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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K
[X] Annual Report Pursuant to Section 13 or 15(d) of
The Securities Exchange Act of 1934
For the fiscal year ended May 31, 2004
or
[ ] Transition Report Under Section 13 or 15(d) of
The Securities Exchange Act of 1934
For the transition period from __________ to __________
Commission File Number: 0-8656
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TSR, Inc.
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(Exact name of registrant as specified in its charter)
Delaware 13-2635899
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
400 Oser Avenue, Hauppauge, NY 11788
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(Address of principal executive offices)
Registrant's telephone number: 631-231-0333
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]
Page 1
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Indicated by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes [ ] No [X].
The aggregate market value of voting and non-voting common equity held by
non-affiliates of the Registrant based upon the closing price of $6.77 at
November 30, 2003 was $17,973,000.
The number of shares of the Registrant's common stock outstanding as of July 31,
2004 was 4,568,012.
Documents incorporated by Reference:
The information required in Part III, Items 10, 11, 12, 13 and 14 is
incorporated by reference to the Registrant's Proxy Statement in connection with
the 2004 Annual Meeting of Stockholders, which will be filed by the Registrant
within 120 days after the close of its fiscal year.
Page 2
PART I
Item 1. Business.
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General
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TSR, Inc. (the "Company") is primarily engaged in the business of providing
contract computer programming services to its clients. The Company provides its
clients with technical computer personnel to supplement their in-house
information technology ("IT") capabilities. The Company's clients for its
contract computer programming services consist primarily of Fortune 1000
companies and state and local government agencies with significant technology
budgets. In the year ended May 31, 2004, the Company provided IT staffing
services to approximately 95 clients.
The Company was incorporated in Delaware in 1969. The Company's executive
offices are located at 400 Oser Avenue, Hauppauge, NY 11788, and its telephone
number is (631) 231-0333. This annual report, and each of our other periodic and
current reports, including any amendments, are available, free of charge, on our
website, www.tsrconsulting.com, as soon as reasonably practicable after such
material is electronically filed with, or furnished to, the Securities and
Exchange Commission. The information contained on our website is not
incorporated by reference into this annual report on Form 10-K and should not be
considered part of this report.
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 mainframe and mid-range computer
operations, personal computers and client-server support, internet and
e-commerce operations, voice and data communications (including local and wide
area networks) and help desk support. The Company's services provide clients
with flexibility in staffing their day-to-day operations, as well as special
projects, on a short-term or long-term basis.
The Company provides technical employees for projects, which usually range from
three months to one year. Generally, clients may terminate projects at any time.
Staffing services are provided at the client's facility and are billed primarily
on an hourly basis based on the actual hours worked by technical personnel
provided by the Company and with reimbursement for out-of-pocket expenses. The
Company pays its technical personnel on a semi-monthly basis and invoices its
clients, not less frequently than monthly.
The Company's success is dependent upon, among other things, its ability to
attract and retain qualified professional computer personnel. The Company
believes that there is significant competition for software professionals with
the skills and experience necessary to perform the services offered by the
Company. Although the Company generally has been successful in attracting
employees with the skills needed to fulfill customer engagements, demand for
qualified professionals conversant with certain technologies may outstrip supply
as new and additional skills are required to keep pace with evolving computer
technology or as competition for technical personnel increase. Increasing demand
for qualified personnel could also result in increased expenses to hire and
retain qualified technical personnel and could adversely affect the Company's
profit margins.
In the past few years, an increasing number of companies are using or are
considering using low cost offshore outsourcing centers, particularly in India,
to perform technology related work and projects. This trend has contributed to
the decline in domestic IT staffing revenues. There can be no assurance that
this trend will not continue to adversely impact the Company's IT staffing
revenues.
Page 3
OPERATIONS
The Company provides contract computer programming services in the New York
metropolitan area, New England, and the Mid-Atlantic region. The Company
provides its services principally through offices located in New York, New York,
Edison, New Jersey and Long Island, New York. The Company does not currently
intend to open additional offices. Additionally, due to the economic downturn,
the Company closed its Farmington, Connecticut office in October 2002 and is not
currently hiring new account executives and technical recruiters and has not
replaced account executives and technical recruiters who have left the Company.
At these offices, as of May 31, 2004, the Company employed 10 persons who are
responsible for recruiting technical personnel and 13 persons who are account
executives. As of May 31, 2003 the Company had employed 11 technical personnel
recruiters and 15 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 95 clients during the year
ended May 31, 2004 as compared to 100 in the prior fiscal year. The Company has
historically derived a significant percentage of its total revenues from a
relatively small number of clients. In the fiscal year ended May 31, 2004, the
Company had two clients which constituted more than 10% of consolidated revenues
(Procurestaff Ltd., 25.5% and NYC Department of Education, 15.0%). Procurestaff
Ltd. is a vendor management services provider. The majority of the revenue
generated from Procurestaff Ltd. was from AT&T as the end client. Additionally,
the Company's top ten clients accounted for 73% of consolidated revenues in both
fiscal 2004 and fiscal 2003. While continuing its efforts to expand further its
client base, the Company's marketing efforts are focused primarily on increasing
business from its existing accounts.
The Company's marketing is conducted through account executives that are
responsible for customers in an assigned territory. Account executives call on
potential new customers and are also responsible for maintaining existing client
contacts within an assigned territory. Instead of utilizing technical managers
to oversee the services provided by technical personnel to each client, the
account executives are responsible for this role. As a result of the cost
savings due to the combined functions of the account executives, the Company is
able to provide its account executives with significantly higher incentive-based
compensation. In addition, the Company generally pairs each account executive
with a recruiter of technical personnel, who also receives incentive-based
compensation. The Company believes that this approach allows the Company to more
effectively serve its clients' needs for technical personnel, as well as
providing its account executives and recruiters with incentives to maximize
revenues in their territories.
The Company's marketing has been affected because some major customers have
retained a third party to provide vendor management services and centralize the
consultant hiring process. Under this system, the third party retains the
Company to provide contract computer programming services and the Company bills
the third party and the third party bills the ultimate customer. This process
weakens the relationship the Company has built with its client contacts, the
project managers, who the Company would normally work directly with to place
consultants. Instead, the Company is required to interface with the vendor
management provider, making it more difficult to maintain its relationships with
its customers and preserve and expand its business. These changes have also
reduced the Company's profit margins because the vendor management company tries
to keep costs down for the end client and receives a fee which is deducted from
the payment to the Company.
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 90,000 technical personnel with a wide
range of skills. The Company uses a sophisticated proprietary computer system to
match a potential employee's skills and experience with client requirements. The
Company periodically contacts personnel in its database to update their
availability, skills, employment interests and other matters and continually
updates its database. This database is made available to the account executives
and recruiters at each of the Company's offices. The Company considers its
database to be a valuable asset.
The Company employs technical personnel primarily on an hourly basis, as
required in order to meet the staffing requirements under particular contracts
or for particular projects. The Company recruits technical personnel by posting
jobs on the on the Internet, publishing weekly advertisements in local
newspapers and attending job fairs on a periodic basis. The Company devotes
significant resources to recruiting technical personnel, maintaining 10
recruiters. Potential applicants are generally interviewed and tested by the
Company's recruiting personnel, by third parties that have the required
technical backgrounds to review the qualifications of the applicants, or by
on-line testing services. In some cases, instead of employing technical
personnel directly, the Company uses subcontractors who employ the technical
personnel who are provided to the Company's customers.
Page 4
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. Many of the Company's competitors are significantly larger
and have greater financial resources than the Company. The Company believes that
the principal competitive factors in obtaining and retaining clients are
accurate assessment of clients' requirements, timely assignment of technical
employees with appropriate skills and the price of services. The principal
competitive factors in attracting qualified technical personnel are
compensation, availability, quality and variety of projects and schedule
flexibility. The Company believes that many of the technical personnel included
in its database may also be pursuing other employment opportunities. Therefore,
the Company believes that its responsiveness to the needs of technical personnel
is an important factor in the Company's ability to fill projects. Although the
Company believes it competes favorably with respect to these factors, it expects
competition to increase and there can be no assurance that the Company will
remain competitive.
Intellectual Property Rights
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The Company relies primarily upon a combination of trade secret, nondisclosure
and other contractual arrangements to protect its proprietary rights. The
Company generally enters into confidentiality agreements with its employees,
consultants, clients and potential clients and limits access to and distribution
of its proprietary information. There can be no assurance that the steps taken
by the Company in this regard will be adequate to deter misappropriation of its
proprietary information or that the Company will be able to detect unauthorized
use and take appropriate steps to enforce its intellectual property rights.
Personnel
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As of June 30, 2004, the Company employs 290 people including its 3 executive
officers. Of such employees 13 are engaged in sales, 10 are recruiters for
programmers, 252 are technical and programming consultants, and 12 are in
administration and clerical functions. None of the Company's employees belong to
unions.
Item 2. Properties.
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The Company leases 8,000 square feet of space in Hauppauge, New York for a term
expiring October 31, 2005, with annual rentals of approximately $100,000. This
space is used as executive and administrative offices for the Company and the
Company's operating subsidiary.
