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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, 2007
or
[ ] Transition Report Under Section 13 or 15(d) of The Securities
Exchange Act of 1934
For the transition period from __________ to __________
Commission File Number: 0-8656
TSR, Inc.
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(Exact name of registrant as specified in its charter)
Delaware 13-2635899
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(State or other jurisdiction of (I.R.S. Employer 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:
Common Stock, par value $0.01 per share
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(Title of Class)
Securities registered pursuant to Section 12(g) of the Exchange Act: None
(Title of Class)
Indicate by check mark if the Registrant is a well-known seasoned issuer, as
defined in Rule 405 of the Securities Act. [ ] Yes [X] No
Indicate by check mark if the Registrant is not required to file reports
pursuant to Section 13 or Section 15(d) of the Exchange Act. [ ] Yes [X] No
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. [X] Yes [ ] No
Indicate by check mark if there is no disclosure of delinquent filers in
response to Item 405 of Regulation S-K contained in this form, and no disclosure
will be contained, to the best of Registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. [X]
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Page 1
Indicate by check mark whether the Registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer (as defined in Rule 12b-2 of the
Exchange Act). [ ] Large accelerated filer [ ] Accelerated filer [X ]
Non-accelerated filer.
Indicate by check mark whether the Registrant is a shell Company (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 $4.00 at
November 30, 2006 was $11,102,000.
The number of shares of the Registrant's common stock outstanding as of July 31,
2007 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 2007 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 with significant technology budgets. In the year ended May 31, 2007,
the Company provided IT staffing services to approximately 90 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. The Company is in the process of hiring
additional account executives and technical recruiters in its existing offices
to address increased competition and to promote revenue growth. The hiring
process has been taking longer than expected due a combination of limited
qualified candidates and increased compensation expectations of qualified
candidates. As of May 31, 2007, the Company employed 14 persons who are
responsible for recruiting technical personnel and 14 persons who are account
executives. As of May 31, 2006 the Company had employed 14 technical personnel
recruiters and 10 account executives.
The Company intends to increase the number of technical recruiters it employs to
address increased competition, especially at accounts with vendor management.
During fiscal year 2006, to supplement its in-house recruiters, the Company
contracted with an India based company to provide recruiting and recruiting
support in locating technical consultants in the United States. During fiscal
2007 the number of recruiters provided by this India based company increased
from 2 to 4.
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 90 clients during the year
ended May 31, 2007 as compared to 80 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, 2007, the
Company had two clients which constituted more than 10% of consolidated revenues
(Procurestaff Ltd., 19.1% and Ensemble-Chimes, 11.3%). Procurestaff Ltd. and
Ensemble-Chimes are vendor management services providers. In excess of 90% of
the revenue generated from Procurestaff Ltd. was from AT&T as the end client. In
excess of 90% of the revenue generated from Ensemble-Chimes was derived from two
clients, neither of which individually constituted more than 10% of revenues.
Additionally, the Company's top ten clients accounted for 71% of consolidated
revenues in fiscal 2007 and 70% in fiscal 2006. 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 is
retained for the purpose of keeping costs down for the end client and receives a
processing 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.
In June 2006, the New York State Office of General Services, Procurement
Services Group ("OGS") terminated its contract with the Company. The OGS actions
were due to the report of an investigation by the Office of the Special
Commissioner of Investigation of the New York City Department of Education
("DOE"). The investigative report concluded that the Company operated improperly
from 2001 through the spring of 2003 by using a subcontracting arrangement to
obtain programmers for positions with the DOE.
Page 4
The DOE also asserted a claim against the Company for a reimbursement due to the
Company's subcontracting without written authorization. While the Company
believes that its subcontracting did not result in overcharges to DOE, it has
settled the matter in order to avoid the expense and uncertainty of litigation.
The reserve of $900,000 relating to this claim which was established at May 31,
2006 was sufficient to cover the settlement which was finalized in May 2007. The
last of the remaining consultants placed with the DOE were terminated in April
2007 and the Company will not be making any new placements with DOE. The DOE
accounted for approximately 13% of the Company's revenues during its fiscal year
ended May 31, 2006 and 4% during fiscal 2007.
PROFESSIONAL STAFF AND RECRUITMENT
In addition to using internet based job boards such as Dice, Net Temps and
Monster, the Company maintains a database of over 100,000 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 advertisements in local newspapers and
attending job fairs on a periodic basis. The Company devotes significant
resources to recruiting technical personnel, maintaining 14 recruiters based in
the U.S. and contracting with an India based company for 4 recruiters in India
to help locate U.S. based technical consultants. 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.
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 May 31, 2007, the Company employs 216 people including its 2 executive
officers. Of such employees 14 are engaged in sales, 14 are recruiters for
programmers, 174 are technical and programming consultants, and 12 are in
administration and clerical functions. None of the Company's employees belong to
unions.
Page 5
Item 1A. Risk Factors.
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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. The Company does not currently have an employment
agreement with Mr. Hughes. 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 Customers.
In the fiscal year, ended May 31, 2007, the Company's largest clients,
Procurestaff Ltd. and Ensemble-Chimes accounted for 19.1% and 11.3% of the
Company's consolidated revenues, respectively. Procurestaff and Ensemble-Chimes
are vendor management companies. In excess of 90% of the revenues received from
Procurestaff relate to a single customer, AT&T, while in excess of 90% of the
revenues received from Ensemble-Chimes were derived from two customers which
individually did not exceed 10% of revenues. The New York City Department of
Education (DOE) accounted for 13.0% of the Company's consolidated revenues in
fiscal 2006 and 4.3% in fiscal 2007. The last remaining consultants on billing
with the DOE were terminated in April 2007. 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. See "Rapidly Changing Industry" below.
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.
Competitive Market for Account Executives and Technical Recruiters
The Company has been seeking to hire qualified account executives and technical
recruiters to meet competition and promote growth. The Company faces a highly
competitive market for the limited number of qualified personnel and there can
be no assurance that the Company will be successful in hiring such personnel.
Page 6
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 staffing industry has also experienced margin erosion caused
by this increased competition, and customers leveraging their buying power by
consolidating the number of vendors with which they deal.
In addition to these factors, there has been intense price competition in the
area of IT staffing, pressure on billing rates and pressure by customers for
discounts.
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. The Company attributes a
significant portion of its decline in revenues to customers reducing their
spending on IT projects as a result of the economic environment.
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 7
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 made 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.
Voting Power of Major Shareholder
Joseph F. Hughes and members of his family own Common Stock, representing
approximately 39% of the Company's voting power as of July 31, 2007. As such,
Joseph Hughes has significant voting power on all matters submitted to a vote of
the Company's common shareholders.
