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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
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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, 1998
or
[ ] Transition Report Under Section 13 or 15(d) of
The Securities Exchange Act Of 1934
For the transition period from __________ to __________
Commission File Number: 0-8656
TSR, Inc.
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(Exact name of registrant as specified in its charter)
Delaware 13-2635899
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
400 Oser Avenue, Hauppauge, NY 11788
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(Address of principal executive offices)
Registrant's telephone number: 516-231-0333
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 $38,232,000 based on the market
price of the Registrant's Common Stock at July 31, 1998 of $11.38 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.
5,988,276 shares of Common Stock, par value $0.01 per share, as of July 31,
1998.
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 1998 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.
General
TSR, Inc. (the "Company") is primarily engaged in the business of providing
contract computer programming services to its clients. The Company provides
technical computer personnel to companies to supplement their in-house
information technology ("IT") capabilities. In addition, the Company has
developed Catch/21, a Year 2000 compliance software 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's contract computer programming services business has been the
Company's primary focus and the Company believes that this business will be the
Company's primary source of growth in the future.
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, 1998 the Company provided IT
staffing services to approximately 115 clients.
The Company has developed a software solution, called Catch/21, which automates
to a significant extent the conversion process for applications which may not
properly interpret dates after the year 1999. Catch/21 utilizes a sliding
century approach, an internal modification technique, 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 or the form in which data is stored. Currently, Catch/21 can be used to
convert IBM mainframe, COBOL, RPG, PL/1, Assembler, CA-ADS, and CA- IDEAL
applications. Additionally, several of the languages are supported in AS/400 and
DEC/VAX environments. The Company has provided Year 2000 conversion services to
approximately 20 companies and is engaged in discussions with potential clients
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
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, as of May 31, 1998, the Company employed 19 persons who are responsible
for recruiting technical personnel and 14 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 115 clients during the
year ended May 31, 1998 as compared to 85 in the prior fiscal year. The Company
has historically derived a significant percentage of its total revenues from a
relatively small number of clients. However, in the fiscal year ended May 31,
1998, the Company did not have any clients which constituted more than 10% of
consolidated revenues. Additionally, the Company's top ten clients accounted for
only 40% of consolidated revenues in fiscal 1998 as compared to 50% in fiscal
1997. While continuing its efforts to expand further its client base, the
Company's marketing efforts are focused primarily on increasing business from
its existing accounts. To this end, the Company expects to expand its sales
force by 40%. This will give the account executives more time to spend with each
account, as they will have fewer accounts to cover.
The Company's marketing is conducted through account executives who are
responsible for customers in an assigned territory. Account executives call on
potential new customers and are also responsible for maintaining existing client
contacts within an assigned territory. Instead of utilizing technical managers
to oversee the services provided by technical personnel to each client, the
account executives are responsible for this role. As a result of the cost
savings due to the combined functions of the account executives, the Company is
able to provide its account executives with significantly higher incentive-
based compensation. In addition, the Company generally pairs each account
executive with a recruiter of technical personnel, who also receives
incentive-based compensation. The Company believes that this approach allows the
Company to more effectively serve its clients' needs for technical personnel, as
well as providing its account executives and recruiters with incentives to
maximize revenues in their territories.
In accordance with industry practice, most of the Company's contracts for
contract computer programming services are terminable by either the client or
the Company on short notice. The Company does not believe that backlog is
material to its business.
PROFESSIONAL STAFF AND RECRUITMENT
The Company maintains a database of over 35,000 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 19 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
The Company commenced in fiscal 1997 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 software solution. The Company's Catch/21 software 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, 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 similar conversion services. As of May 31, 1998 the
Company charges a fixed price of $0.30 and up per line of code. Currently, the
Company's Catch/21 conversion software is designed for conversion of IBM
mainframe COBOL, RPG, PL/1, Assembler, CA-ADS, and CA-IDEAL programs.
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. As of July 31, 1998, the Company has 48
employees directly involved in its Year 2000 business. The Company had
previously hired analysts in anticipation of significant growth in its Year 2000
business. Due to slower than anticipated growth in its Year 2000 business, the
Company reduced the number of employees in its Year 2000 business subsequent to
its fiscal year end.
The Company has converted an aggregate of 27,000,000 lines of code pursuant to
agreements with twenty companies. Revenue growth and contracts with new
customers have been below Company expectations. In addition, the Company is
experiencing more intense competition. Because of these factors it is difficult
to accurately predict near term Year 2000 compliance solution revenues and the
Company expects revenues may decline in its Year 2000 business. However, the
Company is in the process of reducing expenses to appropriate levels to match
its revenue stream.
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-
Competition
The technical staffing industry is highly competitive and fragmented and has low
barriers to entry. The Company competes for potential clients with providers of
outsourcing services, systems integrators, computer systems consultants, other
providers of technical staffing services and, to a lesser extent, temporary
personnel agencies. The Company competes for technical personnel with other
providers of technical staffing services, systems integrators, providers of
outsourcing services, computer systems consultants, clients and temporary
personnel agencies. Many of the Company's competitors are significantly larger
and have greater financial resources than the Company. The Company believes that
the principal competitive factors in obtaining and retaining clients are
accurate assessment of clients' requirements, timely assignment of technical
employees with appropriate skills and the price of services. The principal
competitive factors in attracting qualified technical personnel are
compensation, availability, quality and variety of projects and schedule
flexibility. The Company believes that many of the technical personnel included
in its database may also be pursuing other reemployment opportunities.
Therefore, the Company believes that its responsiveness to the needs of
technical personnel is an important factor in the Company's ability to fill
projects. Although the Company believes it competes favorably with respect to
these factors, it expects competition to increase and there can be no assurance
that the Company will remain competitive.
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.
