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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or
15(d) of the Securities Exchange Act of 1934
For the period ended February 29, 2004
[_] Transition Report Pursuant to Section 13 or
15(d) of the Securities Exchange Act of 1934
For the transition period from to
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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)
631-231-0333
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(Registrant's telephone number)
None
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(Former name, former address and former fiscal year,
if changed since last report)
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
SHARES OUTSTANDING
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4,568,012 shares of common stock, par value $.01 per share,
as of March 31, 2004
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TSR, INC. AND SUBSIDIARIES
INDEX
Page
Number
------
Part I. Financial Information:
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets -
February 29, 2004 and May 31, 2003.................................... 3
Condensed Consolidated Statements of Earnings -
For the three months and nine months ended February 29, 2004 and
February 28, 2003..................................................... 4
Condensed Consolidated Statements of Cash Flows -
For the nine months ended February 29, 2004 and February 28, 2003..... 5
Notes to Condensed Consolidated Financial Statements.................... 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations............................................ 9
Item 3. Quantitative and Qualitative Disclosure About Market Risk......... 14
Item 4. Procedures and Controls........................................... 15
Part II. Other Information.................................................. 15
Item 6. Exhibits and Reports on Form 8K................................... 15
Signatures.................................................................. 15
Page 2
Part I. Financial Information
Item 1. Financial Statements
TSR, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
February 29, May 31,
ASSETS 2004 2003
------------ ------------
(Unaudited)
Current Assets:
Cash and cash equivalents (Note 3) .................................... $ 4,538,913 $ 5,063,098
Marketable securities (Note 5) ........................................ 5,506,247 12,949,174
Accounts receivable (net of allowance for doubtful
accounts of $430,000) ............................................... 8,791,047 9,238,037
Other receivables ..................................................... 18,832 50,828
Prepaid expenses ...................................................... 30,217 39,857
Prepaid and recoverable income taxes .................................. 96,744 60,739
Deferred income taxes ................................................. 180,000 180,000
------------ ------------
Total current assets ............................................. 19,162,000 27,581,733
Equipment and leasehold improvements, at cost
(net of accumulated depreciation and
amortization of $724,110 and $708,346) ............................. 14,396 24,955
Other assets ............................................................. 49,893 50,804
Deferred income taxes .................................................... 123,000 123,000
Acquired client relationships, (net of accumulated
amorization of $143,007 and $100,105) .................................. 28,601 71,503
------------ ------------
$ 19,377,890 $ 27,851,995
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts and other payables ........................................... $ 140,544 $ 230,632
Accrued expenses and other current liabilities ........................ 2,168,523 2,286,282
Advances from customers ............................................... 1,552,542 1,793,496
Income taxes payable .................................................. 186,975 242,981
------------ ------------
Total current liabilities ........................................ 4,048,584 4,553,391
------------ ------------
Minority Interest ........................................................ 34,679 40,902
------------ ------------
Shareholders' Equity:
Preferred stock, $1 par value, authorized 1,000,000
shares; none issued ................................................ -- --
Common stock, $.01 par value, authorized 25,000,000
shares; issued 6,228,326 and 6,078,326 shares ...................... 62,283 60,783
Additional paid-in capital ............................................ 5,042,341 4,134,053
Retained earnings ..................................................... 22,221,304 31,094,167
------------ ------------
27,325,928 35,289,003
Less: Treasury Stock, 1,660,314 shares, at cost ....................... 12,031,301 12,031,301
------------ ------------
15,294,627 23,257,702
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$ 19,377,890 $ 27,851,995
============ ============
The accompanying notes are an integral part of
these condensed consolidated financial statements.
