U.S. Securities and Exchange Commission Washington, D.C. 20549 Gentlemen, We are transmitting herewith Form 10-KSB for the year ended December 31, 2002 for TSI, Inc. TSI, Inc. s/D. Mellinger D. Mellinger Accountant U.S. SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-KSB (Mark One) XX ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2002 TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission file number 0-2054 TSI, INC. (Name of small business issuer in its charter) Montana (State or other jurisdiction of incorporation or organization) 81-0267738 (I.R.S. Employer Identification Number) 128 Second Street South, Great Falls, Montana 59405 (Address of principal executive offices) (Zip Code) Issuer's telephone number (406) 727-2600 Securities registered under Section 12(b) of the Exchange Act: None Securities registered under Section 12(g) of the Exchange Act: Common Stock $.05 Par Value (Title of class) Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 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. Yes XX No Check if disclosure of delinquent filers in response to Item 405 of Regulation S-B is not 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-KSB or any amendment to this Form 10-KSB. State issuer's revenues for its most recent fiscal year $2,452,563. State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was sold, or the average bid and asked price of such common equity, as of a specified date within the past 60 days. (See definition of affiliate in Rule 12b-2 of the Exchange Act). As of February 28, 2003, 765,904 shares held by nonaffiliates were outstanding. The aggregate market value of the Registrant's common stock held by non-affiliates of the Registrant as of February 28, 2003 was approximately $76,590 based pon the aaverage bid price as reported by Nasdaq.com. (APPLICABLE ONLY TO CORPORATE REGISTRANTS) State the number of shares outstanding of each of the issuer's classes of common equity, as of the latest practicable date. 10,468,976 shares $.05 par value common stock are outstanding as of February 28, 2003. DOCUMENTS INCORPORATED BY REFERENCE If the following documents are incorporated by reference, briefly describe them and identify the part of the form 10-KSB (e.g., Part I, Part II, etc.) into which the documents are incorporated: (1) any annual report to security holders: (2) any proxy or information statement; and (3) any prospectus filed pursuant to Rule 424(b) or (c) of the Securities Act of 1933 ("Securities Act"). The listed documents should be clearly described for identification. DOCUMENTS FORM 10-KSB REFERENCE Annual Report to Shareholders for Part I, Items 1 and 2 the year ended December 31, 2002. Part II, Items 5, 6 and 7 Part III, Item 12 Part IV, Item 13 Transitional Small Business Disclosure Format (check one): Yes ; No X TSI, INC. PART I ITEM 1. DESCRIPTION OF BUSINESS AND ITEM 2. DESCRIPTION OF PROPERTY A description of the Company's business and property ownership is set forth on Page 1 of Exhibit 13, the Annual Report to Shareholders for the year ended December 31, 2002, which description is incorporated herein by reference. ITEM 3. LEGAL PROCEEDINGS No legal proceedings presently pending by or against TSI, Inc., are described herein as management believes that the outcome of such litigation should not have a material adverse effect on the financial position of the Company and its subsidiaries taken as a whole. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of security holders during the fourth quarter of 2002. I-1 1. TSI, INC. PART II ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS; ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION ITEM 7. FINANCIAL STATEMENTS Items 5, 6 and 7 are set forth on Page 18, Pages 1 and 2 and Pages 3 to 17, respectively, of Exhibit 13, TSI, Inc. Annual Report to Shareholders for the year ended December 31, 2002, which report is incorporated herein by reference. ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE There have been no disagreements concerning accounting principles or practices or financial statement disclosures between the Company and the Company's independent auditor during the two most recent years. II-1 2. TSI, INC. PART III ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION 16 (A) OF THE EXCHANGE ACT. The following are the directors and executive officers of the Company. All directors and officers serve as such until the 2003 annual meeting of shareholders or until their successors are elected and qualify. NAME, AGE, AND YEAR ELECTED DIRECTOR POSITION Paul J. McCann, Jr., 48, 1995 Director, President John Ross, 49, 2000 Director Miriam A. Arneson, 47, 1998 Director Paul