Intellectual Property Rights
The Company's success in the Year 2000 compliance solution services business is
dependent upon its Catch/21 Year 2000 software 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
As of July 31, 1998, the Company employs 387 people including its 3 executive
officers. Of such employees 20 are engaged in sales, 19 are recruiters for
programmers, 320 are technical and programming consultants, and 25 are in
administration and clerical functions. Of the 387 employees, approximately 326
are employed in the contract computer programming business, 48 in the Year 2000
business and 13 are employed directly by the Company.
-6-
Item 2. Properties.
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.
None
Item 4. Submission of Matters to a Vote of Security Holders.
Not Applicable
-7-
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, 1998 and 1997:
JUNE 1, 1997 - MAY 31, 1998
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1ST 2ND 3RD 4TH
QUARTER QUARTER QUARTER QUARTER
------- ------- ------- -------
High Sales Price............... 19-1/8 16-1/2 28-3/8 27
Low Sales Price................ 8-3/8 9-1/4 13-3/4 10-1/4
JUNE 1, 1996 - MAY 31, 1997
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1ST 2ND 3RD 4TH
QUARTER QUARTER QUARTER QUARTER
------- ------- ------- -------
High Sales Price............... 3-3/8 5-5/8 25-1/8 14-3/16
Low Sales Price................ 1-15/16 2-1/16 4-3/4 6-1/2
There were 220 holders of record of the Company's Common Stock as of July 31,
1998. Additionally, the Company estimates that there were approximately 3,000
beneficial holders as of that date. On October 22, 1997, the Company declared a
stock split in the form of a 100% stock dividend on the shares of common stock
payables November 17, 1997 to shareholders of record on November 3, 1997.
Additionally, 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 these splits. 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 $0.10 per share on
its Common Stock payable on August 28, 1995 to shareholders of record as of July
31, 1995. 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
1998.
Item 6. Selected Financial Data.
(Amounts in Thousands, Except Per Share Data)
MAY 31, May 31, May 31, May 31, May 31,
1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
Revenues.................................. $ 70,435 $ 49,704 $ 31,810 $ 26,674 $ 21,926
Income From Operations.................... 6,064 2,970 1,456 1,264 799
Net Income................................ 3,430 1,796 964 802 500
Diluted Net Income Per Common Share....... 0.57 0.31 0.16 0.13 0.08
Working Capital........................... 14,994 9,884 8,358 8,337 7,525
Total Assets.............................. 20,516 14,044 11,167 10,629 9,191
Shareholders' Equity...................... 16,167 10,431 8,635 8,609 7,808
Book Value Per Common Share............... 2.70 1.79 1.48 1.42 1.29
Cash Dividends Declared
Per Common Share........................ -- -- 0.10 -- --
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Note: Net Income, Book Value and Cash Dividends Per Common Share have been
adjusted for stock splits in the form of 100% stock dividends paid in
November 1996 and November 1997.
-8-
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations.
The following discussion and analysis should be read in conjunction with the
financial statements and the notes to the consolidated financial statements
presented elsewhere in this report.
Overview
The Company is primarily engaged in the business of providing contract computer
programming services to its clients. The Company provides technical computer
personnel to companies to supplement their in-house IT capabilities. In
addition, the Company has developed Catch/21, a Year 2000 compliance software
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
commenced providing services to customers to make applications Year 2000
compliant. The Company's contract computer programming services business has
been the Company's primary focus and the Company believes that this business
will be the Company's primary source of growth in the future.
In the year ended May 31, 1998, the Company provided IT staffing services to
approximately 115 clients as compared to 85 in the prior fiscal year. The
Company has historically derived a significant percentage of its total revenues
from a relatively small number of clients. However, in the fiscal year ended May
31, 1998, the Company did not have any clients who constituted more than 10% of
consolidated revenues. Additionally, the Company's top ten clients accounted for
only 40% of consolidated revenues in fiscal 1998 as compared to 50% in fiscal
1997. 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 Year 2000 compliance solution business represented approximately
10% of consolidated revenues in fiscal 1998. The Company has converted an
aggregate of 27,000,000 lines of code pursuant to agreements with twenty
companies. Revenue growth and contracts with new customers have been below
Company expectations. In addition, the Company is experiencing more intense
competition. Because of these factors it is difficult to accurately predict near
term Year 2000 compliance solution revenues. However, the Company is in the
process of reducing expenses to appropriate levels to match its revenue stream.
While the Company initially experienced growth in its Year 2000 business during
its 1998 fiscal year and anticipated that such growth would continue, the
Company experienced a slow-down in obtaining contracts with new customers during
the latter part of the 1998 fiscal year. The Company does not presently
anticipate significant growth in its Year 2000 business in the near term.
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.
-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:
YEAR ENDED MAY 31,
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1998 1997 1996
------------------ ------------------ ------------------
% OF % of % of
AMOUNT REVENUE Amount Revenue Amount Revenue
------- ------- ------- ------- ------- -------
(Amounts in Thousands)
Revenues ...................................... $70,435 100.0 $49,704 100.0 $31,810 100.0
Cost of Sales ................................. 51,332 72.9 37,485 75.4 23,317 73.3
------- ----- ------- ----- ------- -----
Gross Profit .................................. 19,103 27.1 12,219 24.6 8,493 26.7
Selling, General, and Administrative expenses.. 12,208 17.3 8,924 18.0 7,037 22.1
Research and Development expenses ............. 831 1.2 325 0.6 -- --
------- ----- ------- ----- ------- -----
Income from Operations ........................ 6,064 8.6 2,970 6.0 1,456 4.6
Other Income .................................. 164 0.3 297 0.6 250 0.8
------- ----- ------- ----- ------- -----
Income Before Income Taxes..................... 6,228 8.9 3,267 6.6 1,706 5.4
Provision for Income Taxes .................... 2,798 4.0 1,471 3.0 742 2.4
------- ----- ------- ----- ------- -----
Net Income .................................... $ 3,430 4.9 $ 1,796 3.6 $ 964 3.0
======= ===== ======= ===== ======= =====
Revenues
Revenues consist primarily of revenues from contract computer programming
services. In addition, the Company's revenues included revenues from its Year
2000 software solution 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 1998 increased $20,731,000
or 41.7% over fiscal 1997. For fiscal 1998 89.6% of revenues were from contract
computer programming services and 10.3% of revenues were from the Year 2000
business.