The Company also leases sales and technical recruiting offices in New York City
(lease expires August, 2007) and Edison, New Jersey (lease expires August,
2005), with aggregate monthly rentals of approximately $20,000.
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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There are no material legal proceedings.
Item 4. Submission of Matters to a Vote of Security Holders.
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Not Applicable
Page 5
PART II
Item 5. Market for Common Equity and Related Stockholder Matters.
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The Company's shares of Common Stock trade on the NASDAQ National Market System
under the symbol TSRI. The following are the high and low sales prices for each
quarter during the fiscal years ended May 31, 2004 and 2003:
JUNE 1, 2003 - MAY 31, 2004
1ST 2ND 3RD 4TH
QUARTER QUARTER QUARTER QUARTER
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High Sales Price...... 10.50 8.14 8.29 8.00
Low Sales Price....... 5.84 6.25 6.51 6.10
JUNE 1, 2002 - MAY 31, 2003
1ST 2ND 3RD 4TH
QUARTER QUARTER QUARTER QUARTER
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High Sales Price...... 6.45 5.34 5.83 6.73
Low Sales Price....... 3.51 4.12 4.55 4.45
There were 155 holders of record of the Company's Common Stock as of July 31,
2004. Additionally, the Company estimates that there were approximately 1,500
beneficial holders as of that date. On June 23, 2003, the Company declared a
special, large nonrecurring dividend of $2.00 per share payable on July 28, 2003
to holders of record as of July 11, 2003. Additionally, the Company declared
quarterly dividends of $0.15 during the fiscal year ending May 31, 2004. The
Company intends to maintain its dividend at the current level for the fiscal
year ending May 31, 2005 and the Company also intends to maintain an ongoing
quarterly dividend rate of $0.15 beyond fiscal year 2005 but may reconsider if
cash flow from operations does not increase. There can be no assurance that the
Company will continue to pay dividends.
Securities authorized for issuance under equity compensation plans.
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The following table provides information as of May 31, 2004 with respect to
compensation plans (including individual compensation arrangements) under with
equity securities of the Company are authorized for issuances:
Equity Compensation Plan Information
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Number of securities to be Weighted-average exercise Number of securities
issued upon exercise of price of outstanding options, remaining available for
outstanding options, warrants and rights future issuance under equity
warrants and rights compensation plans
(excluding securities
reflected in column (a))
Plan Category (a) (b) (c)
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Equity compensation
Plans approved by security
holders. 10,000 $5.53 549,950
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Equity compensation
Plans not approved by
security holders 0 0 0
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Total 10,000 $5.53 549,950
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Page 6
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,
2004 2003 2002 2001 2000
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Revenues ............................................... $ 51,725 $ 52,443 $ 59,455 $ 78,951 $ 78,493
Income From Operations ................................. 3,696 3,975 4,424 6,294 7,241
Net Income ............................................. 2,124 2,362 2,708 3,858 4,402
Basic and Diluted Net Income Per Common Share .......... 0.47 0.53 0.61 0.86 0.88
Working Capital ........................................ 14,976 23,028 20,518 17,810 15,294
Total Assets ........................................... 19,203 27,852 25,597 23,284 20,945
Stockholders' Equity ................................... 15,192 23,258 20,896 18,187 15,749
Book Value Per Common Share ............................ 3.33 5.26 4.73 4.12 3.36
Unaudited Quarterly Financial Data
(Amounts in Thousands, except Per Share Data)
The following is a summary of unaudited quarterly operating results for the
fiscal years ended May 31, 2004 and 2003.
Fiscal 2004
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First Second Third Fourth
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Revenues ............................................ $ 12,737 $ 12,997 $ 12,571 $ 13,421
Gross Profit ........................................ 2,864 2,981 2,667 2,953
Net Income .......................................... 504 638 436 546
Basic and Diluted Net Income
per Common Share ......................... $ 0.11 $ 0.14 $ 0.10 $ 0.12
Fiscal 2003
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First Second Third Fourth
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Revenues ............................................ $ 13,681 $ 13,859 $ 11,987 $ 12,916
Gross Profit ........................................ 2,981 3,078 2,564 2,801
Net Income .......................................... 664 709 452 537
Basic and Diluted Net Income
per Common Share ......................... $ 0.15 $ 0.16 $ 0.10 $ 0.12
Page 7
Item 7. Management's Discussion and Analysis of Financial Condition and Results
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of Operations.
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The following discussion and analysis should be read in conjunction with the
Company's consolidated financial statements and the notes thereto presented
elsewhere in this report.
Results of Operations
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The following table sets forth for the periods indicated certain financial
information derived from the Company's consolidated statements of earnings.
There can be no assurance that historical trends in operating results will
continue in the future:
YEAR ENDED MAY 31,
(DOLLAR AMOUNTS IN THOUSANDS)
2004 2003 2002
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% OF % of % of
AMOUNT REVENUE Amount Revenue Amount Revenue
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Revenues ............................................ $ 51,725 100.0 $ 52,443 100.0 $ 59,455 100.0
Cost of Sales ....................................... 40,261 77.8 41,019 78.2 46,568 78.3
-------- -------- -------- -------- -------- --------
Gross Profit ........................................ 11,464 22.2 11,424 21.8 12,887 21.7
Selling, General, and Administrative Expenses ....... 7,768 15.0 7,450 14.2 8,463 14.2
-------- -------- -------- -------- -------- --------
Income from Operations .............................. 3,696 7.2 3,974 7.6 4,424 7.5
Other Income ........................................ 63 0.1 182 0.3 314 0.5
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Income Before Income Taxes .......................... 3,759 7.3 4,156 7.9 4,738 8.0
Provision for Income Taxes .......................... 1,635 3.2 1,794 3.4 2,030 3.4
-------- -------- -------- -------- -------- --------
Net Income .......................................... $ 2,124 4.1 $ 2,362 4.5 $ 2,708 4.6
======== ======== ======== ======== ======== ========
Revenues
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Revenues consist primarily of revenues from computer programming consulting
services. Revenues for the fiscal year ended May 31, 2004 decreased $718,000 or
1.4% from fiscal 2003. Despite advances in the economic environment, IT spending
levels continue to be reduced at many of our major customers, limiting
opportunities to place new consultants on billing. The reduced spending levels
have also decreased demand for placements, resulting in an overall decrease in
the rates charged for computer programming services. Revenues have also been
impacted by the increased use of offshore development companies, particularly in
India, over the past few years to provide technology related work and projects.
Although the average number of consultants on billing increased from
approximately 358 for the year ended May 31, 2003 to 383 for the year ended May
31, 2004 it was not enough to offset the decrease in billing rates and the
impact on margins of vendor management companies. During the fiscal year, the
Company experienced periods of both increasing and decreasing numbers of
consultants on billing, with no strong trends developing.
The Company's revenues from programmers on billing continue to be affected by
discounts required by major customers as a condition to remaining on their
approved vendor lists, such as discounts for prompt payment and volume
discounts. In addition, some major customers have retained third parties to
provide vendor management services and centralize the consultant hiring process.
Under this system, the third party retains the Company to provide contract
computer programming services and the Company bills the third party and the
third party bills the ultimate customer. This process weakens the relationship
the Company has built with its client contacts, the project managers, who the
Company would normally work directly with to place consultants. Instead, the
Company is required to interface with the vendor management provider, making it
more difficult to maintain its relationships with its customers and preserve and
expand its business. These changes have also reduced the Company's profit
margins because the vendor management company tries to keep costs down for the
end client and receives a fee which is deducted from the payment to the Company.
The Company is unable to predict the long-term effects of these changes.
Revenues for fiscal 2003 decreased $7,012,000 from fiscal 2002. This decrease
resulted from an overall decrease in the average number of programmers on
billing with clients from approximately 368 for the year ended May 31, 2002 to
approximately 358 for the year ended May 31, 2003. The economic environment also
decreased demand for placements, resulting in an overall decrease in the rates
charged for computer programming services.
Page 8
Cost of Sales
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Cost of sales decreased by $758,000, or 1.8%, in fiscal 2004 from fiscal 2003.
The decrease in costs resulted primarily from the decrease in amounts paid to
technical personnel resulting primarily from the decrease in contract computer
programming services revenues and from decreases in amounts paid to programmers.
Cost of sales as a percentage of revenues decreased to 77.8% in fiscal 2004 from
78.2% in fiscal 2003. This resulted primarily from decreased amounts paid to
programmers as a result of price rollbacks and discounts required by several
clients, as discussed above.
Fiscal 2003 cost of sales decreased $5,549,000, or 11.9%, compared to fiscal
2002. The decrease in costs resulted primarily from the decrease in amounts paid
to technical personnel resulting from primarily the decrease in contract
computer programming services revenues and from decreases in amounts paid to
programmers.
Selling, General and Administrative Expenses
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Selling, general and administrative expenses consist primarily of expenses
relating to account executives, technical recruiters, facilities costs,
management and corporate overhead. These expenses increased $318,000, or 4.3%,
from $7,450,000 in fiscal 2003 to $7,768,000 in fiscal 2004. This increase was
primarily attributed to increased legal and technical recruiting expenses. The
increased legal expenses primarily relate to one employment related litigation
brought by one of the Company's former consultants which litigation was settled
in March, 2004.
