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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, 2006
[_] 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
Indicate by check mark whether the Registrant is large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check
one):
Large accelerated filer [_] Accelerated filer [_] Non-accelerated filer [X]
Indicate by check mark whether the registrant is a shell company (as defined in
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,
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as of December 31, 2006
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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 -
November 30, 2006 and May 31, 2006................... 3
Condensed Consolidated Statements of Income -
For the three months and six months ended
November 30, 2006 and 2005........................... 4
Condensed Consolidated Statements of Cash Flows -
For the six months ended November 30, 2006 and 2005.. 5
Notes to Condensed Consolidated Financial Statements...... 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.................. 10
Item 3. Quantitative and Qualitative Disclosure About
Market Risk.......................................... 16
Item 4. Controls and Procedures................................... 16
Part II. Other Information.................................................. 17
Item 1A. Risk Factors.............................................. 17
Item 6. Exhibits.................................................. 17
Signatures.................................................................. 17
Page 2
Part I. Financial Information
Item 1. Financial Statements
TSR, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS November 30, May 31,
2006 2006
------------ ------------
(Unaudited)
Current Assets:
Cash and cash equivalents (Note 3) ..................................... $ 2,129,532 $ 2,660,739
Marketable securities (Note 5) ......................................... 6,386,616 5,406,830
Accounts receivable (net of allowance for doubtful accounts
of $355,000) ........................................................ 8,674,678 8,272,963
Other receivables ...................................................... 105,286 90,172
Prepaid expenses ....................................................... 63,883 48,793
Prepaid and recoverable income taxes ................................... 82,761 320,156
Deferred income taxes .................................................. 150,000 150,000
------------ ------------
Total current assets ................................................ 17,592,756 16,949,653
Marketable securities (Note 5) .............................................. 995,937 1,490,547
Equipment and leasehold improvements, at cost (net of accumulated
depreciation and amortization of $557,687 and $544,946) ................ 52,973 36,134
Other assets ................................................................ 49,653 49,653
Deferred income taxes ....................................................... 109,000 109,000
------------ ------------
$ 18,800,319 $ 18,634,987
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts and other payables ............................................ $ 187,911 $ 209,840
Accrued expenses and other current liabilities ......................... 2,872,309 2,730,202
Advances from customers ................................................ 1,496,443 1,538,985
Income taxes payable ................................................... 51,765 102,974
------------ ------------
Total current liabilities ........................................... 4,608,428 4,582,001
------------ ------------
Minority Interest ........................................................... 45,326 31,751
------------ ------------
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 ............................................. 5,071,727 5,071,727
Retained earnings ...................................................... 21,043,856 20,918,526
------------ ------------
26,177,866 26,052,536
Less: Treasury stock, 1,660,314 shares, at cost ........................ 12,031,301 12,031,301
------------ ------------
14,146,565 14,021,235
------------ ------------
$ 18,800,319 $ 18,634,987
============ ============
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, 2006 AND 2005
(UNAUDITED)
Three Months Ended Six Months Ended
November 30, November 30,
---------------------------- ----------------------------
2006 2005 2006 2005
------------ ------------ ------------ ------------
Revenues, net .............................................. $ 12,626,000 $ 11,829,402 $ 25,001,689 $ 24,294,103
Cost of sales .............................................. 10,256,562 9,459,779 20,255,107 19,399,227
Selling, general and administrative expenses ............... 1,805,021 1,601,046 3,553,744 3,341,648
------------ ------------ ------------ ------------
12,061,583 11,060,825 23,808,851 22,740,875
------------ ------------ ------------ ------------
Income from operations ..................................... 564,417 768,577 1,192,838 1,553,228
Other income (expense):
Interest and dividend income .......................... 114,812 83,450 227,249 161,599
Realized and unrealized gain (loss) from marketable
securities, net .................................... 1,460 768 2,700 (224)
Minority interest in subsidiary operating profits ..... (12,139) (22,923) (30,575) (47,868)
------------ ------------ ------------ ------------
Income before income taxes ................................. 668,550 829,872 1,392,212 1,666,735
Provision for income taxes ................................. 256,000 346,000 536,000 709,000
------------ ------------ ------------ ------------
Net income ............................................ $ 412,550 $ 483,872 $ 856,212 $ 957,735
============ ============ ============ ============
Basic and diluted net income per common share .............. $ 0.09 $ 0.11 $ 0.19 $ 0.21
============ ============ ============ ============
