The Company leases 8,000 square feet of space in Hauppauge, New York for a term
expiring December 31, 1998, with annual rentals of approximately $70,000. This
space is used as executive and administrative offices as well as by the
Registrant's operating subsidiaries.
The Company leases an additional 8,000 square feet of space in Hauppauge, New
York for a term expiring July, 2000 with annual rentals of approximately
$84,000. This space is used for its Year 2000 compliance solution business.
The Company also leases sales and technical recruiting offices in New York City
(lease expires July, 2002), Edison, New Jersey (lease expires August, 2000), and
Farmington, Connecticut (lease expires November, 1999), with aggregate monthly
rentals of approximately $17,000.
The Company believes the present locations are adequate for its current needs as
well as for the future expansion of its existing business.
Item 3. Legal Proceedings.
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None
Item 4. Submission of Matters to a Vote of Security Holders.
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Not Applicable
-7-
PART II
Item 5. Market for Common Equity and Related Stockholder Matters.
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The Company's shares of Common Stock trade on the NASDAQ National Market System
under the symbol TSRI. The following are the high and low sales prices for each
quarter during the fiscal years ended May 31, 1997 and 1996:
JUNE 1, 1995 - MAY 31, 1996
1ST 2ND 3RD 4TH
QUARTER QUARTER QUARTER QUARTER
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High Sales Price............... 4 1/2 5 1/4 3 5/16 10 1/2
Low Sales Price................ 2 3/8 2 5/8 2 9/16 2 11/16
JUNE 1, 1996 - MAY 31, 1997
1ST 2ND 3RD 4TH
QUARTER QUARTER QUARTER QUARTER
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High Sales Price............... 6 3/4 11 1/4 50 1/4 28 3/8
Low Sales Price................ 3 7/8 4 1/8 9 1/2 13
There were 220 holders of record of the Company's Common Stock as of July 31,
1997. Additionally, the Company estimates that there were approximately 700
beneficial holders as of that date. On October 10, 1996, the Company declared a
stock split in the form of a 100% stock dividend on the shares of Common Stock
payable November 14, 1996 to shareholders of record on October 28, 1996. All
share prices and cash dividends have been adjusted for this split. Historically,
no cash dividends have been paid by the Company on its Common Stock except that
on July 18, 1995, the Board of Directors declared a special cash dividend of
$0.20 per share on its Common Stock payable on August 28, 1995 to shareholders
of record as of July 31, 1995. Also, on September 16, 1991, the Company paid a
special dividend of $0.50 per share on its Common Stock. The Company has not
adopted a policy of paying cash dividends on a regular periodic basis and does
not intend to declare a cash dividend for fiscal 1997.
Item 6. Selected Financial Data.
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(Amounts in Thousands, Except Per Share Data)
MAY 31, May 31, May 31, May 31, May 31,
1997 1996 1995 1994 1993
------- ------- ------- ------- -------
Revenues............................................. $49,704 $31,810 $26,674 $21,926 $17,006
Income From Operations............................... 2,970 1,456 1,264 799 142
Net Income........................................... 1,796 964 802 500 152
Net Income Per Common Share.......................... 0.62 0.32 0.26 0.16 0.04
Working Capital...................................... 9,884 8,358 8,337 7,525 7,372
Total Assets......................................... 14,044 11,167 10,629 9,191 8,734
Shareholders' Equity................................. 10,431 8,635 8,609 7,808 7,642
Book Value Per Common Share.......................... 3.58 2.96 2.84 2.58 2.35
Cash Dividends Declared
Per Common Share................................... -- 0.20 -- -- --
Note: Net Income, Book Value and Cash Dividends Per Common Share have been
adjusted for a stock split in the form of a 100% stock dividend paid
in November 1996.
-8-
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations.
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The following discussion and analysis should be read in conjunction with the
financial statements and the notes to the consolidated financial statements
presented elsewhere in this report.
Overview
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The Company is engaged in the business of providing contract computer
programming services to its clients. The Company provides technical computer
personnel to companies that desire to supplement their in-house IT capabilities.
In addition, the Company has developed Catch/21, a Year 2000 compliance
solution, which enables the Company to correct on a substantially automated
basis problems which may occur in computer software as a result of the century
change in the year 2000. In its fiscal year ended May 31, 1997 the Company has
commenced providing services to customers to make applications Year 2000
compliant.
In the year ended May 31, 1997, the Company provided IT staffing services to
approximately 85 clients. Two of such clients, AT&T and IBM, accounted for 16.3%
and 10.3%, respectively, of the Company's consolidated revenues in the year
ended May 31, 1997. The services provided to IBM related primarily to projects
which were outsourced by Lucent, which was formed as part of the split up of
AT&T. The Company has recently expanded its marketing staff and is focusing its
marketing efforts on broadening its client base.
The Company's Year 2000 compliance solution business is in the early stages. The
Company currently is converting an aggregate of 15 software applications having
10,000,000 lines of code pursuant to agreements with six companies. These
projects are in the preliminary stages and the Company believes that, assuming
successful completion of these projects, it will receive additional conversion
projects from these companies. In addition, the Company is having discussions
with other companies relating to its retention to convert applications to be
Year 2000 compliant or performing pilot projects to permit companies to evaluate
the Catch/21 solution. The Company is expanding its capacity to perform Year
2000 conversions. However, the Company is unable to predict the extent to which
it will obtain additional applications for Year 2000 conversion or the timing or
amount of receipt of revenues from this business.
The Company's agreements relating to Year 2000 conversion projects generally do
not provide for a minimum number of lines of code or applications to be
converted by the Company. The Company's revenues for applications converted
under these agreements are subject to satisfactory acceptance testing of such
converted applications and the Company agrees to refund any amounts paid if the
converted application does not perform in accordance with mutually agreed upon
acceptance criteria.
The Company previously engaged in the business of marketing construction
specification databases on magnetic media that are useful to the engineering,
architectural and building contractor fields. The Company provided all of its
products and services under an exclusive license agreement with the Construction
Sciences Research Foundation, Inc. ("CSRF"), which terminated March 1, 1996.