Certain Anti-Takeover Provisions May Inhibit a Change of Control
In addition to the significant ownership of Common Stock by Joseph F. Hughes,
certain provisions of the Company's charter and by-laws may have the effect of
discouraging a third party from making an acquisition proposal for the Company
and may thereby inhibit a change in control of the Company under circumstances
that could give the holders of Common Stock the opportunity to realize a premium
over the then-prevailing market prices. Such provisions include a classified
Board of Directors, advance notice requirements for nomination of directors and
certain shareholder proposals set forth in the Company's Certificate of
Incorporation and by-laws.
Page 8
New Classes and Series of Stock
The Company's charter authorizes the Board of Directors to create new classes
and series of preferred stock and to establish the preferences and rights of any
such classes and series without further action of the shareholders. The issuance
of additional classes or series of Capital Stock may have the effect of
delaying, deferring or preventing a change in control of the Company.
The Company's Stock Price Could Be Extremely Volatile And, As A Result,
Investors May Not Be Able To Resell Their Shares At Or Above The Price They Paid
For Them.
Among the factors that could affect the Company's stock price are:
- limited float and a low average daily trading volume;
- industry trends and the performance of the Company's customers;
- fluctuations in the Company's results of operations;
- litigation; and
- general market conditions.
The stock market has and may in the future experience extreme volatility that
has often been unrelated to the operating performance of particular companies.
These broad market fluctuations may adversely affect the market price of the
Company's common stock.
Item 1B. Unresolved Staff Comments - None
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Item 2. Properties.
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The Company leases 8,000 square feet of space in Hauppauge, New York for a term
expiring November 30, 2010, with annual rentals of approximately $70,000. 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 July, 2012) and Edison, New
Jersey (lease expires August, 2008), with aggregate monthly rentals of
approximately $23,000.
The Company believes the present locations are adequate for its current needs as
well as for the future expansion of its existing business.
Item 3. Legal Proceedings.
-----------------
There are no material legal proceedings.
Item 4. Submission of Matters to a Vote of Security Holders.
---------------------------------------------------
Not Applicable
Page 9
PART II
Item 5. Market for Common Equity and Related Stockholder Matters.
--------------------------------------------------------
The Company's shares of Common Stock trade on the NASDAQ Global Market under the
symbol TSRI. The following are the high and low sales prices for each quarter
during the fiscal years ended May 31, 2007 and 2006:
JUNE 1, 2006 - MAY 31, 2007
1ST 2ND 3RD 4TH
QUARTER QUARTER QUARTER QUARTER
------- ------- ------- -------
High Sales Price...... 5.50 4.75 4.79 4.53
Low Sales Price....... 3.55 3.80 3.85 3.80
JUNE 1, 2005 - MAY 31, 2006
1ST 2ND 3RD 4TH
QUARTER QUARTER QUARTER QUARTER
------- ------- ------- -------
High Sales Price...... 6.38 6.00 11.16 6.04
Low Sales Price....... 5.10 4.35 4.50 4.30
There were 133 holders of record of the Company's Common Stock as of July 31,
2007. 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 years ended May 31, 2004 and
2005. The dividend was $0.08 per quarter for fiscal 2006 and 2007. The Company
has not determined its dividend policy for fiscal 2008. There can be no
assurance that the Company will continue to pay dividends.
Securities authorized for issuance under equity compensation plans.
The 1997 Employee Stock Option Plan, the Company's lone equity compensation
plan, expired on April 30, 2007.
Page 10
Item 6. Selected Financial Data.
-----------------------
(Amounts in Thousands, Except Per Share Data)
MAY 31, May 31, May 31, May 31, May 31,
2007 2006 2005 2004 2003
---- ---- ---- ---- ----
Revenues ............................................ $49,689 $48,109 $51,444 $51,725 $52,443
Income From Operations .............................. 1,925 1,709 3,635 3,696 3,975
Net Income .......................................... 1,393 1,214 2,145 2,124 2,362
Basic and Diluted Net Income Per Common Share ....... 0.30 0.27 0.47 0.47 0.53
Working Capital ..................................... 12,815 12,368 14,391 14,976 23,028
Total Assets ........................................ 18,059 18,635 18,531 19,203 27,852
Stockholders' Equity ................................ 13,952 14,021 14,589 15,192 23,258
Book Value Per Common Share ......................... 3.05 3.07 3.19 3.33 5.26
Cash Dividends Declared Per Common Share ............ $ 0.32 $ 0.32 $ 0.60 $ 2.60 --
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, 2007 and 2006.
Fiscal 2007
-----------
First Second Third Fourth
----- ------ ----- ------
Revenues .......................... $12,376 $12,626 $11,774 $12,913
Gross Profit ...................... 2,377 2,369 2,052 2,357
Net Income ........................ 444 413 201 335
Basic and Diluted Net Income
per Common Share ................ $ 0.10 $ 0.09 $ 0.04 $ 0.07
Fiscal 2006
-----------
First Second Third Fourth
----- ------ ----- ------
First
Revenues .......................... $12,465 $11,829 $11,595 $12,220
Gross Profit ...................... 2,526 2,369 2,108 2,346
Net Income (Loss) ................. 474 484 289 (33)
Basic and Diluted Net Income
(Loss) per Common Share ......... $ 0.10 $ 0.11 $ 0.06 $ (0.01)
Page 11
Item 7. Management's Discussion and Analysis of Financial Condition and Results
-----------------------------------------------------------------------
of Operations.
-------------
The following discussion and analysis should be read in conjunction with the
Company's consolidated financial statements and the notes thereto presented
elsewhere in this report.
Results of Operations
The following table sets forth for the periods indicated certain financial
information derived from the Company's consolidated statements of earnings.
There can be no assurance that historical trends in operating results will
continue in the future:
YEAR ENDED MAY 31,
(DOLLAR AMOUNTS IN THOUSANDS)
2007 2006 2005
---- ---- ----
% OF % of % of
AMOUNT REVENUE Amount Revenue Amount Revenue
------ ------- ------ ------- ------ -------
Revenues ............................................. $49,689 100.0 $48,109 100.0 $51,444 100.0
Cost of Sales ........................................ 40,534 81.6 38,760 80.6 40,299 78.3
------- ----- ------- ----- ------- -----
Gross Profit ......................................... 9,155 18.4 9,349 19.4 11,145 21.7
Selling, General, and Administrative Expenses ........ 7,230 14.5 7,640 15.9 7,510 14.6
------- ----- ------- ----- ------- -----
Income from Operations ............................... 1,925 3.9 1,709 3.5 3,635 7.1
Other Income ......................................... 409 0.8 279 0.6 111 0.2
------- ----- ------- ----- ------- -----
Income Before Income Taxes ........................... 2,334 4.7 1,988 4.1 3,746 7.3
Provision for Income Taxes ........................... 941 1.9 774 1.6 1,601 3.1
------- ----- ------- ----- ------- -----
Net Income ........................................... $ 1,393 2.8 $ 1,214 2.5 $ 2,145 4.2
======= ===== ======= ===== ======= =====
Revenues
--------
Revenues consist primarily of revenues from computer programming consulting
services. Revenues for the fiscal year ended May 31, 2007 increased $1,580,000
or 3.3% from fiscal 2006. Although revenues from the New York City Department of
Education (DOE) decreased by approximately $4,100,000, increases from other
customers, notably Procurestaff and Ensemble-Chimes, caused overall revenues to
increase. The average number of consultants on billing with customers decreased
from approximately 343 for the fiscal year ended May 31, 2006 to 335 for the
fiscal year ended May 31, 2007. Changes in the business mix toward higher level
skills allowed the Company to increase its average billing rates to customers,
offsetting the slight decrease in the average number of consultants on billing
with customers.