Weighted average number of basic common shares outstanding.. 4,568,012 4,568,012 4,568,012 4,568,012
============ ============ ============ ============
Weighted average number of diluted common shares outstanding 4,568,012 4,568,012 4,568,012 4,568,012
============ ============ ============ ============
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, 2006 AND 2005
(UNAUDITED)
Six Months Ended
November 30,
----------------------------
2006 2005
------------ ------------
Cash flows from operating activities:
Net income ........................................................... $ 856,212 $ 957,735
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Depreciation and amortization ..................................... 12,741 10,560
Realized and unrealized (gain) loss from marketable securities, net (2,700) 224
Minority interest in subsidiary operating profits ................. 30,575 47,868
Deferred income tax benefit ....................................... -- 57,000
Recovery of bad debt expense ...................................... -- (50,000)
Changes in assets and liabilities:
Accounts receivable - trade .......................................... (401,715) (564,343)
Other receivables .................................................... (15,114) (14,559)
Prepaid expenses ..................................................... (15,090) 20,984
Prepaid and recoverable income taxes ................................. 237,395 (30,017)
Other assets ......................................................... -- 240
Accounts payable and accrued expenses ................................ 120,178 (363,919)
Income taxes payable ................................................. (51,209) (50,616)
Advances from customers .............................................. (42,542) (21,290)
Net cash provided by (used in) operating activities .................. 728,731 (133)
------------ ------------
Cash flows from investing activities:
Proceeds from maturities and sales of marketable securities .......... 4,402,747 5,913,431
Purchases of marketable securities ................................... (4,885,223) (5,399,771)
Purchases of fixed assets ............................................ (29,580) (15,784)
------------ ------------
Net cash (used in) provided by investing activities .................. (512,056) 497,876
------------ ------------
Cash flows from financing activities:
Distribution to minority interest .................................... (17,000) (19,000)
Cash dividends paid .................................................. (730,882) (1,050,643)
------------ ------------
Net cash used in financing activities ................................ (747,882) (1,069,643)
------------ ------------
Net decrease in cash and cash equivalents ................................. (531,207) (571,900)
Cash and cash equivalents at beginning of period .......................... 2,660,739 2,571,276
Cash and cash equivalents at end of period ................................ $ 2,129,532 $ 1,999,376
============ ============
Supplemental Disclosures:
Income tax payments .................................................. $ 350,000 $ 733,000
============ ============
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, 2006
(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, 2006, 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, 2007. 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, 2006.
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. No options covering 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, 2006 and 2005,
respectively, because 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, 2006:
Cash in banks. . . . . . . . . . . . . . . . . . . . . . $ 441,330
Money Market Funds . . . . . . . . . . . . . . . . . . . 1,688,202
------------
$ 2,129,532
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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, credit balances from overpayments and
certain escheat liabilities.
Reimbursements received by the Company for out-of-pocket expenses are
characterized as revenue in accordance with Emerging Issues Task Force
(EITF) Issue 01-14 "Income Statement of Characterization of Reimbursements
Received for `Out-of-Pocket' Expenses Incurred."
Page 6
TSR, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
NOVEMBER 30, 2006
(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 mostly 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
Current Cost Gains Losses Value
------- ------------ ------------ ------------ ------------
United States Treasury Securities ........ $ 6,369,500 -- -- $ 6,369,500
Equity Securities ........................ 16,866 250 -- 17,116
------------ ------------ ------------ ------------
$ 6,386,366 $ 250 $ -- $ 6,386,616
============ ============ ============ ============
Long - Term
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United States Treasury Securities ........ $ 995,937 $ -- $ -- $ 995,937
============ ============ ============ ============
Page 7
TSR, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
NOVEMBER 30, 2006
(UNAUDITED)
6. Stock Options
-------------
The Company has one stock-based employee compensation plan in effect.
Effective June 1, 2006, the Company accounts for all transactions under
which employees receive shares of stock or other equity instruments in the
Company in accordance with the revised provisions of SFAS No. 123,
"Statement of Financial Accounting Standards No. 123 (FAS123 (R))," which
requires that the fair market value of all share based payment transactions
be recognized in the financial statements. This Statement establishes fair
value as the measurement objective in accounting for share based payment
arrangements and requires all entities to apply a fair value based
measurement method in accounting for share based transactions with
employees except for equity instruments held by employee share ownership
plans. The Company adopted FAS123(R) at the beginning of fiscal 2007. The
Company has not issued any share based payments as of November 30, 2006.
