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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 28, 2005
[ ] 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
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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
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 March 31, 2005
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Page 1
TSR, INC. AND SUBSIDIARIES
INDEX
Page
Number
------
Part I. Financial Information:
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets -
February 28, 2005 and May 31, 2004.......................... 3
Condensed Consolidated Statements of Income -
For the three months and nine months ended
February 28, 2005 and 2004.................................. 4
Condensed Consolidated Statements of Cash Flows -
For the nine months ended February 28, 2005 and 2004........ 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. Controls and Procedures.......................................... 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
ASSETS February 28, May 31,
2004 2005
----------- -----------
(Unaudited)
Current Assets:
Cash and cash equivalents (Note 3) ......................... $ 4,385,419 $ 2,268,796
Marketable securities (Note 5) ............................. 5,948,143 6,498,839
Accounts receivable (net of allowance for
doubtful accounts of $430,000) ........................ 7,708,989 9,904,620
Other receivables .......................................... 37,460 29,700
Prepaid expenses ........................................... 37,123 38,918
Prepaid and recoverable income taxes ....................... 13,795 15,483
Deferred income taxes ...................................... 180,000 180,000
----------- -----------
Total current assets .................................. 18,310,929 18,936,356
Equipment and leasehold improvements, at cost (net of accumulated
depreciation and amortization of $744,002 and $731,581) .... 29,460 24,001
Other assets .................................................... 49,893 84,893
Deferred income taxes ........................................... 148,000 143,000
Acquired client relationships, (net of accumulated amorization
of $171,608 and $157,308) ................................. -- 14,300
----------- -----------
$18,538,282 $19,202,550
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts and other payables ................................ $ 275,497 $ 144,391
Accrued expenses and other current liabilities ............. 1,776,952 2,139,799
Advances from customers .................................... 1,510,635 1,532,642
Income taxes payable ....................................... 178,835 143,553
----------- -----------
Total current liabilities ............................. 3,741,919 3,960,385
----------- -----------
Minority Interest ............................................... 22,134 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 shares ............ 62,283 62,283
Additional paid-in capital ................................. 5,090,627 5,079,027
Retained earnings .......................................... 21,652,620 22,081,995
----------- -----------
26,805,530 27,223,305
Less: Treasury Stock, 1,660,314 shares, at cost ............ 12,031,301 12,031,301
----------- -----------
14,774,229 15,192,004
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$18,538,282 $19,202,550
=========== ===========
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 28, 2005 AND FEBRUARY 29, 2004
(UNAUDITED)
Three Months Ended Nine Months Ended
February 28, February 29, February 28, February 29,
2005 2004 2005 2004
------------ ------------ ------------ ------------
Revenues, net ............................................... $ 12,432,714 $ 12,570,591 $ 38,951,953 $ 38,304,036
Cost of sales ............................................. 9,841,597 9,903,894 30,526,592 29,792,770
Selling, general and administrative expenses ................ 1,856,245 1,925,110 5,629,414 5,801,298
------------ ------------ ------------ ------------
11,697,842 11,829,004 36,156,006 35,594,068
------------ ------------ ------------ ------------
Income from operations ..................................... 734,872 741,587 2,795,947 2,709,968
Other income (expense):
Interest and dividend income ........................... 49,076 25,774 110,555 92,040
Realized and unrealized gain (loss) from marketable
securities, net .................................... 704 (255) (3,124) 9,778
Minority interest in subsidiary operating profits ...... (13,367) (13,863) (49,148) (51,421)
------------ ------------ ------------ ------------
Income before income taxes .................................. 771,285 753,243 2,854,230 2,760,365
Provision for income taxes ................................. 319,000 317,000 1,228,000 1,182,000
------------ ------------ ------------ ------------
Net income ............................................... $ 452,285 $ 436,243 $ 1,626,230 $ 1,578,365
============ ============ ============ ============
Basic and diluted net income per common share ............... $ 0.10 $ 0.10 $ 0.36 $ 0.35
============ ============ ============ ============
Weighted average number of basic common shares outstanding .. 4,568,012 4,548,012 4,568,012 4,538,345
============ ============ ============ ============
Weighted average number of diluted common shares outstanding 4,571,019 4,550,772 4,570,112 4,544,718
============ ============ ============ ============
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 28, 2005 AND FEBRUARY 29, 2004
(UNAUDITED)
Nine Months Ended
February 28, February 29,
2005 2004
------------ ------------
Cash flows from operating activities:
Net income .......................................................... $ 1,626,230 $ 1,578,365
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization .................................... 26,721 58,666