J. McCann, Jr. is the president and a director of GNI, Inc. Miriam A. Arneson is a director of GNI, Inc., UAC, Inc., and Diversified Realty, Inc. Family Relationships Paul J. McCann, Jr. and Miriam A. Arneson are children of Anne Marie and Paul J. McCann. Members of the Anne Marie and Paul J. McCann family control, directly or indirectly, a majority of the outstanding common stock of M Corp. M Corp owns approximately 92% of the Company's issued and outstanding common stock. There are no other family relationships among the individuals listed above nor are there any arrangements or understandings pursuant to which any of them were elected as officers or directors. Following are the executive officers of the Company and a description of their principal business experience. Name and Position Principal Business Experience Paul J. McCann, Jr., Attorney at Law President, Director Business Owner, Investor Billings, Montana Miriam A. Arneson, Director, Diversified Realty, Inc. Director Director, UAc, Inc. and GNI, Inc. Investor, Billings, Montana Based solely on its review of reports of persons subject to Section 16 of the Securities and Exchange Act, the Company believes that required reports were filed in a timely manner disclosing transactions involving the Company's common stock. III-1 3. TSI, INC. ITEM 10. EXECUTIVE COMPENSATION Summary Compensation Table. The following table shows the cash compensation paid by the Company and its consolidated subsidiaries to the Company's President and Chief Executive Officer for 2002, 2001 and 2000. Summary Compensation Table Name and Calendar Total Cash Principal Position Year Compensation Paul J. McCann, Jr. 2002 $ 0 President, Director 2001 $ 0 2000 $ 0 Paul J. McCann 2002 $198,000 2001 $436,862 2000 $ 0 The Company has no pension plan, no stock option or stock appreciation rights plans and no long-term incentive plans and there was no other material compensation paid during the year ended December 31, 2002. The Company has not adopted a formal plan for the compensation of directors. During 2002 the Company and its consolidated subsidiaries paid a total of $13,750 to directors. ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT (a) Security Ownership of Certain Beneficial Owners Set forth below is certain information concerning persons who are known by the Company to own beneficially more than 5% of the Company's voting shares on February 28, 2003. Amount and Nature Title of Name and Address of of Beneficial Percent Class Beneficial Owner Ownership of Class $.05 Par M Corp 9,694,877 (1) 92.6% Value Common 110 Second Street South Direct Stock Great Falls, Montana (1) At February 28, 2003, members of the Anne Marie and Paul J. McCann family, including Paul J. McCann, Jr. and Miriam A. Arneson, children of Anne Marie and Paul J. McCann, indirectly controlled a majority of the outstanding stock of M Corp. Members of the Anne Marie and Paul J. McCann family own directly a total of 4,745 shares of the Company's outstanding stock. Neither Paul J. McCann or Anne Marie McCann own any shares of stock in TSI, Inc. Anne Marie McCann and Paul J. McCann disclaim beneficial ownership in any stock of TSI, Inc. III-2 4. TSI, INC. ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT - Continued (b) Security Ownership of Management The following table sets forth as of February 28, 2003, information concerning the beneficial ownership of the Company's common stock by each director, each executive officer named in the Company's Summary Compensation Table and by all directors and executive officers of the Company as a group: Amount and Nature Name of Beneficial Owner of Beneficial Ownership Percent Paul J. McCann, Jr. None (1) -- John R. Ross None (1) -- Miriam A. Arneson None (1) -- All Directors and Officers None (1) -- as a Group (1) See Note (1) item 11(a) on preceding page. (c) Changes In Control The Company knows of no contractual arrangements which may at a subsequent date result in a change in control of the Company. ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Transactions with the Company's parent company, its subsidiaries and other related parties are disclosed in Note 9 of the notes to consolidated financial statements in the Annual Report to Shareholders for the year ended December 31, 2002, which note is incorporated herein by reference. III-3 5. TSI, INC. ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits No. 13 - TSI, Inc. Annual Report to Shareholders for the year ended December 31, 2002. No. 22 - Subsidiaries. No. 27 - Financial Data Schedule. (b) Reports on Form 8-K No current reports on Form 8-K were filed by the Company during the three months ended December 31, 2002. IV-1 6. TSI, INC. SIGNATURES In accordance with Section 13 or 15(d) of the Exchange Act, the Registrant has caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. TSI, INC. Date: April 14, 2003 By: s/Paul J. McCann, Jr. Paul J. McCann, Jr., President In accordance with the Exchange Act, this report has been signed below by the following persons on behalf of the Registrant and in the capacities indicated on April 14, 2003. President s/Paul J. McCann, Jr. Paul J. McCann, Jr. Director s/Miriam A. Arneson Miriam A. Arneson Principal Accountant s/D. Mellinger D. Mellinger IV-2 7. TSI, INC. ANNUAL REPORT 2002 TSI, INC. AND CONSOLIDATED SUBSIDIARIES ANNUAL REPORT DESCRIPTION AND LINES OF BUSINESS TSI, Inc. (herein referred to as "TSI" or the "Company") was incorporated in 1958. A wholly-owned subsidiary of the Company, First Montana Title Insurance Company (FMTIC), is a title insurance company operating in that business in the State of Montana only. Through wholly-owned subsidiaries, FMTIC owns and operates title plants in two Montana counties. A subsidiary of FMTIC owns real property in Great Falls, Montana. During 2001 UAC, Inc., a subsidiary of the Company, through its wholly-owned subsidiary sold the title agency assets it owned and operated in Montana. During 1988 through 1991, UAC, Inc., primarily through its wholly-owned subsidiary, acquired rental units in Montana. TSI owns rental property in Helena, Montana and non income-producing properties located within Cascade County, Montana. A subsidiary of the Company owns rental property in Polson, Montana. The Company's investments in rental properties is set forth in Note 8, Rental Property, of the Notes to Consolidated Financial Statements. The Company is a 92% owned subsidiary of M Corp, a financial holding company located in Great Falls, Montana. Transactions with the Company's parent company and its affiliates are set forth in Note 9, Related Party Transactions, of the Notes to Consolidated Financial Statements. The Company operates in a competitive business environment and is not dependent upon one or a few major customers. Information concerning the Company's industry segments is set forth in Note 12 (Information on Segments of Business) of the Notes to Consolidated Financial Statements. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Title insurance premiums and related fees decreased $451,933 (26.9%) in 2002 as compared with 2001 due to the sale of the Great Falls title operation in 2001. 1 TSI, INC. AND CONSOLIDATED SUBSIDIARIES ANNUAL REPORT MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Continued Interest revenues decreased $93,607 (29.5%) in 2002 as compared with 2001 due primarily to a decrease in interest-bearing deposits and a decrease in interest rates earned on such deposits. Rent revenues decreased $12,914 (3.2%) in 2002 as compared with 2001 due primarily to an increase in vacancies. Other income decreased $3,289,468 (84.5%) in 2002 as compared with 2001. During 2001 the Company recognized net gains on the disposition of investments in the total amount of $3,302,297 whereas 2002 dispositions of such resulted in a gain of only $6,357. The decrease in gains recognized on the disposition of investments in 2002 was the primary reason for the decrease in other income in 2002 as compared with 2001. Salaries and other personnel costs decreased $427,235 (30.7%) in 2002 as compared with 2001 due primarily to a decrease in compensation paid to to personnel. The provision for depreciation decreased $9,219 (10.6%) in 2002 as compared to 2001. Transactions with the Company's parent company and other affiliates are disclosed in Note 9, Related Party Transactions, of the Notes to Consolidated Financial Statements. Income tax expense decreased $1,130,500 (89.1%) in 2002 as compared with 2001 due primarily to the decrease in pre-tax income. The Company is considering acquisitions which would deplete the Company's available cash and thus affect the liquidity of the Company. 2 TSI, INC. AND CONSOLIDATED SUBSIDIARIES FINANCIAL REPORT DECEMBER 31, 2002 CONTENTS PAGE AUDITOR'S REPORT . . . . . . . . . . . . . . . . . . . . . . . 4 FINANCIAL STATEMENTS Balance Sheets as of December 31, 2002 and 2001. . . . . 5-6 Statements of Income and Comprehensive Income for the Years Ended December 31, 2002 and 2001 . . . . . . . . . . . . . . . 7 Statements of Stockholders' Equity for the Years Ended December 31, 2002 and 2001 . . . . . . . . . . . . . . . . 8 Statements of Cash Flows for the Years Ended December 31, 2002 and 2001. . . . . . . . . . . . . . . 9-10 Notes to Consolidated Financial Statements . . . . . . . 