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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, 2006
or
[_] Transition Report Under Section 13 or 15(d) of
The Securities Exchange Act of 1934
For the transition period from __________ to __________
Commission File Number: 0-8656
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TSR, Inc.
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(Exact name of registrant as specified in its charter)
Delaware 13-2635899
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
400 Oser Avenue, Hauppauge, NY 11788
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(Address of principal executive offices)
Registrant's telephone number: 631-231-0333
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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
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(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 $4.73 at
November 30, 2005 was $13,128,000.
The number of shares of the Registrant's common stock outstanding as of July 31,
2006 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 2006 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, 2006,
the Company provided IT staffing services to approximately 80 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.
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 however, it is hiring new account executives
and technical recruiters in its existing offices. At these offices, as of May
31, 2006, the Company employed 14 persons who are responsible for recruiting
technical personnel and 10 persons who are account executives. As of May 31,
2005 the Company had employed 12 technical personnel recruiters and 9 account
executives.
Page 3
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, the Company contracted with an India based company to
provide recruiting and recruiting support for its U.S. based recruiters.
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 80 clients during the year
ended May 31, 2006 as compared to 82 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, 2006, the
Company had two clients which constituted more than 10% of consolidated revenues
(Procurestaff Ltd., 16.8% and NYC Department of Education, 13.0%). Procurestaff
Ltd. is a vendor management services provider. The majority of the revenue
generated from Procurestaff Ltd. was from AT&T as the end client. Additionally,
the Company's top ten clients accounted for 70% of consolidated revenues in
fiscal 2006 and 76% in fiscal 2005. 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. 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, until
a new OGS contract is entered into, the Company will not be able to make new
placements or renew existing placements with the DOE. The termination does not
affect existing placements with the DOE until the date such positions are
scheduled to expire. 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 have not been renewed. Of the remaining thirteen
consultants, four are scheduled to end their assignments in February 2007 and
nine in May 2010.
Page 4
DOE also asserted a claim against the Company for a reimbursement due to the
Company's subcontracting without written authorization. DOE and the Company have
agreed in principle to resolve these claims and permit the Company to be treated
as a "responsible vendor" upon making a payment to DOE and appointment of an
independent compliance monitor to monitor the Company's compliance with the DOE
agreement. The Company has established a reserve of $900,000 relating to this
claim. The treatment as a responsible vendor would allow the Company to continue
to submit consultants to the DOE in response to DOE bid requests. The Company
will also need to have its agreement with the OGS reinstated to make new
placements with DOE.
While the Company believes that its subcontracting did not result in overcharges
to DOE, it has agreed to settle the matter in order to avoid the expense and
uncertainty of litigation as well as to protect its existing business with DOE
and maintain the potential to make future placements with DOE.
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 90,000 technical personnel
with a wide range of skills. The Company uses a sophisticated proprietary
computer system to match a potential employee's skills and experience with
client requirements. The Company periodically contacts personnel in its database
to update their availability, skills, employment interests and other matters and
continually updates its database. This database is made available to the account
executives and recruiters at each of the Company's offices. The Company
considers its database to be a valuable asset.
The Company employs technical personnel primarily on an hourly basis, as
required in order to meet the staffing requirements under particular contracts
or for particular projects. The Company recruits technical personnel by posting
jobs on the on the Internet, publishing advertisements in local newspapers and
attending job fairs on a periodic basis. The Company devotes significant
resources to recruiting technical personnel, maintaining 14 recruiters.
Potential applicants are generally interviewed and tested by the Company's
recruiting personnel, by third parties that have the required technical
backgrounds to review the qualifications of the applicants, or by on-line
testing services. In some cases, instead of employing technical personnel
directly, the Company uses subcontractors who employ the technical personnel who
are provided to the Company's customers.
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.
Page 5
Intellectual Property Rights
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The Company relies primarily upon a combination of trade secret, nondisclosure
and other contractual arrangements to protect its proprietary rights. The
Company generally enters into confidentiality agreements with its employees,
consultants, clients and potential clients and limits access to and distribution
of its proprietary information. There can be no assurance that the steps taken
by the Company in this regard will be adequate to deter misappropriation of its
proprietary information or that the Company will be able to detect unauthorized
use and take appropriate steps to enforce its intellectual property rights.
Personnel
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As of June 30, 2006, the Company employs 259 people including its 2 executive
officers. Of such employees 10 are engaged in sales, 14 are recruiters for
programmers, 224 are technical and programming consultants, and 9 are in
administration and clerical functions. None of the Company's employees belong to
unions.
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 has entered into an employment
agreement with Mr. Hughes for a term expiring on May 31, 2007. The Company is
also dependent on certain of its account executives who are responsible for
servicing its principal customers and attracting new customers. The Company does
not have employment contracts with these persons. There can be no assurance that
the Company will be able to retain its existing personnel or find and attract
additional qualified employees. The loss of the services of any of these
personnel could have a material adverse effect on the Company.
Dependence on Significant Customers.
In the fiscal year, ended May 31, 2006, the Company's largest clients,
Procurestaff Ltd. and the NYC Department of Education accounted for 16.8% and
13.0% of the Company's consolidated revenues, respectively. Procurestaff is a
vendor management company and most of the revenues received from Procurestaff
relate to a single customer, AT&T. See "Rapidly Changing Industry" below. Client
contract terms vary depending on the nature of the engagement, and there can be
no assurance that a client will renew a contract when it terminates. In
addition, the Company's contracts, are generally cancelable by the client at any
time on short notice, and clients may unilaterally reduce their use of the
Company's services under such contracts without penalty.
As discussed in Item 1 above, the Company has been unable to renew its
agreements for its consultants placed with DOE as the positions expire due to
the effects of an investigation by the DOE and the termination of the Company's
contract with OGS, pursuant to which new placements of consultants with the DOE
were being made. While the Company has agreed in principle to resolve this
matter with DOE, the settlement has not yet been finalized. The Company's
agreement with OGS also needs to be reinstated to allow the Company to make new
placements with DOE. There can be no assurance that the Company will be able to
continue to provide consultants to the DOE.