More than 90% of the revenues received from Procurestaff related to AT&T. As a
result of the merger of AT&T with SBC Communications, Inc., Procurestaff, which
had been the sole vendor management company for AT&T is currently one of many
vendors to the new AT&T and no longer serves as the primary vendor manager. Due
to these changes, the Company experienced a decrease in new placements with AT&T
beginning in the second quarter of fiscal 2007. This has reduced the number of
consultants on billing with AT&T from 100 at August 31, 2006 to 72 at May 31,
2007. The Company is unable to predict whether this change in relationship will
continue to impact the Company's business relationship with AT&T.
The Company's contract to provide services to the DOE was terminated in June
2006 (See "Marketing and Clients"). The DOE accounted for 13.0% of the Company's
consolidated revenues in fiscal 2006, while accounting for 4.3% of revenues in
fiscal 2007. There were 41 consultants on billing with the DOE at May 31, 2006.
The last remaining consultants were terminated in April 2007.
The Company's revenues from programmers on billing continue to be affected by
discounts, such as prompt payment and volume discounts, required by major
customers as a condition to remaining on their approved vendor lists and the
reduction in the number of vendors on the approval vendor lists to increase
pricing competition among the remaining vendors. 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
Page 12
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 is retained for the purpose of keeping costs down for the end
client and receives a processing fee which is deducted from the payment to the
Company. 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. The Company is unable to predict the
long-term effects of these changes.
Although there has been some improvement in market conditions during the past
few years, revenues have not improved significantly since the Company has not
yet fully adapted its business model to more effectively deal with changing
market factors such as vendor management and off-shore IT operations. A focus of
the Company's plan has been to hire additional experienced account executives
and technical recruiters to address increased competition and to promote revenue
growth. This process has taken longer than expected due to a combination of
limited qualified candidates and increased compensation expectations of
qualified candidates.
Revenues for fiscal 2006 decreased $3,336,000 or 6.5% from fiscal 2005,
substantially all of which related to a decrease with the Company's largest
customer, Procurestaff, Ltd. (end client AT&T). Of this decrease, approximately
$1.9 million was attributable to a decrease in the number of consultants on
billing with this customer and approximately $1.4 million was attributable to
the previously disclosed price reduction mandated by this customer. Beginning in
May 2005, Procurestaff, Ltd. instituted a change in its pricing methodology for
AT&T which not only reduced the Company's revenues but significantly decreased
gross profit derived from this account because the Company was not able to
reduce amounts paid to its consultants.
Cost of Sales
-------------
Cost of sales increased by $1,774,000, in fiscal 2007 from fiscal 2006. Cost of
sales as a percentage of revenues increased to 81.6% in fiscal 2007 from 80.6%
in fiscal 2006. The increase in cost of sales resulted primarily from increased
revenues. The increase in cost of sales as a percentage of revenues is due to
additional mandatory discount programs, as discussed above under Revenues.
Fiscal 2006 cost of sales decreased $1,540,000, compared to fiscal 2005. Cost of
sales as a percentage of revenues increased to 80.6% in fiscal 2006 from 78.3%
in fiscal 2005. The overall decrease in the cost of sales resulted from a
decrease in the number of programmers on billing with customers. The increase in
cost of sales as a percentage of revenues was due to lower pricing, particularly
at the Company's largest customer Procurestaff Ltd. (end client AT&T) which
accounted for approximately one half of the percentage increase and additional
mandatory discount programs at other large customers.
Selling, General and Administrative Expenses
--------------------------------------------
Selling, general and administrative expenses consist primarily of expenses
relating to account executives, technical recruiters, facilities costs,
management and corporate overhead. These expenses decreased $410,000, or 5.4%,
from $7,640,000 in fiscal 2006 to $7,230,000 in fiscal 2007. The decrease was
primarily the result of a $900,000 reserve established in fiscal 2006 to settle
claims by the DOE against the Company for subcontracting without authorization.
Without the reserve, these expenses would have increased by $490,000 primarily
due to increased selling expenses of $302,000 and increased recruiting expenses
of $211,000. This increase resulted primarily from increases in the number of
account executives and technical recruiters as well as increased compensation
for the recruiters. Selling, general and administrative expenses are expected to
increase going forward as the Company has plans to continue hiring additional
account executives and technical recruiters to address increasing competition,
especially at accounts with third party vendor management organizations in
place.
Selling, general and administrative expenses increased $130,000 or 1.7% from
$7,510,000 in fiscal 2005 to $7,640,000 in fiscal 2006. This increase was
primarily the result of the $900,000 reserve established to settle claims by the
DOE against the Company for subcontracting without written authorization.
Without this reserve, these expenses would have decreased by almost $770,000
primarily due to decreased selling expenses of $450,000 and a decrease in
expenses of $180,000 due to the termination of the effort to establish a new
service offering.
Page 13
Other Income
------------
Fiscal 2007 other income resulted primarily from interest and dividend income of
$461,000, which increased from the level realized in 2006 due to higher interest
rates. The Company also had an unrealized gain of $3,000 from marketable
securities due to market adjustments of its equity portfolio.
Fiscal 2006 other income resulted primarily from interest and dividend income of
$358,000, which increased from the level realized in 2005 due to higher interest
rates. The Company also had an unrealized loss of $7,000 from marketable
securities due to market adjustments of its equity portfolio.
Income Taxes
------------
The effective income tax rate increased to 40.3% in fiscal 2007 from 38.9% in
fiscal 2006 because fiscal 2006 benefited from the reversal of prior years'
income tax over accruals. The over accruals resulted primarily from providing
for state income taxes in excess of what was actually due with the filed
returns.
The effective income tax rate decreased to 38.9% in fiscal 2006 from 42.7% in
fiscal 2005 because of lower state and local taxes and reversal of prior years'
income tax over accruals.
Net Income
----------
Net income increased $179,000 or 14.7% in fiscal 2007 from fiscal 2006. Net
income increased primarily due to the pre-tax reserve of $900,000 established in
fiscal 2006 to settle claims made by the DOE. Without the reserve, net income
would have decreased $291,000 or 17.3% from fiscal 2006. This decrease was
primarily due to increased selling and recruiting expenses. Also, gross profit
decreased while revenues increased because additional discount programs at major
customers further decreased margins.
