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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 November 30, 2004
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from _______ to _______
Commission File Number: 0-8656
TSR, Inc.
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(Exact name of registrant as specified in its charter)
Delaware 13-2635899
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
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
Indicate by check mark whether the Registrant is an accelerated filer (as
defined by Rule 12b-2 of the Exchange Act).
[ ] Yes [X] No
SHARES OUTSTANDING
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4,568,012 shares of common stock, par value $.01 per share,
as of December 31, 2004
Page 1
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TSR, INC. AND SUBSIDIARIES
INDEX
Page
Number
------
Part I. Financial Information:
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets -
November 30, 2004 and May 31, 2004........................ 3
Condensed Consolidated Statements of Income -
For the three months and six months ended November
30, 2004 and 2003......................................... 4
Condensed Consolidated Statements of Cash Flows -
For the six months ended November 30, 2004 and 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 8-K...........................15
Signatures...................................................................15
Page 2
Part I. Financial Information
Item 1. Financial Statements
TSR, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
November 30, May 31,
ASSETS 2004 2004
----------- -----------
(Unaudited)
Current Assets:
Cash and cash equivalents (Note 3) .......................... $ 4,250,596 $ 2,268,796
Marketable securities (Note 5) .............................. 5,961,414 6,498,839
Accounts receivable (net of allowance for
doubtful accounts of $430,000) ......................... 8,191,951 9,904,620
Other receivables ........................................... 35,092 29,700
Prepaid expenses ............................................ 17,051 38,918
Prepaid and recoverable income taxes ........................ 3,545 15,483
Deferred income taxes ....................................... 180,000 180,000
----------- -----------
Total current assets ................................... 18,639,649 18,936,356
Equipment and leasehold improvements, at cost (net of accumulated
depreciation and amortization of $739,774 and $731,581) ..... 31,470 24,001
Other assets ..................................................... 49,892 84,893
Deferred income taxes ............................................ 148,000 143,000
Acquired client relationships, (net of accumulated amorization
of $171,608 and $157,308) .................................. -- 14,300
----------- -----------
$18,869,011 $19,202,550
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts and other payables ................................. $ 162,189 $ 144,391
Accrued expenses and other current liabilities .............. 1,982,435 2,139,799
Advances from customers ..................................... 1,489,415 1,532,642
Income taxes payable ........................................ 166,585 143,553
----------- -----------
Total current liabilities .............................. 3,800,624 3,960,385
----------- -----------
Minority Interest ................................................ 69,942 50,161
----------- -----------
Stockholders' 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 6,204,326 shares 62,283 62,283
Additional paid-in capital .................................. 5,081,927 5,079,027
Retained earnings ........................................... 21,885,536 22,081,995
----------- -----------
27,029,746 27,223,305
Less: Treasury Stock, 1,660,314 shares, at cost ............. 12,031,301 12,031,301
----------- -----------
14,998,445 15,192,004
----------- -----------
$18,869,011 $19,202,550
=========== ===========
The accompanying notes are an integral part of these
condensed consolidated financial statements.