The termination or significant reduction of its business relationship with any
of its significant clients, such as the above noted reduction in the scope of
DOE work, would have a material adverse effect on the Company's financial
condition and results of operations.
Page 6
Competitive Market for Technical Personnel.
The Company's success is dependent upon its ability to attract and retain
qualified computer professionals to provide as temporary personnel to its
clients. Competition for the limited number of qualified professionals with a
working knowledge of certain sophisticated computer languages, which the Company
requires for its contract computer services business, is intense. The Company
believes that there is a shortage of, and significant competition for, software
professionals with the skills and experience necessary to perform the services
offered by the Company.
The Company's ability to maintain and renew existing engagements and obtain new
business in its contract computer programming business depends, in large part,
on its ability to hire and retain technical personnel with the IT skills that
keep pace with continuing changes in software evolution, industry standards and
technologies, and client preferences. Although the Company generally has been
successful in attracting employees with the skills needed to fulfill customer
engagements, demand for qualified professionals conversant with certain
technologies may outstrip supply as new and additional skills are required to
keep pace with evolving computer technology or as competition for technical
personnel increases. Increasing demand for qualified personnel could also result
in increased expenses to hire and retain qualified technical personnel and could
adversely affect the Company's profit margins.
Rapidly Changing Industry
The computer industry is characterized by rapidly changing technology and
evolving industry standards. 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.
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.
Page 7
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.
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.
Page 8
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, 2006. 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.
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
-------------------------
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 August, 2007) and Edison, New
Jersey (lease expires August, 2008), with aggregate monthly rentals of
approximately $20,000.
The Company believes the present locations are adequate for its current needs as
well as for the future expansion of its existing business.
Item 3. Legal Proceedings.
-----------------
There are no material legal proceedings.
Item 4. Submission of Matters to a Vote of Security Holders.
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Not Applicable
Page 9
PART II
Item 5. Market for Common Equity and Related Stockholder Matters.
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The Company's shares of Common Stock trade on the NASDAQ National Market System
under the symbol TSRI. The following are the high and low sales prices for each
quarter during the fiscal years ended May 31, 2006 and 2005:
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
JUNE 1, 2004 - MAY 31, 2005
1ST 2ND 3RD 4TH
QUARTER QUARTER QUARTER QUARTER
----------------------------------------
High Sales Price ........... 7.35 7.12 10.49 8.09
Low Sales Price ............ 5.48 5.92 6.55 5.12
There were 145 holders of record of the Company's Common Stock as of July 31,
2006. Additionally, the Company estimates that there were approximately 1,600
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. The Company has
determined to maintain its current dividend policy for fiscal 2007. There can be
no assurance that the Company will continue to pay dividends.
Securities authorized for issuance under equity compensation plans.
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The following table provides information as of May 31, 2006 with respect to
compensation plans (including individual compensation arrangements) under with
equity securities of the Company are authorized for issuances:
Equity Compensation Plan Information
- ----------------------------- --------------------------- ------------------------------ -----------------------------
Number of securities to be Weighted-average exercise Number of securities
issued upon exercise of price of outstanding options, remaining available for
outstanding options, warrants and rights future issuance under equity
warrants and rights compensation plans
(excluding securities
reflected in column (a))
Plan Category (a) (b) (c)
- ----------------------------- --------------------------- ------------------------------ -----------------------------
Equity compensation
Plans approved by security
holders. 0 0 549,950
- ----------------------------- --------------------------- ------------------------------ -----------------------------
Equity compensation
Plans not approved by
security holders 0 0 0
- ----------------------------- --------------------------- ------------------------------ -----------------------------
Total 0 0 549,950
- ----------------------------- --------------------------- ------------------------------ -----------------------------
Page 10
Item 6. Selected Financial Data.
-----------------------
(Amounts in Thousands, Except Per Share Data)
MAY 31, MAY 31, MAY 31, MAY 31, MAY 31,
2006 2005 2004 2003 2002
-------- -------- -------- -------- --------
Revenues .............................................. $ 48,109 $ 51,444 $ 51,725 $ 52,443 $ 59,455
Income From Operations ................................ 1,709 3,635 3,696 3,975 4,424
Net Income ............................................ 1,214 2,145 2,124 2,362 2,708
Basic and Diluted Net Income Per Common Share ......... 0.27 0.47 0.47 0.53 0.61
Working Capital ....................................... 12,368 14,391 14,976 23,028 20,518
Total Assets .......................................... 18,635 18,531 19,203 27,852 25,597
Stockholders' Equity .................................. 14,021 14,589 15,192 23,258 20,896
Book Value Per Common Share ........................... 3.07 3.19 3.33 5.26 4.73
Cash Dividends Declared Per Common Share .............. $ 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, 2006 and 2005.
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)
Fiscal 2005
-----------
First Second Third Fourth
-------- -------- -------- --------
Revenues .................................... $ 13,381 $ 13,138 $ 12,433 $ 12,492
Gross Profit ................................ 2,927 2,907 2,591 2,720
Net Income .................................. 599 575 452 519
Basic and Diluted Net Income
per Common Share ...................... $ 0.13 $ 0.13 $ 0.10 $ 0.11
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)
2006 2005 2004
---- ---- ----
% OF % of % of
AMOUNT REVENUE Amount Revenue Amount Revenue
-------- -------- -------- -------- -------- --------
Revenues ......................................... $ 48,109 100.0 $ 51,444 100.0 $ 51,725 100.0
Cost of Sales .................................... 38,760 80.6 40,299 78.3 40,261 77.8
-------- -------- -------- -------- -------- --------
Gross Profit ..................................... 9,349 19.4 11,145 21.7 11,464 22.2
Selling, General, and Administrative Expenses .... 7,640 15.9 7, 510 14.6 7,768 15.0
-------- -------- -------- -------- -------- --------
Income from Operations ........................... 1,709 3.5 3,635 7.1 3,696 7.2
Other Income ..................................... 279 0.6 111 0.2 63 0.1
-------- -------- -------- -------- -------- --------
Income Before Income Taxes ....................... 1,988 4.1 3,746 7.3 3,759 7.3
Provision for Income Taxes ....................... 774 1.6 1,601 3.1 1,635 3.2
-------- -------- -------- -------- -------- --------
Net Income ....................................... $ 1,214 2.5 $ 2,145 4.2 $ 2,124 4.1
======== ======== ======== ======== ======== ========
Revenues
- --------
Revenues consist primarily of revenues from computer programming consulting
services. Revenues for the fiscal year ended May 31, 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. Overall, the
average number of consultants on billing with customers decreased from
approximately 376 from the fiscal year ended May 31, 2005 to 343 for the fiscal
year ended May 31, 2006.