Net income decreased $931,000 or 43.4% in fiscal 2006 from fiscal 2005. Net
income decreased primarily due to the pre-tax reserve of $900,000 established to
settle claims made by DOE. Without the reserve for DOE claims, net income would
have decreased $461,000 or 21.5% from fiscal 2005 and income from operations
would have been reduced $1,026,000 or 28.2% from fiscal 2005. Net income also
decreased at a higher rate than revenues decreased due to the price reduction
instituted by the Company's largest customer and additional mandatory discount
programs at other large customers. These price reductions did not allow for any
offsetting cost reductions in the amounts paid to the consultants on billing
with the customers. These price reductions, along with a decrease in the number
of consultants on billing with customers and the DOE reserve, were primarily
responsible for the reduction in the Company's income from operations of
$1,926,000 or 53.0% from fiscal 2005. The reduced effective income tax rate due
to the reversal of prior years' over accruals offset, to some extent, the impact
that the special reserve, price reductions and decreased number of consultants
had on net income.
Page 14
Liquidity, Capital Resources and Changes in Financial Condition
---------------------------------------------------------------
The Company expects that cash flow generated from operations together with its
available cash and marketable securities and available credit facilities will be
sufficient to provide the Company with adequate resources to meet its liquidity
requirements for the foreseeable future.
At May 31, 2007, the Company had working capital of $12,815,000 including cash
and cash equivalents of $1,900,000 as compared to working capital of $12,368,000
including cash and cash equivalents of $2,661,000 at May 31, 2006. The Company's
working capital also included $6,395,000 and $5,407,000 of marketable securities
with maturities of less than one year at May 31, 2007 and 2006, respectively.
The majority of increase in working capital occurred due to the reduction of
marketable securities with maturities in excess of one year.
Net cash flow of $1,298,000 was provided by operations during fiscal 2007 as
compared to $965,000 of net cash flow from in operations in fiscal 2006. The
cash flow from operations for fiscal 2007 primarily resulted from net income of
$1,393,000 and a decrease in accounts payable and accrued expenses of $442,000.
The cash flow from operations for fiscal 2006 primarily resulted from net income
of $1,214,000 and an increase in accounts payable and accrued expenses of
$708,000 offset by an increase in accounts receivable of $689,000 and an
increase in prepaid and receivable income taxes of $305,000.
Net cash used in investing activities amounted to $527,000 for fiscal 2007,
compared to $980,000 in net cash provided by investing activities in fiscal
2006. The net cash flows used in investing activities in fiscal 2007 primarily
resulted from the purchase of marketable securities. The net cash flows provided
by investing activities in fiscal 2006 primarily resulted from the maturing of
marketable securities.
Cash used in financing activities during the fiscal year ended May 31, 2007
resulted from cash dividends paid of $1,462,000 and a distribution of $70,000 to
the minority interest. Cash used in financing activities during the fiscal year
ended May 31, 2006 resulted primarily from cash dividends paid of $1,782,000 and
distribution of $73,000 to the minority interest.
The Company's capital resource commitments at May 31, 2007 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 2007. The Company has available a
revolving line of credit of $5,000,000 with a major money center bank through
October 6, 2007. As of May 31, 2007, no amounts were outstanding under this line
of credit.
Tabular Disclosure of Contractual Obligations
---------------------------------------------
Payments Due By Period
--------------------------------------------------------------------------------------------------------------------
Contractual Obligations Total Less than 1 Year 1-3 Years 3-5 Years More than 5 Years
----------------------- ----- ---------------- --------- --------- -----------------
Long-Term Debt....................... -- -- -- -- --
Capital Lease Obligations............ -- -- -- -- --
Operating Leases..................... 1,118,000 336,000 444,000 315,000 23,000
Purchase Obligations................. -- -- -- -- --
Employment Agreements................ 1,400,000 350,000 700,000 350,000 --
Other Long-Term Liabilities
Reflected on the Registrant's
Balance Sheet under GAAP............. -- -- -- -- --
---------- --------- ---------- --------- --------
Total................................ $2,518,000 $ 686,000 $1,144,000 $ 665,000 $ 23,000
========== ========= ========== ========= ========
Page 15
Impact of New Accounting Standards
----------------------------------
In July 2006, the Financial Accounting Standards Board (FASB) issued FASB
Interpretation No. 48 - "Accounting for Uncertainty in Income Taxes" (FIN 48).
This guidance is intended to provide increased consistency in the application of
FASB Statement No. 109 - "Accounting for Income Taxes" by providing guidance
with regard to the recognition and measurement of tax positions, and provide
increased disclosure requirements. In particular, this interpretation requires
uncertain tax positions to be recognized only if they are "more-likely-than-not"
to be upheld based on their technical merits. Additionally, the measurement of
the tax position will be based on the largest amount that is determined to have
greater than a 50% likelihood of realization upon ultimate settlement. Any
resulting cumulative effect of applying the provisions of FIN 48 upon adoption
would be reported as an adjustment to the beginning balance of retained earnings
(deficit) in the period of adoption. The Company does not expect the adoption of
FIN 48 at the beginning of its fiscal 2008 year to have a material impact on its
consolidated financial statements.
On September 15, 2006, the FASB issued SFAS No. 157, "Fair Value Measurements".
SFAS No. 157 is effective for fiscal years beginning after November 15, 2007,
and interim periods within those fiscal years. SFAS No. 157 provides guidance
related to estimating fair value and requires expanded disclosures. The standard
applies whenever other standards require (or permit) assets or liabilities to be
measured at fair value. The standard does not expand the use of fair value in
any new circumstances. The Company is evaluating SFAS No. 157 and its impact on
the Company's consolidated financial statements.
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, or in their willingness
to pay, 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.
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.
Page 16
Item 8. Financial Statements.
--------------------
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
----
Report of Independent Registered Public Accounting Firm.................. 18
Consolidated Financial Statements:
Consolidated Balance Sheets as of May 31, 2007 and 2006.................. 19
Consolidated Statements of Income for the
years ended May 31, 2007, 2006 and 2005............................. 21
Consolidated Statements of Stockholders' Equity
for the years ended May 31, 2007, 2006 and 2005..................... 22
Consolidated Statements of Cash Flows for the
years ended May 31, 2007, 2006 and 2005............................. 23
Notes to Consolidated Financial Statements............................... 24
Page 17
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, 2007 and 2006 and the related consolidated statements
of income, stockholders' equity, and cash flows for each of the three years in
the period ended May 31, 2007. We have also audited the financial statement
schedule for each of the three years in the period ended May 31, 2007 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. The Company is not
required to have, nor were we engaged to perform, an audit of its internal
control over financial reporting. Our audits included consideration of internal
control over financial reporting as a basis for designing audit procedures that
are appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company's internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements and schedule, 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, 2007 and 2006, and the results of their operations and
their cash flows for each of the years in the three year period ended May 31,
2007 in conformity with accounting principles generally accepted in the United
States of America.