Contract computer programming services revenues increased $13,757,000 from
$49,361,000 in fiscal 1997 to $63,118,000 in fiscal 1998. This increase resulted
from an increase in technical personnel on billing from several new accounts and
an overall increase in the number of programmers on billing with clients in
fiscal 1998. The Company's contract computer programming services revenues for
fiscal 1998 increased by 27.9% over fiscal 1997, as compared to an increase of
65.0% from fiscal 1997 over fiscal 1996. The growth in revenues in the contract
computer programming services business in fiscal 1997 resulted, to a significant
extent, from several large projects with the Company's largest customer, which
were discontinued by such customer at the end of fiscal 1997 and during the
first half of fiscal 1998. The rate of growth of the Company's contract computer
programming services business from fiscal 1998 over fiscal 1997, would have been
significantly higher if the effects of such large projects were eliminated. Such
increased growth in the remaining contract computer programming services
business resulted from an increase in accounts from 85 to 115, including several
new significant accounts and further penetration at existing accounts. The
number of programmers on billing with clients increased from 450 at May 31, 1997
to 460 at May 31, 1998. The number of programmers on billing with clients at May
31, 1997 included approximately 50 programmers involved in the larger projects
which were discontinued as discussed above. The Company expects to continue to
broaden its account base by adding additional sales executives and pursuing new
accounts.
Revenues from the Company's Catch/21 Year 2000 compliance business, which was
commenced in fiscal 1997, were $7,268,000 for the year versus $171,000 in fiscal
1997. These revenues consisted mainly of line of code charges for the
remediation of approximately 27,000,000 lines of code for approximately 20
customers. The Company's Year 2000 revenues during the fourth quarter of fiscal
1998 were approximately the same as the third quarter revenues and the Company
expects these revenues may decline. Quarterly revenues from the Company's Year
2000 business can be significantly impacted by the timing of releases of code by
the Company's customers to the Company's conversion facility, as well as the
timing of entering into agreements with new customers. At the present time, the
Company has received less code from customers than it had expected based on
customer's original estimates. In addition, the Company is experiencing more
intense competition which has impacted obtaining new customers. While the
Company believes that its customers have been satisfied with the Company's Year
2000 conversion services and the performance of its Catch/21 software, the above
factors and conditions of the Year 2000 industry generally make it difficult to
predict near term revenues.
-10-
Revenues for fiscal 1997 increased $17,894,000 or 56.3% over fiscal 1996.
Contract computer programming services revenues contributed an increase of
$19,452,000 which was offset by decreases in construction specifications and
health care services of $1,729,000 which businesses were terminated during the
1996 fiscal year. In fiscal 1997, the Company had its first revenues from its
Year 2000 compliance business of $171,000. The increase in revenues in contract
computer programming services resulted primarily from several larger projects
with the Company's largest account during fiscal 1997.
Cost of Sales
Cost of sales increased by $13,847,000 or 36.9% in fiscal 1998 over fiscal 1997.
This increase included an increase in cost of sales in contract computer
programming of $11,171,000 from $37,348,000 in fiscal 1997 to $48,519,000 for
fiscal 1998. 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. The Year 2000 business incurred cost of sales
of $2,813,000 in fiscal 1998 versus $137,000 in fiscal 1997. These costs
consisted primarily of salaries of analysts and quality assurance personnel.
Cost of sales as a percentage of revenues decreased to 72.9% in fiscal 1998 from
75.4% in fiscal 1997. This decrease is primarily attributable to the cost of
sales as a percentage of revenue in the Year 2000 business being less than the
contract computer programming business. Costs of sales in the contract computer
programming business as a percentage of revenue increased to 76.9% in fiscal
1998 from 75.7% in fiscal 1997. This resulted primarily from increased amounts
paid to programmers outpacing the Company's ability to pass increases on to
customers.
The cost of sales for the Company's contract computer programming 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. Due to slower than anticipated growth in its Year 2000
business, the Company reduced the number of employees in its Year 2000 business
subsequent to its fiscal year end.
Fiscal 1997 cost of sales increased $14,168,000 or 60.8% over fiscal 1996. The
increase included additional costs of $14,520,000 from contract computer
programming which primarily resulted from the above mentioned revenue increase.
Construction specifications and health care services costs decreased by $489,000
due to the termination of these businesses during fiscal year 1996. The Year
2000 business incurred costs of $137,000, for fiscal 1997.
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 $3,284,000 or 36.8%
from $8,924,000 in fiscal 1997 to $12,208,000 in fiscal 1998. Contract computer
programming services expenses increased $1,056,000 over the prior year to
$9,467,000. 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
the Company's client base in connection with the continuation of the Company's
planned expansion. In fiscal 1998 approximately $2,741,000 in selling, general
and administrative expenses were attributable to the Catch/21 solution business
which commenced operations in fiscal 1997. These expenses consisted primarily of
marketing, advertising, management and facilities expenses.
In fiscal 1997, selling, general and administrative expenses increased
$1,887,000 or 26.8% over the prior year. The contract computer programming
business incurred increases amounting to $2,406,000 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 $815,000 due to the
termination of those businesses.