In addition, the Company provided temporary nurses and nurses' aides to health
care facilities and home care patients. In the second quarter of fiscal 1996,
the Company discontinued its health care services business and the existing
caseload was transferred to another licensed home care agency. The agreement to
transfer the account base provided that the purchaser would pay the Company 50%
of the gross profit generated from the Company's accounts for a period of two
years.
-9-
Results of Operations
- ---------------------
The following table sets forth for the periods indicated certain financial
information derived from the Company's consolidated statement of operations.
There can be no assurance that trends in sales growth or operating results will
continue in the future:
(Amounts in Thousands) YEAR ENDED MAY 31,
--------------------------------------
1997 1996 1995
------- ------- -------
Revenues................................................. $49,704 $31,810 $26,674
Cost of Sales............................................ 37,485 23,317 19,352
------- ------- -------
Gross Profit............................................. 12,219 8,493 7,322
Research and Development................................. 325 -- --
Selling, General, and Administrative expenses............ 8,924 7,037 6,058
------- ------- -------
Income from Operations................................... 2,970 1,456 1,264
Other Income............................................. 297 250 224
------- ------- -------
Income Before Income Taxes............................... 3,267 1,706 1,488
Provision for Income Taxes............................... 1,471 742 686
------- ------- -------
Net Income............................................... $ 1,796 $ 964 $ 802
======= ======= =======
Revenues
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Revenues consist primarily of revenues from contract computer programming
services. In addition, the Company's revenues included revenues from its
Catch/21 business which was commenced in 1997, and the construction
specifications business and health care services business which were terminated
in fiscal 1996. Revenues for fiscal 1997 increased $17,894,000 or 56.3% over
fiscal 1996.
Contract computer programming services revenues increased $19,452,000 from
$29,909,000 in fiscal 1996 to $49,361,000 in fiscal 1997. This increase resulted
from an increase in technical personnel on billing from several large projects
and an overall increase in the number of programmers on billing with clients in
fiscal 1997. Although inroads have been made in expanding the account base for
its contract computer programming services, a significant portion of the revenue
increase in contract computer programming services was derived from the
Company's largest customer, AT&T. During the 1997 fiscal year, Lucent outsourced
much of its information technology requirements to national vendors, primarily
IBM. The Company has been successful in becoming a supplier to these national
vendors in conjunction with projects for Lucent as well as maintaining its
direct relationship with Lucent. At the end of the current fiscal year, a large
project for AT&T ended which is expected to slow the rate of revenue growth in
the first quarter of fiscal 1998. The Company does not expect to continue the
rate of growth in revenues experienced in 1997 as it does not anticipate the
same opportunity for large staffing projects in fiscal 1998 as it had in fiscal
1997.
Revenues from construction specifications and health care services decreased
$1,729,000 from $1,901,000 in fiscal 1996 to $172,000 in fiscal 1997 due to the
termination of these businesses in fiscal 1996. Revenues from the Company's
Catch/21 Year 2000 compliance business, which was commenced in fiscal 1997, were
$171,000 for the year. These revenues consisted primarily of pilot projects for
which the Company was paid, and to a lesser extent from ongoing conversion
services. The Company believes that potential customers that are evaluating its
Catch/21 Year 2000 compliance solution services have been delaying their
decision to commence converting software applications to make them Year 2000
compliant. As a result, revenues from the Company's Catch/21 Year 2000
conversion business have been less than anticipated.
Revenues for fiscal 1996 increased $5,136,000 or 19.3% over the fiscal 1995.
Contract computer programming services revenues contributed an increase of
$6,221,000 which was offset by decreases in construction specifications of
$582,000 and health care services of $503,000 which businesses were terminated
during the 1996 fiscal year. The increase in revenues in contract computer
programming services resulted primarily from further penetration within existing
accounts, and $3,700,000 of such increase resulted from further penetration in
the Company's largest account, AT&T.
-10-
Cost of Sales
- -------------
Cost of sales increased by $14,168,000 or 60.8% in fiscal 1997 over fiscal 1996.
This increase included an increase in cost of sales in contract computer
programming of $14,520,000 from $22,828,000 in fiscal 1996 to $37,348,000 for
fiscal 1997. The increase in costs resulted primarily from the increase in
amounts paid to technical personnel resulting primarily from the increase in
technical personnel assigned to client projects and was related to the
above-mentioned revenue increase. Construction specification and health care
services costs decreased from $489,000 in fiscal 1996 to zero in fiscal 1997 due
to the termination of these businesses. The Year 2000 business incurred cost of
sales of $137,000 in fiscal 1997. These costs consisted primarily of salaries of
analysts and quality assurance personnel. The Company expects cost of sales from
the Year 2000 business to continue to increase due to the hiring of additional
personnel in anticipation of future conversion projects.
The cost of sales for the Company's contract computer programming business are
variable because technical personnel are generally hired on a per diem basis to
staff particular projects for clients. However, the cost of sales for the
Catch/21 solution business are fixed. A substantial portion of these cost of
sales consist of technical personnel hired to perform the conversion services.
The technical personnel are hired and trained in advance of the time the Company
has conversion projects and these expenses are incurred by the Company whether
or not the Company is generating anticipated revenues from the Year 2000
solutions business.
Fiscal 1996 cost of sales increased $3,965,000 or 20.5% over fiscal 1995. The
increase included additional costs of $4,748,000 from contract computer
programming which primarily resulted form the above mentioned revenue increase.
Construction specifications and health care services costs decreased by $411,000
and $372,000 respectively due to the termination of these businesses during
fiscal year 1996.
Gross Profit
- ------------
Overall, gross profit margins have declined in the last two fiscal years as the
higher gross profit margin construction specifications and health care services
businesses have been phased out. Contract programming gross margins increased
slightly in fiscal 1997 from the prior year due to increased billing rates on a
portion of its lower margin business. In the fourth quarter of fiscal 1997,
however, contract programming margins decreased against the year earlier
comparable period for the first time in a year. This decrease is attributable to
increases in amounts being paid to qualified programming professionals outpacing
the Company's ability to pass these increases on to customers.