Page 3
TSR, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF EARNINGS
FOR THE THREE AND NINE MONTHS ENDED FEBRUARY 29, 2004 AND FEBRUARY 28, 2003
(UNAUDITED)
Three Months Ended Nine Months Ended
------------------------------ ------------------------------
February 29, February 28, February 29, February 28,
2004 2003 2004 2003
------------ ------------ ------------ ------------
Revenues .................................................... $ 12,570,591 $ 11,987,005 $ 38,304,036 $ 39,526,845
Cost of sales ............................................... 9,903,894 9,423,233 29,792,770 30,904,272
Selling, general and administrative expenses ................ 1,925,110 1,805,342 5,801,298 5,544,316
------------ ------------ ------------ ------------
11,829,004 11,228,575 35,594,068 36,448,588
------------ ------------ ------------ ------------
Income from operations ...................................... 741,587 758,430 2,709,968 3,078,257
Other income:
Interest and dividend income ............................. 25,774 58,250 92,040 182,089
Unrealized gain (loss) from marketable securities, net ... (255) (3,764) 9,778 (9,452)
Minority interest in subsidiary operating profits ........ (13,863) (7,728) (51,421) (24,470)
------------ ------------ ------------ ------------
Income before income taxes .................................. 753,243 805,188 2,760,365 3,226,424
Provision for income taxes .................................. 317,000 353,000 1,182,000 1,401,000
------------ ------------ ------------ ------------
Net income .............................................. $ 436,243 $ 452,188 $ 1,578,365 $ 1,825,424
============ ============ ============ ============
Basic and diluted net income per common share ............... $ 0.10 $ 0.10 $ 0.35 $ 0.41
============ ============ ============ ============
Weighted average number of basic common shares
outstanding ............................................... 4,548,012 4,418,012 4,538,345 4,418,012
============ ============ ============ ============
Weighted average number of diluted common shares
outstanding ............................................... 4,550,772 4,418,012 4,544,718 4,418,012
============ ============ ============ ============
The accompanying notes are an integral part of
these consolidated condensed financial statements.
Page 4
TSR, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED FEBRUARY 29, 2004 AND FEBRUARY 28, 2003
(UNAUDITED)
Nine Months Ended
------------------------------
February 29, February 28,
2004 2003
------------ ------------
Cash flows from operating activities:
Net income ................................................................ $ 1,578,365 $ 1,825,424
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization ........................................ 58,666 94,075
Unrealized loss (gain) from marketable securities, net ............... (9,778) 9,452
Non-cash compensation expense ........................................ 80,100 --
Minority interest in subsidiary operating profit ..................... 51,421 24,470
Changes in assets and liabilities:
Accounts receivable .................................................. 446,990 1,457,846
Other receivables .................................................... 31,996 5,755
Prepaid expenses ..................................................... 9,640 (796)
Prepaid and recoverable income taxes ................................. (36,005) 31,812
Other assets ......................................................... 911 2,529
Accounts payable and accrued expenses ................................ (207,847) (474,111)
Income taxes payable ................................................. (56,006) (4,283)
Advances from customers .............................................. (240,954) 78,942
------------ ------------
Net cash provided by operating activities ................................ 1,707,499 3,051,115
------------ ------------
Cash flows from investing activities:
Proceeds from maturities and sales of marketable securities .......... 12,925,210 11,890,400
Purchases of marketable securities ................................... (5,472,505) (14,901,188)
Purchases of fixed assets ............................................ (5,205) (3,123)
------------ ------------
Net cash provided by (used in) investing activities ...................... 7,447,500 (3,013,911)
------------ ------------
Cash flows from financing activities:
Distribution to minority interest .................................... (57,644) (9,358)
Proceeds from exercise of stock options .............................. 829,688 --
Cash dividends paid .................................................. (10,451,228) --
------------ ------------
Net cash used in financing activities ..................................... (9,679,184) (9,358)
------------ ------------
Net increase (decrease) in cash and cash equivalents ......................... (524,185) 27,846
Cash and cash equivalents at beginning of period ............................. 5,063,098 5,793,896
------------ ------------
Cash and cash equivalents at end of period ................................... $ 4,538,913 $ 5,821,742
============ ============
Supplemental Disclosures:
Income tax payments ....................................................... $ 1,274,000 $ 1,374,000
============ ============
The accompanying notes are an integral part of
these consolidated condensed financial statements.