11-17 OTHER INFORMATION. . . . . . . . . . . . . . . . . . . . . . . 18 3 Report of Independent Auditors To The Board of Directors TSI, Inc. Great Falls, MT 59405 We have audited the accompanying consolidated balance sheets of TSI, Inc. and consolidated subsidiaries as of December 31, 2002 and 2001 and the related consolidated statements of income and comprehensive income, stockholders'equity and cash flows for the years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of TSI, Inc. and consolidated subsidiaries as of December 31, 2002 and 2001 and the consolidated results of their operations and their consolidated cash flows for the years then ended, in conformity with accounting priniciples accepted in the United States of America. DWYER & Company, CPA, P.C. May 9, 2003 Great Falls, Montana 4 TSI, INC. AND CONSOLIDATED SUBSIDIARIES BALANCE SHEETS DECEMBER 31, 2002 and 2001 2001 2002 ASSETS Current Assets Cash (Note 2) $ 22,140,919 $ 23,337,149 Investment Securities (Note 3) 2,215,222 1,011,648 Trade Accounts Receivable, Less Allowance for Doubtful Accounts $11,500 in 2001 and $11,500 in 2002 (Note 9) 85,127 102,513 Deferred Tax Asset -- 14,800 Prepaid Expenses 1,800 -- Total Current Assets 24,443,068 24,466,110 Noncurrent Investments (Note 3) 482,702 586,580 Other Assets 2,238 2,238 Investments In Property, Plant and Equipment, at Cost (Notes 1 and 8) Buildings 2,031,873 2,047,260 Furniture, Fixtures and Equipment 433,377 473,924 2,465,250 2,521,184 Less Accumulated Depreciation (1,961,920) (2,039,769) 503,330 481,415 Title Plants 117,865 117,865 Land 80,453 80,453 Net Property, Plant and Equipment 701,648 679,733 $ 25,629,656 $ 25,734,661 See Notes to Consolidated Financial Statements. 5 TSI, INC. AND CONSOLIDATED SUBSIDIARIES BALANCE SHEETS DECEMBER 31, 2002 and 2001 2001 2002 LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities Accounts Payable (Note 9) $ 215,730 $ 208,629 Accrued Liabilities (Note 4) 110,110 126,563 Due to Parent Company (Note 9) 103,718 206,764 Income Taxes Payable 267,747 137,297 Deferred Income Taxes (Notes 1, 3 and 5) 98,700 -- Total Current Liabilities 796,005 679,253 Provision for Estimated Title and Escrow Losses (Note 6) 847,225 815,013 Minority Interests in Consolidated Subsidiaries 387,491 391,503 Deferred Income Taxes (Notes 1, 3 and 5) 86,100 128,500 Excess of Fair Value of Net Assets Acquired Over Cost (Note 1) 23,975 15,755 1,345,241 1,350,771 Commitments (Note 7) Stockholders' Equity Common Stock, $.05 Par Value, 30,000,000 shares authorized, 10,483,142 shares issued and outstanding 524,157 524,157 Capital Surplus (Note 11) 19,165,957 22,165,957 Retained Earnings (Notes 10 and 11) 3,540,191 868,992 Accumulated Other Comprehensive Income (Note 3) 269,323 166,323 Less: Cost of Common Shares in Treasury (11,218) (20,792) Total Stockholders' Equity 23,488,410 23,704,637 $ 25,629,656 $ 25,734,661 See Notes to Consolidated Financial Statements. 6 TSI, INC. AND CONSOLIDATED SUBSIDIARIES STATEMENTS OF INCOME AND COMPREHENSIVE INCOME FOR THE YEARS ENDED DECEMBER 31, 2002 and 2001 2001 2002 Revenues Title Insurance Premiums and Related Fees $ 1,681,592 $ 1,229,659 Interest 317,075 223,468 Rent 409,189 396,275 Other 3,892,629 603,161 6,300,485 2,452,563 Operating Expenses Salaries and Other Personnel Costs 1,391,712 964,477 Depreciation 87,068 77,849 Rent 49,260 49,048 Title and Escrow Losses 3,796 12,612 Other General and Administrative Expenses 799,243 879,791 2,324,079 1,983,777 Operating Income 3,976,406 468,786 Minority Share of Consolidated Subsidiaries Net (Income)Loss (27,154) (4,185) Income Before Income Taxes 3,949,252 464,601 Income Taxes (Note 5) (1,268,200) (135,800) Net Income 2,681,052 328,801 Other Comprehensive Income (Loss), Net of Income Taxes: Unrealized Holding Gains (Losses): Gain (Loss) Arising During Year 307,729 (105,892) Reclassification Adjustment (2,012,392) 2,892 Other Comprehensive Income (Loss) (1,704,663) (103,000) Comprehensive Income (loss) $ 976,389 $ 225,801 See Notes to Consolidated Financial Statements. 7 TSI, INC. AND CONSOLIDATED SUBSIDIARIES STATEMENTS OF STOCKHOLDERS' EQUITY FOR THE YEARS ENDED DECEMBER 31, 2002 and 2001 Accumulated Other Common Capital Retained Comprehensive Treasury Stock Surplus Earnings Income Stock Total Balances, January 1, 2001 $ 524,157 $19,165,957 $ 859,139 $ 1,973,986 $ (300) $ 22,522,939 Net Income 2,681,052 2,681,052 Purchase Treasury Stock (10,918) (10,918) Change in Net Unrealized Holding Gains (1,704,663) (1,704,663) Balances, December 31, 2001 524,157 19,165,957 3,540,191 269,323 (11,218) 23,488,410 Net Income 328,801 328,801 Purchase Treasury Stock (9,574) (9,574) Change in Net Unrealized Holding Gains (103,000) (103,000) Reclassification 3,000,000 (3,000,000) Balances, December 31, 2002 $524,157 $22,165,957 $868,992 $166,323 $ (20,792) $23,704,637 See Notes to Consolidated Financial Statements. 