Contract computer programming gross margins declined slightly in 1996 from the
prior year. However, margins increased in the fourth quarter of fiscal 1996
against the fourth quarter in fiscal 1995 after decreasing for approximately 15
months. The decline in margins was attributable to increased amounts paid to
qualified programming professionals who have been in demand. The increase in the
fourth quarter of fiscal 1996 was attributable to the Company's ability to
increase billing rates on a portion of its lower margin business.
Research and Development
- ------------------------
Research and development costs of $325,000 in the current year represent amounts
expended to develop Catch/21, the Company's Year 2000 compliance solution.
Currently, Catch/21 can convert IBM mainframe COBOL and RPG applications. The
development expenditures are expected to continue into fiscal 1998 as the
Company seeks to expand its product offerings into additional computer platforms
and languages such as PL/1, Assembler and several fourth generation languages.
-11-
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 increased $1,887,000 or 26.8%
from $7,037,000 in fiscal 1996 to $8,924,000 in fiscal 1997. Contract computer
programming services expenses increased $2,406,000 over the prior year to
$8,411,000. The increase was primarily attributable to additional
commission-based compensation due to the increased revenues. Also, these
expenses increased as a result of the expenses relating to the hiring of
additional account executives and technical recruiting professionals to broaden
its client base in connection with the continuation of the Company's planned
expansion. Construction specifications and health care services expenses
decreased by $815,000 to $217,000 due to the termination of these businesses.
Approximately $296,000 in selling, general and administrative expenses were
attributable to the Catch/21 solution business which commenced operations in the
current fiscal year. These expenses consisted primarily of marketing,
advertising and facilities expenses.
In fiscal 1996, selling, general and administrative expenses increased $979,000
or 16.2% over the prior year. The contract computer programming business
incurred increases amounting to $1,418,000 which resulted primarily from
increased personnel in recruiting and sales, including those hired to staff a
new office in Connecticut. The increase also included additional commission
based compensation due to the increased revenues. Expenses decreased in
construction specifications and health care by $227,000 and $212,000
respectively due to the termination of those businesses.
Other Income
- ------------
Fiscal 1997 other income resulted primarily from interest and dividend income
which decreased by $68,000 to $159,000 due to a lower average investable base.
During fiscal 1997 the Company recorded other income of $77,000 in connection
with the termination agreement for its construction specifications subsidiary.
Gain from the sale of securities of $59,000 resulted from the purchase and sale
of marketable equity securities during the period.
Interest and dividend income increased $19,000 in fiscal 1996 on a lower average
investable base due to higher rates paid on the Company's treasury bills. Gains
from the sale of securities resulted from the purchase and sale of marketable
equity securities during the period, none of which were held at the end of
fiscal year 1996.
Income Taxes
- ------------
The effective income tax rate increased to 45.0% in fiscal 1997 from 43.5% in
the fiscal 1996 because the losses incurred by the Year 2000 code conversion
business were not available to offset state and local income taxes other than
for New York State.
The effective income tax rate dropped to 43.5% in fiscal 1996 from 46.1% in the
prior year because of lower state and local taxes, as the majority of the
Company's growth came from New Jersey as compared with New York City, which has
a higher combined tax rate.
Liquidity, Capital Resources and Changes in Financial Condition
- ---------------------------------------------------------------
Subject to continued profitability, 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 requirements with respect to its existing business. The
Company also expects its cash flow from operations, cash and short-term
marketable securities to be sufficient for the foreseeable future to meet its
cash requirements, including its substantial investment in the Catch/21 Year
2000 compliance solution business.
At May 31, 1997, the Company had working capital of $9,884,000 and cash and cash
equivalents of $2,931,000 as compared to working capital of $8,358,000 and cash
and cash equivalents of $2,959,000 at May 31, 1996. Working capital increased
due to the Company's net income in the 1997 fiscal year. Cash and equivalents
declined slightly from May 31, 1996 to May 31, 1997 due to the cash used in
operations, as discussed below, which was mostly offset by the cash and cash
equivalents generated from the maturity of marketable securities to finance such
cash used in operations.
-12-
Net cash flow of $1,405,000 was used in operations during fiscal 1997 as
compared to $711,000 of net cash flow provided by operations in fiscal 1996.
While the Company had net income of $1,796,000, in fiscal 1997 the Company had
cash flow used in operations as a result of an increase in accounts receivable
of $4,386,000 from $6,022,000 at May 31, 1996 to $10,408,000 at May 31, 1997.
The increase in accounts receivable occurred primarily because of the
substantial revenue increase. The cash used in operations as a result of the
increase in accounts receivable was offset to some extent by the increase in the
Company's accounts payable and accrued expenses of $693,000 from $2,001,000 at
May 31, 1996 to $2,694,000 at May 31, 1997. The increase in accounts payable and
accrued expenses resulted from the increase in cost of sales.
Cash flow provided by investing activities resulted primarily from the Company's
decisions to not roll over some maturing United States Treasury Bills. The cash
made available was used to finance the increase in accounts receivable and the
purchase of fixed assets. The increase in the purchase of fixed assets from
$149,000 in fiscal 1996 to $425,000 in 1997 related primarily to the
commencement of the Year 2000 compliance solution business.
The Company's capital resource commitments at May 31, 1997 consisted of lease
obligations on its branch and corporate facilities amounting to $1,178,000 over
the next five years. The Company intends to finance these commitments from cash
flow provided by operations, available cash and short-term marketable
securities.
During the 1997 fiscal year, the Company incurred total operating expenses of
$758,000 in connection with the development and marketing of its Catch/21 Year
2000 compliance solution. The Company expects research and development costs and
marketing costs relating to its Year 2000 conversion business to increase in
fiscal 1998.