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 31, 2007
Page 18
TSR, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
MAY 31, 2007 AND 2006
ASSETS
2007 2006
---- ----
CURRENT ASSETS:
Cash and cash equivalents (note1 (d)) ................ $ 1,900,264 $ 2,660,739
Marketable securities (note 1 (e)) ................... 6,395,131 5,406,830
Accounts receivable:
Trade, net of allowance for doubtful accounts
of $355,000 in 2007 and 2006 ................... 8,156,651 8,272,963
Other ............................................ 99,015 90,172
----------- -----------
8,255,666 8,363,135
Prepaid expenses ..................................... 54,928 48,793
Prepaid and recoverable income taxes ................. 153,618 320,156
Deferred income taxes (note 2) ....................... 145,000 150,000
----------- -----------
TOTAL CURRENT ASSETS ........................... 16,904,607 16,949,653
----------- -----------
EQUIPMENT AND LEASEHOLD IMPROVEMENTS, AT COST:
Equipment ............................................ 226,888 271,646
Furniture and fixtures ............................... 112,196 112,196
Automobiles .......................................... 19,665 128,859
Leasehold improvements ............................... 68,379 68,379
----------- -----------
427,128 581,080
Less accumulated depreciation and amortization ....... 380,838 544,946
----------- -----------
46,290 36,134
MARKETABLE SECURITIES (NOTE 1(E)) ........................ 996,445 1,490,547
OTHER ASSETS ............................................. 49,653 49,653
DEFERRED INCOME TAXES (NOTE 2) ........................... 62,000 109,000
----------- -----------
$18,058,995 $18,634,987
=========== ===========
See accompanying notes to consolidated financial statements.
(Continued)
Page 19
TSR, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS, CONTINUED
MAY 31, 2007 AND 2006
LIABILITIES AND STOCKHOLDERS' EQUITY
2007 2006
---- ----
CURRENT LIABILITIES:
Accounts and other payables .......................... $ 306,695 $ 209,840
Accrued and other liabilities:
Salaries, wages and commissions .................. 1,942,462 1,683,207
Legal and professional fees ...................... 82,094 86,683
Other ............................................ 166,656 960,312
----------- -----------
2,191,212 2,730,202
Advances from customers .............................. 1,591,324 1,538,985
Income taxes payable ................................. -- 102,974
----------- -----------
TOTAL CURRENT LIABILITIES ................. 4,089,231 4,582,001
----------- -----------
MINORITY INTEREST ........................................ 17,500 31,751
COMMITMENTS AND CONTINGENCIES (NOTES 5 AND 7)
STOCKHOLDERS' EQUITY (NOTES 3 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 shares ...... 62,283 62,283
Additional paid-in capital ........................... 5,071,727 5,071,727
Retained earnings .................................... 20,849,555 20,918,526
----------- -----------
25,983,565 26,052,536
Less: Treasury stock, 1,660,314 shares, at cost ..... 12,031,301 12,031,301
----------- -----------
TOTAL STOCKHOLDERS' EQUITY ................ 13,952,264 14,021,235
----------- -----------
$18,058,995 $18,634,987
=========== ===========
See accompanying notes to consolidated financial statements.
Page 20
TSR, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED MAY 31, 2007, 2006 AND 2005
2007 2006 2005
---- ---- ----
REVENUES, NET ................................................... $ 49,688,576 $ 48,108,589 $ 51,444,681
COST OF SALES ................................................... 40,533,746 38,759,768 40,299,450
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES .................... 7,229,832 7,640,092 7,510,112
------------ ------------ ------------
47,763,578 46,399,860 47,809,562
------------ ------------ ------------
INCOME FROM OPERATIONS .......................................... 1,924,998 1,708,729 3,635,119
------------ ------------ ------------
OTHER INCOME (EXPENSE):
Interest and dividend income ............................... 460,794 358,012 178,067
Realized and unrealized (loss) gain from
marketable securities, net ............................... 3,328 (7,152) (828)
Minority interest in subsidiary operating profits .......... (55,327) (71,612) (66,472)
------------ ------------ ------------
408,795 279,248 110,767
------------ ------------ ------------
INCOME BEFORE INCOME TAXES ...................................... 2,333,793 1,987,977 3,745,886
PROVISION FOR INCOME TAXES (NOTE 2) ............................. 941,000 774,000 1,601,000
------------ ------------ ------------
NET INCOME ................................................. $ 1,392,793 $ 1,213,977 $ 2,144,886
============ ============ ============
BASIC NET INCOME PER COMMON SHARE ............................... $ 0.30 $ 0.27 $ 0.47
============ ============ ============
WEIGHTED AVERAGE NUMBER OF BASIC COMMON SHARES OUTSTANDING ...... 4,568,012 4,568,012 4,568,012
============ ============ ============
DILUTED NET INCOME PER COMMON SHARE ............................. $ 0.30 $ 0.27 $ 0.47
============ ============ ============
WEIGHTED AVERAGE NUMBER OF DILUTED COMMON SHARES
OUTSTANDING ................................. 4,568,012 4,568,012 4,569,966
============ ============ ============
See accompanying notes to consolidated financial statements.
Page 21
TSR, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED MAY 31, 2007, 2006 AND 2005
SHARES OF ADDITIONAL TOTAL
COMMON COMMON PAID-IN RETAINED TREASURY STOCK-HOLDERS'
STOCK STOCK CAPITAL EARNINGS STOCK EQUITY
----- ----- ------- -------- ----- ------
BALANCE AT MAY 31, 2004 ........ 6,228,326 $ 62,283 $ 5,079,027 $ 22,081,995 $(12,031,301) $ 15,192,004
NET INCOME ..................... -- -- -- 2,144,886 -- 2,144,886
CASH DIVIDENDS PAID ............ -- -- -- (2,740,807) -- (2,740,807)
STOCK BASED COMPENSATION EXPENSE
(RECOVERY) (NOTE1(N)) .......... -- -- (7,300) -- -- (7,300)
------------ ------------ ------------ ------------ ------------ ------------
BALANCE AT MAY 31, 2005 ........ 6,228,326 62,283 5,071,727 21,486,074 (12,031,301) 14,588,783
NET INCOME ..................... -- -- -- 1,213,977 -- 1,213,977
CASH DIVIDENDS PAID ............ -- -- -- (1,781,525) -- (1,781,525)
------------ ------------ ------------ ------------ ------------ ------------
BALANCE AT MAY 31, 2006 ........ 6,228,326 62,283 5,071,727 20,918,526 (12,031,301) 14,021,235
NET INCOME ..................... -- -- -- 1,392,793 -- 1,392,793
CASH DIVIDENDS PAID ............ -- -- -- (1,461,764) -- (1,461,764)
------------ ------------ ------------ ------------ ------------ ------------
BALANCE AT MAY 31, 2007 ........ 6,228,326 $ 62,283 $ 5,071,727 $ 20,849,555 $(12,031,301) $ 13,952,264
============ ============ ============ ============ ============ ============
See accompanying notes to consolidated financial statements.