The Company previously accounted for share-based employee compensation in
accordance with the provisions of Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees".
7. Recent Accounting Pronouncements
--------------------------------
In July 2006, the Financial Accounting Standards Board (FASB) issued FASB
Interpretation No. 48 - "Accounting for Uncertainty in Income Taxes" (FIN
48). This guidance is intended to provide increased consistency in the
application of FASB Statement No. 109 - "Accounting for Income Taxes" by
providing guidance with regard to the recognition and measurement of tax
positions, and provide increased disclosure requirements. In particular,
this interpretation requires uncertain tax positions to be recognized only
if they are "more-likely-than-not" to be upheld based on their technical
merits. Additionally, the measurement of the tax position will be based on
the largest amount that is determined to have greater than a 50% likelihood
of realization upon ultimate settlement. Any resulting cumulative effect of
applying the provisions of FIN 48 upon adoption would be reported as an
adjustment to the beginning balance of retained earnings (deficit) in the
period of adoption. Management is in the process of evaluating the effects
of this guidance which is effective for fiscal years beginning after
December 15, 2006.
On September 15, 2006, the FASB issued SFAS No. 157, "Fair Value
Measurements". SFAS No. 157 is effective for fiscal years beginning after
November 15, 2007, and interim periods within those fiscal years. SFAS No.
157 provides guidance related to estimating fair value and requires
expanded disclosures. The standard applies whenever other standards require
(or permit) assets or liabilities to be measured at fair value. The
standard does not expand the use of fair value in any new circumstances.
The Company is evaluating SFAS No. 157 and its impact on the Company's
consolidated financial statements.
Page 8
TSR, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
NOVEMBER 30, 2006
(UNAUDITED)
8. Dividends
---------
On January 4, 2007 the Board of Directors of the Company declared that a
regular quarterly cash dividend of $0.08 per share for the quarter ended
November 30, 2006 would be paid on February 5, 2007 to shareholders of
record as of January 22, 2007. This dividend will amount to approximately
$365,000 and will be paid from the Company's cash and marketable
securities.
9. Major Customer
--------------
In June 2006, the New York State Office of General Services, Procurement
Services Group ("OGS") terminated its contract with the Company. The OGS
actions were due to the report of an investigation by the Office of the
Special Commissioner of Investigation of the New York City Department of
Education ("DOE"). The investigative report concluded that the Company
operated improperly from 2001 through the spring of 2003 by using a
subcontracting arrangement to obtain programmers for positions with the
DOE. The subcontracting was with a small firm that was owned by an
individual who worked as a consultant under contract at the DOE in a
supervising capacity and sometimes was involved in decisions to select
consultants that financially benefited both him and the Company. The
investigative report also suggested that the Company received advanced
information as to new positions from this individual and that the
subcontracting increased the costs to the DOE since two firms, instead of
one, profited from this arrangement.
All new placements with the DOE, including renewals of existing placements,
were being made under this OGS contract prior to its termination. As a
result, until a new OGS contract is entered into, the Company will not be
able to make new placements or renew existing placements with the DOE. The
termination does not affect existing placements with the DOE until the date
such positions are scheduled to expire. At May 31, 2006 the Company had
forty-one consultants placed with the DOE. As a result of the termination,
consultants placed with the DOE who came up for renewal have not been
renewed. Of the remaining eleven consultants, five are scheduled to end in
February 2007 and six in May 2010.
DOE also asserted a claim against the Company for a reimbursement due to
the Company's subcontracting without written authorization. On August 29,
2006, the DOE and the Company agreed in principle to resolve these claims
and permit the Company to be treated as a "responsible vendor" upon making
a payment to DOE and appointment of an independent compliance monitor to
monitor the Company's compliance with the DOE agreement. The treatment as a
responsible vendor would allow the Company to continue to submit
consultants to the DOE in response to DOE bid requests. The Company will
also need to have its agreement with the OGS reinstated to make new
placements with DOE. Due to the claim asserted by DOE and the proposed
settlement, the Company established a reserve of $900,000 as of May 31,
2006. While the Company believes that its subcontracting did not result in
overcharges to DOE, it has agreed to settle the matter in order to avoid
the expense and uncertainty of litigation as well as to protect its
existing business with DOE and maintain the potential to make future
placements with DOE. While the Company has agreed in principle to resolve
this matter, the settlement has not been finalized and, therefore, there
can be no assurance that the Company will be able to continue to provide
consultants to DOE.