Although the Company's cash and marketable securities were sufficient to enable
it to provide the cash necessary to finance the cash used in operations during
fiscal 1997, the Company may require a credit facility to finance its accounts
receivable if its accounts receivable continue to grow as a result of a
continued significant increase in revenues. The Company has received a
commitment for such a facility and is in the process of negotiating definitive
agreements relating to such credit facility.
Forward-Looking Statements
- --------------------------
Certain statements contained in "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and "Business", including
statements concerning the development of the Company's Catch/21 solution, 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 following: risks relating to the competitive nature of
the markets for contract computer programming services and the Year 2000
compliance solution market, concentration of the Company's business with certain
customers and uncertainty as to the Company's ability to achieve commercial
acceptance of its Catch/21 Year 2000 compliance solution.
New Accounting Pronouncements
- -----------------------------
In October 1995, the Financial Accounting Standards Board (FASB) issued
Statement No. 123, "Accounting for Stock-Based Compensation," which has been
adopted by the Company in fiscal 1997. The Company has elected not to implement
the fair value based accounting method for employee stock options, but has
elected to disclose, commencing in fiscal 1997, the pro-forma net income and
earnings per share as if such method had been used to account for stock-based
compensation cost as described in the Statement.
In March 1995, the FASB issued Statement No. 121, "Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to be Disposed Of," which was
also adopted by the Company in fiscal 1997. The effect of adopting the standard
is insignificant.
Statement of Financial Account Standards No. 128, "Earnings Per Share", is
required to be adopted in fiscal 1998. At that time the Company will be required
to change the method currently being used to compute earnings per share and
restate all prior periods. Under the new requirements for calculating basic
earnings per share, the dilutive effect of stock option plans will be excluded,
but will be reflected in diluted earnings per share. The impact of SFAS No. 128
in the calculation of earnings per share is not expected to be material.
-13-
Item 8. Financial Statements.
---------------------
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
----
Report of Independent Auditor.......................................... 15
Financial Statements:
Consolidated Balance Sheets as of May 31, 1997 and 1996................ 16
Consolidated Statements of Earnings for the
years ended May 31, 1997, 1996 and 1995.............................. 18
Consolidated Statements of Shareholders' Equity
for the years ended May 31, 1997, 1996 and 1995...................... 19
Consolidated Statements of Cash Flows for the
years ended May 31, 1997, 1996 and 1995.............................. 20
Notes to Consolidated Financial Statements............................. 21
-14-
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
TSR, Inc.:
We have audited the accompanying consolidated balance sheets of TSR, Inc. and
subsidiaries as of May 31, 1997 and 1996, 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, 1997. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. 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, 1997 and 1996, and the results of their operations
and their cash flows for each of the years in the three-year period ended May
31, 1997, in conformity with generally accepted accounting principles.
KPMG PEAT MARWICK LLP
Jericho, New York
July 15, 1997
-15-
TSR, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
MAY 31, 1997 AND 1996
ASSETS
1997 1996
---- ----
CURRENT ASSETS:
Cash and cash equivalents (note 1(e)).............................................. $ 2,931,180 $ 2,958,922
Marketable securities (note 1(f)).................................................. 26,175 1,691,462
Accounts receivable:
Trade (net of allowance for doubtful accounts
of $173,000 in 1997 and $164,000 in 1996)................................... 10,408,542 6,022,264
Other......................................................................... 57,333 35,315
----------- -----------
10,465,875 6,057,579
Prepaid expenses................................................................... 3,860 34,039
Prepaid and recoverable income taxes............................................... 11,095 29,875
Deferred income taxes.............................................................. 59,000 118,000
----------- -----------
TOTAL CURRENT ASSETS..................................................... 13,497,185 10,889,877
----------- -----------
EQUIPMENT AND LEASEHOLD IMPROVEMENTS, AT COST:
Equipment.......................................................................... 641,862 429,236
Furniture and fixtures............................................................. 169,330 151,032
Automobiles........................................................................ 252,553 262,805
Leasehold improvements............................................................. 82,804 76,748
----------- -----------
1,146,549 919,821
Less accumulated depreciation and amortization..................................... 686,647 699,098
----------- -----------
459,902 220,723
OTHER ASSETS............................................................................ 57,782 34,091
DEFERRED INCOME TAXES (NOTE 2).......................................................... 29,000 22,000
----------- -----------
$14,043,869 $11,166,691
=========== ===========
See accompanying notes to consolidated financial statements.
(Continued)
-16-
TSR, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS, CONTINUED
MAY 31, 1997 AND 1996
LIABILITIES AND SHAREHOLDERS' EQUITY
1997 1996
---- ----
CURRENT LIABILITIES:
Accounts and other payables........................................................ $ 207,074 $ 159,797
Accrued and other liabilities:
Salaries, wages and commissions............................................... 2,204,254 1,484,437
Legal and professional fees................................................... 97,570 82,211
Customer support.............................................................. -- 182,600
Other......................................................................... 184,964 91,859
----------- -----------
2,486,788 1,841,107
Advances from customers............................................................ 783,892 399,945
Income taxes payable............................................................... 135,173 130,695
----------- ----------
TOTAL CURRENT LIABILITIES................................................ 3,612,927 2,531,544
COMMITMENTS AND CONTINGENCIES (NOTES 5 AND 6)
SHAREHOLDERS' EQUITY (NOTES 4, 7 AND 9):
Preferred stock, $1.00 par value,
authorized 1,000,000 shares; none issued........................................ -- --
Common stock, $.01 par value, authorized
4,000,000 shares; issued 2,914,138 and 4,939,192 shares......................... 29,141 49,392
Additional paid-in capital......................................................... 907,588 1,538,277
Retained earnings.................................................................. 9,494,213 10,334,277
----------- -----------
10,430,942 11,921,946
Less 2,025,054 common shares in treasury in 1996, at cost.......................... -- 3,286,799
----------- -----------
TOTAL SHAREHOLDERS' EQUITY............................................... 10,430,942 8,635,147
----------- -----------
$14,043,869 $11,166,691
=========== ===========
See accompanying notes to consolidated financial statements.