Selling, general and administrative expenses decreased $1,013,000 or 12.0% from
$8,463,000 in fiscal 2002 to $7,450,000 in fiscal 2003. Commissions relating to
revenues from contract computer programming services decreased, and there was an
overall decrease in expenses as a result of a reduction of account executives,
technical recruiting professionals and administrative assistants. Also included
in the 2002 expenses was a $200,000 provision for bad debts.
Other Income
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Fiscal 2004 other income resulted primarily from interest and dividend income of
$120,000, which decreased from the level realized in 2003 due to lower
investable balances and lower rates. The Company also had a net gain of $9,000
from marketable securities due to mark to market adjustments of its equity
portfolio. Other income also decreased due to an increase in minority interest
allocation of operating profits of the Company's majority owned subsidiary.
Fiscal 2003 other income resulted primarily from interest and dividend income of
$235,000, which decreased from the level realized in 2002 due to lower interest
rates. The Company also had a net loss of $6,000 from marketable securities due
to mark to market adjustments of its equity portfolio.
Income Taxes
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The effective income tax rate increased to 43.5% in fiscal 2004 from 43.2% in
fiscal 2003 because of higher state and local taxes.
The effective income tax rate increased to 43.2% in fiscal 2003 from 42.8% in
fiscal 2002 because of higher state and local taxes.
Page 9
Liquidity, Capital Resources and Changes in Financial Condition
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The Company expects that cash flow generated from operations together with its
available cash and marketable securities and available credit facilities will be
sufficient to provide the Company with adequate resources to meet its liquidity
requirements for the foreseeable future.
At May 31, 2004, the Company had working capital of $14,976,000 and cash and
cash equivalents of $2,269,000 as compared to working capital of $23,028,000 and
cash and cash equivalents of $5,063,000 at May 31, 2003. The Company's working
capital also included $6,499,000 and $12,949,000 of marketable securities at May
31, 2004 and 2003, respectively. In July, 2003, the Company declared a special,
large nonrecurring dividend of $2.00 per share, resulting in a reduction of
working capital and cash and marketable securities of $9,088,000. At that time,
the Company also announced a policy of declaring dividends at the rate of $0.15
per quarter for its 2004 fiscal year. This amounted to $2,048,000 for dividends
related to the first three quarters of fiscal 2004. These dividends have
exceeded and are expected to continue to exceed the cash flow provided by the
Company's operations. The regular dividends paid during the Company's 2004
fiscal year exceeded the Company's cash flow for its 2004 fiscal year by
approximately $900,000. The Company has used maturities of short-term marketable
securities to meet these cash requirements.
Net cash flow of $1,132,000 was provided by operations during fiscal 2004 as
compared to $3,298,000 of net cash flow from in operations in fiscal 2003. The
cash flow from operations primarily resulted from net income of $2,124,000 in
fiscal 2004. The reduction in net cash flow provided by operations occurred
because of a reduction in net income and an increase in accounts receivable
during fiscal 2004 as compared with a reduction in fiscal 2003. The increase in
accounts receivable at May 31, 2004, is attributable primarily to delays with
payment from one major account. Substantial collections have been subsequently
made.
Net cash provided by investing activities amounted to $6,438,000 for fiscal
2004, compared to $4,019,000 in net cash used for fiscal 2003. The net cash
flows provided by investing activities primarily resulted from the proceeds of
maturities of marketable securities in excess of purchases of marketable
securities.
Cash used in financing activities during the fiscal year ended May 31, 2004
resulted from cash dividends paid of $11,136,000 and a distribution of $58,000
to the minority interest. These were offset by $830,000 from the proceeds of the
exercise of stock options. Cash used in financing activities during the fiscal
year ended May 31, 2003 resulted from a distribution of $9,000 to the minority
interest.
The Company's capital resource commitments at May 31, 2004 consisted of lease
obligations on its branch and corporate facilities. The Company intends to
finance these lease commitments from cash flow provided by operations, available
cash and short-term marketable securities.
The Company's cash and marketable securities were sufficient to enable it to
meet its liquidity requirements during fiscal 2004. The Company has available a
revolving line of credit of $5,000,000 with a major money center bank through
October 6, 2005. As of May 31, 2004, no amounts were outstanding under this line
of credit.
Tabular Disclosure of Contractural Obligations
----------------------------------------------
- -----------------------------------------------------------------------------------------------------------
Payments Due By Period
- -----------------------------------------------------------------------------------------------------------
Contractural Obligations Total Less than 1 Year 1-3 Years 3-5 Years More than 5 Years
------------------------ ---------- ---------- ---------- ---------- ----------
Long-Term Debt ................. -- -- -- -- --
Capital Lease Obligations ...... -- -- -- -- --
Operating Leases ............... 637,000 349,000 271,000 17,000 --
Purchase Obligations ........... -- -- -- -- --
Employment Agreements .......... 2,232,000 789,000 1,443,000 -- --
Other Long-Term Liabilities
Reflected on the Registrant's
Balance Sheet under GAAP ....... -- -- -- -- --
---------- ---------- ---------- ---------- ----------
Total .......................... $2,869,000 $1,138,000 $1,684,000 $ 17,000 $ --
========== ========== ========== ========== ==========
Page 10
Impact of New Accounting Standards
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In January 2003, the FASB issued Interpretation No. 46 "Consolidation of
Variable Interest Entities" ("Interpretation 46"). Interpretation 46 clarifies
the application of Accounting Research Bulletin No. 51 "Consolidated Financial
Statements", and applies immediately to any variable interest entities created
after January 31, 2003 and to variable interest entities in which an interest is
obtained after that date. The Company holds no interest in variable interest
entities.
Critical Accounting Policies
- ----------------------------
The Securities and Exchange Commission ("SEC") recently issued disclosure
guidance for "critical accounting policies." The SEC defines "critical
accounting policies" as those that require the application of management's most
difficult, subjective or complex judgments, often as a result of the need to
make estimates about the effect of matters that are inherently uncertain and may
change in subsequent periods.
The Company's significant accounting policies are described in Note 1 to its
consolidated financial statements, contained elsewhere in this report. The
Company believes that the following accounting policies require the application
of management's most difficult, subjective or complex judgments:
ESTIMATING ALLOWANCES FOR DOUBTFUL ACCOUNTS RECEIVABLE
We perform ongoing credit evaluations of our customers and adjust credit limits
based upon payment history and the customer's current credit worthiness, as
determined by our review of their current credit information. We continuously
monitor collections and payments from our customers and maintain a provision for
estimated credit losses based upon our historical experience and any specific
customer collection issues that we have identified. While such credit losses
have historically been within our expectations and the provisions established,
we cannot guarantee that we will continue to experience the same credit loss
rates that we have in the past. A significant change in the liquidity or
financial position of any of our significant customers could have a material
adverse effect on the collectibility of our accounts receivable and our future
operating results.
VALUATION OF DEFERRED TAX ASSETS
We regularly evaluate our ability to recover the reported amount of our deferred
income taxes considering several factors, including our estimate of the
likelihood of the Company generating sufficient taxable income in future years
during the period over which temporary differences reverse. Presently, the
Company believes that it is more likely than not that it will realize the
benefits of its deferred tax assets based primarily on the Company's history of
and projections for taxable income in the future. In the event that actual
results differ from our estimates or we adjust these estimates in future
periods, we may need to establish a valuation allowance against a portion or all
of our deferred tax assets, which could materially impact our financial position
or results of operations.
VALUATION OF LONG-LIVED ASSETS
We assess the recoverability of long-lived assets and intangible assets whenever
we determine that events or changes in circumstances indicate that their
carrying amounts may not be recoverable. Our assessment is primarily based upon
our estimate of future cash flows associated with these assets. Although there
has been a sustained weakness in our operating results, through May 31, 2004, we
have continued and expect to continue to generate sufficient cash flows, and,
therefore, we have not determined that there has been an indication of
impairment of any of our assets. However, should our operating results
deteriorate in the future, we may determine that some portions of our long-lived
assets or intangible assets are impaired. Such determination could result in
non-cash charges to income that could materially affect our financial position
or results of operations in future periods.
Page 11
Forward-Looking Statements; Factors that Affect Future Results
- --------------------------------------------------------------
Certain statements contained in "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and "Business", including
statements concerning the Company's future prospects and the Company's future
cash flow requirements are forward looking statements, as defined in the Private
Securities Litigation Reform Act of 1995. Actual results may differ materially
from those projections in the forward looking statements which statements
involve risks and uncertainties, including but not limited to the factors set
forth below.
Dependence Upon Key Personnel.
The Company is dependent on its Chairman of the Board, Chief Executive Officer
and President, Joseph Hughes, and Ernest Bago, the President of TSR's contract
computer programming services subsidiary. The Company has entered into
employment agreements with Mr. Hughes and Mr. Bago for terms expiring on May 31,
2007. The Company is also dependent on certain of its account executives who are
responsible for servicing its principal customers and attracting new customers.