Page 3
TSR, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
FOR THE THREE AND SIX MONTHS ENDED NOVEMBER 30, 2004 AND 2003
(UNAUDITED)
Three Months Ended Six Months Ended
November 30, November 30,
2004 2003 2004 2003
------------ ------------ ------------ ------------
Revenues, net .............................................. $ 13,138,281 $ 12,996,626 $ 26,519,239 $ 25,733,445
Cost of sales ............................................. 10,231,397 10,016,017 20,684,995 19,888,876
Selling, general and administrative expenses ............... 1,906,599 1,889,646 3,773,169 3,876,188
------------ ------------ ------------ ------------
12,137,996 11,905,663 24,458,164 23,765,064
------------ ------------ ------------ ------------
Income from operations .................................... 1,000,285 1,090,963 2,061,075 1,968,381
Other income (expense):
Interest and dividend income ......................... 34,012 24,656 61,479 66,266
Realized and unrealized gain (loss) from marketable
securities, net .................................... 1,184 3,367 (3,828) 10,033
Minority interest in subsidiary operating profits ..... (20,071) (19,653) (35,781) (37,558)
------------ ------------ ------------ ------------
Income before income taxes ................................. 1,015,410 1,099,333 2,082,945 2,007,122
Provision for income taxes ............................... 440,000 461,000 909,000 865,000
------------ ------------ ------------ ------------
Net income ............................................. $ 575,410 $ 638,333 $ 1,173,945 $ 1,142,122
============ ============ ============ ============
Basic and diluted net income per common share .............. $ 0.13 $ 0.14 $ 0.26 $ 0.25
============ ============ ============ ============
Weighted average number of basic common shares outstanding . 4,568,012 4,544,012 4,568,012 4,533,512
============ ============ ============ ============
Weighted average number of diluted common shares outstanding 4,569,649 4,551,732 4,569,563 4,541,286
============ ============ ============ ============
The accompanying notes are an integral part of these
condensed consolidated financial statements.
Page 4
TSR, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED NOVEMBER 30, 2004 AND 2003
(UNAUDITED)
Six Months Ended
November 30,
2004 2003
---- ----
Cash flows from operating activities:
Net income ........................................ $ 1,173,945 $ 1,142,122
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization .................. 22,493 41,490
Realized and unrealized loss (gain) from
marketable securities, net ................... 3,828 (10,033)
Stock based compensation expense ............... 2,900 43,520
Minority interest in subsidiary operating profit 35,781 37,558
Deferred income taxes .......................... (5,000) --
Changes in assets and liabilities:
Accounts receivable .......................... 1,712,669 (132,261)
Other receivables ............................ (5,392) 28,499
Prepaid expenses ............................. 21,867 20,756
Prepaid and recoverable income taxes ......... 11,938 (35,281)
Other assets ................................. 35,001 1,151
Accounts payable and accrued expenses ........ (139,566) (378,170)
Income taxes payable ......................... 23,032 (20,755)
Advances from customers ...................... (43,227) (217,273)
------------ ------------
Net cash provided by operating activities ......... 2,850,269 521,323
------------ ------------
Cash flows from investing activities:
Proceeds from maturities and sales of
marketable securities ........................ 6,476,443 12,925,210
Purchases of marketable securities ............. (5,942,846) (2,984,810)
Purchases of fixed assets ...................... (15,662) (1,767)
------------ ------------
Net cash provided by investing activities .......... 517,935 9,938,633
------------ ------------
Cash flows from financing activities:
Distribution to minority interest ............... (16,000) --
Proceeds from exercise of stock options ......... -- 696,938
Cash dividends paid ............................. (1,370,404) (9,769,626)
------------ ------------
Net cash used in financing activities .............. (1,386,404) (9,072,688)
------------ ------------
Net increase in cash and cash equivalents .............. 1,981,800 1,387,268
Cash and cash equivalents at beginning of period ....... 2,268,796 5,063,098
------------ ------------
Cash and cash equivalents at end of period ............. $ 4,250,596 $ 6,450,366
============ ============
Supplemental Disclosures:
Income tax payments ............................. $ 879,000 $ 921,000
============ ============
The accompanying notes are an integral part of these
condensed consolidated financial statements.
Page 5
TSR, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOVEMBER 30, 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 six months ended November 30, 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, 2005. 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, 2004.