-11-
Research and Development
Research and development costs of $831,000 in the current year represent amounts
expended to expand Catch/21, the Company's Year 2000 compliance solution,
product offerings into additional computer platforms and languages such as PL/1,
Assembler and several fourth generation languages. Fiscal 1997 expenditures of
$325,000 primarily related to the development of the Catch/21 solution. Research
and development costs are expected to decline in fiscal 1999 as the millennium
approaches.
Other Income
Fiscal 1998 other income resulted primarily from interest and dividend income of
$158,000. The Company also sustained a net loss of $3,000 from marketable
securities due to mark to market adjustments of its equity portfolio.
Fiscal 1997 other income also 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. Gains from marketable securities of $59,000 in fiscal 1997 resulted
from the purchase and sale of marketable equity securities during the period.
Income Taxes
The effective income tax rate decreased slightly from 45.0% in fiscal 1997 to
44.9% in fiscal 1998 because non-deductible expenses did not grow as rapidly as
taxable income.
The effective income tax rate increased to 45.0% in fiscal 1997 from 43.5% in
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.
Liquidity, Capital Resources and Changes in Financial Condition
The Company expects that cash flow generated from operations together with its
cash and marketable securities and available credit facilities will be
sufficient to provide the Company with adequate resources to meet its cash
requirements.
At May 31, 1998, the Company had working capital of $14,994,000 and cash and
cash equivalents of $2,425,000 as compared to working capital of $9,884,000 and
cash and cash equivalents of $2,931,000 at May 31, 1997. Working capital
increased due to the Company's net income in the 1998 fiscal year and $2,306,400
of proceeds from the sale of common stock. Cash and equivalents declined from
May 31, 1997 to May 31, 1998 due to the cash used in operations, as discussed
below, and cash used to purchase marketable securities and fixed assets,
partially offset by the cash generated from the sale of common stock.
-12-
Net cash flow of $308,000 was used in operations during fiscal 1998 as compared
to $1,405,000 of net cash flow used by operations in fiscal 1997. While the
Company had net income of $3,430,000, in fiscal 1998 the Company had cash flow
used in operations as a result of an increase in accounts receivable of
$4,629,000 from $10,409,000 at May 31, 1997 to $15,038,000 at May 31, 1998. 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 $536,000 from $2,694,000 at May 31,
1997 to $3,229,000 at May 31, 1998. The increase in accounts payable and accrued
expenses resulted primarily from the increase in cost of sales.
Cash flow used by investing activities resulted primarily from the Company's
purchase of United States Treasury Bills and fixed assets. The increase in the
purchase of fixed assets from $425,000 in fiscal 1997 to $960,000 in 1998
related primarily to the ramping up of the Year 2000 compliance solution
business. The significant increase was required for equipment to emulate client
computer environments to enable sufficient testing and quality assurance of the
Catch/21 software solution.
Cash flow from financing activities of $2,306,400 resulted primarily from the
sale of 160,000 shares of common stock at $16 per share, less expenses, in a
private placement on January 30, 1998.
The Company's capital resource commitments at May 31, 1998 consisted of lease
obligations on its branch and corporate facilities amounting to $844,000 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.
Although the Company's cash and marketable securities were sufficient to enable
it to meet its cash requirements during fiscal 1998, 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 available a revolving line of credit of $5,000,000 from a major
money center bank. As of May 31, 1998 there were no amounts outstanding under
this line of credit.
Year 2000 Information
The Company is in the process of reviewing the potential impact of the Year 2000
on its computer systems. The Company uses computer systems throughout its entire
operations. The Company has not completed its assessment, but currently believes
that its computer systems are substantially Year 2000 compliant and that any
costs of addressing this issue will not have a material adverse impact on the
Company's financial position. However, if the Company, or third parties upon
which the Company relies, are unable to address the Year 2000 issue in a timely
manner, it could result in a material financial risk to the Company.
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 bring in new customers
and the risk that the Catch/21 software solution will not achieve increased
commercial acceptance.
-13-
Item 8. Financial Statements.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
----
Independent Auditors' Report ............................................. 15
Financial Statements:
Consolidated Balance Sheets as of May 31, 1998 and 1997 .................. 16
Consolidated Statements of Earnings for the
years ended May 31, 1998, 1997 and 1996 ............................. 18
Consolidated Statements of Shareholders' Equity
for the years ended May 31, 1998, 1997 and 1996 ..................... 19
Consolidated Statements of Cash Flows for the
years ended May 31, 1998, 1997 and 1996 ............................. 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, 1998 and 1997, 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, 1998. 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, 1998 and 1997, and the results of their operations
and their cash flows for each of the years in the three-year period ended May
31, 1998, in conformity with generally accepted accounting principles.
KPMG PEAT MARWICK LLP
Jericho, New York
July 15, 1998
-15-
TSR, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
MAY 31, 1998 AND 1997
ASSETS
1998 1997
----------- -----------
CURRENT ASSETS:
Cash and cash equivalents (note 1(e)) ............ $ 2,425,122 $ 2,931,180
Marketable securities (note 1(f)) ................ 1,575,945 26,175
Accounts receivable:
Trade (net of allowance for doubtful accounts
of $173,000 in 1998 and 1997) ............... 15,037,995 10,408,542
Other ......................................... 86,772 57,333
----------- -----------
15,124,767 10,465,875
Prepaid expenses ................................. 67,449 3,860
Prepaid and recoverable income taxes ............. 90,823 11,095
Deferred income taxes ............................ 59,000 59,000
----------- -----------
TOTAL CURRENT ASSETS ................... 19,343,106 13,497,185
----------- -----------
EQUIPMENT AND LEASEHOLD IMPROVEMENTS, AT COST:
Equipment ........................................ 1,297,551 641,862
Furniture and fixtures ........................... 222,709 169,330
Automobiles ...................................... 252,553 252,553
Leasehold improvements ........................... 188,006 82,804
----------- -----------
1,960,819 1,146,549
Less accumulated depreciation and amortization ... 952,043 686,647
----------- -----------
1,008,776 459,902
OTHER ASSETS ....................................... 90,995 57,782
DEFERRED INCOME TAXES (NOTE 2) ..................... 73,000 29,000
----------- -----------
$20,515,877 $14,043,869
=========== ===========
See accompanying notes to consolidated financial statements.