Realized and unrealized loss (gain) from marketable securities, net 3,124 (9,778)
Stock based compensation expense .................................. 11,600 80,100
Minority interest in subsidiary operating profit .................. 49,148 51,421
Deferred income taxes ............................................. (5,000) --
Changes in assets and liabilities:
Accounts receivable ............................................. 2,195,631 446,990
Other receivables ............................................... (7,760) 31,996
Prepaid expenses ................................................ 1,795 9,640
Prepaid and recoverable income taxes ............................ 1,688 (36,005)
Other assets .................................................... 35,000 911
Accounts payable and accrued expenses ........................... (231,741) (207,847)
Income taxes payable ............................................ 35,282 (56,006)
Advances from customers ........................................ (22,007) (240,954)
------------ ------------
Net cash provided by operating activities ............................ 3,719,711 1,707,499
------------ ------------
Cash flows from investing activities:
Proceeds from maturities and sales of marketable securities ....... 9,450,593 12,925,210
Purchases of marketable securities ................................ (8,903,021) (5,472,505)
Purchases of fixed assets ......................................... (17,880) (5,205)
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Net cash provided by investing activities ............................ 529,692 7,447,500
------------ ------------
Cash flows from financing activities:
Distribution to minority interest ................................ (77,175) (57,644)
Proceeds from exercise of stock options ........................... -- 829,688
Cash dividends paid ............................................... (2,055,605) (10,451,228)
------------ ------------
Net cash used in financing activities ................................. (2,132,780) (9,679,184)
------------ ------------
Net increase (decrease) in cash and cash equivalents ...................... 2,116,623 (524,185)
Cash and cash equivalents at beginning of period .......................... 2,268,796 5,063,098
------------ ------------
Cash and cash equivalents at end of period ................................ $ 4,385,419 $ 4,538,913
============ ============
Supplemental Disclosures:
Income tax payments ................................................ $ 1,196,000 $ 1,274,000
============ ============
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 28, 2005
(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 28, 2005, 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 6,993 and 7,240; and 7,900 and
19,627 shares of common stock have been omitted from the calculations of
diluted net income per common share for the three month and nine month
periods ended February 28, 2005 and 2004, 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 February
28, 2005:
Cash in banks............................... $ 846,203
Money Market Funds.......................... 3,539,216
-----------
$ 4,385,419
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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 28, 2005
(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 $5,928,871 -- -- 5,928,871
Equity Securities 16,866 2,406 -- 19,272
---------- ------- ---------- -----------
$5,945,737 $ 2,406 $ -- $ 5,948,143
========== ======= ========== ===========
6. RECENT ACCOUNTING PRONOUNCEMENTS
In December 2004, the FASB issued a revision of SFAS No. 123, "Statement of
Financial Accounting Standards No. 123 (revised 2004)," which requires that
the cost resulting from all share based payment transactions be recognized
in the financial statements. This Statement establishes fair value as the
measurement objective in accounting for share based payment arrangements
and requires all entities to apply a fair value based measurement method in
accounting for share based payment transactions with employees except for
equity instruments held by employee share ownership plans. This Statement
is effective as of the beginning of the first interim or annual reporting
period that begins after June 15, 2005. The Company does not expect the
adoption of the revised SFAS No. 123 to have a material impact on its
consolidated financial statements.
Page 7
TSR, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
FEBRUARY 28, 2005
(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 28, 2005 and 2004 respectively
which are now subject to variable accounting treatment. Accordingly, the
Company recorded a non-cash compensation charge of $8,700 and $36,580 for
the three months ended February 28, 2005 and 2004 and $11,600 and $80,100
for the nine months ended February 28, 2005 and 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.
Three Months Ended Nine Months Ended
February 28, February 29, February 28, February 29,
2005 2004 2005 2004
----------- ----------- ----------- -----------
Net income:
As reported............................ $ 452,285 $ 436,243 $ 1,626,230 $ 1,578,365
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 included in
reported net income, net of related tax
effect................................... 8,700 36,580 11,600 80,100
Proforma net income.................... $ 460,985 $ 472,823 $ 1,637,830 $ 1,658,465
=========== =========== =========== ===========
Basic net income per share:
As reported............................ $ 0.10 $ 0.10 $ 0.36 $ 0.35
=========== =========== =========== ===========
Proforma................................. $ 0.10 $ 0.10 $ 0.36 $ 0.37
=========== =========== =========== ===========
There were no options granted in fiscal 2005 and 2004.