-17-
TSR, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
YEARS ENDED MAY 31, 1997, 1996 AND 1995
1997 1996 1995
---- ---- ----
REVENUES............................................................. $49,704,325 $31,810,163 $26,674,386
COST OF SALES........................................................ 37,485,148 23,317,141 19,351,891
RESEARCH AND DEVELOPMENT............................................. 324,768 -- --
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES......................... 8,924,027 7,037,025 6,058,504
----------- ----------- -----------
46,733,943 30,354,166 25,410,395
----------- ----------- -----------
INCOME FROM OPERATIONS............................................... 2,970,382 1,455,997 1,263,991
----------- ----------- -----------
OTHER INCOME:
Interest and dividend income.................................... 159,324 227,184 208,244
Gain from sales of securities, net.............................. 59,439 23,508 --
Gain (loss) from sales of assets................................ 77,650 (424) 15,425
----------- ----------- -----------
296,413 250,268 223,669
----------- ----------- -----------
INCOME BEFORE INCOME TAXES........................................... 3,266,795 1,706,265 1,487,660
PROVISION FOR INCOME TAXES (NOTE 2).................................. 1,471,000 742,000 686,000
----------- ----------- -----------
NET INCOME...................................................... $ 1,795,795 $ 964,265 $ 801,660
=========== =========== ===========
NET INCOME PER COMMON SHARE.......................................... $ 0.62 $ 0.32 $ 0.26
=========== =========== ===========
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING *........................................ 2,914,138 2,996,514 3,029,138
=========== =========== ===========
* Adjusted for a stock split in the form of a 100% stock dividend on November 14, 1996.
See accompanying notes to consolidated financial statements.
-18-
TSR, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED MAY 31, 1997, 1996 AND 1995
TOTAL
ADDITIONAL SHARE-
COMMON PAID-IN RETAINED TREASURY HOLDERS'
STOCK* CAPITAL* EARNINGS STOCK EQUITY
-------- ---------- ----------- ----------- -----------
BALANCE AT MAY 31, 1994...................... $ 49,392 $1,538,277 $ 9,174,180 $(2,954,043) $ 7,807,806
NET INCOME................................... -- -- 801,660 -- 801,660
-------- ---------- ----------- ----------- -----------
BALANCE AT MAY 31, 1995...................... 49,392 1,538,277 9,975,840 (2,954,043) 8,609,466
CASH DIVIDENDS ($0.20 PER SHARE)............. -- -- (605,828) -- (605,828)
PURCHASE OF TREASURY STOCK................... -- -- -- (332,756) (332,756)
NET INCOME................................... -- -- 964,265 -- 964,265
-------- ---------- ----------- ----------- -----------
BALANCE AT MAY 31, 1996...................... 49,392 1,538,277 10,334,277 (3,286,799) 8,635,147
NET INCOME................................... -- -- 1,795,795 -- 1,795,795
RETIRED TREASURY STOCK....................... (20,251) (630,689) (2,635,859) 3,286,799 --
-------- ---------- ---------- ----------- -----------
BALANCE AT MAY 31, 1997...................... $ 29,141 $ 907,588 $ 9,494,213 $ -- $10,430,942
======== ========== =========== =========== ===========
* Amounts adjusted for a stock split in the form of a 100% stock dividend on November 14, 1996.
See accompanying notes to consolidated financial statements.
-19-
TSR, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED MAY 31, 1997, 1996 AND 1995
1997 1996 1995
---- ---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income............................................................... $ 1,795,795 $ 964,265 $ 801,660
----------- ---------- ----------
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization........................................ 185,455 141,708 127,534
Provision for losses (recovery) on accounts receivable............... -- 10,000 (5,000)
Gain on sale of marketable securities, net........................... (59,439) (23,508) --
Loss (gain) on sale of fixed assets.................................. (77,650) 424 (15,425)
Deferred income taxes................................................ 52,000 16,000 (84,000)
Changes in assets and liabilities:
Accounts receivable-trade......................................... (4,386,278) (987,153) (1,099,882)
Other accounts receivable......................................... (22,018) 82,220 (7,047)
Prepaid expenses.................................................. 30,179 (3,979) 24,411
Prepaid and recoverable income taxes.............................. 18,780 9,817 (22,898)
Other assets...................................................... (23,691) (10,770) 5,939
Accounts payable and accrued expenses............................. 692,958 315,212 405,042
Advances from customers........................................... 383,947 161,354 238,591
Income taxes payable.............................................. 4,478 35,583 (7,581)
----------- ---------- ----------
Total adjustments.................................................... (3,201,279) (253,092) (440,316)
----------- ---------- ----------
Net cash provided by (used in) operating activities...................... (1,405,484) 711,173 361,344
----------- ---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturity and sale of marketable securities............. 4,846,275 8,079,734 3,006,577
Purchase of marketable securities.................................... (3,121,549) (5,393,507) (5,835,390)
Proceeds from sale of fixed assets................................... 77,650 15,756 16,763
Purchase of fixed assets............................................. (424,634) (149,306) (176,936)
----------- ---------- ----------
Net cash provided by (used in) investing activities...................... 1,377,742 2,552,677 (2,988,986)
----------- ---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Cash dividends paid.................................................. -- (605,828) --
Purchase of treasury stock........................................... -- (332,756) --
----------- ---------- ----------
Net cash used in financing activities.................................... -- (938,584) --
----------- ---------- ----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS......................... (27,742) 2,325,266 (2,627,642)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR............................... 2,958,922 633,656 3,261,298
----------- ---------- ----------
CASH AND CASH EQUIVALENTS AT END OF YEAR..................................... $ 2,931,180 $ 2,958,922 $ 633,656
=========== =========== ==========
SUPPLEMENTAL DISCLOSURE:
Income taxes paid........................................................ $ 1,396,000 $ 681,000 800,000
=========== =========== ==========
Interest paid............................................................ $ -- $ -- $ --
=========== =========== ==========
See accompanying notes to consolidated financial statements.