(Continued)
-16-
TSR, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS, CONTINUED
MAY 31, 1998 AND 1997
LIABILITIES AND SHAREHOLDERS' EQUITY
1998 1997
----------- -----------
CURRENT LIABILITIES:
Accounts and other payables .................... $ 278,410 $ 207,074
Accrued and other liabilities:
Salaries, wages and commissions ............. 2,481,964 2,204,254
Legal and professional fees ................. 79,578 97,570
Other ....................................... 389,444 184,964
----------- -----------
2,950,986 2,486,788
Advances from customers ........................ 946,257 783,892
Income taxes payable ........................... 173,377 135,173
----------- -----------
TOTAL CURRENT LIABILITIES ............ 4,349,030 3,612,927
----------- -----------
COMMITMENTS AND CONTINGENCIES (NOTES 6 AND 7)
SHAREHOLDERS' EQUITY (NOTES 4, 8, 9 AND 10):
Preferred stock, $1.00 par value,
authorized 1,000,000 shares; none issued .... -- --
Common stock, $.01 par value, authorized
25,000,000 shares; issued 5,988,276 and
5,828,276 shares ............................ 59,883 58,283
Additional paid-in capital ..................... 3,183,246 878,446
Retained earnings .............................. 12,923,718 9,494,213
----------- -----------
TOTAL SHAREHOLDERS' EQUITY ........ 16,166,847 10,430,942
----------- -----------
$20,515,877 $14,043,869
=========== ===========
See accompanying notes to consolidated financial statements.
-17-
TSR, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
YEARS ENDED MAY 31, 1998, 1997 AND 1996
1998 1997 1996
----------- ----------- -----------
REVENUES ............................................. $70,434,925 $49,704,325 $31,810,163
COST OF SALES ........................................ 51,332,267 37,485,148 23,317,141
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES ......... 12,208,090 8,924,027 7,037,025
RESEARCH AND DEVELOPMENT EXPENSES .................... 830,441 324,768 --
----------- ----------- -----------
64,370,798 46,733,943 30,354,166
----------- ----------- -----------
INCOME FROM OPERATIONS ............................... 6,064,127 2,970,382 1,455,997
----------- ----------- -----------
OTHER INCOME:
Interest and dividend income .................... 158,155 159,324 227,184
Gain (loss) from marketable securities, net ..... (3,377) 59,439 23,508
Gain (loss) from sales of assets ................ 8,600 77,650 (424)
----------- ----------- -----------
163,378 296,413 250,268
----------- ----------- -----------
INCOME BEFORE INCOME TAXES ........................... 6,227,505 3,266,795 1,706,265
PROVISION FOR INCOME TAXES (NOTE 2) .................. 2,798,000 1,471,000 742,000
----------- ----------- -----------
NET INCOME ...................................... $ 3,429,505 $ 1,795,795 $ 964,265
=========== =========== ===========
BASIC NET INCOME PER COMMON SHARE .................... $ 0.58 $ 0.31 $ 0.16
=========== =========== ===========
WEIGHTED AVERAGE NUMBER OF
BASIC COMMON SHARES OUTSTANDING * .................. 5,881,609 5,828,276 5,993,028
=========== =========== ===========
DILUTED NET INCOME PER COMMON SHARE .................. $ 0.57 $ 0.31 $ 0.16
=========== =========== ===========
WEIGHTED AVERAGE NUMBER OF
DILUTED COMMON SHARES OUTSTANDING * ................ 6,035,038 5,831,226 5,993,028
=========== =========== ===========
- ----------
* Adjusted for stock splits in the form of 100% stock dividends on November 14, 1996
and November 17, 1997.
See accompanying notes to consolidated financial statements.
-18-
TSR, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED MAY 31, 1998, 1997 AND 1996
ADDITIONAL TOTAL
COMMON PAID-IN RETAINED TREASURY SHAREHOLDERS'
STOCK* CAPITAL* EARNINGS STOCK EQUITY
-------- ---------- ----------- ----------- -----------
BALANCE AT MAY 31, 1995 .................. $ 98,784 $1,488,885 $ 9,975,840 $(2,954,043) $ 8,609,466
CASH DIVIDENDS ($0.10 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 .................. 98,784 1,488,885 10,334,277 (3,286,799) 8,635,147
NET INCOME ............................... -- -- 1,795,795 -- 1,795,795
RETIRED TREASURY STOCK ................... (40,501) (610,439) (2,635,859) 3,286,799 --
-------- ---------- ----------- ----------- -----------
BALANCE AT MAY 31, 1997 .................. 58,283 878,446 9,494,213 -- 10,430,942
SALE OF COMMON STOCK ..................... 1,600 2,304,800 -- -- 2,306,400
NET INCOME ............................... -- -- 3,429,505 -- 3,429,505
-------- ---------- ----------- ----------- -----------
BALANCE AT MAY 31, 1998 .................. $ 59,883 $3,183,246 $12,923,718 $ -- $16,166,847
======== ========== =========== =========== ===========
- ---------------
* Amounts adjusted for stock splits in the form of 100% stock dividends on November 14, 1996 and November 17, 1997.
See accompanying notes to consolidated financial statements.