8 TSI, INC. AND CONSOLIDATED SUBSIDIARIES STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 2002 and 2001 INCREASE (DECREASE) IN CASH 2001 2002 CASH FLOWS FROM OPERATING ACTIVITIES: Cash Received From Customers $ 2,062,142 $ 2,133,095 Cash Paid to Suppliers and Employees (2,147,292) (1,925,007) Interest and Dividends Received in Cash 709,451 285,524 Income Taxes Paid in Cash (1,000,000) (266,250) Net Cash Provided (Used) By Operating Activities (375,699) 227,362 CASH FLOWS FROM INVESTING ACTIVITIES: Cash Proceeds From Redemptions of Property, Plant and Equipment 280,000 - Cash Purchases of Minority Interests - (228) Capital Expenditures Paid in Cash (37,923) (55,934) Cash Received on Dispositions of Investments 10,610,276 1,320,479 Cash Purchases of Current Investments (4,868,774) (388,921) Net Cash Provided (Used) By Investing Activities 5,983,579 875,396 CASH FLOWS FROM FINANCING ACTIVITIES: Net Cash Advances From (To) Parent Company (323,400) 103,046 Cash Purchases of Treasury Stock (10,918) (9,574) Net Cash Provided (Used) By Financing Activities (334,318) 93,472 NET INCREASE IN CASH 5,273,562 1,196,230 CASH - BEGINNING OF YEAR 16,867,357 22,140,919 CASH - END OF YEAR $22,140,919 $23,337,149 (Continued) 9 TSI, INC. AND CONSOLIDATED SUBSIDIARIES STATEMENTS OF CASH FLOWS - Continued FOR THE YEARS ENDED DECEMBER 31, 2002 and 2001 RECONCILIATION OF NET INCOME TO NET CASH PROVIDED BY OPERATING ACTIVITIES 2001 2002 Net Income $ 2,681,051 $ 328,801 Adjustments to Reconcile Net Income to Net Cash Provided By Operating Activities: Depreciation 87,068 77,849 Provision for Doubtful Accounts Receivable (5,000) - Minority Share of Consolidated Subsidiaries Net Income (Loss) 27,154 4,185 Amortization of Deferred Credit (8,220) (8,220) Realized (Gains) on Dispositions of Investments (3,485,433) (6,357) Changes in Operating Assets and Liabilities (Increase)Decrease in Accounts Receivable (31,916) (17,386) Decrease in Prepaid Income Taxes 453 - (Increase) in Prepaid Expenses (1,800) 1,800 Increase (Decrease) in Payables and Accrued Liabilities 93,197 (22,860) Increase in Income Taxes Payable 267,547 (130,450) NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES $ (375,699) $ 227,362 See Notes to Consolidated Financial Statements. 10 TSI, INC. AND CONSOLIDATED SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (a) Nature of Operations, Risks and Uncertainties The Company is engaged in the title insurance business within the state of Montana, in the title insurance agency business in Yellowstone and Rosebud Counties, Montana and in the ownership and rental of properties located in Montana. The Company's primary business based on revenues is title insurance. The process of preparing financial statements in conformity with generally accepted accounting principles requires the use of estimates and assumptions that affect the reported amounts of certain types of assets, liabilities, revenues and expenses. Such estimates primarily relate to unsettled transactions and events as of the date of the financial statements. Actual results could differ from those estimates. (b) Principles of Consolidation The consolidated financial statements include the accounts of the Company and its wholly and majority owned subsidiaries. All significant intercompany transactions and balances have been eliminated in consolidation. (c) Depreciation and Amortization Depreciation and amortization, computed using various methods are provided over the useful lives of the various classes of property, plant and equipment. Title plants and land are carried at cost and are not depreciated. (d) Fiduciary Assets and Liabilities The assets and liabilities of the escrows administered by the Company are not included in the consolidated balance sheets. (e) Title Insurance Income and Related Fees The Company follows the practice of recording title insurance premiums as income upon the issuance of the title insurance policy or the collection of payment for the title insurance preliminary commitment, whichever occurs first. All other fees and charges are recognized as income upon the rendering of services. (f) Policy of Cash Equivalents For purposes of the statements of cash flows, cash equivalents include time deposits, certificates of deposit and money market accounts, all with original maturities of three months or less. 11 TSI, INC. AND CONSOLIDATED SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Cintinued 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued (g) Income Taxes