Page 5
TSR, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FEBRUARY 29, 2004
(UNAUDITED)
1. Basis of Presentation
---------------------
The accompanying condensed consolidated interim financial statements
include the accounts of TSR, Inc. and its subsidiaries (the "Company"). All
significant inter-company balances and transactions have been eliminated in
consolidation. These interim financial statements have been prepared in
accordance with accounting principles generally accepted in the United
States of America applying to interim financial information and with the
instructions to Form 10-Q of Regulation S-X of the Securities and Exchange
Commission. Accordingly, certain information and footnote disclosures
required by accounting principles generally accepted in the United States
of America and normally included in the Company's annual financial
statements have been condensed or omitted. These interim financial
statements as of and for the nine months ended February 29, 2004, are
unaudited; however, in the opinion of management, such statements include
all adjustments (consisting of normal recurring accruals) necessary to
present fairly the consolidated financial position, results of operations,
and cash flows of the Company for the periods presented. The results of
operations for the interim periods presented are not necessarily indicative
of the results that might be expected for future interim periods or for the
full year ending May 31, 2004. These interim financial statements should be
read in conjunction with the Company's consolidated financial statements
and notes thereto included in the Company's Annual Report on Form 10-K for
the year ended May 31, 2003.
2. 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. Options covering 7,240 and 19,627 shares of
common stock have been omitted from the calculations of diluted net income
per common share for the three and nine month periods ended February 29,
2004 respectively, as their effect would have been antidilutive. Options
covering 160,000 shares of common stock have been omitted for the
calculation of diluted net income per common shares for the three and nine
month periods ended February 28, 2003 as their effect would have been
antidilutive.
3. 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 February
29, 2004:
Cash in banks......................... $ 849,767
Money Market Funds.................... 3,190,266
US Treasury Bills..................... 498,880
-----------
$ 4,538,913
4. Revenue Recognition
-------------------
The Company's contract computer programming services are generally provided
under time and materials agreements with customers. Accordingly, the
Company recognizes such revenues as services are provided. Advances from
customers represent amounts received from customers prior to the Company's
provision of the related services and credit balances from overpayments.
Page 6
TSR, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
FEBRUARY 29, 2004
(UNAUDITED)
5. Marketable Securities
The Company accounts for its marketable securities in Accordance with
Statement of Financial Accounting Standards 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 between three months and two years), 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 Fair
Cost Gains Losses Value
----------- ----------- ----------- -----------
United States Treasury Securities.... $ 5,475,703 -- -- 5,475,703
Equity Securities.................... 28,287 6,494 (4,237) 30,544
----------- ----------- ----------- -----------
$ 5,503,990 $ 6,494 $ (4,237) $ 5,506,247
=========== =========== =========== ===========
6. Recent Accounting Pronouncements
--------------------------------
In January 2003, the FASB issued Interpretation No. 46 "Consolidation of
Variable Interest Entities" ("Interpretation 46"). Interpretation 46
clarifies the application of Accounting Research Bulletin No. 54
"Consolidated Financial Statements", and applies immediately to any
variable interest entities created after January 31, 2003 and to variable
interest entities in which an interest is obtained after the date. The
Company holds no interest in variable interest entities.
Page 7
TSR, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
FEBRUARY 29, 2004
(UNAUDITED)
7. 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 February 29, 2004 which are now subject to
variable accounting treatment. Accordingly, the Company recorded a non-cash
compensation charge for $80,100 for the nine months ended February 29, 2004
and will continue to adjust the compensation charge associated with these
options through the earlier of their exercise, forfeiture or expiration
dates.
The Company has one stock-based employee compensation plan in effect. The
Company accounts for all transactions under which employees receive shares
of stock or other equity instruments in the Company based on the price of
its stock in accordance with the provisions of Accounting Principles Board
Opinion No. 25, ACCOUNTING FOR STOCK ISSUED TO Employees. All options
granted under the plan had an exercise price equal to the market value of
the underlying common stock, and the number of shares represented by such
options were known and fixed, on the date of grant. However, as a result of
the large nonrecurring cash dividend, the remaining outstanding 10,000
options are now treated as variable options. The following table
illustrates the effect on net income and earnings per share if the Company
had applied the fair value recognition provisions of Statement of Financial
Accounting Standards (SFAS) No. 123 ACCOUNTING FOR STOCK-BASED
COMPENSATION.