The Company does not have employment contracts with these persons. There can be
no assurance that the Company will be able to retain its existing personnel or
find and attract additional qualified employees. The loss of the services of any
of these personnel could have a material adverse effect on the Company.
Dependence on Significant Relationships.
In the fiscal year, ended May 31, 2004, the Company's largest clients,
Procurestaff Ltd. and the NYC Department of Education accounted for 25.5% and
15.0% of the Company's consolidated revenues, respectively. Procurestaff is a
vendor management company and most of the revenues received from Procurestaff
relate to a single customer, AT&T. See "Rapidly Changing Industry" below. Client
contract terms vary depending on the nature of the engagement, and there can be
no assurance that a client will renew a contract when it terminates. In
addition, the Company's contracts, are generally cancelable by the client at any
time on short notice, and clients may unilaterally reduce their use of the
Company's services under such contracts without penalty. The termination or
significant reduction of its business relationship with any of its significant
clients would have a material adverse effect on the Company's financial
condition and results of operations.
Competitive Market for Technical Personnel.
The Company's success is dependent upon its ability to attract and retain
qualified computer professionals to provide as temporary personnel to its
clients. Competition for the limited number of qualified professionals with a
working knowledge of certain sophisticated computer languages, which the Company
requires for its contract computer services business, is intense. The Company
believes that there is a shortage of, and significant competition for, software
professionals with the skills and experience necessary to perform the services
offered by the Company.
The Company's ability to maintain and renew existing engagements and obtain new
business in its contract computer programming business depends, in large part,
on its ability to hire and retain technical personnel with the IT skills that
keep pace with continuing changes in software evolution, industry standards and
technologies, and client preferences. Although the Company generally has been
successful in attracting employees with the skills needed to fulfill customer
engagements, demand for qualified professionals conversant with certain
technologies may outstrip supply as new and additional skills are required to
keep pace with evolving computer technology or as competition for technical
personnel increases. Increasing demand for qualified personnel could also result
in increased expenses to hire and retain qualified technical personnel and could
adversely affect the Company's profit margins.
Page 12
Rapidly Changing Industry
The computer industry is characterized by rapidly changing technology and
evolving industry standards. These include the overall increase in the
sophistication and interdependency of computer technology and a focus by IT
managers on cost-efficient solutions. Recently, there has been an increased
focus on the Internet and e-Commerce and there has been a shift away from
mainframe legacy systems. Historically, much of the Company's staffing services
has related to mainframe legacy systems. There can be no assurance that these
changes will not adversely affect demand for technical staffing services.
Organizations may elect to perform such services in-house or outsource such
functions to companies that do not utilize temporary staffing, such as that
provided by the Company.
There have also been recent changes in the industry, which could potentially
affect the Company's operating results. Many customers have begun retaining
third parties to provide vendor management services. The third party is then
responsible for retaining companies to provide temporary IT personnel. This
results in the Company contracting with such third parties and not directly with
the ultimate customer. This change weakens the Company's relationship with its
customer, which makes it more difficult for the Company to maintain and expand
its business. It also reduces the Company's profit margins. Additionally, a
number of companies have begun limiting the number of companies on their
approved vendor lists, and in some cases this has required the Company to
sub-contract with a company on the approved vendor list to provide services to
customers. The Company cannot predict at this time what long-term effect these
changes will have on the Company's business and results of operations.
Effect of Fluctuations in Economic Conditions
Demand for the Company's IT staffing services is significantly affected by the
general economic environment. During periods of slowing economic activity,
customers may reduce their IT projects and their demand for outside consultants.
As a result, any significant economic downturn could have material adverse
affect on the Company's results of operations. Beginning with the second half of
the Company's 2001 fiscal year, the Company has experienced a decline in demand
for its IT staffing services. The Company attributes a significant portion to
this decline to customers reducing their spending on IT projects as a result of
the current economic environment. During fiscal 2004, the Company experienced
periods of both increasing and decreasing numbers of consultants on billing,
with no strong trends developing. The Company cannot predict when economic
conditions will improve and the demand for IT services will increase.
The current trend of companies moving technology jobs and projects offshore has
caused and could continue to cause revenues to decline.
In the past few years, more companies are using or are considering using low
cost offshore outsourcing centers, particularly in India, to perform technology
related work and projects. This trend has contributed to the decline in domestic
IT staffing revenue. There can be no assurance that this trend will not continue
to adversely impact the Company's IT staffing revenues.
Fluctuations in Quarterly Operating Results.
The Company's revenues and operating results are subject to significant
variations from quarter to quarter. Revenues are subject to fluctuation based
upon a number of factors, including the timing and number of client projects
commenced and completed during the quarter, delays incurred in connection with
projects, the growth rate of the market for contract computer programming
services and general economic conditions. Unanticipated termination of a project
or the decision by a client not to proceed to the next stage of a project
anticipated by the Company could result in decreased revenues and lower
utilization rates which could have a material adverse effect on the Company's
business, operating results and financial condition. Compensation levels can be
impacted by a variety of factors, including competition for highly skilled
employees and inflation. The Company's operating results are also subject to
fluctuation as a result of other factors.
Intellectual Property Rights.
The Company relies primarily upon a combination of trade secret, nondisclosure
and other contractual agreements to protect its proprietary rights. The Company
generally enters into confidentiality agreements with its employees,
consultants, clients and potential clients and limits access to and distribution
of its proprietary information. There can be no assurance that the steps taken
by the Company in this regard will be adequate to deter misappropriation of its
proprietary information or that the Company will be able to detect unauthorized
use and take appropriate steps to enforce its intellectual property rights.
Page 13
Competition.
The technical staffing industry is highly competitive and fragmented and has low
barriers to entry. The Company competes for potential clients with providers of
outsourcing services, systems integrators, computer systems consultants, other
providers of technical staffing services and, to a lesser extent, temporary
personnel agencies. The Company competes for technical personnel with other
providers of technical staffing services, systems integrators, providers of
outsourcing services, computer systems consultants, clients and temporary
personnel agencies. Many of the Company's competitors are significantly larger
and have greater financial resources than the Company. The Company believes that
the principal competitive factors in obtaining and retaining clients are
accurate assessment of clients' requirements, timely assignment of technical
employees with appropriate skills and the price of services. The principal
competitive factors in attracting qualified technical personnel are
compensation, availability, quality and variety of projects and schedule
flexibility. The Company believes that many of the technical personnel included
in its database may also be pursuing other employment opportunities. Therefore,
the Company believes that its responsiveness to the needs of technical personnel
is an important factor in the Company's ability to fill projects. Although the
Company believes it competes favorably with respect to these factors, it expects
competition to increase, and there can be no assurance that the Company will
remain competitive.
Potential for Contract and Other Liability.
The personnel provided by the Company to clients provide services involving key
aspects of its clients' software applications. A failure in providing these
services could result in a claim for substantial damages against the Company,
regardless of the Company's responsibility for such failure. The Company
attempts to limit, contractually, its liability for damages arising from
negligence or omissions in rendering services, but it is not always successful
in negotiating such limits. Despite this precaution, there can be no assurance
that the limitations of liability set forth in its contracts would be
enforceable or would otherwise protect the Company from liability for damages.
The Company's contract computer programming services business involves assigning
technical personnel to the workplace of the client, typically under the client's
supervision. Although the Company has little control over the client's
workplace, the Company may be exposed to claims of discrimination and harassment
and other similar claims as a result of inappropriate actions allegedly taken
against technical personnel by clients. As an employer, the Company is also
exposed to other possible employment-related claims. The Company is exposed to
liability with respect to actions taken by its technical personnel while on a
project, such as damages caused by technical personnel, errors, and misuse of
client proprietary information or theft of client property. To reduce such
exposures, the Company maintains insurance policies and a fidelity bond covering
general liability, worker's compensation claims, errors and omissions and
employee theft. In certain instances, the Company indemnifies its clients from
the foregoing and claims have been against the Company. Certain of these cost
and liabilities are not covered by insurance. There can be no assurance that
insurance coverage will continue to be available and at its current price or
that it will be adequate to, or will, cover any such liability.
Page 14
Item 7A. Quantitative and Qualitative Disclosure About Market Risk
---------------------------------------------------------
The Company's earnings and cash flows are subject to fluctuations due to (i)
changes in interest rates primarily affecting its income from the investment of
available cash balances in money market funds and (ii) changes in market values
of its investments in trading equity securities. Under its current policies, the
Company does not use interest rate derivative instruments to manage exposure to
interest rate changes. The Company's present exposure to changes in the market
value of its investments in equity securities is not significant.
Item 8. Financial Statements.
--------------------
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
----
Report of Independent Registered Public Accounting Firm....... 16
Report of Independent Registered Public Accounting Firm....... 17
Consolidated Financial Statements:
Consolidated Balance Sheets as of May 31, 2004 and 2003....... 18
Consolidated Statements of Income for the
years ended May 31, 2004, 2003 and 2002.................. 20
Consolidated Statements of Stockholders' Equity
for the years ended May 31, 2004, 2003 and 2002.......... 21
Consolidated Statements of Cash Flows for the
years ended May 31, 2004, 2003 and 2002.................. 22
Notes to Consolidated Financial Statements.................... 23
Page 15
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholders
TSR, Inc.