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 8,363 and 26,280; and 8,449 and
26,226 shares of common stock have been omitted from the calculations of
diluted net income per common share for the three month and six month
periods ended November 30, 2004 and November 30, 2003, respectively, 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 November
30, 2004:
Cash in banks............................... $ 429,150
Money Market Funds.......................... 3,821,446
------------
$ 4,250,596
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
NOVEMBER 30, 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 are less than one year), such securities have been
classified as held-to -maturity and are carried at amortized cost. The
Company's equity securities are classified as trading securities, which are
carried at fair value with unrealized gains and losses included in
earnings. The Company's marketable securities are summarized as follows:
Gross Gross
Unrealized Unrealized
Amortized Holding Holding Recorded
Cost Gains Losses Value
---- ----- ------ -----
United States Treasury
Securities............. $5,942,846 -- -- 5,942,846
Equity Securities........ 16,866 1,702 -- 18,568
---------- ------ --------- -----------
$5,959,712 $1,702 $ $ 5,961,414
========== ====== ========= ===========
Page 7
TSR, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
NOVEMBER 30, 2004
(UNAUDITED)
6. 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 and 34,000 such
outstanding options, all of which were vested, as of November 30, 2004 and
2003 respectively which are now subject to variable accounting treatment.
Accordingly, the Company recorded a non-cash compensation charge (recovery)
of $10,500 and $(6,460) for the three months ended November 30, 2004 and
2003 and $2,900 and $43,520 for the six months ended November 30, 2004 and
2003 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.
Three Months Ended Six Months Ended
November 30, November 30,
------------ ------------
2004 2003 2004 2003
---- ---- ---- ----
Net income:
As reported........................... $ 575,410 $ 638,333 $1,173,945 $1,142,122
Deduct: Total stock-based employee
compensation expense determined under
fair value method for all awards, net
of minority interest and related tax
effects................................. -- -- -- --
Add: Stock based employee
compensation expense (recovery)
included in reported net income, net
of related tax effect................... 10,500 (6,460) 2,900 43,520
---------- ---------- ---------- ----------
Proforma net income................... $ 585,910 $ 631,873 $1,176,845 $1,185,642
========== ========== ========== ==========
Basic net income per share:
As reported........................... $ 0.13 $ 0.14 $ 0.26 $ 0.25
========== ========== ========== ==========
Proforma................................ $ 0.13 $ 0.14 $ 0.26 $ 0.26
========== ========== ========== ==========
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 the increase in customers
moving IT operations offshore, and uncertainty as to the operating results of
the Company's new legacy system migration service 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 November 30, 2004 compared with three months ended November
- ------------------------------------------------------------------------------
30, 2003
- --------
Three Months Ended
November 30,
(Dollar amounts in Thousands)
2004 2003
---- ----
% of % of
Amount Revenues Amount Revenues
Revenues ........................... $ 13,138 100.0 $ 12,997 100.0
Cost of sales ...................... 10,231 77.9 10,016 77.1
-------- ------ -------- ------
Gross profit ....................... 2,907 22.1 2,981 22.9
Selling, general, and
administrative expenses........... 1,907 14.5 1,890 14.5
-------- ------ -------- ------
Income from operations ............. 1,000 7.6 1,091 8.4
Other income ....................... 15 0.1 8 0.0
-------- ------ -------- ------
Income before income taxes ......... 1,015 7.7 1,099 8.4
Provision for income taxes ......... 440 3.3 461 3.5
-------- ------ -------- ------
Net income ......................... $ 575 4.4 $ 638 4.9
======== ====== ======== ======
Page 9
TSR, INC. AND SUBSIDIARIES
Revenues
- --------
Revenues consist primarily of revenues from computer programming consulting
services. Revenues for the quarter ended November 30, 2004 increased $141,000 or
1.1% over the comparable period in fiscal 2004. At the beginning of the current
quarter, the Company's largest customer, AT&T, cut back its IT budget for
certain of its divisions, resulting in a reduction of approximately 20
consultants on billing. However, the overall business trend with other customers
remained positive, causing the average number of consultants on billing with
customers to remain at 389 for both the quarters ended November 30, 2004 and
2003. While approximately 100 consultants remain on billing with AT&T, we cannot
predict the extent to which further reductions may take place.