-20-
TSR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1997, 1996 AND 1995
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(A) BUSINESS
The Company is engaged in the business of providing contract computer
programming services. The Company provides technical computer
personnel to companies that desire to supplement their in-house
information technology capabilities. During fiscal 1997, the Company
developed Catch/21, a Year 2000 compliance solution which enables the
Company to correct, on a substantially automated basis, problems which
may occur in computer software as a result of the century change in
the year 2000. The Company has recently commenced providing services
to customers to make applications Year 2000 compliant. Previously,
until March 1, 1996, the Company provided construction specifications
databases on magnetic media, primarily to architectural and
engineering firms, and, until October 8, 1995, provided temporary
nurses and nurses' aides to health care facilities and home care
patients.
On October 8, 1995, the Company discontinued its health care services
business by transferring the existing caseload to another licensed
home care agency, which did not result in a gain or loss to the
Company. Based on the agreement, the purchasing agency pays the
Company 50% of the gross profit generated from the transferred
accounts for a period of two years, which amounted to $132,000 and
$46,000 included in revenues in fiscal 1997 and 1996, respectively.
The Company's exclusive license to market construction specifications
databases expired March 1, 1996. In June 1996, in accordance with the
terms of the termination agreement of its licensing contract, the
Company sold its customer database for $76,850 which was recorded as
non-operating income in fiscal 1997.
(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 POLICY
The Company recognizes contract computer programming services revenues
as services are provided. Revenues from the maintenance and support of
the Company's proprietary software are recognized monthly as services
are rendered. The revenues from the licensing of construction
specifications databases were recognized at shipment. The revenues
from health care services were recognized as services were provided.
Provided that acceptance is probable, revenue from code conversion is
recognized as services are rendered.
(D) RESEARCH AND DEVELOPMENT
In fiscal 1997 the Company commenced efforts to develop an automated
solution to the Year 2000 compliance problem. The resultant software,
Catch/21, has been used successfully to convert legacy IBM
mainframe/COBOL and RPG applications to attain Year 2000 compliance.
These expenditures will continue into fiscal 1998 as the Company seeks
to expand its product offerings into additional computer platforms and
languages.
(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, 1997 and 1996:
1997 1996
---------- ----------
Cash in banks ............................. $ 549,959 $ 208,946
Money Market Funds......................... 1,658,537 1,258,406
US Treasury Bills.......................... 722,684 1,491,570
---------- ----------
$2,931,180 $2,958,922
========== ==========
(Continued)
-21-
TSR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
MAY 31, 1997, 1996 AND 1995
(F) MARKETABLE SECURITIES
The Company classifies securities as held to maturity and carries them
at amortized cost only if it has a positive intent and ability to hold
those securities to maturity. If not classified as held to maturity,
such securities are classified as trading securities or securities
available for sale. Unrealized gains or losses for securities
available for sale are excluded from earnings and reported as a net
amount as a separate component of stockholders' equity. Unrealized
holding gains and losses for trading securities are included in
earnings. The Company's marketable debt securities primarily
consisting of U.S. Treasury Bills with a maturity at acquisition in
excess of 90 days are classified as held to maturity securities and,
its equity securities are classified as trading securities. The
amortized cost, gross unrealized holding gains, gross unrealized
holding losses and fair value for marketable securities by major
security type at May 31, 1997 and 1996, are as follows:
Gross Gross
Unrealized Unrealized
Amortized Holding Holding
Cost Gains Losses Fair Value
---------- ---------- ---------- ----------
1997: EQUITY SECURITIES................... $ 28,287 $ -- $(2,112) $ 26,175
========== ======= ======= ==========
1996: US Treasury Securities.............. $1,691,462 $14,086 $ -- $1,705,548
========== ======= ======= ==========
(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
Net income per common share has been computed on the weighted average
number of shares outstanding during the year of 2,914,138 in 1997,
2,996,514 in 1996, and 3,029,138 in 1995. The prior years' shares
outstanding have been adjusted for a stock split in the form of a 100%
stock dividend paid in November 1996. Since the assumed exercise of
stock options and warrants would be less than 3% dilutive, shares
issuable have not been included in the weighted average shares
outstanding for those years.
Statement of Financial Accounting Standards No. 128, "Earnings Per
Share", is required to be adopted in fiscal 1998. At that time, the
Company will be required to change the method currently used to
compute earnings per share and restate all prior periods. Under the
new requirements for calculating basic earnings per share, the
dilutive effect of stock option plans will be excluded, but will be
reflected in diluted earnings per share. The impact of SFAS No. 128 on
the calculation of earnings per share is not expected to be material.
(I) INCOME TAXES
Deferred tax liabilities and assets 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)
-22-
TSR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
MAY 31, 1997, 1996 AND 1995
(J) FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107, "Disclosures
About Fair Value of Financial Instruments," requires disclosure of the
fair value of certain financial instruments. Cash and cash
equivalents, accounts receivable, accounts and other payables, accrued
liabilities and advances from customers are reflected in the financial
statements at fair value because of the short-term maturity of these
instruments. Marketable securities are carried at their fair value
based upon quoted market values at May 31, 1997.
(K) USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities, and disclosure of contingent assets and liabilities at
the date of the financial statements, and the reported amounts of
revenues and expenses during the reporting period. Actual results
could differ from those estimates.
(L) ACCOUNTING FOR STOCK-BASED COMPENSATION
The Company records compensation expense for employee stock options
only if the current market price of the underlying stock exceeds the
exercise price on the date of the grant. On June 1, 1996, the Company
adopted SFAS No. 123, "Accounting for Stock-Based Compensation." The
Company has elected not to implement the fair value based accounting
method for employee stock options, but has elected to disclose the pro
forma net earnings and pro forma earnings per share for employee stock
option grants made beginning in fiscal 1996 as if such method had been
used to account for stock-based compensation cost as described in SFAS
No. 123.