The Company and its subsidiaries file consolidated income tax returns with the Company's parent company. Income taxes are allocated to the Company based upon the ratio of the Company's pre-tax income to total consolidated income. The Company follows the practice of recording deferred income taxes resulting from timing differences between financial reporting and income tax reporting. Investment tax credits, if any, are accounted for as a reduction of income tax expense in the years they are available for use under the flow-through method. (h) Excess of Fair Value of Net Assets of Acquired Subsidiaries Over Cost The excess of fair value of the net assets of acquired subsidiaries over cost is amortized over a twenty year period using the straight-line method. (i) Retirement Plans The Company adopted an employees' savings plan under Section 401(k) of the Internal Revenue Code (the "Code") during 1998. The Company allows eligible employees to contribute the maximum percentage of their compensation allowed by the Code. The Company matches employee contributions in an amount equal to fifty percent of the first six percent of the employee's compensation up to a maximum of $1,080. Participants are at all times fully vested in their contributions and are gradually vested in the Company's contributions. The Company's 401(k) contributions and administrative costs were $6,160 and $8,332 for 2002 and 2001, respectively. (j) Reclassifications Certain reclassifications have been made to the prior year amounts to make them comparable to the 2001 presentation. 2. CASH BALANCES The Company maintains accounts with various financial institutions and stock brokerage firms. Cash balances are insured up to $100,000 by either the Securities Investor Protection Corporation ("SIPC") or the Federal Deposit Insurance Corporation ("FDIC"). At December 31, 2002, cash balances totalling $21,216,906 were uninsured by either the SIPC or the FDIC. The Board of Directors of the Company has approved the Company's participation with its subsidiaries and M Corp in the purchase of all, or substantially all, the outstanding stocks of a bank, which if sucessfully accomplished would significantly affect the liquidity of the Company, the cash available to pay dividends and the cash available for other purposes and acquisitions. Subsequent to the balance sheet ending December 31, 2002, the bank was purchased by another company. 12 TSI, INC. AND CONSOLIDATED SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued 3.INVESTMENT SECURITIES AND OTHER INVESTMENTS The Company adopted Statement of Financial Accounting Standards No. 115 ("SFAS No. 115"), "Accounting For Investments in Certain Debt and Equity Securities" effective January 1, 1994. In accordance with SFAS No. 115, the Company has classified all of itscurrent and noncurrent investments, except for restricted investments, as available for sale. Following is a summary of the Company's investments, all of which consist of equity securities: 2001 2002 Current Assets: Cost $ 1,973,013 $ 1,047,811 Gross Unrealized Holding Gains 250,972 62,037 Gross Unrealized Holding Losses (8,763) (98,200) Fair Value $ 2,215,222 $ 1,011,648 Noncurrent Assets: Cost $ 166,443 $ 166,443 Gross Unrealized Holding Gains 211,259 315,137 Fair Value $ 377,702 $ 481,580 Realized gains and losses are determined on the basis of specific identification. During 2002 and 2001, sales proceeds and gross realized gains and losses were as follows: 2001 2002 Sales Proceeds $10,610,276 $1,320,479 Gross Realized Losses $ 3,319,653 $ - Gross Realized Gains $ 17,356 $ 4,888 No other gains or losses, realized or unrealized, are included in the Company's statements of income for 2002 or 2001. Glacier Bancrop, Inc. merged with WesterFed Financial Corportaion during the first quarter of 2001. Pursuant to the terms of the merger agreement the Company and its subsidiaries received approximately $6,530,400 in exchange for all of their holdings in WesterFed Financial Corporation resuting in a net gain of approximately $2,859,500 after deducting a fee of 7 per cent of gross proceeds to Paul J. McCann, a member of the controlling shareholders group, who played an active part in connection therewith. Stockholder's equity at December 31, 2002 has been increased by $166,323, the difference between the total net unrealized gain at December 31, 2002, and deferred income taxes and minority interests in the net unrealized gain. Other noncurrent investments consist of certificates of deposit in the amount of $105,000 which are on deposit with the State of Montana Commissioner of Insurance and are restricted as to use by law. 13 TSI, INC. AND CONSOLIDATED SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued 4. ACCRUED LIABILITIES Accrued liabilities consist of the following at December 31,: 2001 2002 Property Taxes $ 39,757 $ 43,904 Compensation 45,054 46,274 Payroll Taxes (212) - Other 25,511 36,385 $ 110,110 $ 126,563 5. INCOME TAXES Income tax expense consists of the following: 2001 2002 Federal $1,093,250 $ 96,100 State 174,950 39,700 $1,268,200 $ 135,800 The income tax expense reflected in the financial statements differs from the amounts that would normally be expected by applying the U.S. Federal income tax rates to income before income taxes. The reasons for these differences are as follows: 2001 2002 Computed "Expected" Tax Expense $1,349,540 $ 159,387 Purchase Accounting Adjustments (2,795) (2,795) Nontaxable Income (89,162) (47,420) Minority Interest in Subsidiaries' Income (Loss) 9,232 1,423 Dividends Received Deduction (32,924) (21,099) Contributions (87,959) (251) State Income Taxes 174,950 39,700 Other (52,682) 6,855 $1,268,200 $ 135,800 The Company and its wholly and eighty percent or more owned subsidiaries file consolidated income tax returns with the Company's parent company. The Company has established deferred income tax liabilities for net unrealized gains on investments in the current and noncurrent amounts of $47,800 and $65,900, respectively at December 31, 2002. 14 TSI, INC. AND CONSOLIDATED SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued 6.PROVISION FOR ESTIMATED TITLE AND ESCROW LOSSES The Company's wholly-owned subsidiary, First Montana Title Insurance Company (FMTIC) issues title insurance policies in the State of Montana. The terms of policies issued are indefinite and premiums are not refundable. FMTIC is a party to various lawsuits wherein, among other things, plaintiffs generally claim defects in insured titles, unreported liens or improper practices. FMTIC is also required under many of its policies issued to provide defense for its insures in litigation founded upon alleged defects or other matters insured against by the policy. Such litigation and claims are normal occurrences within the title insurance industry. In accordance with generally accepted accounting practices, FMTIC has established a provision for estimated title and escrow losses which appears on the consolidated balance sheets under the same title. FMTIC has established the provision for estimated losses on (1) claims known to FMTIC and (2) claims unknown to FMTIC but incurred upon issuance of policies as well as for estimated external settlement expenses to be incurred. The provision has been reduced for estimated recoveries. 7. COMMITMENTS The Company and its subsidiaries are obligated under various lease agreements for office space expiring at various dates through 2003. Rental expense for office space for the years ended December 31, 2002 and 2001, was $38,904 and $46,554, respectively. Annual rental commitments for the ensuing calendar years are as follows: calendar year 2003 - $47,004 and calendar year 2004 - $47,004. The Board of Directors has approved the Company's participation with M Corp, its parent, in an attempt to purchase a bank. Should the purchase take place, the liquidity of the Company will be significantly affected. Subsequent to the December 31, 2002 balance sheet, the bank was purchased by another company. 8. RENTAL PROPERTY The Company is the lessor of property under operating leases expiring in calendar year 2002. The following is a summary of property leased or held for lease at December 31, 2002: Buildings $ 1,808,134 Land 61,125 1,869,259 Less: Accumulated Depreciation (1,380,298) $ 488,961 There are no minimum future rentals to be received on non-cancelable leases as of December 31, 2002. The consolidated statements of income do not contain any contingent rental income. 15 TSI, INC. AND CONSOLIDATED SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued 9. RELATED PARTY TRANSACTIONS The Company maintains a non interest-bearing demand account with its parent company, M Corp. M Corp owns approximately 92% of the Company's outstanding stock. Included in accounts payable is $135,129 due to Jefferson Management Company. Jefferson Management Company owns 44.7% of the Company's parent, M Corp. Included in accounts receivable is $14,082 in miscellaneous receivables due from indirectly related companies. The Company had transactions with its parent company or affiliates during 2002 and 2001, as follows: 2001 2002 Was Charged For Managerial Assistance $ (132,000) $ (132,000) Net Cash Transfers To 1,459,090 182,584 Was Charged For Property Insurance (33,600) (43,880) Income Tax Allocation (970,000) (109,750) 10. DIVIDEND RESTRICTIONS