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 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 compared to the
past few years, revenues have not improved 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.
Page 12
As more fully described in Item I. "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.
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 termination does not affect existing placements with the DOE
until the date such positions are scheduled to expire. The DOE accounted for
approximately 13% of the Company's revenues during the Company's fiscal year
ended May 31, 2006. 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 have not been renewed. Of the remaining thirteen
consultants, four are scheduled to end in February 2007 and nine in May 2010.
DOE also asserted a claim against the Company for a reimbursement due to the
Company's subcontracting. DOE and the Company have agreed in principle to
resolve these claims and permit the Company to be treated as a "responsible
vendor" upon making a payment to DOE and appointment of an independent
compliance monitor to monitor the Company's compliance with the DOE agreement.
The treatment as a responsible vendor would allow the Company to continue to
submit consultants to the DOE in response to DOE bid requests. The Company will
also need to have its agreement with the OGS reinstated to make new placements
with DOE. There can be no assurance that the Company will be able to continue to
provide consultants to the DOE. Due to the claim asserted by the DOE and the
proposed settlement, the Company has established a reserve of $900,000 as of May
31, 2006 which has been included in selling, general and administrative
expenses. While the Company believes that its subcontracting did not result in
overcharges to DOE, it has agreed to settle the matter in order to avoid the
expense and uncertainty of litigation as well as to protect its existing
business with DOE and maintain the potential to make future placements with DOE.
Revenues for fiscal 2005 decreased $281,000 or 0.5% from fiscal 2004. Reduced
spending at many major customers decreased demand for placements, resulting in
an overall decrease in the rates charged for computer programming services.
Offshore facilities and the trend of an increasing number of customers using
vendor management systems also had a negative impact on revenues.
Cost of Sales
- -------------
Cost of sales decreased by $1,540,000, in fiscal 2006 from 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 revenue is 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, as discussed further above
under Revenues.
Fiscal 2005 cost of sales increased $39,000, compared to fiscal 2004. The
increase in costs resulted primarily from utilizing a higher percentage of the
consultants as direct employees of the Company rather than employees of
subcontractors and competitive market pressures on rates and discounts.
Selling, General and Administrative Expenses
- --------------------------------------------
Selling, general and administrative expenses consist primarily of expenses
relating to account executives, technical recruiters, facilities costs,
management and corporate overhead. These expenses increased $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. (See
"Revenues" above). Without this reserve, these expenses would have decreased by
almost $700,000 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. Excluding the reserve, selling, general and
administrative expenses are expected to increase going forward as the Company
has been 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 decreased $258,000 or 3.3% from
$7,768,000 in fiscal 2004 to $7,510,000 in fiscal 2005. This decrease was
primarily attributed to decreased legal, selling, technical recruiting and
amortization expenses of $254,000, 144,000, 62,000 and $50,000, respectively.
The decrease in the expenses was offset to some extent by approximately $300,000
of expenses incurred in an effort to establish a new service offering.
Page 13
Other Income
- ------------
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 mark to market adjustments of its equity portfolio.
Fiscal 2005 other income resulted primarily from interest and dividend income of
$178,000, which increased from the level realized in 2004 due to higher interest
rates. The Company also had a realized loss of $4,000 from the sale of
marketable securities due to a merger and an unrealized gain of $3,000 from
marketable securities due to mark to market adjustments of its equity portfolio.
Income Taxes
- ------------
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. 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 42.7% in fiscal 2005 from 43.5% in
fiscal 2004 because of lower state and local taxes.
Net Income
- ----------
Net income decreased $931,000 or 43.4% from fiscal 2005. Net income decreased
primarily due to the pre-tax reserve of $900,000 established to settle claims
made by DOE as discussed in "Revenues" above. 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 $1,117,000 or 30.7% 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, 2006, the Company had working capital of $12,368,000 and cash and
cash equivalents of $2,661,000 as compared to working capital of $14,391,000 and
cash and cash equivalents of $2,571,000 at May 31, 2005. The Company's working
capital also included $5,407,000 and $7,908,000 of marketable securities with
maturities of less than one year at May 31, 2006 and 2005, respectively. The
majority of decrease in working capital occurred due to the purchase of
$1,491,000 of marketable securities with maturities in excess of one year.
Net cash flow of $965,000 was provided by operations during fiscal 2006 as
compared to $4,562,000 of net cash flow from in operations in fiscal 2005. 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. The increase in accounts
payable and accrued expenses primarily resulted from a $900,000 reserve
established to settle claims made by the New York City Department of Education
("DOE"). The increase in accounts receivable at May 31, 2006, is attributable
primarily to a delay by the DOE in making payments for seven of its consultants
who had been placed under a contract with the New York State Office of General
Services, Procurement Services Group ("OGS"). This contract was terminated by
OGS in June 2006. (See Item I. Business). The DOE has not advised the Company as
to the reason for the delay, but the Company believes the amounts are
collectible. The cash flow from operations for 2005 primarily resulted from net
income of $2,145,000 and a decrease in accounts receivable of $2,395,000. The
decrease in accounts receivable occurred primarily due to significantly improved
collections of accounts receivables from the DOE which had been outstanding at
May 31, 2004.