(2) INCOME TAXES
A reconciliation of the provisions for income taxes computed at the federal
statutory rates for fiscal 1997, 1996 and 1995 to the reported amounts is
as follows:
1997 1996 1995
AMOUNT % Amount % Amount %
-------------------- ----------------- ------------------
Amounts at statutory federal tax rate......... $1,111,000 34.0% $580,000 34.0% $506,000 34.0%
State and local taxes, net of
federal income tax effect.................. 313,000 9.6 123,000 7.2 142,000 9.5
Non-deductible expenses....................... 48,000 1.4 39,000 2.3 39,000 2.6
Other, net.................................... (1,000) -- -- -- (1,000) --
---------- ---- -------- ---- -------- ----
$1,471,000 45.0% $742,000 43.5% $686,000 46.1%
========== ==== ======== ==== ======== ====
The components of the provision for income taxes are as follows:
Federal State Total
-------- -------- ----------
1997: CURRENT.............. $945,000 $474,000 $1,419,000
DEFERRED............. 52,000 -- 52,000
-------- -------- ----------
$997,000 $474,000 $1,471,000
======== ======== ==========
1996: Current.............. $539,000 $187,000 $ 726,000
Deferred............. 16,000 -- 16,000
-------- -------- ----------
$555,000 $187,000 $ 742,000
======== ======== ==========
1995: Current.............. $556,000 $214,000 $ 770,000
Deferred............. (84,000) -- (84,000)
-------- -------- ----------
$472,000 $214,000 $ 686,000
======== ======== ==========
(Continued)
-23-
TSR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
MAY 31, 1997, 1996 AND 1995
The tax effects of temporary differences that give rise to significant
portions of the deferred income tax assets at May 31, 1997 and 1996 are as
follows:
1997 1996
---- ----
Allowance for doubtful accounts receivable.... $59,000 $ 56,000
Equipment and leasehold improvement
depreciation and amortization............... 29,000 22,000
Accrued customer support...................... -- 62,000
------- --------
Total deferred income tax assets............ $88,000 $140,000
======= ========
The Company believes that it is more likely than not that it will realize
its deferred tax asset of $88,000 at May 31, 1997 based on the Company's
recent earnings.
(3) SEGMENT REPORTING AND MAJOR CUSTOMERS
The Company currently operates in one business segment, computer software,
and is engaged primarily in the business of providing contract computer
programming and Year 2000 compliance solution services. Previously, from
fiscal 1993 through fiscal 1996, the Company also provided temporary nurses
and nurses' aides to health care facilities and home care patients. The
following table summarizes certain financial information for the computer
software segment and the health care services segment as of and for the
years ended May 31, 1997, 1996 and 1995.
COMPUTER HEALTH CONSOLIDATED
SOFTWARE CARE CORPORATE TOTAL
----------- -------- ---------- ------------
Revenues to 1997............. $49,571,888 $132,437 -- $49,704,325
=========== ======== ========== ===========
unaffiliated customers 1996............. 31,365,091 445,072 -- 31,810,163
=========== ======== ========== ===========
1995............. 25,726,756 947,630 -- 26,674,386
=========== ======== ========== ===========
Operating profit 1997............. 2,839,329 131,053 -- 2,970,382
=========== ======== ========== ===========
1996............. 1,374,076 81,921 -- 1,455,997
=========== ======== ========== ===========
1995............. 1,263,351 640 -- 1,263,991
=========== ======== ========== ===========
Identifiable assets 1997............. 10,987,419 -- 3,056,450(1) 14,043,869
=========== ======== ========== ===========
1996............. 6,345,536 896 4,820,259(1) 11,166,691
=========== ======== ========== ===========
1995............. 5,251,621 193,711 5,183,529(1) 10,628,861
=========== ======== ========== ===========
Capital expenditures 1997............. 424,634 -- -- 424,634
=========== ======== ========== ===========
1996............. 135,084 14,222 -- 149,306
=========== ======== ========== ===========
1995............. 176,936 -- -- 176,936
=========== ======== ========== ===========
Depreciation and amortization 1997............. 184,262 1,193 -- 185,455
=========== ======== ========== ===========
1996............. 134,419 7,289 -- 141,708
=========== ======== ========== ===========
1995............. $ 113,360 $ 14,174 $ -- $ 127,534
=========== ======== ========== ===========
(1) Corporate identifiable assets consist of cash, marketable securities
and prepaid, recoverable and deferred income taxes.
(Continued)
-24-
TSR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
MAY 31, 1997, 1996 AND 1995
In the fiscal years ended May 31, 1997, 1996 and 1995 the Company derived
16.3%, 22.4%, and 12.8% respectively, of consolidated revenues from one
customer for contract computer programming services. The Company derived
10.3% of consolidated revenues from another contract computer programming
services customer in fiscal 1997. The two previously mentioned customers
represented 12.2% and 11.7%, respectively, of consolidated trade accounts
receivable as of May 31, 1997.
(4) STOCK OPTIONS
The Board of Directors of the Company has approved the 1997 Employee Stock
Option Plan. The plan provides for the granting of options to purchase up
to 400,000 shares of the Company's common stock at prices equal to fair
market values at the grant dates. Options are exercisable after one year
from date of grant and expire on the third anniversary of the date of
grant. Treatment of the options granted, to the extent allowable, as
Incentive Stock Options is subject to shareholder approval. None of the
options granted in fiscal 1997 were granted to officers or directors of the
Company.
STOCK OPTIONS OUTSTANDING
EXERCISE
SHARES PRICE
------- --------
Balance May 31, 1996.......................... 0 $ 0.00
Options granted............................... 110,000 18.25
------- ------
BALANCE AT MAY 31, 1997 (none exercisable).... 110,000 $18.25
======= ======
The per share weighted-average fair value of stock options granted during
1997 was approximately $9.95 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 100% and an expected option life of two years.