Quarter Ended Nine Months Ended
------------- -----------------
February 29, February 28, February 29, February 28,
------------ ------------ ------------ ------------
2004 2003 2004 2003
---- ---- ---- ----
Net income:
As reported........................ $ 436,243 $ 452,188 $ 1,578,365 $ 1,825,424
Deduct: Total stock-based
employee compensation expense
determined under fair value
method for all awards, net of
minority interest and related tax
effects.............................. -- (1,895) -- (9,131)
----------- ----------- ----------- -----------
Proforma net income............ $ 436,243 $ 450,293 $ 1,578,365 $ 1,816,293
=========== =========== =========== ===========
Basic net income per share:
As reported........................ $ 0.10 $ 0.10 $ 0.35 $ 0.41
=========== =========== =========== ===========
Proforma............................. $ 0.10 $ 0.10 $ 0.35 $ 0.41
=========== =========== =========== ===========
There were no options granted in fiscal 2004 and 2003.
Page 8
PART I. FINANCIAL INFORMATION
ITEM 2.
TSR, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with the
condensed consolidated financial statements and the notes to such financial
statements.
Forward-Looking Statements
- --------------------------
Certain statements contained in Management's Discussion and Analysis of
Financial Condition and Results of Operations, 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 following: risks relating to the
competitive nature of the markets for contract computer programming services;
the extent to which market conditions for the Company's contract computer
consulting services will continue to adversely affect the Company's business;
the concentration of the Company's business with certain customers; uncertainty
as to the Company's ability to maintain its relations with existing customers
and expand its contract computer consulting services business; the impact of
changes in the industry, such as the use of vendor management companies in
connection with the consulting procurement process, and the increase in
customers moving IT operations offshore and other risks and uncertainties set
forth in the Company's filings with the Securities and Exchange Commission.
Results of Operations
- ---------------------
The following table sets forth for the periods indicated certain financial
information derived from the Company's condensed consolidated statements of
earnings. There can be no assurance that trends in operating results will
continue in the future:
Three months ended February 29, 2004 compared with three months ended February
28, 2003
(Dollar amounts in Thousands)
Three Months Ended
February 29, 2004 February 28, 2003
----------------- -----------------
% of % of
Amount Revenues Amount Revenues
------ -------- ------ --------
Revenues ....................... $12,571 100.0 $11,987 100.0
Cost of sales .................. 9,904 78.8 9,423 78.6
------- ----- ------- -----
Gross profit ................... 2,667 21.2 2,564 21.4
Selling, general, and
administrative expenses ...... 1,925 15.3 1,806 15.1
------- ----- ------- -----
Income from operations ......... 742 5.9 758 6.3
Other income ................... 11 0.1 47 0.4
------- ----- ------- -----
Income before income taxes ..... 753 6.0 805 6.7
Provision for income taxes ..... 317 2.5 353 2.9
------- ----- ------- -----
Net income ..................... $ 436 3.5 $ 452 3.8
======= ===== ======= =====
Page 9
TSR, INC. AND SUBSIDIARIES
Revenues
- --------
Revenues consist primarily of revenues from computer programming consulting
services. Revenues for the quarter ended February 29, 2004 increased $584,000 or
4.9% from the comparable period in fiscal 2003. After several years of an
industry wide slowdown in IT spending, which limited the demand for new
consultants, the Company has recently experienced an increase in the number of
consultants on billing. The average number of consultants on billing increased
from approximately 345 for the quarter ended February 28, 2003 to 390 for the
quarter ended February 29, 2004. This increase resulted primarily from existing
customers continuing consultants on billing at the end of the calendar year,
where, in the past few years, there were greater reductions in consultants on
billing by customers at year end. We cannot yet determine whether the increase
in the number of consultants will continue. While the number of consultants
increased, we did not experience an increase in the rates charged for the
Company's services, which had decreased due to the IT slowdown. Accordingly, the
Company's revenues and profits did not increase proportionately with the
increase in consultants on billing. Although revenues increased in the quarter
ended February 29, 2004, the factors creating the decrease in revenues for the
nine months ended February 29, 2004 still impact the Company.
Cost of Sales
- -------------
Cost of sales for the quarter ended February 29, 2004, increased $481,000 or
5.1% to $9,904,000 from $9,423,000 in the prior year period. Cost of sales as a
percentage of revenues increased from 78.6% in the quarter ended February 28,
2003 to 78.8% in the quarter ended February 29, 2004. This increase is primarily
attributable to decreases in rates charged to the Company's customers, discounts
and fees for vendor management systems.