Net cash provided by investing activities amounted to $980,000 for fiscal 2006,
compared to $1,435,000 in net cash used for fiscal 2005. The net cash flows
provided by investing activities in fiscal 2006 primarily resulted from the
maturing of marketable securities. The net cash flows used in investing
activities in fiscal 2005 primarily resulted from the purchase of additional
marketable securities.
Cash used in financing activities during the fiscal year ended May 31, 2006
resulted from cash dividends paid of $1,782,000 and a distribution of $73,000 to
the minority interest. Cash used in financing activities during the fiscal year
ended May 31, 2005 resulted primarily from cash dividends paid of $2,741,000 and
distribution of $83,000 to the minority interest.
The Company's capital resource commitments at May 31, 2006 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 2006. 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, 2006, no amounts were outstanding under this line
of credit.
Tabular Disclosure of Contractual Obligations
---------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------
Payments Due By Period
- -------------------------------------------- --------------------------------------------------------------------------
Less than 1-3 3-5 More than
Contractual Obligations Total 1 Year Years Years 5 Years
---------- ---------- ---------- ---------- ----------
Long-Term Debt ........................ -- -- -- -- --
Capital Lease Obligations ............. -- -- -- -- --
Operating Leases ...................... 767,000 313,000 340,000 114,000 --
Purchase Obligations .................. -- -- -- -- --
Employment Agreements ................. 1,092,000 642,000 300,000 150,000 --
Consulting Contract ................... 200,000 200,000 -- -- --
Other Long-Term Liabilities
Reflected on the Registrant's
Balance Sheet under GAAP .............. -- -- -- -- --
---------- ---------- ---------- ---------- ----------
Total ................................. $2,059,000 $1,155,000 $ 640,000 $ 264,000 $ 0
========== ========== ========== ========== ==========
- -----------------------------------------------------------------------------------------------------------------------
Page 15
Impact of New Accounting Standards
- ----------------------------------
In December 2004, the FASB issued a revision of SFAS No. 123, "Statement of
Financial Accounting Standards No. 123 (FAS123(R))," which requires that the
cost resulting from 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 value based measurement method in accounting for share
based payment transactions with employees except for equity instruments held by
employee share ownership plans. This Statement is effective as of the beginning
of the first annual reporting period that begins after June 15, 2005. Therefore,
the Company will adopt FAS123(R) at the beginning of fiscal 2007. The Company
does not expect the adoption of FAS 123(R) to have a material impact on its
consolidated financial statements.
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. Management is in the process of evaluating
the effects of this guidance which is effective for fiscal years beginning after
December 15, 2006.
In May 2005, the FASB issued SFAS 154, "Accounting for Changes and Error
Corrections - a replacement of APB Opinion No. 20 and FASB Statement No. 3."
SFAS 154 changes the requirements with regard to the accounting for and
reporting a change in an accounting principle. The provisions of SFAS 154
require, unless impracticable, retrospective application to prior periods
presented in financial statements for all voluntary changes in an accounting
principle and changes required by the adoption of a new accounting pronouncement
in the unusual instance that the pronouncement does not indicate a specific
transition method. SFAS 154 also requires that a change in depreciation,
amortization or depletion method for long-lived, non-financial assets be
accounted for as a change in an accounting estimate, which requires prospective
application of the new method. SFAS 154 is effective for all changes in an
accounting principle made in fiscal years beginning after December 15, 2005. The
Company has adopted SFAS 154 as of June 1, 2006. Because SAS 154 is directly
dependent upon future events, the Company cannot determine what effect, if any,
the expected adoption of SFAS 154 will have on its financial condition, results
of operations or cash flows.
In November 2005, the FASB issued FSP 115-1 and ESP 124-1, "The Meaning of
Other-Than-Temporary Impairment and Its Application to Certain Investments"
which nullify certain requirements of EITF 03-1 and supersede EITF D-44. The
FSPs provide guidance for identifying impaired investments and new disclosure
requirements for investments that are deemed to be temporarily impaired. The
FSPs are effective for fiscal years beginning after December 15, 2005. The
Company does not expect the adoption of the FSPs to have a material impact on
its financial position, results of operations or cash flows.
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.
Page 16
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.
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, 2006 and 2005............... 19
Consolidated Statements of Income for the
years ended May 31, 2006, 2005 and 2004.......................... 21
Consolidated Statements of Stockholders' Equity
for the years ended May 31, 2006, 2005 and 2004.................. 22
Consolidated Statements of Cash Flows for the
years ended May 31, 2006, 2005 and 2004.......................... 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, 2006 and 2005 and the related consolidated statements
of income, stockholders' equity, and cash flows for each of the three years in
the period ended May 31, 2006. We have also audited the financial statement
schedule for each of the three years in the period ended May 31, 2006 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, 2006 and 2005, and the results of their operations and
their cash flows for each of the years in the three year period ended May 31,
2006 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, 2006, except as to Note 9, which is as of August 29, 2006.