Cost of Sales
- -------------
Cost of sales for the quarter ended November 30, 2004, increased $215,000 or
2.1% to $10,231,000 from $10,016,000 in the prior year period. Cost of sales as
a percentage of revenues increased from 77.1% in the quarter ended November 30,
2003 to 77.9% in the quarter ended November 30, 2004. These increases are
primarily attributed to the increased costs resulting from a higher percentage
of the consultants on billing being direct employees of the Company rather than
employees of subcontractors and continued competitive market pressures on rates.
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 $17,000 or 0.9% from
$1,890,000 in the quarter November 30, 2003 to $1,907,000 in the quarter ended
November 30, 2004. This increase was primarily attributable to expenses of
approximately $81,000 incurred in establishing the Company's new "Transformer"
service offering. A decrease in legal expenses offset most of these additional
expenses.
The Company is in the process of developing a new service, "Transformer", aimed
at companies with large investments in legacy systems, which will use an
automated process to transform the code of older legacy applications, in
computer languages such as Fortran, into more modern, flexible applications that
are less expensive to operate and maintain. The Company has begun to market the
service to potential customers. While the Company believes that the new service
offers the potential to generate revenues in the future, the Company cannot
predict whether it will be successful in completing the development of, and
marketing, this service or whether it will realize significant revenues from
this service.
Other Income
- ------------
Other income resulted primarily from interest and dividend income, which
increased by $9,000 to $34,000 due to higher interest rates in the quarter ended
November 30, 2004. Additionally, the Company had a net unrealized gain of $3,000
in the quarter ended November 30, 2003 versus a gain of $5,000 in the quarter
ended November 30, 2004 from marketable securities due to mark to market
adjustments of its trading securities equity portfolio. The unrealized gain of
$5,000 in the quarter ended November 30, 2004 was offset by a loss of $4,000 on
the sale of marketable securities due to a merger.
Income Taxes
- ------------
The effective income tax rate of 43.3% for the quarter ended November 30, 2004
increased from a rate of 41.9% in the quarter ended November 30, 2003.
Page 10
TSR, INC. AND SUBSIDIARIES
Six months ended November 30, 2004 compared with six months ended November 30,
- ------------------------------------------------------------------------------
2003
- ----
Six Months Ended
November 30,
(Dollar amounts in Thousands)
2004 2003
---- ----
% of % of
Amount Revenues Amount Revenues
Revenues ........................... $ 26,519 100.0 $ 25,733 100.0
Cost of sales ...................... 20,685 78.0 19,889 77.3
-------- ------ -------- ------
Gross profit ....................... 5,834 22.0 5,844 22.7
Selling, general, and administrative
expenses ......................... 3,773 14.2 3,876 15.1
-------- ------ -------- ------
Income from operations ............. 2,061 7.8 1,968 7.6
Other income ....................... 22 -- 39 0.2
-------- ------ -------- ------
Income before income taxes ......... 2,083 7.8 2,007 7.8
Provision for income taxes ......... 909 3.4 865 3.4
-------- ------ -------- ------
Net income ......................... $ 1,174 4.4 $ 1,142 4.4
======== ====== ======== ======
Revenues
- --------
Revenues consist primarily of revenues from computer programming consulting
services. Revenues for the six months ended November 30, 2004 increased $786,000
or 3.1% from the comparable period in fiscal 2004. Increased opportunities to
place consultants on billing with existing clients in the first quarter of the
current six month period was partially offset by a budget reduction at the
Company's largest client in the second quarter of the current period. This
resulted in the average number of consultants on billing with clients increasing
to 387 for the six months ended November 30, 2004 from 380 in the six months
ended November 30, 2003.
Cost of Sales
- -------------
Cost of sales for the six months ended November 30, 2004, increased $796,000 or
4.0% to $20,685,000 from $19,889,000 in the prior year period. Cost of sales as
a percentage of revenues increased from 77.3% in the six months ended November
30, 2004 to 78.0% in the six months ended November 30, 2004. These increases are
primarily attributable to utilizing a higher percentage of consultants as direct
employees of the Company rather than employees of subcontractors and continued
competitive market pressures on rates.