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 $119,000 or 6.6%
from $1,806,000 in the quarter February 28, 2003 to $1,925,000 in the quarter
ended February 29, 2004. This increase was primarily attributable to increased
technical recruiting and legal expenses. The increased legal expenses primarily
relate to one employment-related litigation brought by one of the Company's
consultants which litigation has been settled without requiring a special
charge.
Other Income
- ------------
Other income resulted primarily from interest and dividend income, which
decreased by $32,000 to $26,000 due to lower interest rates and lower investable
balances in the quarter ended February 29, 2004. Additionally, the Company had a
net unrealized loss of $255 in the quarter ended February 29, 2004 versus a net
unrealized loss of $4,000 in the quarter ended February 28, 2003 from marketable
securities due to mark to market adjustments of its trading securities equity
portfolio. Other income also decreased due to an increase in minority interest
allocation of operating profits of the Company's majority owned subsidiary.
Operating profits in that subsidiary increased from $39,000 in the three months
ended February 28, 2003 to $69,000 in the three months ended February 29, 2004.
Income Taxes
- ------------
The effective income tax rate of 42.1% for the quarter ended February 29, 2004
decreased from a rate of 43.8% in the quarter ended February 28, 2003. The rate
decrease was due to the income tax benefit from the exercise of stock options.
Page 10
TSR, INC. AND SUBSIDIARIES
Nine months ended February 29, 2004 compared with nine months ended February 28,
- --------------------------------------------------------------------------------
2003
- ----
(Dollar amounts in Thousands)
Nine Months Ended
February 29, 2004 February 28, 2003
----------------- -----------------
% of % of
Amount Revenues Amount Revenues
------ -------- ------ --------
Revenues ........................ $38,304 100.0 $39,527 100.0
Cost of sales ................... 29,793 77.8 30,904 78.2
------- ------- ------- -------
Gross profit .................... 8,511 22.2 8,623 21.8
Selling, general, and
administrative expenses ....... 5,801 15.1 5,545 14.0
------- ------- ------- -------
Income from operations .......... 2,710 7.1 3,078 7.8
Other income .................... 50 0.1 148 0.4
------- ------- ------- -------
Income before income taxes ...... 2,760 7.2 3,226 8.2
Provision for income taxes ...... 1,182 3.1 1,401 3.6
------- ------- ------- -------
Net income ...................... $ 1,578 4.1 $ 1,825 4.6
======= ------- ======= =======
Revenues
- --------
Revenues consist primarily of revenues from computer programming consulting
services. Revenues for the nine months ended February 29, 2004 decreased
$1,223,000 or 3.1% from the comparable period in fiscal 2003. Due to the
continuing weak economic environment, almost all of our customers significantly
cut back on their IT spending during the past year. This has limited our
opportunities to place new consultants on billing and decreased demand for new
consultants. In addition, we are also seeing an increasing use of offshore
development companies which also decreases the demand for placements. As a
result of decreased demand, there has been an overall industry wide decrease in
rates charged for computer processing services. The Company has recently
experienced an increase in the average number of programmers on billing with
clients from approximately 353 during the nine months ended February 28, 2003 to
approximately 384 during the nine months ended February 29, 2004. This increase
resulted primarily from existing customers continuing consultants on billing at
the end of the calendar year, where, in the past few years, there were greater
reductions in consultants on billing by customers at year end. We cannot yet
determine whether the increase in the number of consultants will continue. While
the number of consultants increased, we did not experience an increase in the
rates charged for the Company's services, which had decreased due to the IT
slowdown. Further, due to the decrease in rates charged for the Company's
services, revenues declined.
Cost of Sales
- -------------
Cost of sales for the nine months ended February 29, 2004, decreased $1,111,000
or 3.6% to $29,793,000 from $30,904,000 in the prior year period. Cost of sales
as a percentage of revenues decreased from 78.2% in the nine months ended
February 28, 2003 to 77.8% in the nine months ended February 29, 2004. These
decreases are primarily attributable to the Company's ability to reduce rates
paid to consultants in regard to decreases in rates charged to the Company's
customers. The reduction in rates paid to the Company's consultants was not
sufficient to fully offset the decreases in rates paid by the Company's
customers, even after taking into account the increase in consultants on
billing.