Page 22
TSR, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED MAY 31, 2007, 2006 AND 2005
2007 2006 2005
---- ---- ----
Cash flows from operating activities:
Net Income ................................................................ $ 1,392,793 $ 1,213,977 $ 2,144,886
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization ......................................... 26,066 20,804 30,309
Realized and unrealized loss (gain) from
marketable securities, net .......................................... (3,328) 7,152 828
Deferred income taxes ................................................. 52,000 69,000 (5,000)
Minority interest in subsidiary operating profits ..................... 55,327 71,612 66,472
Stock based compensation expense (recovery) ........................... -- -- (7,300)
Recovery of bad debt expense .......................................... -- (75,000) --
Changes in operating assets and liabilities:
Accounts receivable-trade ...................................... 116,312 (688,775) 2,395,432
Other receivables .............................................. (8,843) (20,661) (39,811)
Prepaid expenses ............................................... (6,135) (2,513) (7,362)
Prepaid and recoverable income taxes ........................... 166,538 (304,753) 80
Other assets ................................................... -- 240 35,000
Accounts payable and accrued expenses .......................... (442,135) 708,016 (52,164)
Advances from customers ........................................ 52,339 15,436 (9,093)
Income taxes payable ........................................... (102,974) (49,992) 9,413
------------ ------------ ------------
Net cash provided by operating activities ................................. 1,297,960 964,543 4,561,690
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturities and sales of marketable securities .......... 9,779,044 12,792,923 12,419,289
Purchases of marketable securities ................................... (10,269,915) (11,789,314) (13,829,416)
Purchases of fixed assets ............................................ (36,222) (23,845) (25,101)
------------ ------------ ------------
Net cash provided by (used in) investing activities ....................... (527,093) 979,764 (1,435,228)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Distribution to minority interest .................................... (69,578) (73,319) (83,175)
Cash dividends paid .................................................. (1,461,764) (1,781,525) (2,740,807)
------------ ------------ ------------
Net cash used in financing activities ..................................... (1,531,342) (1,854,844) (2,823,982)
------------ ------------ ------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS .......................... (760,475) 89,463 302,480
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR ................................ 2,660,739 2,571,276 2,268,796
------------ ------------ ------------
CASH AND CASH EQUIVALENTS AT END OF YEAR ...................................... $ 1,900,264 $ 2,660,739 $ 2,571,276
============ ============ ============
SUPPLEMENTAL DISCLOSURE:
Income taxes paid ......................................................... $ 825,000 $ 1,060,000 $ 1,597,000
============ ============ ============
See accompanying notes to consolidated financial statements
Page 23
TSR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 2007, 2006 AND 2005
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(A) BUSINESS, NATURE OF OPERATIONS AND CUSTOMER CONCENTRATIONS
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 2007, two customers accounted for more
than 10% of the Company's revenues, constituting 19.1% and 11.3%,
respectively. In fiscal 2006, two customers accounted for more than 10%
of the Company's revenues, constituting 16.8% and 13.0% of revenues,
respectively. In fiscal 2005, two customers accounted for more than 10%
of the Company's revenues, constituting 22.2% and 13.5% of revenues,
respectively. The accounts receivable associated with the Company's
largest customer was $1,610,000, $1,286,000 and $1,360,000 at May 31,
2007, 2006 and 2005, respectively. The accounts receivable associated
with the Company's second largest customer was $1,197,000, $1,349,000 and
$666,000 at May 31, 2007, 2006, and 2005, 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 completion of the related services, credit balances from
overpayments and certain escheat liabilities.
Reimbursements received by the Company for out-of-pocket expenses are
characterized as revenue in accordance with Emerging Issues Task Force
(EITF) Issue 01-14 "Income Statement Characterization of Reimbursements
Received for 'Out-of-Pocket' Expenses Incurred."
(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, 2007 and 2006:
2007 2006
---- ----
Cash in banks ..................... $ 390,370 $ 286,625
Money Market Funds ................ 1,509,894 2,374,114
---------- ----------
$1,900,264 $2,660,739
========== ==========
(Continued)
Page 24
TSR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
MAY 31, 2007, 2006 AND 2005
(E) MARKETABLE SECURITIES
The Company accounts for its marketable securities in accordance with
Statement of Financial Accounting Standards ("SFAS") No. 115 "Accounting
for Certain Investments in Debt and Equity Securities." Accordingly, the
Company classifies its marketable securities at acquisition as either (i)
held-to-maturity, (ii) trading, or (iii) available-for-sale. Based upon
the Company's intent and ability to hold its US Treasury securities to
maturity (which maturities range up to nineteen months), 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
---- ----- ------ -----
CURRENT
-------
2007: US TREASURY SECURITIES.... $ 6,377,387 $ -- $ -- $ 6,377,387
EQUITY SECURITIES ........ 16,866 $ -- 878 17,744
----------- ----------- ----------- -----------
$ 6,394,253 $ -- $ 878 $ 6,395,131
=========== =========== =========== ===========
LONG TERM
---------
US TREASURY SECURITIES ... $ 996,445 $ -- $ -- $ 996,445
=========== =========== =========== ===========
Current
-------
2006: US Treasury securities.... $ 5,392,414 $ -- $ -- $ 5,392,414
Equity securities ........ 16,866 -- (2,450) 14,416
----------- ----------- ----------- -----------
$ 5,409,280 $ -- $ (2,450) $ 5,406,830
=========== =========== =========== ===========
Long Term
---------
US Treasury securities ... $ 1,490,547 $ -- $ -- $ 1,490,547
=========== =========== =========== ===========
(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. No antidilutive stock
options covering shares of common stock have been omitted from the
calculation of diluted net income per common share for the fiscal year
ended May 31, 2007, 2006 and 2005, 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 25
TSR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
MAY 31, 2007, 2006 AND 2005
(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 the end of a
period.
(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. Actual results could
differ from those estimates.
(L) LONG-LIVED ASSETS
The Company reviews its long-lived assets for possible impairment
whenever events or changes in circumstances indicate that the carrying
amount of an asset may not be recoverable. 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 2007,
2006 and 2005.
(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,
required 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,
2005 which were subject to variable accounting treatment. Accordingly,
the Company recorded a non-cash net recovery of $7,300 for fiscal 2005.
These options expired in June 2005.
The Company's one stock-based employee compensation plan expired on April
30, 2007. Effective June 1, 2006, the Company accounts for all
transactions under which employees receive shares of stock or other
equity instruments in the Company in accordance with the revised
provisions of SFAS No. 123, "Statement of Financial Accounting Standards
No. 123 (FAS123 (R))," which requires that the fair market value of all
share based payment transactions be recognized in the financial
statements. This Statement establishes fair value as the measurement
objective in accounting for share based payment arrangements and requires
all entities to apply a fair based measurement method in accounting for
share based transactions with employees except for equity instruments
held by employee share ownership plans. The Company adopted FAS 123(R) at
the beginning of fiscal 2007. The Company has not issued any share based
payments in fiscal 2007.