Page 18
TSR, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
MAY 31, 2006 AND 2005
ASSETS
2006 2005
------------ ------------
CURRENT ASSETS:
Cash and cash equivalents (note1 (d)) . . . . . . . . . . $ 2,660,739 $ 2,571,276
Marketable securities (note 1 (e)) . . . . . . . . . . . 5,406,830 7,908,138
Accounts receivable:
Trade, net of allowance for doubtful accounts
of $355,000 in 2006 and $430,000 in 2005. . . . . . 8,272,963 7,509,188
Other . . . . . . . . . . . . . . . . . . . . . . . . 90,172 69,511
------------ ------------
8,363,135 7,578,699
Prepaid expenses. . . . . . . . . . . . . . . . . . . . . 48,793 46,280
Prepaid and recoverable income taxes. . . . . . . . . . . 320,156 15,403
Deferred income taxes (note 2). . . . . . . . . . . . . . 150,000 180,000
------------ ------------
TOTAL CURRENT ASSETS . . . . . . . . . . . . . . . . 16,949,653 18,299,796
------------ ------------
EQUIPMENT AND LEASEHOLD IMPROVEMENTS, AT COST:
Equipment . . . . . . . . . . . . . . . . . . . . . . . . 271,646 247,801
Furniture and fixtures. . . . . . . . . . . . . . . . . . 112,196 112,196
Automobiles . . . . . . . . . . . . . . . . . . . . . . . 128,859 128,859
Leasehold improvements . . . . . . . . . . . . . . . . . 68,379 68,379
------------ ------------
581,080 557,235
Less accumulated depreciation and amortization . . . . . 544,946 524,142
------------ ------------
36,134 33,093
MARKETABLE SECURITIES (NOTE 1(E)) . . . . . . . . . . . . . . 1,490,547 --
OTHER ASSETS. . . . . . . . . . . . . . . . . . . . . . . . . 49,653 49,893
DEFERRED INCOME TAXES (NOTE 2). . . . . . . . . . . . . . . . 109,000 148,000
------------ ------------
$ 18,634,987 $ 18,530,782
============ ============
See accompanying notes to consolidated financial statements.
(Continued)
Page 19
TSR, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS, CONTINUED
MAY 31, 2006 AND 2005
LIABILITIES AND STOCKHOLDERS' EQUITY
2006 2005
------------ ------------
CURRENT LIABILITIES:
Accounts and other payables . . . . . . . . . . . . . . . $ 209,840 $ 216,031
Accrued and other liabilities:
Salaries, wages and commissions . . . . . . . . . . . 1,683,207 1,890,620
Legal and professional fees . . . . . . . . . . . . . 86,683 71,414
Other . . . . . . . . . . . . . . . . . . . . . . . . 960,312 53,961
------------ ------------
2,730,202 2,015,995
Advances from customers . . . . . . . . . . . . . . . . . 1,538,985 1,523,549
Income taxes payable. . . . . . . . . . . . . . . . . . . 102,974 152,966
------------ ------------
TOTAL CURRENT LIABILITIES. . . . . . . . . . . 4,582,001 3,908,541
------------ ------------
MINORITY INTEREST . . . . . . . . . . . . . . . . . . . . . . 31,751 33,458
COMMITMENTS AND CONTINGENCIES (NOTES 5, 6 AND 8)
STOCKHOLDERS' EQUITY (NOTES 3 AND 8):
Preferred stock, $1.00 par value,
Authorized 1,000,000 shares; none issued. . . . . . . -- --
Common stock, $.01 par value, authorized
25,000,000 shares; issued 6,228,326 shares. . . . . . 62,283 62,283
Additional paid-in capital. . . . . . . . . . . . . . . . 5,071,727 5,071,727
Retained earnings . . . . . . . . . . . . . . . . . . . . 20,918,526 21,486,074
------------ ------------
26,052,536 26,620,084
Less: Treasury stock, 1,660,314 shares, at cost. . . . . 12,031,301 12,031,301
------------ ------------
TOTAL STOCKHOLDERS' EQUITY . . . . . . . . . . 14,021,235 14,588,783
------------ ------------
$ 18,634,987 $ 18,530,782
============ ============
See accompanying notes to consolidated financial statements.
Page 20
TSR, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED MAY 31, 2006, 2005 AND 2004
2006 2005 2004
------------ ------------ ------------
REVENUES, NET . . . . . . . . . . . . . . . . . . . . . . . . $ 48,108,589 $ 51,444,681 $ 51,725,431
COST OF SALES . . . . . . . . . . . . . . . . . . . . . . . . 38,759,768 40,299,450 40,260,847
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. . . . . . . . . 7,640,092 7,510,112 7,768,138
------------ ------------ ------------
46,399,860 47,809,562 48,028,985
------------ ------------ ------------
INCOME FROM OPERATIONS. . . . . . . . . . . . . . . . . . . . 1,708,729 3,635,119 3,696,446
------------ ------------ ------------
OTHER INCOME (EXPENSE):
Interest and dividend income. . . . . . . . . . . . . . . 358,012 178,067 120,150
Realized and unrealized (loss) gain from
marketable securities, net . . . . . . . . . . . . . . (7,152) (828) 9,564
Minority interest in subsidiary operating profits . . . . (71,612) (66,472) (66,903)
------------ ------------ ------------
279,248 110,767 62,811
------------ ------------ ------------
INCOME BEFORE INCOME TAXES. . . . . . . . . . . . . . . . . . 1,987,977 3,745,886 3,759,257
PROVISION FOR INCOME TAXES (NOTE 2) . . . . . . . . . . . . . 774,000 1,601,000 1,635,000
------------ ------------ ------------
NET INCOME. . . . . . . . . . . . . . . . . . . . . . . . $ 1,213,977 $ 2,144,886 $ 2,124,257
============ ============ ============
BASIC NET INCOME PER COMMON SHARE . . . . . . . . . . . . . . $ 0.27 $ 0.47 $ 0.47
============ ============ ============
WEIGHTED AVERAGE NUMBER OF BASIC COMMON SHARES
OUTSTANDING . . . . . . . . . . . . . . . . . . . . . . . . . 4,568,012 4,568,012 4,545,762
============ ============ ============
DILUTED NET INCOME PER COMMON SHARE . . . . . . . . . . . . . $ 0.27 $ 0.47 $ 0.47
============ ============ ============
WEIGHTED AVERAGE NUMBER OF DILUTED COMMON SHARES
OUTSTANDING . . . . . . . . . . . . . . . . . . . . . . . . . 4,568,012 4,569,966 4,550,939
============ ============ ============
See accompanying notes to consolidated financial statements.