-19-
TSR, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED MAY 31, 1998, 1997 AND 1996
1998 1997 1996
----------- ----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ........................................................ $ 3,429,505 $ 1,795,795 $ 964,265
----------- ----------- -----------
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization ................................. 436,519 185,455 141,708
Provision for losses on accounts receivable ................... -- -- 10,000
Loss (gain) from marketable securities, net ................... 3,377 (59,439) (23,508)
Loss (gain) on sale of fixed assets ........................... (8,600) (77,650) 424
Deferred income taxes ......................................... (44,000) 52,000 16,000
Changes in assets and liabilities:
Accounts receivable-trade .................................. (4,629,453) (4,386,278) (987,153)
Other accounts receivable .................................. (29,439) (22,018) 82,220
Prepaid expenses ........................................... (63,589) 30,179 (3,979)
Prepaid and recoverable income taxes ....................... (79,728) 18,780 9,817
Other assets ............................................... (58,213) (23,691) (10,770)
Accounts payable and accrued expenses ...................... 535,534 692,958 315,212
Advances from customers .................................... 162,365 383,947 161,354
Income taxes payable ....................................... 38,204 4,478 35,583
----------- ----------- -----------
Total adjustments ............................................. (3,737,023) (3,201,279) (253,092)
----------- ----------- -----------
Net cash provided by (used in) operating activities ............... (307,518) (1,405,484) 711,173
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturity and sale of marketable securities ...... -- 4,846,275 8,079,734
Purchase of marketable securities ............................. (1,553,147) (3,121,549) (5,393,507)
Proceeds from sale of fixed assets ............................ 8,600 77,650 15,756
Purchase of fixed assets ...................................... (960,393) (424,634) (149,306)
----------- ----------- -----------
Net cash provided by (used in) investing activities ............... (2,504,940) 1,377,742 2,552,677
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from sale of common stock ............................ 2,306,400 -- --
Cash dividends paid ........................................... -- -- (605,828)
Purchase of treasury stock .................................... -- -- (332,756)
----------- ----------- -----------
Net cash provided by (used in) financing activities ............... 2,306,400 -- (938,584)
----------- ----------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS .................. (506,058) (27,742) 2,325,266
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR ........................ 2,931,180 2,958,922 663,656
----------- ----------- -----------
CASH AND CASH EQUIVALENTS AT END OF YEAR .............................. $ 2,425,122 $ 2,931,180 $ 2,958,922
=========== =========== ===========
SUPPLEMENTAL DISCLOSURE:
Income taxes paid ................................................. $ 2,884,000 $ 1,396,000 $ 681,000
=========== =========== ===========
Interest paid ..................................................... $ -- $ -- $ --
=========== =========== ===========
See accompanying notes to consolidated financial statements.
-20-
TSR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1998, 1997 AND 1996
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) BUSINESS
The Company is primarily engaged in the business of providing
contract computer programming services. The Company provides
technical computer personnel to companies to supplement their
in-house information technology capabilities. In addition, during
fiscal 1997, the Company developed Catch/21, a Year 2000 compliance
software 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. Toward
the end of fiscal 1997 the Company 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 $48,000,
$132,000 and $46,000 included in revenues in fiscal 1998, 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 wholly-owned 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. Provided that acceptance is probable,
revenue from Catch/21 code conversion is recognized when the
converted code is delivered.
(d) RESEARCH AND DEVELOPMENT
In fiscal 1997 the Company commenced efforts to develop an automated
solution to the Year 2000 compliance problem. The resultant software,
Catch/21, has been used successfully to convert legacy IBM mainframe
applications to attain Year 2000 compliance. These expenditures,
which are expensed as incurred, increased in fiscal 1998 as the
Company expanded its product offerings into additional computer
platforms and languages.
(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, 1998 and 1997:
1998 1997
---------- ----------
Cash in banks ................. $ 904,370 $ 549,959
Money Market Funds............. 1,520,752 1,658,537
US Treasury Bills.............. -- 722,684
---------- ----------
$2,425,122 $2,931,180
========== ==========
(Continued)
-21-
TSR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
MAY 31, 1997, 1996 AND 1995
(f) MARKETABLE SECURITIES
The Company's marketable debt securities primarily consisting of U.S.
Treasury Bills with a maturity at acquisition in excess of 90 days
are classified as held to maturity securities and its equity
securities are classified as trading securities. The Company
classifies securities as held to maturity and carries them at
amortized cost only if it has a positive intent and ability to hold
those securities to maturity. If not classified as held to maturity,
such securities are classified as trading securities or securities
available for sale. Unrealized gains or losses from securities
available for sale are excluded from earnings and reported as a net
amount as a separate component of stockholders' equity. Unrealized
holding gains and losses from trading securities are included in
earnings. The amortized cost, gross unrealized holding gains, gross
unrealized holding losses and fair value for marketable securities by
major security type at May 31, 1998 and 1997, are as follows:
Gross Gross
Unrealized Unrealized
Amortized Holding Holding
Cost Gains Losses Fair Value
---------- ---------- ---------- ----------
1998: US TREASURY SECURITIES ...... $1,448,144 $ -- $ -- $1,448,144
EQUITY SECURITIES ........... 133,290 6,842 (12,331) 127,801
---------- ------ -------- ----------
$1,581,434 $6,842 $(12,331) $1,575,945
========== ====== ======== ==========
1997: Equity Securities ........... $ 28,287 $ -- $ (2,112) $ 26,175
========== ====== ======== ==========
(g) DEPRECIATION AND AMORTIZATION
Depreciation and amortization of equipment and leasehold improvements
has been computed using the straight-line method over the following
useful lives:
Equipment................... 3 years
Furniture and fixtures...... 3 years
Automobiles................. 3 years
Leasehold improvements...... Lesser of lease term or useful life
(h) NET INCOME PER COMMON SHARE
Basic net income per common share has been computed based on the
weighted average number of shares outstanding during the year of
5,881,609 in 1998, 5,828,276 in 1997, and 5,993,028 in 1996. Diluted
net income per common share has been computed by increasing the above
amounts by the weighted average number of common stock equivalents
from employee stock options. The shares outstanding as adjusted are
6,035,038 in 1998, 5,831,226 in 1997, and 5,993,028 in 1996. The
prior years' shares outstanding have been adjusted for stock splits
in the form of 100% stock dividends paid in November 1996 and
November 1997.