The Company previously accounted for share-based employee compensation 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 were treated as variable options until their
expiration in June 2005. 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 26
TSR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
MAY 31, 2007, 2006 AND 2005
Year Ended May 31,
2006 2005
---- ----
Net income:
As reported............................... $ 1,213,977 $ 2,144,886
Add: Stock-based employee compensation
expense (recovery) included in reported
net income, net of related tax effect..... -- (7,300)
----------- -----------
Proforma net income..................... $ 1,213,977 $ 2,137,586
=========== ===========
Basic and diluted net income per share:
As reported............................. $ 0.27 $ 0.47
=========== ===========
Proforma SFAS 123....................... $ 0.27 $ 0.47
=========== ===========
There were no options granted in fiscal 2007, 2006 or 2005 and all
previously issued options expired in June 2005.
(O) IMPACT OF NEW ACCOUNTING STANDARDS
In July 2006, the Financial Accounting Standards Board (FASB) issued FASB
Interpretation No. 48 - "Accounting for Uncertainty in Income Taxes" (FIN
48). This guidance is intended to provide increased consistency in the
application of FASB Statement No. 109 - "Accounting for Income Taxes" by
providing guidance with regard to the recognition and measurement of tax
positions, and provide increased disclosure requirements. In particular,
this interpretation requires uncertain tax positions to be recognized
only if they are "more-than-likely-not" to be upheld based on their
technical merits. Additionally, the measurement of the tax position will
be based on the largest amount that is determined to have greater than a
50% likelihood of realization upon ultimate settlement. Any resulting
cumulative effect of applying the provisions of FIN 48 upon adoption
would be reported as an adjustment to the beginning balance of retained
earnings (deficit) in the period of adoption. The Company does not expect
the adoption of FIN 48 at the beginning of its fiscal 2008 year to have a
material impact on its consolidated financial statements.
On September 15, 2006, the FASB issued SFAS No. 157, "Fair Value
Measurements". SFAS No. 157 is effective for fiscal years beginning after
November 15, 2007, and interim periods within those fiscal years. SFAS
No. 157 provides guidance related to estimating fair value and requires
expanded disclosures. The standard does not expand the use of fair value
in any new circumstances. The Company is evaluating SFAS No. 157 and its
impact on the Company's consolidated financial statements.
(P) CREDIT RISK
Financial instruments that potentially subject the Company to
concentrations of credit risk consist primarily of cash and cash
equivalents, marketable securities and accounts receivable. The Company
places its cash equivalents with financial institutions and brokerage
houses. The Company has substantially all of its cash in three bank
accounts. The balances are insured by FDIC up to $100,000. Such cash
balances, at times, may exceed FDIC limits. The Company holds its
marketable securities, which consist primarily of United States Treasury
Securities, directly with the Treasury and in brokerage accounts. The
Company has not experienced losses in any such accounts. The Company's
accounts receivables represent approximately 70 accounts with open
balances of which, the top 2 customers, as a percentage of revenue,
consisted of 19.7% and 14.7% of the net accounts receivable balance at
May 31, 2007, respectively.
Page 27
TSR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
MAY 31,2007,2006 AND 2005
(2) INCOME TAXES
A reconciliation of the provisions for income taxes computed at the
federal statutory rates for fiscal 2007, 2006, and 2005 to the reported
amounts is as follows:
2007 2006 2005
AMOUNT % Amount % Amount %
------ --- ------ --- ------ ---
Amounts at statutory federal tax rate $ 793,000 34.0% $ 676,000 34.0% $1,274,000 34.0%
State and local taxes, net of
federal income tax effect .... 160,000 6.8 115,000 5.8 317,000 8.5
Non-deductible expenses, and other ... (12,000) (0.5) (17,000) (0.9) 10,000 0.2
---------- ---- ---------- ---- ---------- ----
$ 941,000 40.3% $ 774,000 38.9% $1,601,000 42.7%
========== ==== ========== ==== ========== ====
The components of the provision for income taxes are as follows:
Federal State Total
------- ----- -----
2007: CURRENT ....... $ 660,000 $ 229,000 $ 889,000
DEFERRED ...... 39,000 13,000 52,000
----------- ----------- -----------
$ 699,000 $ 242,000 $ 941,000
=========== =========== ===========
2006: Current ....... $ 551,000 $ 154,000 $ 705,000
Deferred ...... 49,000 20,000 69,000
----------- ----------- -----------
$ 600,000 $ 174,000 $ 774,000
=========== =========== ===========
2005: Current ....... $ 1,126,000 $ 480,000 $ 1,606,000
Deferred ...... (5,000) -- (5,000)
----------- ----------- -----------
$ 1,121,000 $ 480,000 $ 1,601,000
=========== =========== ===========
The tax effects of temporary differences that give rise to significant
portions of the deferred income tax assets at May 31, 2007 and 2006 are
as follows:
2007 2006
---- ----
Allowance for doubtful accounts receivable ..... $145,000 $150,000
Equipment and leasehold improvement
Depreciation and amortization .......... 14,000 54,000
Acquired client relationships .................. 48,000 55,000
-------- --------
Total deferred income tax assets .... $207,000 $259,000
======== ========
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 28
TSR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
MAY 31, 2007, 2006 AND 2005
(3) STOCK OPTIONS
The 1997 Employee Stock Option Plan, which expired on April 30, 2007,
provided 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 were exercisable as determined on the date of the
grant and expired on the fifth anniversary of the date of grant.
STOCK OPTIONS OUTSTANDING
WEIGHTED
EXERCISE AVERAGE
SHARES PRICE PRICE
Outstanding at May 31, 2005........... 10,000 $ 5.53 $ 5.53
======== ======== ========
Options expired ...................... (10,000) $ 5.53 $ 5.53
======== ======== ========
OUTSTANDING AT MAY 31, 2006 AND 2007.. 0 $ 0 $ 0
======== ======== ========
(4) LINE OF CREDIT
The Company has an available line of credit of $5,000,000 with a major
money center bank through October 6, 2007. As of May 31, 2007, 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.
(5) COMMITMENTS AND CONTINGENCIES
A summary of noncancellable long-term operating lease commitments for
facilities as of May 31, 2007 follows:
PERIOD AMOUNT
------ ------
Less than
1 year.......... $ 336,000
1-3 years....... 444,000
3-5 years....... 315,000
Over 5 years.... 23,000
-----------
Total.... $ 1,118,000
Total rent expenses under all lease agreements amounted to $340,000,
$340,000 and $369,000 in fiscal 2007, 2006 and 2005.
From time to time, the Company is party to various lawsuits, some
involving substantial amounts. Management is not aware of any lawsuits
that would have a material adverse impact on the financial position of
the Company.
Page 29
TSR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
MAY 31, 2007, 2006 AND 2005
(6) UNAUDITED QUARTERLY FINANCIAL DATA
The following is a summary of unaudited quarterly operating results for
the fiscal years ended May 31, 2007 and 2006.