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, uncertainty as to the operating results of the
Company's new legacy systems migration service and the impact of the change in
pricing methodology of the Company's largest customer 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 28, 2005 COMPARED WITH THREE MONTHS ENDED FEBRUARY
29, 2004
(Dollar amounts in Thousands)
Three Months Ended
February 28, 2005 February 29, 2004
----------------- -----------------
% of % of
Amount Revenues Amount Revenues
------ -------- ------ --------
Revenues .................................... $12,433 100.0 $12,571 100.0
Cost of sales ............................... 9,842 79.2 9,904 78.8
------- ------- ------- -------
Gross profit ................................ 2,591 20.8 2,667 21.2
Selling, general, and administrative expenses 1,856 14.9 1,925 15.3
------- ------- ------- -------
Income from operations ...................... 735 5.9 742 5.9
Other income ................................ 36 0.3 11 0.1
------- ------- ------- -------
Income before income taxes .................. 771 6.2 753 6.0
Provision for income taxes .................. 319 2.6 317 2.5
------- ------- ------- -------
Net income .................................. $ 452 3.6 $ 436 3.5
======= ======= ======= =======
Page 9
TSR, INC. AND SUBSIDIARIES
REVENUES
Revenues consist primarily of revenues from computer programming consulting
services. Revenues for the quarter ended February 28, 2005 decreased $138,000 or
1.1% from the comparable period in fiscal 2004. At the beginning of the current
calendar year, the Company experienced more consultants not being extended on
projects than were hired on new assignments causing the average number of
consultants on billing with customers to decrease 4.1% from 389 for the quarter
ending February 28, 2004 to 373 for the current quarter. A change in the
business mix toward placing consultants with higher skill levels and therefore
higher billing rates lessened the decrease in revenues and earnings.
The Company's largest customer, AT&T, which accounted for approximately 20% of
revenues for the quarter, is changing its procurement practices and instituting
a program under which it will only pay for consulting services on a cost
(subject to a cap) plus basis. This change will reduce the amount the Company
can bill for each consultant. It is expected that this change will significantly
reduce revenues and gross profit from this client. The Company is currently
discussing this change with the client and anticipates that the change will be
implemented by the end of April, 2005.
COST OF SALES
Cost of sales for the quarter ended February 28, 2005, decreased $62,000 or 0.6%
to $9,842,000 from $9,904,000 in the prior year period. Cost of sales as a
percentage of revenues increased from 78.8% in the quarter ended February 29,
2004 to 79.2% in the quarter ended February 28, 2005. 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
and discounts.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses consist primarily of expenses
relating to account executives, technical recruiters, facilities costs,
management and corporate overhead. These expenses decreased $69,000 or 3.6% from
$1,925,000 in the quarter February 29, 2004 to $1,856,000 in the quarter ended
February 28, 2005. This decrease was primarily attributable to a decrease in
legal expenses. Also, the decrease would have been higher except for $43,000 in
expenses incurred in establishing the Company's new "Transformer" service
offering.
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 into more
modern, flexible applications that are less expensive to operate and maintain.
The Company has begun to market the service to potential customers. The first
transformation project has commenced for a data services provider in the
brokerage industry. In performing this project, the Company will transform the
major modules in a financial instruments pricing application from a dated
architecture and programming language (FORTRAN) to a well structured
object-oriented language (C++). 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 and
marketing of this service or whether it will realize significant revenues from
this service offering.
OTHER INCOME
Other income resulted primarily from interest and dividend income, which
increased by $23,000 to $49,000 due to higher interest rates in the quarter
ended February 28, 2005. Additionally, the Company had a net unrealized loss of
$255 in the quarter ended February 29, 2004 versus a gain of $704 in the quarter
ended February 28, 2005 from marketable securities due to mark to market
adjustments of its trading securities equity portfolio.
INCOME TAXES
The effective income tax rate of 41.4% for the quarter ended February 28, 2005
decreased from a rate of 42.1% in the quarter ended February 29, 2004.