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 net income per common share in fiscal 1997 would have been
reduced to the pro forma amounts indicated below:
1997
----
Net Income: As reported...................... $1,795,795
Pro forma ....................... 1,746,000
Net income per
common share: As reported...................... $ 0.62
Pro forma........................ 0.60
(Continued)
-25-
TSR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
MAY 31, 1997, 1996 AND 1995
(5) COMMITMENTS
A summary of noncancellable long-term operating lease commitments for
facilities as of May 31, 1997 follows:
FISCAL YEAR AMOUNT
----------- ------
1998.................. $334,000
1999.................. 321,000
2000.................. 267,000
2001.................. 124,000
Thereafter............ 132,000
Total rent expenses under all lease agreements amounted to $236,000,
$211,000, and $190,000 and in 1997, 1996 and 1995, respectively.
(6) EMPLOYMENT AGREEMENTS
In June 1994, an employment agreement was entered into with the President
of the contract computer programming subsidiary providing for an annual
base salary of $150,000 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
subsidiary. During fiscal 1997, 1996, and 1995, $407,000, $253,000 and
$253,000 was paid as incentive compensation. This agreement is for a five
year term and provides for severance, in the event of termination, of the
base salary for the shorter of three years or the remainder of the original
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 1997, 1996 and 1995, the minimum bonus
of 7.5% of pre-tax profit was awarded, which amounted to $265,000,
$139,000 and $120,000 respectively under a similar plan included in this
executive's prior contract.
(7) TREASURY STOCK
During fiscal 1996, under a buy-back plan authorized by the Board of
Directors to repurchase up to 300,000 shares of the Company's common stock,
the Company purchased for $332,756, 115,000 shares of its common stock at
the market value of the stock on the purchase date. The remaining
authorization under the buy-back plan has been canceled. During fiscal
1997, the Company retired all its previously acquired treasury stock, which
amounted to 2,025,054 shares.
(8) CASH DIVIDEND
On July 18, 1995 the Board of Directors of the Company declared a cash
dividend of $0.20 per share on Common Stock payable on August 28, 1995 to
shareholders of record on July 31, 1995. The Company funded such dividend
from its available cash and maturing marketable securities. This dividend,
which amounted to $605,828, did not have a material impact on the liquidity
of the Company. The Company has not adopted a policy of paying dividends on
a regular periodic basis, and does not expect to declare a cash dividend
for fiscal 1997.
(9) STOCK DIVIDEND
On October 10, 1996 the Board of Directors of the Company declared a stock
split in the form of a 100% stock dividend on the shares of Common Stock
payable November 14, 1996 to stockholders of record as of October 28, 1996.
All data for prior periods has been adjusted accordingly.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
---------------------------------------------------------------
None
-26-
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 1997 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 1997 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 1997 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 1997 Annual Meeting
of Shareholders.
PART IV
Item 14. Exhibits; Financial Statement Schedules, and Reports on Form 8-K.
-----------------------------------------------------------------
(a) Exhibits:
---------
3.1 Articles of Incorporation of the Company, as amended,
incorporated by reference to Exhibit 3.1 to the Annual Report on
Form 10-K filed by the Company for the fiscal year ended
May 31, 1992.
3.2 Bylaws of the Company, as amended, incorporated by reference to
Exhibit 3.2 to the Annual Report on Form 10-K filed by the
Company for the fiscal year ended May 31, 1992.
10.1 Employment Agreement between TSR, Inc. and Ernest G. Bago, dated
as of June 1, 1994, incorporated by reference to Exhibit 10.2 to
the Annual Report on Form 10-KSB filed by the Company for the
fiscal year ended May 31, 1995.
10.2 1997 Employee Stock Option Plan.
10.3 Form of Employee Stock Option Agreement.
10.4 Employment Agreement dated June 1, 1997 between the Company and
Joseph F. Hughes.
10.5 Subscription and Shareholders Agreement dated September 30, 1996
among the Company, Catch/21 Enterprises Incorporated and William
Connor, 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, 1996.
21 List of Subsidiaries.
27 Financial Data Schedule.
(b) Reports on Form 8-K:
--------------------
None
-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 27, 1997
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.
By: /s/ J.F. HUGHES
---------------------------------------------------------------------
J. F. Hughes, President, Treasurer and Director
By: /s/ JOHN G. SHARKEY
---------------------------------------------------------------------
John G. Sharkey, Vice President, Finance, Controller and Secretary
By: /s/ ERNEST G. BAGO
---------------------------------------------------------------------
Ernest G. Bago, President, TSR Consulting Services, Inc. and Director
By: /s/ JOHN H. HOCHULI, JR.
---------------------------------------------------------------------
John H. Hochuli, Jr., Director
By: /s/ JAMES J. HILL
---------------------------------------------------------------------
James J. Hill, Director
Dated: August 27, 1997
-28-
TSR, INC. AND SUBSIDIARIES
EXHIBIT INDEX
FORM 10-K, MAY 31, 1997
EXHIBIT SEQUENTIAL
NUMBER EXHIBIT PAGE #
- ------- ------- ----------
3.1 Articles of Incorporation of the Company, as amended, incorporated by reference N/A
to Exhibit 3.1 to the Annual Report on Form 10-K filed by the Company for the fiscal
year ended May 31, 1992.
3.2 Bylaws of the Company, as amended, incorporated by reference to Exhibit 3.2 to the N/A
Annual Report on Form 10-K filed by the Company for the fiscal year ended May 31,
1992.
10.1 Employment Agreement between TSR, Inc. and Ernest G. Bago, dated as of June 1, N/A
1994, incorporated by reference to Exhibit 10.2 to the Annual Report on Form 10-KSB
filed by the Company for the fiscal year ended May 31, 1995.
10.2 1997 Employee Stock Option Plan.
10.3 Form of Employee Stock Option Agreement.
10.4 Employment Agreement dated July 1, 1997 between the Company and Joseph F.
Hughes.
10.5 Subscription and Shareholders Agreement dated September 30, 1996 among the N/A
Company, Catch/21 Enterprises Incorporated and William Connor, 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, 1996.
21 List of Subsidiaries.
27 Financial Data Schedule.
-29-