Hauppauge, New York
We have audited the accompanying consolidated balance sheets of TSR, Inc. and
subsidiaries as of May 31, 2004 and 2003 and the related consolidated statements
of income, stockholders' equity, and cash flows for each of the two years in the
period ended May 31, 2004. We have also audited the financial statement schedule
for the two year period ended May 31, 2004 as listed on Item 15(a)2. These
financial statements and schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements and schedule are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements and schedule. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall presentation of the financial statements and schedule.
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 at May 31, 2004, and the results of their operations and their cash
flows for each of the years in the two year period ended May 31, 2004 in
conformity with U.S. generally accepted accounting principles.
Also, in our opinion, the schedule presents fairly, in all material respects,
the information set forth therein.
/s/ BDO SEIDMAN, LLP
Melville, New York
July 9, 2004
Page 16
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors
and Shareholders
TSR, Inc.:
We have audited the accompanying consolidated statements of earnings,
shareholders' equity and cash flows of TSR, Inc. and subsidiaries (the Company)
for the year ended May 31, 2002, and the related consolidated financial
statement schedule for year ended May 31, 2002, as listed in Item 15(a)2. These
consolidated financial statements and the financial statement schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements and the financial statement
schedule based on our audit.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). 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 audit provides a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the results of operations of TSR Inc. and
subsidiaries and their cash flows for year ended May 31, 2002, in conformity
with accounting principles generally accepted in the United States of America.
Also, in our opinion, the related consolidated financial statement schedule
referred to above, when considered in relation to the basic consolidated
financial statements taken as a whole, presents fairly, in all material
respects, the information set forth therein.
/s/ KPMG, LLP
Melville, New York
July 18, 2002
Page 17
TSR, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
MAY 31, 2004 AND 2003
ASSETS
2004 2003
------------ ------------
CURRENT ASSETS:
Cash and cash equivalents (note 1 (d)) ..................................... $ 2,268,796 $ 5,063,098
Marketable securities (note 1 (e)) .......................................... 6,498,839 12,949,174
Accounts receivable:
Trade, net of allowance for doubtful accounts
of $430,000 in 2004 and 2003 (note 1(f)) ............................. 9,904,620 9,238,037
Other ................................................................... 29,700 50,828
------------ ------------
9,934,320 9,288,865
Prepaid expenses ............................................................ 38,918 39,857
Prepaid and recoverable income taxes ........................................ 15,483 60,739
Deferred income taxes (note 2) ............................................. 180,000 180,000
------------ ------------
TOTAL CURRENT ASSETS .................................................. 18,936,356 27,581,733
------------ ------------
EQUIPMENT AND LEASEHOLD IMPROVEMENTS, AT COST:
Equipment ................................................................... 446,148 423,867
Furniture and fixtures ...................................................... 112,196 112,196
Automobiles ................................................................. 128,859 128,859
Leasehold improvements ...................................................... 68,379 68,379
------------ ------------
755,582 733,301
Less accumulated depreciation and amortization .............................. 731,581 708,346
------------ ------------
24,001 24,955
OTHER ASSETS .................................................................... 84,893 50,804
DEFERRED INCOME TAXES (NOTE 2) .................................................. 143,000 123,000
ACQUIRED CLIENT RELATIONSHIPS, NET OF ACCUMULATED
AMORTIZATION OF $157,308 AND $100,105 (NOTE 3) ............................ 14,300 71,503
------------ ------------
$ 19,202,550 $ 27,851,995
============ ============
See accompanying notes to consolidated financial statements.
(Continued)
Page 18
TSR, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS, CONTINUED
MAY 31, 2004 AND 2003
LIABILITIES AND STOCKHOLDERS' EQUITY
2004 2003
------------ ------------
CURRENT LIABILITIES:
Accounts and other payables ................................................. $ 144,391 $ 230,632
Accrued and other liabilities:
Salaries, wages and commissions ......................................... 2,002,906 2,067,042
Legal and professional fees ............................................. 102,948 103,776
Other ................................................................... 33,945 115,464
------------ ------------
2,139,799 2,286,282
Advances from customers ..................................................... 1,532,642 1,793,496
Income taxes payable ........................................................ 143,553 242,981
------------ ------------
TOTAL CURRENT LIABILITIES ........................................ 3,960,385 4,553,391
------------ ------------
MINORITY INTEREST ............................................................... 50,161 40,902
COMMITMENTS AND CONTINGENCIES (NOTES 6 AND 8)
STOCKHOLDERS' EQUITY (NOTES 4 AND 7):
Preferred stock, $1.00 par value,
Authorized 1,000,000 shares; none issued ................................ -- --
Common stock, $.01 par value, authorized
25,000,000 shares; issued 6,228,326 and 6,078,326 shares ............... 62,283 60,783
Additional paid-in capital .................................................. 5,079,027 4,134,053
Retained earnings ........................................................... 22,081,995 31,094,167
------------ ------------
27,223,305 35,289,003
Less: Treasury stock, 1,660,314 shares, at cost ............................ 12,031,301 12,031,301
------------ ------------
TOTAL STOCKHOLDERS' EQUITY ....................................... 15,192,004 23,257,702
------------ ------------
$ 19,202,550 $ 27,851,995
============ ============
See accompanying notes to consolidated financial statements.
Page 19
TSR, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED MAY 31, 2004, 2003 AND 2002
2004 2003 2002
------------ ------------ ------------
REVENUES, NET ............................................................. $ 51,725,431 $ 52,443,160 $ 59,455,162
COST OF SALES ............................................................. 40,260,847 41,018,719 46,568,053
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES .............................. 7,768,138 7,449,831 8,463,186
------------ ------------ ------------
48,028,985 48,468,550 55,031,239
------------ ------------ ------------
INCOME FROM OPERATIONS .................................................... 3,696,446 3,974,610 4,423,923
------------ ------------ ------------
OTHER INCOME (EXPENSE):
Interest and dividend income ......................................... 120,150 234,867 322,520
Unrealized gain (loss) from marketable securities, net ............... 9,564 (5,620) (6,371)
Minority interest in subsidiary operating profit ..................... (66,903) (47,682) (1,578)
------------ ------------ ------------
62,811 181,565 314,571
------------ ------------ ------------
INCOME BEFORE INCOME TAXES ................................................ 3,759,257 4,156,175 4,738,494
PROVISION FOR INCOME TAXES (NOTE 2) ....................................... 1,635,000 1,794,000 2,030,000
------------ ------------ ------------
NET INCOME ........................................................... $ 2,124,257 $ 2,362,175 $ 2,708,494
============ ============ ============
BASIC NET INCOME PER COMMON SHARE ......................................... $ 0.47 $ 0.53 $ 0.61
============ ============ ============
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING ...................... 4,545,762 4,418,012 4,418,012
============ ============ ============
DILUTED NET INCOME PER COMMON SHARE ....................................... $ 0.47 $ 0.53 $ 0.61
============ ============ ============
WEIGHTED AVERAGE NUMBER OF DILUTED COMMON SHARES
OUTSTANDING ................................................... 4,550,939 4,418,012 4,422,348
============ ============ ============
See accompanying notes to consolidated financial statements.
Page 20
TSR, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED MAY 31, 2004, 2003 AND 2002
SHARES OF ADDITIONAL TOTAL
COMMON COMMON PAID-IN RETAINED TREASURY STOCK-HOLDERS'
STOCK STOCK CAPITAL EARNINGS STOCK EQUITY
------------ ------------ ------------ ------------ ------------ ------------
BALANCE AT MAY 31, 2001 .. 6,078,326 $ 60,783 $ 4,134,053 $ 26,023,498 $(12,031,301) $ 18,187,033
NET INCOME ............... -- -- -- 2,708,494 -- 2,708,494
------------ ------------ ------------ ------------ ------------ ------------
BALANCE AT MAY 31, 2002 .. 6,078,326 60,783 4,134,053 28,731,992 (12,031,301) 20,895,527
NET INCOME ............... -- -- -- 2,362,175 -- 2,362,175
------------ ------------ ------------ ------------ ------------ ------------
BALANCE AT MAY 31, 2003 .. 6,078,326 60,783 4,134,053 31,094,167 (12,031,301) 23,257,702
NET INCOME ............... -- -- -- 2,124,257 -- 2,124,257
EXERCISE OF STOCK
OPTIONS INCLUDING
RELATED TAX BENEFIT ...... 150,000 1,500 873,187 -- -- 874,687
SPECIAL CASH DIVIDEND
PAID .................... -- -- -- (9,088,024) -- (9,088,024)
CASH DIVIDENDS PAID ...... -- -- -- (2,048,405) -- (2,048,405)
STOCK BASED
COMPENSATION EXPENSE
(NOTE 1(N)) .............. -- -- 71,787 -- -- 71,787
------------ ------------ ------------ ------------ ------------ ------------
BALANCE AT MAY 31, 2004 .. 6,228,326 $ 62,283 $ 5,079,027 $ 22,081,995 $(12,031,301) $ 15,192,004
============ ============ ============ ============ ============ ============
See accompanying notes to consolidated financial statements.