Page 21
TSR, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED MAY 31, 2006, 2005 AND 2004
TOTAL
SHARES OF ADDITIONAL STOCK-
COMMON COMMON PAID-IN RETAINED TREASURY HOLDERS'
STOCK STOCK CAPITAL EARNINGS STOCK EQUITY
------------ ------------ ------------ ------------ ------------ ------------
BALANCE AT MAY 31, 2003 ........ $ 6,078,326 $ 60,783 $ 4,134,053 $ 31,094,167 $(12,031,301) $ 23,257,702
NET INCOME ..................... -- -- -- 2,124,257 -- 2,124,257
EXERCISE OF STOCK
OPTIONS INCLUDING
RELATED TAX BENEFIT ............ 150,000 1,500 873,187 -- -- 874,687
SPECIAL CASH DIVIDEND PAID ..... -- -- -- (9,088,024) -- (9,088,024)
CASH DIVIDENDS PAID ............ -- -- -- (2,048,405) -- (2,048,405)
STOCK BASED COMPENSATION
EXPENSE (NOTE 1(N)) ............ -- -- 71,787 -- -- 71,787
------------ ------------ ------------ ------------ ------------ ------------
BALANCE AT MAY 31, 2004 ........ 6,228,326 62,283 5,079,027 22,081,995 (12,031,301) 15,192,004
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
============ ============ ============ ============ ============ ============
See accompanying notes to consolidated financial statements.
Page 22
TSR, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED MAY 31, 2006, 2005 AND 2004
2006 2005 2004
------------ ------------ ------------
Cash flows from operating activities:
Net Income .................................................................... $ 1,213,977 $ 2,144,886 $ 2,124,257
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization ............................................. 20,804 30,309 80,438
Realized and unrealized loss (gain) from marketable securities, net ....... 7,152 828 (9,564)
Deferred income taxes ..................................................... 69,000 (5,000) (20,000)
Minority interest in subsidiary operating profits ......................... 71,612 66,472 66,903
Stock based compensation expense (recovery) ............................... -- (7,300) 71,787
Tax benefit from stock option exercises ................................... -- -- 45,000
Changes in operating assets and liabilities:
Recovery of bad debt expense .............................................. (75,000) -- --
Accounts receivable-trade ................................................. (688,775) 2,395,432 (666,583)
Other receivables .................................................. (20,661) (39,811) 21,128
Prepaid expenses ................................................... (2,513) (7,362) 939
Prepaid and recoverable income taxes ............................... (304,753) 80 45,256
Other assets ....................................................... 240 35,000 (34,089)
Accounts payable and accrued expenses .............................. 708,016 (52,164) (232,724)
Advances from customers ............................................ 15,436 (9,093) (260,854)
Income taxes payable ............................................... (49,992) 9,413 (99,428)
------------ ------------ ------------
Net cash provided by operating activities ..................................... 964,543 4,561,690 1,132,466
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturities and sales of marketable securities ............... 12,792,923 12,419,289 14,914,970
Purchases of marketable securities ........................................ (11,789,314) (13,829,416) (8,455,071)
Purchases of fixed assets ................................................. (23,845) (25,101) (22,281)
------------ ------------ ------------
Net cash provided by (used in) investing activities ........................... 979,764 (1,435,228) 6,437,618
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Distribution to minority interest ......................................... (73,319) (83,175) (57,644)
Cash dividends paid ....................................................... (1,781,525) (2,740,807) (11,136,429)
Proceeds from exercise of stock options ................................... -- -- 829,687
------------ ------------ ------------
Net cash used in financing activities ......................................... (1,854,844) (2,823,982) (10,364,386)
------------ ------------ ------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS .............................. 89,463 302,480 (2,794,302)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR .................................... 2,571,276 2,268,796 5,063,098
------------ ------------ ------------
CASH AND CASH EQUIVALENTS AT END OF YEAR .......................................... $ 2,660,739 $ 2,571,276 $ 2,268,796
============ ============ ============
SUPPLEMENTAL DISCLOSURE:
Income taxes paid ............................................................. $ 1,060,000 $ 1,597,000 $ 1,664,000
============ ============ ============
See accompanying notes to consolidated financial statements.
Page 23
TSR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 2006, 2005 AND 2004
(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 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. In fiscal 2004, two customers accounted for more
than 10% of the Company's revenues, constituting 25.5% and 15.0% of
revenues respectively. The accounts receivable associated with the
Company's largest customer was $1,286,000, $1,360,000 and $2,377,000 at
May 31, 2006, 2005 and 2004, respectively. The accounts receivable
associated with the Company's second largest customer was $1,349,000,
$666,000 and $2,253,000 at May 31, 2006, 2005, and 2004, 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, 2006 and 2005:
2006 2005
------------ ------------
Cash in banks. . . . . . . . . . . . . $ 286,625 $ 294,237
Money Market Funds . . . . . . . . . . 2,374,114 2,277,039
------------ ------------
$ 2,660,739 $ 2,571,276
============ ============
(Continued)
Page 24
TSR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
MAY 31, 2006, 2005 AND 2004
(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
-------
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
============ ============ ============ ============
2005: US Treasury securities . . $ 7,886,570 $ -- $ -- $ 7,886,570
Equity securities. . . . . 16,866 4,702 -- 21,568
------------ ------------ ------------ ------------
$ 7,903,436 $ 4,702 $ -- $ 7,908,138
============ ============ ============ ============
(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, 2006, 2005 and 2004, 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, 2006, 2005 AND 2004
(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 2006,
2005 and 2004.