Page 10
TSR, INC. AND SUBSIDIARIES
Nine months ended February 28, 2005 compared with nine months ended February 29,
2004
(Dollar amounts in Thousands)
Nine Months Ended
February 28, 2005 February 29, 2004
----------------- -----------------
% of % of
Amount Revenues Amount Revenues
------ -------- ------ --------
Revenues $ 38,952 100.0 $ 38,304 100.0
Cost of sales 30,527 78.4 29,793 77.8
-------- ------ -------- ------
Gross profit 8,425 21.6 8,511 22.2
Selling, general, and administrative
expenses 5,629 14.4 5,801 15.1
-------- ------ -------- ------
Income from operations 2,796 7.2 2,710 7.1
Other income 58 0.1 50 0.1
-------- ------ -------- ------
Income before income taxes 2,854 7.3 2,760 7.2
Provision for income taxes 1,228 3.1 1,182 3.1
-------- ------ -------- ------
Net income $ 1,626 4.2 $ 1,578 4.1
======== ====== ======== ======
REVENUES
Revenues consist primarily of revenues from computer programming consulting
services. Revenues for the nine months ended February 28, 2005 increased
$648,000 or 1.7% from the comparable period in fiscal 2004. Increased
opportunities to place consultants on billing with existing clients in the first
quarter of the current nine month period was partially offset by a budget
reduction at the Company's largest client in the second quarter of the current
period and a less than expected rate of contract extensions in the third quarter
of the current period. This resulted in the average number of consultants on
billing with clients decreasing to 382 for the nine months ended February 28,
2005 from 384 in the nine months ended February 29, 2004. A change in business
mix toward clients using consultants with higher level skill levels and
therefore higher billing rates resulted in the revenue increase.
COST OF SALES
Cost of sales for the nine months ended February 28, 2005, increased $734,000 or
2.5% to $30,527,000 from $29,793,000 in the prior year period. Cost of sales as
a percentage of revenues increased from 77.8% in the nine months ended February
29, 2004 to 78.4% in the nine months ended February 28, 2005. 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 and discounts.
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 $172,000 or 3.0%
from $5,801,000 in the nine months ended February 29, 2004 to $5,629,000 in the
nine months ended February 28, 2005. 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 $168,000 of expenses
incurred in establishing the Company's new "Transformer" service offering.
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 into more
modern, flexible applications that are less expensive to operate and maintain.
The Company has begun to market the service to potential customers. The first
transformation project has commenced for a data services provider in the
brokerage industry. In performing this project, the Company will transform the
major modules in a financial instruments pricing application from a dated
architecture and programming language (FORTRAN) to a well structured
object-oriented language (C++). 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 and
marketing of this service or whether it will realize significant revenues from
this service offering.
OTHER INCOME
Other income resulted primarily from interest and dividend income, which
increased by $19,000 to $111,000 due to higher interest rates in the nine months
ended February 28, 2005. Additionally, the Company also had a net unrealized
gain of $10,000 in the nine months ended February 29, 2004 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 nine months
ended February 28, 2005 from the sale of marketable securities due to a merger.
INCOME TAXES
The effective income tax rate of 43.0% for the nine months ended February 28,
2005 increased from a rate of 42.8% in the nine months ended February 29, 2004.
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 28, 2005, the Company had working capital of $14,569,000 and cash
and cash equivalents of $4,385,000 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 $5,948,000 and $6,499,000 of marketable securities
at February 28, 2005 and May 31, 2004, respectively.
Net cash provided by operating activities of $3,720,000 for the nine months
ended February 28, 2005, compared to cash provided of $1,707,000 for the nine
months ended February 29, 2004. 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 $530,000 for the nine months ended
February 28, 2005 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 $2,056,000 and distributions to the minority interest of
$77,000.
The Company's capital resource commitments at February 28, 2005 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 nine months ended February 28, 2005. 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 28, 2005, 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.................... 388,000 245,000 143,000 -- --
Purchase Obligations................ -- -- -- -- --
Employment Agreements............... 1,640,000 779,000 861,000 -- --
Other Long-Term Liabilities
Reflected on the Registrant's
Balance Sheet under GAAP............ -- -- -- -- --
---------- ---------- ---------- ---------- ----------
Total............................... $2,028,000 $1,024,000 $1,004,000 $ -- $ --
========== ========== ========== ========== ==========
Page 13
TSR, INC. AND SUBSIDIARIES
RECENT ACCOUNTING PRONOUNCEMENTS
In December 2004, the FASB issued a revision of SFAS No. 123, "Statement of
Financial Accounting Standards No. 123 (revised 2004)," which requires that the
cost resulting from all share based payment transactions be recognized in the
financial statements. This Statement establishes fair value as the measurement
objective in accounting for share based payment arrangements and requires all
entities to apply a fair value based measurement method in accounting for share
based payment transactions with employees except for equity instruments held by
employee share ownership plans. This Statement is effective as of the beginning
of the first interim or annual reporting period that begins after June 15, 2005.
The Company does not expect the adoption of the revised SFAS No. 123 to have a
material impact on its consolidated financial statements.
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 February 28,
2005, 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.
Page 14
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.
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 5, 2005 /s/ J.F. Hughes
---------------------------------------------
J.F. Hughes, Chairman, President and Treasurer
Date: April 5, 2005 /s/ John G. Sharkey
---------------------------------------------
John G. Sharkey, Vice President Finance
Page 15