Page 21
TSR, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED MAY 31, 2004, 2003 AND 2002
2004 2003 2002
------------ ------------ ------------
Cash flows from operating activities:
Net Income ........................................................ $ 2,124,257 $ 2,362,175 $ 2,708,494
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization ................................. 80,438 114,506 130,446
Provision for doubtful accounts ............................... -- -- 200,000
Unrealized loss (gain) from marketable securities, net ........ (9,564) 5,620 6,371
Deferred income tax benefit ................................... (20,000) -- (21,000)
Minority interest in subsidiary operating profit .............. 66,903 47,682 1,578
Stock based compensation expense .............................. 71,787 -- --
Tax benefit from stock option exercises ....................... 45,000 -- --
Changes in operating assets and liabilities:
Accounts receivable-trade .............................. (666,583) 893,542 1,900,911
Other accounts receivable .............................. 21,128 (1,009) 16,022
Prepaid expenses ....................................... 939 11,069 (17,199)
Prepaid and recoverable income taxes ................... 45,256 8,618 75,006
Other assets ........................................... (34,089) 1,378 (6,037)
Accounts payable and accrued expenses .................. (232,724) (131,526) (763,119)
Advances from customers ................................ (260,854) (21,115) 126,461
Income taxes payable ................................... (99,428) 7,093 21,933
------------ ------------ ------------
Net cash provided by operating activities ......................... 1,132,466 3,298,033 4,379,867
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturities and sales of marketable securities .. 14,914,970 16,854,460 10,312,027
Purchases of marketable securities ........................... (8,455,071) (20,867,719) (14,826,955)
Purchases of fixed assets .................................... (22,281) (6,214) (5,840)
Purchase of net assets, net of cash acquired ................. -- -- (274,564)
------------ ------------ ------------
Net cash provided by (used in) investing activities ............... 6,437,618 (4,019,473) (4,795,332)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Distribution to minority interest ............................ (57,644) (9,358) --
Proceeds from sale of minority interest ...................... -- -- 1,000
Cash dividends paid .......................................... (11,136,429) -- --
Proceeds from exercise of stock options ...................... 829,687 -- --
------------ ------------ ------------
Net cash provided by (used in) financing activities .................. (10,364,386) (9,358) 1,000
------------ ------------ ------------
NET DECREASE IN CASH AND CASH EQUIVALENTS ............................. (2,794,302) (730,798) (414,465)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR ........................ 5,063,098 5,793,896 6,208,361
------------ ------------ ------------
CASH AND CASH EQUIVALENTS AT END OF YEAR .............................. $ 2,268,796 $ 5,063,098 $ 5,793,896
============ ============ ============
SUPPLEMENTAL DISCLOSURE:
Income taxes paid ................................................. $ 1,664,000 $ 1,778,000 $ 1,954,000
============ ============ ============
See accompanying notes to consolidated financial statements.
Page 22
TSR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 2004, 2003 AND 2002
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(A) BUSINESS AND NATURE OF OPERATIONS
TSR, Inc. and subsidiaries ("the Company") are primarily engaged in
providing contract computer programming services to commercial customers
and state and local government agencies located primarily in the
Metropolitan New York area. The Company provides its clients with
technical computer personnel to supplement their in-house information
technology capabilities. In fiscal 2004, two customers accounted for more
than 10% of the Company's revenues, constituting 25.5% and 15.0% of
revenues respectively. In fiscal 2003, two customers accounted for more
than 10% of the Company's revenues, constituting 20.7% and 19.6% of
revenues, respectively. In fiscal 2002, two customers accounted for more
than 10% of the Company's revenues, constituting 15.3% and 11.6% of
revenues, respectively. The Company operates in one business segment,
computer programming services.
(B) PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of TSR, Inc.
and its subsidiaries. All significant intercompany balances and
transactions have been eliminated in consolidation.
(C) REVENUE RECOGNITION
The Company's contract computer programming services are generally
provided under time and materials arrangements with its customers.
Accordingly, such revenues are recognized as services are provided.
Advances from customers represent amounts received from customers prior
to the Company's provision of the related services and credit balances
from overpayments.
Effective March 1, 2002, the Company adopted Emerging Issues Task Force
(EITF) Issue 01-14 "Income Statement Characterization of Reimbursements
Received for `Out-of-Pocket' Expenses Incurred." Accordingly,
reimbursements received by the Company for out-of-pocket expenses are
characterized as revenue. Prior to adoption of EITF Issue 01-14 the
Company characterized such amounts as a reduction of cost of sales.
(D) CASH AND CASH EQUIVALENTS
The Company considers short-term highly liquid investments with
maturities of three months or less at the time of purchase to be cash
equivalents. Cash and cash equivalents were comprised of the following as
of May 31, 2004 and 2003:
2004 2003
---- ----
Cash in banks..................... $ 570,003 $ 341,815
Money Market Funds................ 1,199,988 4,721,283
US Treasury Securities............ 498,805 --
----------- ----------
$ 2,268,796 $5,063,098
=========== ==========
(Continued)
Page 23
TSR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
MAY 31, 2004, 2003 AND 2002
(E) MARKETABLE SECURITIES
The Company accounts for its marketable securities in accordance with
Statement of Financial Accounting Standards ("SFAS") No. 115 "Accounting
for Certain Investments in Debt and Equity Securities." Accordingly, the
Company classifies its marketable securities at acquisition as either (i)
held-to-maturity, (ii) trading, or (iii) available-for-sale. Based upon
the Company's intent and ability to hold its US Treasury securities to
maturity (which maturities are mostly less than one year), such
securities have been classified as held-to-maturity and are carried at
amortized cost. The Company's equity securities are classified as trading
securities, which are carried at fair value, with unrealized gains and
losses included in earnings. The Company's marketable securities are
summarized as follows:
Gross Gross
Unrealized Unrealized
Amortized Holding Holding Recorded
Cost Gains Losses Value
---- ----- ------ -----
2004: US TREASURY SECURITIES... $ 6,468,508 $ -- $ -- $ 6,468,508
EQUITY SECURITIES........ 28,287 5,974 (3,930) 30,331
------------ ---------- ---------- ------------
$ 6,496,795 $ 5,974 $ (3,930) $ 6,498,839
============ ========== ========== ============
2003: US Treasury securities... $ 12,928,408 $ -- $ -- $ 12,928,408
Equity securities........ 28,287 -- (7,521) 20,766
------------ ---------- ---------- ------------
$ 12,956,695 $ -- $ (7,521) $ 12,949,174
============ ========== ========== ============
(F) ACCOUNTS RECEIVABLE AND CREDIT POLICIES:
The carrying amount of accounts receivable is reduced by a valuation
allowance that reflects management's best estimate of the amounts that
will not be collected. In addition to reviewing delinquent accounts
receivable, management considers many factors in estimating its general
allowance, including historical data, experience, customer types, credit
worthiness and economic trends. From time to time, management may adjust
its assumptions for anticipated changes in any of those or other factors
expected to affect collectability.
(G) DEPRECIATION AND AMORTIZATION
Depreciation and amortization of equipment and leasehold improvements has
been computed using the straight-line method over the following useful
lives:
Equipment.................... 3 years
Furniture and fixtures....... 3 years
Automobiles.................. 3 years
Leasehold improvements....... Lesser of lease term or useful life
(H) NET INCOME PER COMMON SHARE
Basic net income per common share is computed by dividing income
available to common stockholders (which for the Company equals its net
income) by the weighted average number of common shares outstanding, and
diluted net income per common share adds the dilutive effect of stock
options and other common stock equivalents, if any. Antidilutive shares
aggregating 0, 160,000 and 185,664 have been omitted from the calculation
of diluted net income per common share for the fiscal year ended May 31,
2004, 2003 and 2002, respectively.
(I) INCOME TAXES
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to temporary differences between the financial
reporting and tax bases of the Company's assets and liabilities at
enacted rates expected to be in effect when such amounts are realized or
settled. The effect of enacted tax law or rate changes is reflected in
income in the period of enactment.
(Continued)
Page 24
TSR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
MAY 31, 2004, 2003 AND 2002
(J) FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS No. 107, "Disclosures About Fair Value of Financial Instruments"
requires disclosure of the fair value of certain financial instruments.
For cash and cash equivalents, accounts receivable, accounts and other
payables, accrued liabilities and advances from customers, the amounts
presented in the financial statements approximate fair value because of
the short-term maturities of these instruments. The fair value of
marketable securities is based upon quoted market values at May 31, 2004.
(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. Such estimates include, but are not limited
to provisions for doubtful accounts receivable, and assessments of the
recoverability of the Company's deferred tax assets and intangible
assets. Actual results could differ from those estimates.
(L) LONG-LIVED ASSETS
The Company reviews its long-lived assets, including intangibles, for
possible impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. If the sum
of the expected cash flows undiscounted and without interest, is less
than the carrying amount of the asset, an impairment loss is recognized
for the amount by which the carrying amount of the asset exceeds its fair
value.