TSI, Inc., the parent company, depends in part upon cash dividends from its subsidiaries for the funding of its cash requirements. Dividends paid to TSI, Inc. by its subsidiary, First Montana Title Insurance Company (FMTIC) are restricted by statutes of the State of Montana. FMTIC is required to obtain regulatory approval before making any dividend distributions. At December 31, 2002, substantially all of consolidated retained earnings were subject to such restrictions. At December 31, 2002, FMTIC's statutory capital and surplus as regards policyholders amounted to $9,375,314. The Board of Directors has approved the Company's participation with M Corp, it's parent, in an attempt to purchase a bank. Should the purchase take place, the liquidity of the Company will be significantly affected. Subsequent to December 31, 2002 balance sheet, the bank was purchased by another company. 16 TSI, INC. AND CONSOLIDATED SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued 11. RECAPITALIZATION During 2002, a portion of the Company's retained earnings totaling $3,000,000 were reclassified as capital surplus. 12. INFORMATION ON SEGMENTS OF BUSINESS The Company's operations are classified into three reportable segments that provide different products or services. The Company's reportable segments, the title insurance business, ownership and rental of properties and financial holding company are managed separately because of their differing operations, customers and requirements. The Company's accounting policies for segments are the same as those described in the summary of significant accounting policies. Management evaluates segment performance based on segment profit or loss before income taxes. Substantially all of the Company's business is conducted within the state of Montana. Sales To Segment Total Net Expenditures Outside Interest Operating Segment Depreciation For Segment Concerns Revenues Profit Assets Expense Assets Year Ended December 31, 2001: Financial Holding Company $1,929,584 $ 95,018 $1,791,631 $10,838,352 $ - $ - Title Insurance Operations 3,644,637 222,057 2,065,358 14,096,937 15,134 - Rental Properties 409,189 - 112,246 648,196 71,934 30,752 Consolidated $5,983,410 $ 317,075 $3,969,235 $25,583,485 $ 87,068 $ 30,752 Year Ended December 31, 2002: Financial Holding Company $ 29,175 $ 101,528 $ (99,977) $10,146,581 $ - $ - Title Insurance Operations 1,795,425 121,940 598,942 14,975,868 9,110 20,824 Rental Properties 396,275 - (30,179) 597,412 68,739 35,112 Consolidated $2,220,875 $ 223,468 $ 468,786 $25,719,861 $ 77,849 $ 55,936 17 TSI, INC. AND CONSOLIDATED SUBSIDIARIES DIRECTORS AND OFFICERS NAME OCCUPATION Paul J. McCann, Jr. Attorney at Law, Investor Director, Billings, Montana President Miriam A. Arneson Investor Director Billings, Montana John R. Ross Manufacturers Representative Director Billings, Montana MARKET INFORMATION The company's common stock is listed on the OTC Bulletin Board under the symbol "TSIA". Accourding to Nasdaq.com and Pinks Sheets, LLC, the reange of high and low bid prices and the trading volume of the Company's common stock for each quarter during 2001 and 2002 were as indicated below accouringly. Such over-the-counter market quotations reflect inter-dealer prices without retail markup, markdown or commission and may not necessarily represent actual trancsactions. 2001 2002 Quarter High Low Volume High Low Volume First 1.50 1.50 None .10 .10 None Second 1.50 1.13 1,000 .10 .10 None Third 1.13 1.00 200 .10 .10 None Fourth 1.00 .10 None .10 .00 1,000 No dividends were paid in 2001 or 2002. There are approximately 3,087 holders of record of the Company's common stock. A copy of the Form 10-KSB Annual Report may be obtained upon written request to the Company. TSI, INC. P.O. Box 2249 110 Second Street South Great Falls, MT 59403-2249 18 TSI, INC. EXHIBIT #22 SUBSIDIARIES Percentage Voting Securities State of Owned By Name of Company Organization Registrant UAC, Inc. Delaware 87.2 TSI Business Systems, Inc. Montana 100.0 TSI Leasing, Inc. Montana 100.0 First Mortgage Investors, Inc. North Dakota (1) Personnel Services Company (Formally First Montana Title Company of Great Falls) Montana (2) First Montana Title Insurance Company Montana 100.0 First Montana Title Company of Billings Montana (3) First Montana Title Company of Cut Bank (Inactive) Montana (3) First Montana Title Company of Forsyth Montana (3) Consulting Associates, Inc. Montana (2) Merritt Properties, Inc. Montana (3) Lake Place, Inc. Montana (4) Miramar, Inc. Montana 100.0 (1) Owned 70% by UAC, Inc. (2) Owned 100% by UAC, Inc. (3) Owned 100% by First Montana Title Insurance Company (4) Owned 100% by Miramar, Inc.