(i) INCOME TAXES
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to temporary differences between the
financial reporting bases and the tax bases of the Company's assets
and liabilities at enacted rates expected to be in effect when such
amounts are realized or settled. The effect of enacted tax law or
rate changes is reflected in income in the period of enactment.
(Continued)
-22-
TSR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
MAY 31, 1998, 1997 AND 1996
(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. The fair value of marketable securities is
based upon quoted market values at May 31, 1998.
(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 1998, 1997, and 1996 to the reported
amounts is as follows:
1998 1997 1996
------------------ ------------------ ----------------
AMOUNT % Amount % Amount %
---------- ---- ---------- ---- -------- ----
Amounts at statutory federal tax rate ...... $2,117,000 34.0% $1,111,000 34.0% $580,000 34.0%
State and local taxes, net of
federal income tax effect ............... 616,000 9.9 313,000 9.6 123,000 7.2
Non-deductible expenses .................... 65,000 1.0 48,000 1.4 39,000 2.3
Other, net ................................. -- -- (1,000) -- -- --
---------- ---- ---------- ---- -------- ----
$2,798,000 44.9% $1,471,000 45.0% $742,000 43.5%
========== ==== ========== ==== ======== ====
The components of the provision for income taxes are as follows:
Federal State Total
---------- -------- ----------
1998: CURRENT.............. $1,908,000 $934,000 $2,842,000
DEFERRED............. (44,000) -- (44,000)
---------- -------- ----------
$1,864,000 $934,000 $2,798,000
========== ======== ==========
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
========== ======== ==========
(Continued)
-23-
TSR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
MAY 31, 1998, 1997 AND 1996
The tax effects of temporary differences that give rise to significant
portions of the deferred income tax assets at May 31, 1998 and 1997 are as
follows:
1998 1997
-------- -------
Allowance for doubtful accounts receivable.... $ 59,000 $59,000
Equipment and leasehold improvement
depreciation and amortization............... 73,000 29,000
-------- -------
Total deferred income tax assets........ $132,000 $88,000
======== =======
The Company believes that it is more likely than not that it will realize
its deferred tax asset of $132,000 at May 31, 1998 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, 1998, 1997 and 1996.
COMPUTER HEALTH CONSOLIDATED
SOFTWARE CARE CORPORATE TOTAL
----------- -------- ---------- -----------
Revenues to
unaffiliated customers
1998 ............. $70,386,487 $ 48,438 $ -- $70,434,925
=========== ======== ========== ===========
1997 ............. 49,571,888 132,437 -- 49,704,325
=========== ======== ========== ===========
1996 ............. 31,365,091 445,072 -- 31,810,163
=========== ======== ========== ===========
Operating profit
1998 ............. 6,015,689 48,438 -- 6,064,127
=========== ======== ========== ===========
1997 ............. 2,839,329 131,053 -- 2,970,382
=========== ======== ========== ===========
1996 ............. 1,374,076 81,921 -- 1,455,997
=========== ======== ========== ===========
Identifiable assets
1998 ............. 16,291,987 -- 4,223,890(1) 20,515,877
=========== ======== ========== ===========
1997 ............. 10,987,419 -- 3,056,450(1) 14,043,869
=========== ======== ========== ===========
1996 ............. 6,345,536 896 4,820,259(1) 11,166,691
=========== ======== ========== ===========
Capital expenditures
1998 ............. 960,393 -- -- 960,393
=========== ======== ========== ===========
1997 ............. 424,634 -- -- 424,634
=========== ======== ========== ===========
1996 ............. 135,084 14,222 -- 149,306
=========== ======== ========== ===========
Depreciation and
amortization
1998 ............. 436,519 -- -- 436,519
=========== ======== ========== ===========
1997 ............. 184,262 1,193 -- 185,455
=========== ======== ========== ===========
1996 ............. $ 134,419 $ 7,289 $ -- $ 141,708
=========== ======== ========== ===========
- ----------
(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, 1998, 1997 AND 1996
In the fiscal year ended May 31, 1998 the Company did not derive more than
10% of consolidated revenues from any one customer. In the fiscal years
ended May 31, 1997 and 1996 the Company derived 16.3%, and 22.4%
respectively, of consolidated revenues from one customer for contract
computer programming services. The Company also derived 10.3% of
consolidated revenues from another contract computer programming services
customer in fiscal 1997.
(4) STOCK OPTIONS
The 1997 Employee Stock Option Plan provides for the granting of options to
purchase up to 800,000 shares of the Company's common stock at prices equal
to fair market values at the grant dates. Options are exercisable as
determined on the date of the grant and expire on the third anniversary of
the date of grant.