(M) COMPREHENSIVE INCOME
The Company's net income equaled comprehensive income in fiscal 2004,
2003 and 2002.
(N) STOCK OPTIONS
On July 28, 2003 the Company paid a large nonrecurring cash dividend of
$2.00 per share to shareholders of record as of July 11, 2003. The
dividend paid amounted to $9,088,024. Guidance under Emerging Issues Task
Force (EITF) 00-23, ISSUES RELATED TO THE ACCOUNTING FOR STOCK
COMPENSATION UNDER APB OPINION NO.25 AND FASB INTERPRETATION NO.44,
requires modification for outstanding stock options by adjusting the
price and/or the number of shares under a fixed stock option award as a
result of a large nonrecurring cash dividend. The Company did not adjust
the terms of any outstanding stock options and, given the circumstances,
a new measurement date and variable accounting treatment was required for
its outstanding options at the dividend payment date. The Company had
10,000 such outstanding options, all of which were vested, as of May 31,
2004 which are now subject to variable accounting treatment. Accordingly,
the Company recorded a non-cash compensation charge of $71,787 for the
2004 fiscal year and will continue to record such charges, or recoveries
associated with the value of the stock underlying these options through
the earlier of their exercise, forfeiture or expiration dates.
The Company has one stock-based employee compensation plan in effect. The
Company accounts for all transactions under which employees receive
shares of stock or other equity instruments in the Company based on the
price of its stock in accordance with the provisions of Accounting
Principles Board Opinion No. 25, ACCOUNTING FOR STOCK ISSUED TO
EMPLOYEES. All options granted under the plan had an exercise price equal
to the market value of the underlying common stock, and the number of
shares represented by such options were known and fixed, on the date of
grant. However, as a result of the large nonrecurring cash dividend
discussed above, the remaining outstanding 10,000 options are now treated
as variable options. The following table illustrates the effect on net
income and earnings per share if the Company had applied the fair value
recognition provisions of Statement of Financial Accounting Standards
(SFAS) No. 123 ACCOUNTING FOR STOCK-BASED COMPENSATION.
Page 25
TSR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
MAY 31, 2004, 2003 AND 2002
Year Ended May 31,
------------------
2004 2003 2002
---- ---- ----
Net income as reported...................................... $ 2,124,257 $ 2,362,175 $ 2,708,494
Deduct: Total stock-based employee compensation expense
determined under fair value method for all awards, net of
minority interest and related tax effects................... -- (12,175) (12,494)
Add: Stock-based employee compensation expense included
in reported net income, net of related tax effect........... 71,787 -- --
----------- ----------- -----------
Proforma Net Income....................................... $ 2,196,044 $ -- $ --
=========== =========== ===========
Basic and diluted net income per share:
As reported............................................... $ 0.47 $ 0.53 $ 0.61
=========== =========== ===========
Proforma SFAS 123......................................... $ 0.48 $ 0.53 $ 0.61
=========== =========== ===========
The per share weighted-average fair value of stock options granted during
2001 was approximately $2.11 on the date of grant using the Black-Scholes
option pricing model with the following weighted-average assumptions:
expected dividend yield of 0%, risk free interest rate of 6%, expected
stock volatility of 48%, and an expected option life of three years.
There were no options granted in fiscal 2004, 2003 and 2002.
(O) IMPACT OF NEW ACCOUNTING STANDARDS
In January 2003, the FASB issued Interpretation No. 46 "Consolidation of
Variable Interest Entities" ("Interpretation 46"). Interpretation 46
clarifies the application of Accounting Research Bulletin No. 51
"Consolidated Financial Statements", and applies immediately to any
variable interest entities created after January 31, 2003 and to variable
interest entities in which an interest is obtained after that date. The
Company holds no interest in variable interest entities.
Page 26
TSR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
MAY 31, 2004, 2003 AND 2002
(2) INCOME TAXES
A reconciliation of the provisions for income taxes computed at the
federal statutory rates for fiscal 2004, 2003, and 2002 to the reported
amounts is as follows:
2004 2003 2002
AMOUNT % Amount % Amount %
------ --- ------- --- ------ ---
Amounts at statutory federal tax rate... $1,278,000 34.0% $1,413,000 34.0% $1,611,000 34.0%
State and local taxes, net of
federal income tax effect............. 341,000 9.1 334,000 8.0 340,000 7.2
Non-deductible expenses, and other...... 16,000 0.4 47,000 1.2 79,000 1.6
---------- ---- ---------- ---- ---------- ----
$1,635,000 43.5% $1,794,000 43.2% $2,030,000 42.8%
========== ==== ========== ==== ========== ====
The components of the provision for income taxes are as follows:
Federal State Total
------- ----- -----
2004: CURRENT.......... $ 1,139,000 $ 516,000 $ 1,655,000
DEFERRED......... (20,000) -- (20,000)
----------- ----------- -----------
$ 1,119,000 $ 516,000 $ 1,635,000
=========== =========== ===========
2003: Current.......... $ 1,288,000 $ 506,000 $ 1,794,000
Deferred......... -- -- --
----------- ----------- -----------
$ 1,288,000 $ 506,000 $ 1,794,000
=========== =========== ===========
2002: Current.......... $ 1,449,000 $ 602,000 $ 2,051,000
Deferred......... 66,000 (87,000) (21,000)
----------- ----------- -----------
$ 1,515,000 $ 515,000 $ 2,030,000
=========== =========== ===========
The tax effects of temporary differences that give rise to significant
portions of the deferred income tax assets at May 31, 2004 and 2003 are
as follows:
2004 2003
---- ----
Allowance for doubtful accounts
receivable............................... $ 180,000 $ 180,000
Equipment and leasehold improvement
Depreciation and amortization............ 89,000 89,000
Acquired client relationships.............. 54,000 34,000
--------- ---------
Total deferred income tax assets......... $ 323,000 $ 303,000
========= =========
The Company believes that it is more likely than not that it will realize
the benefits of its deferred tax assets based primarily on the Company's
history of and projections for taxable income in the future.
(Continued)
Page 27
TSR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
MAY 31, 2004, 2003 AND 2002
(3) ACQUISITION
In August 2001, the Company capitalized a newly formed subsidiary with
$4,000 and simultaneously sold a 20% interest to a third party for
$1,000. On August 14, 2001, this subsidiary acquired substantially all of
the assets and assumed certain liabilities of a computer consulting firm
for cash of $286,500 (including cash acquired of $11,936). In accordance
with SFAS No. 141, this transaction is being accounted for as a purchase
business combination. Accordingly, the purchase price has been allocated
to the assets acquired and liabilities assumed based on their estimated
fair value, summarized as follows:
Cash ..................................... $ 11,936
Other current assets ..................... 303,520
Equipment ................................ 16,235
Acquired client relationships ............ 171,608
Current liabilities ...................... (216,799)
---------
$ 286,500
In connection with the acquisition, the Company acquired certain
contractual client relationships. The related intangible asset is being
amortized over a three-year period, reflecting the estimated average life
of the underlying client relationships. Amortization expense for the year
ended May 31, 2004, 2003 and 2002 were $57,203, $57,203 and $42,902,
respectively.
The results of operations of the acquired business have been included in
the Company's consolidated financial statements from the date of
acquisition. Had the acquisition been completed as of June 1, 2001,
unaudited pro forma consolidated revenues, net income and net income per
common share would have been $59,938,000, $2,719,000, and $0.61,
respectively, for the fiscal year ended May 31, 2002.
(4) STOCK OPTIONS
The 1997 Employee Stock Option Plan provides for the granting of options
to purchase up to 800,000 shares of the Company's common stock at prices
equal to fair market values at the grant dates. Options are exercisable
as determined on the date of the grant and expire on the fifth
anniversary of the date of grant. There are 559,950 shares of common
stock which remain reserved for issuance under the Plan.
STOCK OPTIONS OUTSTANDING
WEIGHTED
EXERCISE AVERAGE
SHARES PRICE PRICE
------ ----- -----
Outstanding at May 31, 2001 and 2002.. 190,000 $ 5.53 $ 5.53
Options forfeited..................... ( 30,000) 5.53 5.53
--------- -------- --------
Outstanding at May 31, 2003........... 160,000 5.53 5.53
Options exercised..................... (150,000) 5.53 5.53
--------- -------- --------
OUTSTANDING AT MAY 31, 2004........... 10,000 $ 5.53 $ 5.53
========= ======== ========
Exercisable at May 31, 2004........... 10,000 $ 5.53 $ 5.53
========= ======== ========
Page 28
TSR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
MAY 31, 2004, 2003 AND 2002
(5) LINE OF CREDIT
The Company has an available line of credit of $5,000,000 with a major
money center bank through October 6, 2005. As of May 31, 2004, 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.
The Company intends to renew this facility on or before its current
expiration.