TSR, INC. AND SUBSIDIARIES
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 $256,000 or 4.6%
from $5,545,000 in the nine months ended February 28, 2003 to $5,801,000 in the
nine months ended February 29, 2004. This increase was primarily attributable to
increased technical recruiting and legal expenses. The increased legal expenses
primarily related to one employment-related litigation brought by one of the
Company's consultants, which litigation has been settled without requiring a
special charge.
Other Income
- ------------
Other income resulted primarily from interest and dividend income, which
decreased by $90,000 to $92,000 due to lower interest rates and lower investable
balances in the nine months ended February 29, 2004. Additionally, the Company
also had a net unrealized gain of $10,000 in the nine months ended February 29,
2004 versus a net unrealized loss of $9,000 in the nine months ended February
28, 2003 from marketable securities due to mark to market adjustments of its
trading securities equity portfolio. Other income also decreased due to an
increase in the minority interest allocation of operating profits of the
Company's majority owned subsidiary. Operating profits in that subsidiary
increased from $122,000 in the nine months ended February 28, 2003 to $257,000
in the nine months ended February 29, 2004.
Income Taxes
- ------------
The effective income tax rate of 42.8% for the nine months ended February 29,
2004 decreased from a rate of 43.4% in the nine months ended February 28, 2003.
The reduction was due to the income tax benefit from the exercise of stock
options.
Page 12
TSR, INC. AND SUBSIDIARIES
Liquidity and Capital Resources
- -------------------------------
The Company expects that cash flow generated from operations together with its
cash and marketable securities will be sufficient to provide the Company with
adequate resources to meet its liquidity requirements for the foreseeable
future.
At February 29, 2004, the Company had working capital of $15,113,000 and cash
and cash equivalents of $4,539,000 as compared to working capital of $23,028,000
and cash and cash equivalents of $5,063,000 at May 31, 2003. Working capital
decreased primarily due to the large nonrecurring cash dividend of $2.00 per
share, totalling $9,088,024, paid in the current nine month period. The Company
has also announced a policy of declaring dividends at the rate of $0.15 per
quarter for its 2004 fiscal year. The Company also announced that the Company
intends to maintain an ongoing dividend rate of $0.15 beyond the fiscal year
provided it is able to maintain cash flow from operations at current levels.
During the nine month period ended February 29, 2004, the Company paid
$1,363,204 in regular quarterly dividends. The dividends being paid during the
Company's 2004 fiscal year have exceeded, and are expected to continue to
exceed, the cash flow provided by the Company's operations. The Company has
disposed of short-term marketable securities to meet these cash requirements.
The Company expects to use approximately $300,000 of available cash in addition
to the cash flow from operations for the nine months just ended to pay the
regular quarterly cash dividends associated with the first two quarters of
fiscal 2004 plus the cash dividend expected to be paid for the third quarter
ended February 29, 2004.
Net cash provided by operating activities amounted to $1,707,000 for the nine
months ended February 29, 2004, compared to cash provided of $3,051,000 for the
nine months ended February 28, 2003. The cash provided by operating activities
resulted primarily from the Company's net income. The cash provided in the prior
fiscal year resulted primarily from the Company's net income and a decrease in
accounts receivables.
Net cash provided by investing activities amounted to $7,448,000 for the nine
months ended February 29, 2004, primarily resulted from allowing U.S. Treasury
Bills to mature and not being reinvested.
Net cash used in financing activities resulted primarily from the payment of
cash dividends of $10,451,000 offset, to some extent, by the proceeds received
from the exercise of stock options in the amount of $830,000.
The Company's capital resource commitments at February 29, 2004 consisted of
lease obligations on its branch and corporate facilities. The Company intends to
finance these lease commitments from cash flow provided by operations, available
cash and short-term marketable securities. A summary of non-cancelable long-term
operating lease commitments as of February 29, 2004 follows:
FY 04 FY 05 FY 06 FY 07 Thereafter Total
Operating Leases $86,000 $349,000 $170,000 $101,000 $17,000 $723,000
The Company's cash and marketable securities were sufficient to enable it to
meet its cash requirements during the nine months ended February 29, 2004. The
Company has available a revolving line of credit of $5,000,000 with a major
money center bank through October 6, 2005. As of February 29, 2004, no amounts
were outstanding under this line of credit.