(n) STOCK OPTIONS
On July 28, 2003 the Company paid a large nonrecurring cash dividend of
$2.00 per share to shareholders of record as of July 11, 2003. The
dividend paid amounted to $9,088,024. Guidance under Emerging Issues Task
Force (EITF) 00-23, ISSUES RELATED TO THE ACCOUNTING FOR STOCK
COMPENSATION UNDER APB OPINION NO.25 AND FASB INTERPRETATION NO.44,
requires modification for outstanding stock options by adjusting the
price and/or the number of shares under a fixed stock option award as a
result of a large nonrecurring cash dividend. The Company did not adjust
the terms of any outstanding stock options and, given the circumstances,
a new measurement date and variable accounting treatment was required for
its outstanding options at the dividend payment date. The Company had
10,000 such outstanding options, all of which were vested, as of May 31,
2005 and 2004 which were subject to variable accounting treatment.
Accordingly, the Company recorded a non-cash compensation charge of
$71,787 for the 2004 fiscal year and a net recovery of $7,300 for fiscal
2005. These options expired in June 2005.
The Company has one stock-based employee compensation plan in effect. The
Company accounts for all transactions under which employees receive
shares of stock or other equity instruments in the Company based on the
price of its stock in accordance with the provisions of Accounting
Principles Board Opinion No. 25, ACCOUNTING FOR STOCK ISSUED TO
EMPLOYEES. All options granted under the plan had an exercise price equal
to the market value of the underlying common stock, and the number of
shares represented by such options were known and fixed, on the date of
grant. However, as a result of the large nonrecurring cash dividend
discussed above, the remaining outstanding 10,000 options 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, 2006, 2005 AND 2004
Year Ended May 31,
------------------------------------------
2006 2005 2004
------------ ------------ ------------
Net income:
As reported.............................................. $ 1,213,977 $ 2,144,886 $ 2,124,257
Add: Stock-based employee compensation expense
(recovery) included in reported net income,
net of related tax effect.......................... -- (7,300) 71,787
------------ ------------ ------------
Proforma net income.................................. $ 1,213,977 $ 2,137,586 $ 2,196,044
============ ============ ============
Basic and diluted net income per share:
As reported.......................................... $ 0.27 $ 0.47 $ 0.47
============ ============ ============
Proforma SFAS 123.................................... $ 0.27 $ 0.47 $ 0.48
============ ============ ============
There were no options granted in fiscal 2006, 2005 and 2004.
(o) IMPACT OF NEW ACCOUNTING STANDARDS
In December 2004, the FASB issued a revision 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 value based
measurement method in accounting for share based transactions with
employees except for equity instruments held by employee share ownership
plans. This Statement is effective as of the beginning of the first
annual reporting period that begins after June 15, 2005. Therefore, the
Company will adopt FAS123(R) at the beginning of fiscal 2007. The Company
does not expect the adoption of the FAS 123(R) to have a material impact
on its consolidated financial statements.
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. Management is in the
process of evaluating the effects of this guidance which is effective for
fiscal years beginning after December 15, 2006.
In May 2005, the FASB issued SFAS 154, "Accounting for Changes and Error
Corrections - a replacement of APB Opinion No. 20 and FASB Statement No.
3." SFAS 154 changes the requirements with regard to the accounting for
and reporting a change in an accounting principle. The provisions of SFAS
154 require, unless impracticable, retrospective application to prior
periods presented in financial statements for all voluntary changes in an
accounting principle and changes required by the adoption of a new
accounting pronouncement in the unusual instance that the pronouncement
does not indicate a specific transition method. SFAS 154 also requires
that a change in depreciation, amortization or depletion method for
long-lived, non-financial assets be accounted for as a change in an
accounting estimate, which requires prospective application of the new
method. SFAS 154 is effective for all changes in an accounting principle
made in fiscal years beginning after December 15, 2005. The Company has
adopted SFAS 154 as of June 1, 2006. Because SAS 154 is directly
dependent upon future events, the Company cannot determine what effect,
if any, the expected adoption of SFAS 154 will have on its financial
condition, results of operations or cash flows.
In November 2005, the FASB issued FSP 115-1 and ESP 124-1, "The Meaning
of Other-Than-Temporary Impairment and Its Application to Certain
Investments" which nullify certain requirements of EITF 03-1 and
supersede EITF D-44. The FSPs provide guidance for identifying impaired
investments and new disclosure requirements for investments that are
deemed to be temporarily impaired. The FSPs are effective for fiscal
years beginning after December 15, 2005. The Company does not expect the
adoption of the FSPs to have a material impact on its financial position,
results of operations or cash flows.
Page 27
TSR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
MAY 31, 2006, 2005 AND 2004
(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 60 accounts with open
balances of which, the top 2 customers, as a percentage of revenue,
consisted of 15.5% and 16.3% of the net accounts receivable balance at
May 31, 2006, respectively.
(2) INCOME TAXES
A reconciliation of the provisions for income taxes computed at the
federal statutory rates for fiscal 2006, 2005, and 2004 to the reported
amounts is as follows:
2006 2005 2004
------------------ ------------------ ------------------
AMOUNT % Amount % Amount %
---------- ---- ---------- ---- ---------- ----
Amounts at statutory federal tax rate ..... $ 676,000 34.0% $1,274,000 34.0% $1,278,000 34.0%
State and local taxes, net of federal
income tax effect ....................... 115,000 5.8 317,000 8.5 341,000 9.1
Non-deductible expenses, and other ........ (17,000) (0.9) 10,000 0.2 16,000 0.4
---------- ---- ---------- ---- ---------- ----
$ 774,000 38.9% $1,601,000 42.7% $1,635,000 43.5%
========== ==== ========== ==== ========== ====
The components of the provision for income taxes are as follows:
Federal State Total
------------ ------------ ------------
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
============ ============ ============
2004: Current. . . . . . . . . . $ 1,139,000 $ 516,000 $ 1,655,000
Deferred . . . . . . . . . (20,000) -- (20,000)
------------ ------------ ------------
$ 1,119,000 $ 516,000 $ 1,635,000
============ ============ ============
The tax effects of temporary differences that give rise to significant
portions of the deferred income tax assets at May 31, 2006 and 2005 are
as follows:
2006 2005
------------ ------------
Allowance for doubtful accounts receivable . . . . . $ 150,000 $ 180,000
Equipment and leasehold improvement
Depreciation and amortization. . . . . . . . . . 54,000 89,000
Acquired client relationships. . . . . . . . . . . . 55,000 59,000
------------ ------------
Total deferred income tax assets . . . . . . . . $ 259,000 $ 328,000
============ ============
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, 2006, 2005 AND 2004
(3) STOCK OPTIONS
The 1997 Employee Stock Option Plan provides for the granting of options
to purchase up to 800,000 shares of the Company's common stock at prices
equal to fair market values at the grant dates. Options are exercisable as
determined on the date of the grant and expire on the fifth anniversary of
the date of grant. There are 559,950 shares of common stock which remain
reserved for issuance under the Plan.