(Amounts in Thousands, except Per Share Data)
Fiscal 2007
First Second Third Fourth
Revenues ......................... $ 12,376 $ 12,626 $ 11,774 $ 12,913
Gross Profit ..................... 2,377 2,369 2,052 2,357
Net Income ....................... 444 413 201 335
Basic and Diluted Net Income
per Common Share ............... $ 0.10 $ 0.09 $ 0.04 $ 0.07
(Amounts in Thousands, except Per Share Data)
Fiscal 2006
First Second Third Fourth
Revenues ......................... $ 12,465 $ 11,829 $ 11,595 $ 12,220
Gross Profit ..................... 2,526 2,369 2,108 2,346
Net Income (Loss) ................ 474 484 289 (33)
Basic and Diluted Net Income
(Loss) per Common Share ........ $ 0.10 $ 0.11 $ 0.06 $ (0.01)
(7) SUBSEQUENT EVENT
On August 3, 2007, the Board of Directors of the Company announced that a
regular quarterly cash dividend of $0.08 per share will be paid on
September 12, 2007 to shareholders of record as of August 24, 2007. This
dividend will amount to approximately $365,000 and will be paid from the
Company's cash and marketable securities.
(8) MAJOR CUSTOMER
In June 2006, the New York State Office of General Services, Procurement
Services Group ("OGS") terminated its contract with the Company. The OGS
actions were due to the report of an investigation by the Office of the
Special Commissioner of Investigation of the New York City Department of
Education ("DOE"). The investigative report concluded that the Company
operated improperly from 2001 through the spring of 2003 by using a
subcontracting arrangement to obtain programmers for positions with the
DOE. The subcontracting was with a small firm that was owned by an
individual who worked as a consultant under contract at the DOE in a
supervising capacity and sometimes was involved in decisions to select
consultants that financially benefited both him and the Company. The
investigative report also suggested that the Company received advanced
information as to new positions from this individual and that the
subcontracting increased the costs to the DOE since two firms, instead of
one, profited from this arrangement.
All new placements with the DOE, including renewals of existing
placements, were being made under this OGS contract prior to its
termination. As a result the Company will not be able to make new
placements or renew existing placements with the DOE. The DOE accounted
for approximately 13% of the Company's revenues during the Company's
fiscal year ended May 31, 2006 and 4% during fiscal 2007. At May 31, 2006
the Company had forty-one consultants placed with the DOE. As a result of
the termination, consultants placed with the DOE who came up for renewal
were not renewed. The last remaining consultants were terminated in April
2007.
DOE also asserted a claim against the Company for a reimbursement due to
the Company's subcontracting without written authorization. While the
Company believes that its subcontracting did not result in overcharges to
DOE, it has settled the matter in order to avoid the expense and
uncertainty of litigation. The related $900,000 reserve established at
May 31, 2006 was sufficient for the settlement which was finalized in
May, 2007.
Page 30
Item 9. Changes in and Disagreements with Accountants on Accounting and
---------------------------------------------------------------
Financial Disclosure
--------------------
None
Item 9A. Controls and Procedures
-----------------------
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.
Item 9B. Other Information
-----------------
None
PART III
Item 10. Directors and Executive Officers of the Company.
-----------------------------------------------
The information required by this Item 10 is incorporated by reference to the
Company's definitive proxy statement in connection with the 2007 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 2007 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 2007 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 2007 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 2007 Annual Meeting
of Stockholders.
Page 31
PART IV
Item 15. Exhibits and Financial Statement Schedules.
------------------------------------------
(a) The following documents are filed as part of this report:
1. The financial statements as indicated in the index set forth on page 17.
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.
TSR, INC. AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
Charged to
Balance at Cost and
Beginning Expense Deductions/ Balance at
of Period (Recovery) Write-Offs End of Period
Year ended May 31, 2007:
Allowance for doubtful accounts ...... $355,000 $ -- $ -- $355,000
======== ========== ========== ========
Year ended May 31, 2006:
Allowance for doubtful accounts ...... $430,000 $ (75,000) $ -- $355,000
======== ========== ========== ========
Year ended May 31, 2005:
Allowance for doubtful accounts ...... $430,000 $ -- $ -- $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 7, 2007
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/ John H. Hochuli, Jr
--------------------------------------------
John H. Hochuli, Jr., Director
/s/ James J. Hill
--------------------------------------------
James J. Hill, Director
/s/ Christopher Hughes
--------------------------------------------
Christopher Hughes, Senior Vice President
and Director
/s/ Robert A. Esernio
--------------------------------------------
Robert A. Esernio, Director
/s/ Raymond A. Roel
--------------------------------------------
Raymond A. Roel, Director
Dated: August 7, 2007
Page 33
TSR, INC. AND SUBSIDIARIES
EXHIBIT INDEX
FORM 10-K, MAY 31, 2007
Exhibit Sequential
Number EXHIBIT Page #
------ ------
3.1 Articles of Incorporation for the Company, as amended.
Incorporated by reference to Exhibit 3.1 to the Annual
Report on Form 10-K filed by the Company for the fiscal year
ended May 31, 1998. N/A
3.2 Bylaws of the Company, as amended incorporated by reference
to Exhibit 3.2 to the Annual Report on Form 10-K filed by
the Company for the fiscal year ended May 31, 1998. N/A
10.1 Employment Agreement between TSR, Inc. and Christopher
Hughes, dated as of March 1, 2007. Incorporated by reference
to the Form 8-K filed by the Company on March 6, 2007. N/A
10.2 1997 Employee Stock Option Plan, incorporated by reference
to Exhibit 10.2 to the annual Report on Form 10-K filed by
Company for the fiscal year ended May 31, 1997. N/A
10.3 Form of Employee Stock Option Agreement, incorporated by
reference to Exhibit 10.3 to the Annual report on Form 10-K
filed by the Company for the fiscal year ended May 31, 1997. N/A
10.4 Employment Agreement dated June 1, 2002 between the Company
and Joseph F. Hughes, incorporated by reference to Exhibit
N/A 10.4 to the Annual Report on Form 10-K filed by the
Company for the fiscal year ended May 31, 2002. N/A
10.5 Revolving Credit Agreement dated October 6, 1997 among TSR
Consulting Services, Inc., TSR, Inc., Catch/21 Enterprises
Incorporated and the Chase Manhattan Bank, incorporated by
reference to Exhibit 10.3 to the Quarterly Report on Form
10-Q filed by the Company for the quarter ended August 31,
1997. N/A
10.6 Employment Agreement dated June 1, 2005 between the Company
and John G. Sharkey incorporated by reference to Exhibit
10.1 to the Report on Form 8-K filed by the Company on July
26, 2005. N/A
21 List of Subsidiaries 35
31.1 Certification by J.F. Hughes Pursuant to Securities Exchange
Act Rule 13a-14 36
31.2 Certification by John G. Sharkey Pursuant to Securities
Exchange Act Rule 13a-14 37
32.1 Certification of J.F. Hughes Pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002. 38
32.2 Certification of John G. Sharkey Pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002. 39
Page 34