Recent Accounting Pronouncements
- --------------------------------
In January 2003, the FASB issued Interpretation No. 46 "Consolidation of
Variable Interest Entities" ("Interpretation 46"). Interpretation 46 clarifies
the application of Accounting Research Bulletin No. 54 "Consolidated Financial
Statements", and applies immediately to any variable interest entities created
after January 31, 2003 and to variable interest entities in which an interest is
obtained after the date. The Company holds no interest in variable interest
entities.
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TSR, INC. AND SUBSIDIARIES
Critical Accounting Policies
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The Securities and Exchange Commission ("SEC") issued disclosure guidance for
"critical accounting policies." The SEC defines "critical accounting policies"
as those that require the application of management's most difficult, subjective
or complex judgments, often as a result of the need to make estimates about the
effect of matters that are inherently uncertain and may change in subsequent
periods.
The Company's significant accounting policies are described in Note 1 to the
Company's consolidated financial statements, contained in its May 31, 2003
Annual Report on Form 10-K, as filed with the SEC. The Company believes that the
following accounting policies require the application of management's most
difficult, subjective or complex judgments:
ESTIMATING ALLOWANCES FOR DOUBTFUL ACCOUNTS RECEIVABLE
We perform ongoing credit evaluations of our customers and adjust credit limits
based upon payment history and the customer's current credit worthiness, as
determined by our review of their current credit information. We continuously
monitor collections and payments from our customers and maintain a provision for
estimated credit losses based upon our historical experience and any specific
customer collection issues that we have identified. While such credit losses
have historically been within our expectations and the provisions established,
we cannot guarantee that we will continue to experience the same credit loss
rates that we have in the past. A significant change in the liquidity or
financial position of any of our significant customers could have a material
adverse effect on the collectibility of our accounts receivable and our future
operating results.
VALUATION OF DEFERRED TAX ASSETS
We regularly evaluate our ability to recover the reported amount of our deferred
income taxes considering several factors, including our estimate of the
likelihood of the Company generating sufficient taxable income in future years
during the period over which temporary differences reverse. Presently, the
Company believes that it is more likely than not that it will realize the
benefits of its deferred tax assets based primarily on the Company's history of
and projections for taxable income in the future. In the event that actual
results differ from our estimates or we adjust these estimates in future
periods, we may need to establish a valuation allowance against a portion or all
of our deferred tax assets, which could materially impact our financial position
or results of operations.
VALUATION OF LONG-LIVED AND INTANGIBLE ASSETS
We assess the recoverability of long-lived assets and intangible assets whenever
we determine that events or changes in circumstances indicate that their
carrying amount may not be recoverable. Our assessment is primarily based upon
our estimate of future cash flows associated with these assets. Although there
has been a sustained weakness in our operating results, through February 28,
2004, we have continued to generate net income. Accordingly, we have not
determined that there has been an indication of impairment of any of our assets.
However, should our operating results deteriorate, we may determine that some
portion of our long-lived assets or intangible assets are impaired. Such
determination could result in non-cash charges to income that could materially
affect our financial position or results of operations for that period.
Item 3. 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.
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TSR, INC. AND SUBSIDIARIES
Item 4. 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.
Part II. Other Information
Item 6. Exhibits and Reports on Form 8K
(a). Exhibit 31.1 - Certification by J.F. Hughes pursuant
to 18 U.S.C. Section 1350, as adopted pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.
Exhibit 31.2 - Certification by John G. Sharkey pursuant to
18 U.S.C. Section 1350, as adopted pursuant to Section 302
of the Sarbanes-Oxley Act of 2002.
Exhibit 32.1 - Certification by J.F. Hughes pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
Exhibit 32.2 - Certification by John G. Sharkey pursuant to
18 U.S.C. Section 1350, as adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.
(b). Reports on Form 8K: None
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
TSR, Inc.
(Registrant)
Date: April 2, 2004 /s/ J.F. Hughes
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J.F. Hughes, Chairman, President and Treasurer
Date: April 2, 2004 /s/ John G. Sharkey
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John G. Sharkey, Vice President Finance
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