STOCK OPTIONS OUTSTANDING
--------------------------------------
WEIGHTED
EXERCISE AVERAGE
SHARES PRICE PRICE
------- ------------ -------
Balance May 31, 1996.............. 0 $ 0.00 $ --
Options granted................... 220,000 9.125 9.125
------- ------------ -------
Outstanding at May 31, 1997....... 220,000 $ 9.125 9.125
Options granted................... 390,000 11.75-14.75 12.65
------- ------------ -------
OUTSTANDING AT MAY 31, 1998....... 610,000 $9.125-14.75 $11.38
======= ============ =======
Exercisable at May 31, 1998....... 483,333 $9.125-13.50 $10.675
======= ============ =======
The per share weighted-average fair value of stock options granted during
1998 and 1997 was approximately $5.80 and $4.97 respectively on the date of
grant using the Black-Scholes option pricing model with the following
weighted-average assumptions: expected dividend yield of 0%, risk free
interest rate of 6%, expected stock volatility of 80% and 100% in 1998 and
1997 respectively, 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 diluted net income per common share in fiscal 1998 and 1997
would have been reduced to the pro forma amounts indicated below:
1998 1997
---------- ----------
Net Income:
As reported.......................... $3,429,505 $1,795,795
Pro forma ........................... 1,832,000 1,746,000
Diluted net income
per common share:
As reported ......................... $ 0.57 $ 0.31
Pro forma............................ $ 0.30 $ 0.30
(5) LINE OF CREDIT
The Company has an available line of credit of $5,000,000 with a major
money center bank. As of May 31, 1998, 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)
-25-
TSR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
MAY 31, 1998, 1997 AND 1996
(6) COMMITMENTS
A summary of noncancellable long-term operating lease commitments for
facilities as of May 31, 1998 follows:
FISCAL YEAR AMOUNT
----------- ------
1999........................ $321,000
2000........................ 267,000
2001........................ 124,000
2002........................ 113,000
Thereafter.................. 19,000
Total rent expenses under all lease agreements amounted to $360,000,
$236,000, and $211,000 in 1998, 1997 and 1996, respectively.
(7) 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 1998, 1997, and 1996, $456,000, $407,000, 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 1998, 1997, and 1996, the minimum
bonus of 7.5% of pre-tax profit was awarded, which amounted to $512,000,
$265,000, and $139,000 respectively. The fiscal 1997 and 1996 amounts were
awarded under a similar plan included in this executive's prior contract.
(8) COMMON STOCK
On January 30, 1998, the Company sold 160,000 shares of common stock at $16
per share in a private placement. The proceeds to the Company, net of
expenses were $2,306,400.
(9) TREASURY STOCK
During fiscal 1996, 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 $332,756, 230,000 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 4,050,108 shares.
(10) CASH DIVIDEND
On July 18, 1995 the Board of Directors of the Company declared a cash
dividend of $0.10 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 1998.
(11) STOCK DIVIDEND
On October 22, 1997 the Board of Directors of the Company declared a stock
split in the form of a 100% stock dividend on the shares of Common Stock
payable November 17, 1997 to stockholders of record as of November 3, 1997.
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 1998 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 1998 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 1998 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 1998 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.
3.2 Bylaws of the Company, as amended.
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, incorporated by reference to Exhibit
10.2 to the Annual Report on Form 10-K filed by the Company for the
fiscal year ended May 31, 1997.
10.3 Form of Employee Stock Option Agreement, incorporated by reference to
Exhibit 10.3 to the Annual Report on Form 10-K filed by the Company
for the fiscal year ended May 31, 1997.
10.4 Employment Agreement dated June 1, 1997 between the Company and Joseph
F. Hughes, incorporated by reference to Exhibit 10.4 to the Annual
Report on Form 10-K filed by the Company for the fiscal year ended May
31, 1997.
10.5 Agreement to purchase subsidiary minority interest between TSR, Inc.
and William Connor dated September 1, 1997, 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, 1997.
10.6 Employment Agreement dated September 1, 1997 between TSR, Inc. and
William Connor incorporated by reference to Exhibit 10.2 to the
Quarterly Report on Form 10-Q filed by the Company for the quarter
ended August 31, 1997.
10.7 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.
-27-
21 List of Subsidiaries.
23 Consent of KPMG Peat Marwick LLP, Independent Auditors.
27 Financial Data Schedule.
(b) Reports on Form 8-K:
Filed March 23, 1998: Press Release of Earnings Report for the three and
nine months ended February 28, 1998.
-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 14, 1998
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
By: /s/ MICHAEL P. DOWD
----------------------------------
Michael P. Dowd, Director
Dated: August 14, 1998
-29-
TSR, INC. AND SUBSIDIARIES
EXHIBIT INDEX
FORM 10-K, MAY 31, 1998
EXHIBIT SEQUENTIAL
NUMBER EXHIBIT PAGE #
- ------- ------- ----------
3.1 Articles of Incorporation of the Company, as amended.
3.2 Bylaws of the Company, as amended
10.1 Employment Agreement between TSR, Inc. and Ernest G. Bago, dated N/A
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, incorporated by reference to N/A
Exhibit 10.2 to the Annual Report on Form 10-K filed by the
Company for the fiscal year ended May 31, 1997.
10.3 Form of Employee Stock Option Agreement, incorporated by N/A
reference to Exhibit 10.3 to the Annual Report on Form 10-K
filed by the Company for the fiscal year ended May 31, 1997.
10.4 Employment Agreement dated July 1, 1997 between the Company and N/A
Joseph F. Hughes, incorporated by reference to Exhibit 10.4
to the Annual Report on Form 10-K filed by the Company for the
fiscal year ended May 31, 1997.
10.5 Agreement to purchase subsidiary minority interest between TSR, N/A
Inc. and William Connor dated September 1, 1997, 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, 1997.
10.6 Employment Agreement dated September 1, 1997 between TSR, Inc. N/A
and William Connor incorporated by reference to Exhibit 10.2
to the Quarterly Report on Form 10-Q filed by the Company for the
quarter ended August 31, 1997.
10.7 Revolving Credit Agreement dated October 6, 1997 among TSR N/A
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.
21 List of Subsidiaries
23 Consent of KPMG Peat Marwick LLP, Independent Auditors.
27 Financial Data Schedule
-30-