STOCK OPTIONS OUTSTANDING
WEIGHTED
EXERCISE AVERAGE
SHARES PRICE PRICE
-------- -------- --------
Outstanding at May 31, 2003 .................. 160,000 5.53 5.53
Options exercised ............................ (150,000) 5.53 5.53
-------- -------- --------
Outstanding at May 31, 2004 and 2005 ......... 10,000 $ 5.53 $ 5.53
======== ======== ========
Options expired .............................. (10,000) $ 5.53 $ 5.53
-------- -------- --------
OUTSTANDING AT MAY 31, 2006 .................. 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, 2006, 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, 2006 follows:
PERIOD AMOUNT
------ ------
Less than
1 year........... $ 313,000
1-3 years........ 340,000
3-5 years........ 114,000
Over 5 years..... --
-----------
Total $ 767,000
===========
Total rent expenses under all lease agreements amounted to $340,000,
$369,000 and $347,000 in fiscal 2006, 2005 and 2004.
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, 2006, 2005 AND 2004
(6) EMPLOYMENT AGREEMENTS
In June 2002, an employment agreement was entered into with the Chairman
of the Board, Chief Executive Officer, President and Treasurer, which
terminates May 31, 2007. This agreement provides for an initial base
salary with annual adjustments based upon increases in the Consumer Price
Index, such increases to be no less than 3% and no more than 8% per year.
Additionally, the agreement provides for an annual discretionary bonus for
each fiscal year, the maximum to be $50,000 if pre-tax profits are less
than $1,000,000 and a minimum of 7.5% of pre-tax profit if such profits
exceed $1,000,000.
(7) UNAUDITED QUARTERLY FINANCIAL DATA
The following is a summary of unaudited quarterly operating results for
the fiscal years ended May 31, 2006 and 2005.
(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)
(Amounts in Thousands, except Per Share Data)
Fiscal 2005
-----------
First Second Third Fourth
-------- -------- -------- --------
Revenues .................................... $ 13,381 $ 13,138 $ 12,433 $ 12,492
Gross Profit ................................ 2,927 2,907 2,591 2,720
Net Income .................................. 599 575 452 519
Basic and Diluted Net Income
per Common Share ...................... $ 0.13 $ 0.13 $ 0.10 $ 0.11
(8) SUBSEQUENT EVENT
On August 15, 2006, the Board of Directors of the Company announced that a
regular quarterly cash dividend of $0.08 per share will be paid on
September 14, 2006 to shareholders of record as of August 29, 2006. This
dividend will amount to approximately $365,000 and will be paid from the
Company's cash and marketable securities.
(9) 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.
Page 30
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 termination does
not affect existing placements with the DOE until the date such positions
are scheduled to expire. The DOE accounted for approximately 13% of the
Company's revenues during the Company's fiscal year ended May 31, 2006. 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 have not been renewed. Of the remaining thirteen consultants,
four are scheduled to end in February 2007 and nine in May 2010.
DOE also asserted a claim against the Company for a reimbursement due to
the Company's subcontracting without written authorization. On August 29,
2006, the DOE and the Company agreed in principle to resolve these claims
and permit the Company to be treated as a "responsible vendor" upon making
a payment to DOE of approximately $900,000 and appointment of an
independent compliance monitor to monitor the Company's compliance with
the DOE agreement. The treatment as a responsible vendor would allow the
Company to continue to submit consultants to the DOE in response to DOE
bid requests. The Company will also need to have its agreement with the
OGS reinstated to make new placements with DOE.
While the Company believes that its subcontracting did not result in
overcharges to DOE, it has agreed to settle the matter in order to avoid
the expense and uncertainty of litigation as well as to protect its
existing business with DOE and maintain the potential to make future
placements with DOE.
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 2006 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 2006 Annual Meeting
of Stockholders.
Page 31
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 2006 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 2006 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 2006 Annual Meeting
of Stockholders.
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, 2006:
Allowance for doubtful accounts........ $ 430,000 $ (75,000) $ -- $ 355,000
========== ========== ========== ==========
Year ended May 31, 2005:
Allowance for doubtful accounts........ $ 430,000 $ -- $ -- $ 430,000
========== ========== ========== ==========
Year ended May 31, 2004:
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: September 11, 2006
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, Director
/s/ Robert A. Esernio
-----------------------------------
Robert A. Esernio, Director
/s/ Raymond A. Roel
-----------------------------------
Raymond A. Roel, Director
Dated: September 11, 2006
Page 33
TSR, INC. AND SUBSIDIARIES
EXHIBIT INDEX
FORM 10-K, MAY 31, 2006
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 Consulting Agreement between TSR, Inc. and Ernest G.
Bago, dated as of September 30, 2005. Incorporated by
reference to Exhibit 10.1 to the Accountingl Report on
Form 10-Q filed by the Corporation for the fiscal
quarter ended August 31, 2005. 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 10:04 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., N/A 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
23.1 Consent of BDO Seidman, LLP 36
31.1 Certification by J.F. Hughes Pursuant to Securities
Exchange Act Rule 13a-14 37
31.2 Certification by John G. Sharkey Pursuant to Securities
Exchange Act Rule 13a-14 38
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. 39
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. 40
Page 34