(6) COMMITMENTS AND CONTINGENCIES
A summary of noncancellable long-term operating lease commitments for
facilities as of May 31, 2004 follows:
FISCAL YEAR AMOUNT
----------- ------
2005............ 349,000
2006............ 170,000
2007............ 101,000
2008............ 17,000
--------
Total $637,000
========
Total rent expenses under all lease agreements amounted to $347,000,
$357,000 and $393,000, in fiscal 2004, 2003 and 2002.
The Company is party to various lawsuits, some involving substantial
amounts. Management does not believe that the resolution of these
lawsuits will have a material adverse impact on the financial position of
the Company.
(7) TREASURY STOCK
During fiscal 1999, under a buy-back plan authorized by the Board of
Directors to repurchase up to 600,000 shares of the Company's common
stock, the Company repurchased 576,500 shares of its common stock for
$4,194,378, at the market value of the stock on the purchase date.
Additionally, in June 1999 and January 2000 the Board of Directors
authorized additional buy backs of up to 500,000 shares of common stock
each. In fiscal 2000, the Company repurchased 821,414 shares of its
common stock for $6,417,782, at the market value of the stock at the
purchase date. In October 2000, the Board of Directors authorized an
additional buyback of up to 250,000 shares of common stock. In fiscal
2001, the Company repurchased 262,400 shares of its common stock for
$1,419,141, at the market value of the stock at the purchase date. In
fiscal 2004, 2003 and 2002, there were no repurchases.
Page 29
TSR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
MAY 31, 2004, 2003 AND 2002
(8) EMPLOYMENT AGREEMENTS
In June 2004, an employment agreement was entered into with the President
of the contract computer programming services subsidiary providing for an
annual base salary 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. This agreement is for a three-year term
ending May 31, 2007 and provides for severance, in the event of
termination, of a maximum of one year's salary. In the event of a change
in control of the Corporation, the executive would be entitled to a
severance payment of $250,000 times the remaining years in the contract
term if certain profitability criteria are met.
In June 2002, an employment agreement was entered into with the Chairman
of the Board, Chief Executive Officer, President and Treasurer, which
terminates May 31, 2007. This agreement provides for an initial base
salary 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.
(9) UNAUDITED QUARTERLY FINANCIAL DATA
The following is a summary of unaudited quarterly operating results for
the fiscal years ended May 31, 2004 and 2003.
(Amounts in Thousands, except Per Share Data)
Fiscal 2004
-----------
First Second Third Fourth
----- ------ ----- ------
Revenues.................. $ 12,737 $ 12,997 $ 12,571 $ 13,421
Gross Profit.............. 2,864 2,981 2,667 2,953
Net Income................ 504 638 436 546
Basic and Diluted Net
Income per Common Share. $ 0.11 $ 0.14 $ 0.10 $ 0.12
(Amounts in Thousands, except Per Share Data)
Fiscal 2003
-----------
First Second Third Fourth
----- ------ ----- ------
Revenues.................. $ 13,681 $ 13,859 $ 11,987 $ 12,916
Gross Profit.............. 2,981 3,078 2,564 2,801
Net Income................ 664 709 452 537
Basic and Diluted Net
Income per Common Share. $ 0.15 $ 0.16 $ 0.10 $ 0.12
(10) SUBSEQUENT EVENT
On June 30, 2004, the Board of Directors of the Company announced that a
regular quarterly cash dividend of $0.15 per share will be paid on July
30, 2004 to shareholders of record as of July 16, 2004. This dividend
will amount to approximately $685,000 and will be paid from the Company's
cash and marketable securities.
Page 30
Item 9. Changes in and Disagreements with Accountants on Accounting and
---------------------------------------------------------------
Financial Disclosure
--------------------
None
Item 9A. Procedures and Controls
-----------------------
DISCLOSURE CONTROLS AND PROCEDURES. The Company conducted an evaluation, under
the supervision and with the participation of the principal executive officer
and principal financial officer, of the Company's disclosure controls and
procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of
1934 (the "Exchange Act")). Based on this evaluation, the principal executive
officer and principal financial officer concluded that, as of the end of the
period covered by this report, the Company's disclosure controls and procedures
are effective.
INTERNAL CONTROL OVER FINANCIAL REPORTING. There was no change in the Company's
internal control over financial reporting (as such term is defined in Rule
13a-15(f) under the Exchange Act) during the Company's most recently reported
completed fiscal quarter that has materially affected, or is reasonably likely
to materially affect, the Company's internal control over financial reporting.
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 2004 Annual Meeting
of Stockholders.
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 2004 Annual Meeting
of Stockholders.
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 2004 Annual Meeting
of Stockholders.
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 2004 Annual Meeting
of Stockholders.
Item 14. Principal Accountant Fees and Services.
--------------------------------------
The information required by this Item 14 is incorporated by reference to the
Company's definitive proxy statement in connection with the 2004 Annual Meeting
of Stockholders.
Page 31
PART IV
Item 15. Exhibits, Financial Statements, Financial Statement Schedules, and
------------------------------------------------------------------
Reports on Form 8-K.
-------------------
(a) The following documents are filed as part of this report:
1. The financial statements as indicated in the index set forth on page 15.
2. Financial statement schedule:
Schedule supporting consolidated financial statements: Page
----
Schedule II - Valuation and Qualifying Accounts......... 32
Schedules other than those listed above have been omitted, since they are either
not applicable, not required or the information is included elsewhere herein.
3. Exhibits as listed in Exhibit Index on page 34.
(b)Reports on Form 8-K: None
TSR, INC. AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
Balance at Charged to
Beginning Cost and Deductions/ Balance at
of Period Expense Write-Offs End of Period
--------- ------- ---------- -------------
Year ended May 31, 2004:
Allowance for doubtful accounts $ 430,000 $ -- $ -- $ 430,000
========= ======== ======== =========
Year ended May 31, 2003:
Allowance for doubtful accounts $ 430,000 $ -- $ -- $ 430,000
========= ======== ======== =========
Year ended May 31, 2002:
Allowance for doubtful accounts $ 273,000 $200,000 $ 43,000 $ 430,000
========= ======== ======== =========
Page 32
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 19, 2004
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Company and in
the capacities and on the dates indicated.
/s/ J.F. Hughes
-------------------------------------------
J. F. Hughes, President, Treasurer and
Director
/s/ John G. Sharkey
-------------------------------------------
John G. Sharkey, Vice President, Finance,
Controller and Secretary
/s/ Ernest G. Bago
-------------------------------------------
Ernest G. Bago, President, TSR Consulting
Services, Inc. and Director
/s/ John H. Hochuli, Jr
-------------------------------------------
John H. Hochuli, Jr., Director
/s/ James J. Hill
-------------------------------------------
James J. Hill, Director
/s/ Christopher Hughes
-------------------------------------------
Christopher Hughes, Director
/s/ Robert A. Esernio
-------------------------------------------
Robert A. Esernio, Director
Dated: August 19, 2004
Page 33
TSR, INC. AND SUBSIDIARIES
EXHIBIT INDEX
FORM 10-K, MAY 31, 2004
Exhibit Sequential
Number EXHIBIT Page #
- ------ ------
3.1 Articles of Incorporation for the Company, as amended. Incorporated by N/A
reference to Exhibit 3.1 to the Annual Report on Form 10-K filed by the
Company for the fiscal year ended May 31, 1998.
3.2 Bylaws of the Company, as amended incorporated by reference to Exhibit N/A
3.2 to the Annual Report of Form 10-K filed by the Company for the fiscal
year ended May 31, 1998.
10.1 Employment Agreement between TSR, Inc. and Ernest G. Bago, dated as of 35
June 1, 2004.
10.2 1997 Employee Stock Option Plan, incorporated by reference to Exhibit N/A
10.2 to the annual Report on Form 10-K filed by Company for the fiscal
year ended May 31, 1997.
10.3 Form of Employee Stock Option Agreement, incorporated by reference to N/A
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, 2002 between the Company and Joseph F. N/A
Hughes, incorporated by reference to Exhibit 10:04 to the Annual Report
on Form 10-K filed by the Company for the fiscal year ended May 31, 2002.
10.5 Revolving Credit Agreement dated October 6, 1997 among TSR Consulting N/A
Services, Inc., TSR, Inc., Catch/21 Enterprises Incorporated and the
Chase Manhattan Bank, incorporated by reference to Exhibit 10.3 to the
Quarterly Report on Form 10-Q filed by the Company for the quarter ended
August 31, 1997.
10.6 Employment Agreement dated January 1, 2002 between the Company and John N/A
G. Sharkey incorporated by reference to Exhibit 10.1 to the Quarterly
Report on Form 10-Q filed by the Company for the quarter ended February
28, 2002.
21 List of Subsidiaries 40
23.1 Consent of BDO Seidman, LLP 41
23.2 Consent of KPMG LLP 42
31.1 Certification by J.F. Hughes Pursuant to Securities Exchange Act Rule 43
13a-14
31.2 Certification by John G. Sharkey Pursuant to Securities Exchange Act Rule 44
13a-14
32.1 Certification of J.F. Hughes Pursuant to 18 U.S.C. Section 1350, as 45
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2 Certification of John G. Sharkey Pursuant to 18 U.S.C. Section 1350, as 46
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
Page 34