Page 11
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 decreased $103,000 or 2.7%
from $3,876,000 in the six months ended November 30, 2003 to $3,773,000 in the
six months ended November 30, 2004. This decrease was primarily attributable to
decreased legal, technical recruiting and amortization expenses. The decrease in
these expenses was offset to some extent by approximately $125,000 of expenses
incurred in establishing the Company's new "Transformer" service offering.
Other Income
- ------------
Other income resulted primarily from interest and dividend income, which
decreased by $5,000 to $61,000 due to lower investable balances in the six
months ended November 30, 2004. Additionally, the Company also had a net
unrealized gain of $10,000 in the six months ended November 30, 2003 from
marketable securities due to mark to market adjustments of its trading
securities equity portfolio. The Company also had a realized loss of $4,000 in
the six months ended November 30, 2004 from the sale of marketable securities
due to a merger.
Income Taxes
- ------------
The effective income tax rate of 43.6% for the six months ended November 30,
2004 increased from a rate of 43.1% in the six months ended November 30, 2003.
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 November 30, 2004, the Company had working capital of $14,839,000 and cash
and cash equivalents of $4,251,000 as compared to working capital of $14,976,000
and cash and cash equivalents of $2,269,000 at May 31, 2004. The Company's
working capital also included $5,961,000 and $6,499,000 of marketable securities
at November 30, 2004 and May 31, 2004, respectively.
Net cash provided by operating activities of $2,850,000 for the six months ended
November 30, 2004, compared to cash provided of $521,000 for the six months
ended November 30, 2003. The cash provided by operating activities resulted
primarily from the Company's net income and a decrease in accounts receivable.
This decrease occurred due to increased collections from a major customer who
had delayed payments due to administrative issues at May 31, 2004. All amounts
outstanding at May 31, 2004 for this client have been collected.
Net cash provided by investing activities of $518,000 for the six months ended
November 30, 2004 primarily resulted from allowing US Treasury Bills to mature
without reinvesting all of the proceeds.
Net cash used in financing activities resulted primarily from the payment of a
cash dividend of $1,370,000 and distributions to the minority interest of
$16,000.
The Company's capital resource commitments at November 30, 2004 consisted of
lease obligations on its branch and corporate facilities. The Company intends to
finance these lease commitments from cash flow provided by operations, available
cash and short-term marketable securities.
The Company's cash and marketable securities were sufficient to enable it to
meet its cash requirements during the six months ended November 30, 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 November 30, 2004, no amounts
were outstanding under this line of credit.
Tabular Disclosure of Contractural Obligations
- -----------------------------------------------------------------------------------------------------
Payments Due By Period
- -----------------------------------------------------------------------------------------------------
Contractural Obligations
------------------------ LESS THAN MORE THAN
TOTAL 1 YEAR 1-3 YEARS 3-5 YEARS 5 YEARS
----- ---------- ---------- ---------- ----------
Long-Term Debt..................... -- -- -- -- --
Capital Lease Obligations.......... -- -- -- -- --
Operating Leases................... 476,000 308,000 168,000 -- --
Purchase Obligations............... -- -- -- -- --
Employment Agreements.............. 1,837,000 796,000 1,041,000 -- --
Other Long-Term Liabilities
Reflected on the Registrant's
Balance Sheet under GAAP.......... -- -- -- -- --
---------- ---------- ---------- ---------- ----------
Total.............................. $2,313,000 $1,104,000 $1,209,000 $ -- $ --
========== ========== ========== ========== ==========
Page 13
TSR, INC. AND SUBSIDIARIES
Critical Accounting Policies
- ----------------------------
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, 2004
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 November 30,
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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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: January 3, 2005 /s/ J.F. Hughes
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J.F. Hughes, Chairman, President and Treasurer
Date: January 3, 2005 /s/ John G. Sharkey
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John G. Sharkey, Vice President Finance
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