Page 9
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 settlement
with the NYC Department of Education (DOE) and the Company's ability to continue
to provide consultants to the DOE; the impact on the Company's business due to
the merger of AT&T and SBC Communications, Inc.; 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 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, 2006 compared with three months ended November
------------------------------------------------------------------------------
30, 2005
--------
Three Months Ended
November 30,
(Dollar amounts in Thousands)
2006 2005
--------------------------- ---------------------------
% of % of
Amount Revenues Amount Revenues
------------ ------------ ------------ ------------
Revenues .......................................... $ 12,626 100.0 $ 11,829 100.0
Cost of sales ..................................... 10,256 81.2 9,460 80.0
------------ ------------ ------------ ------------
Gross profit ...................................... 2,370 18.8 2,369 20.0
Selling, general, and administrative expenses...... 1,805 14.3 1,601 13.5
------------ ------------ ------------ ------------
Income from operations ............................ 565 4.5 768 6.5
Other income ...................................... 104 0.8 62 0.5
------------ ------------ ------------ ------------
Income before income taxes ........................ 669 5.3 830 7.0
Provision for income taxes ........................ 256 2.0 346 2.9
------------ ------------ ------------ ------------
Net income ........................................ $ 413 3.3 $ 484 4.1
============ ============ ============ ============
Page 10
TSR, INC. AND SUBSIDIARIES
Revenues
--------
Revenues consist primarily of revenues from computer programming consulting
services. Revenues for the quarter ended November 30, 2006 increased $797,000 or
6.7% from the comparable period in fiscal 2006. Due to the contract suspension
with the NYC Department of Education (DOE), the consultants on billing with DOE
decreased from 41 at May 31, 2006 to 11 at the end of the current quarter. The
Company expects a further reduction to six at the end of the next quarter due to
placements that will expire February 28, 2007. While the Company has agreed in
principle to resolve this matter with the DOE, the settlement has not been
finalized and, therefore, there can be no assurance that the Company will be
able to continue to provide consultants to the DOE. Despite this reduction in
the number of consultants on billing at DOE, the overall average number of
consultants on billing increased from 345 in the prior year quarter to 348 for
the current quarter. Additional placements at other accounts, many at higher
billing rates, have offset most of the reduction at DOE and, therefore, revenues
have increased.
As a result of the merger of AT&T with SBC Communications, Inc., Procurestaff,
which had been the vendor management company for AT&T is currently one of many
vendors to the new AT&T and no longer serves as the primary vendor manager. Due
to these changes, the Company experienced a decrease in new placements with AT&T
during the second fiscal quarter. The Company is unable to predict whether this
change of relationship will continue to impact the Company's business
relationship with AT&T.
Cost of Sales
-------------
Cost of sales for the quarter ended November 30, 2006, increased $796,000 or
8.4% to $10,256,000 from $9,460,000 in the prior year period. Cost of sales as a
percentage of revenues increased from 80.0% in the quarter ended November 30,
2005 to 81.2% in the quarter ended November 30, 2006. The increase in cost of
sales as a percentage of revenues was primarily attributable to discount
programs instituted or expanded by customers. These discount programs decrease
revenues without allowing offsetting cost reductions.
Cost of sales as a percentage of revenues increased because of a decline in
revenues at AT&T, the Company's largest customer, due to Procurestaff offering
further discounts to AT&T to maintain its relationship. This required the
Company to reduce what it received from Procurestaff, which further reduced the
Company's margins on its AT&T business.
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 $204,000 or 12.7%
from $1,601,000 in the quarter ended November 30, 2005 to $1,805,000 in the
quarter ended November 30, 2006. This increase was primarily attributable to an
increase in the number of technical recruiters and sales executives. Additional
personnel have been hired to address increasing competition.
Income from Operations
----------------------
In spite of the increase in revenues, income from operations decreased $203,000
or 26.4% from $768,000 in the quarter ended November 30, 2005 to $565,000 in the
quarter ended November 30, 2006. The discount programs which have caused an
increase in cost of sales as a percentage of revenues, along with the expenses
related to the hiring of additional sales and recruiting personnel, have reduced
income from operations.
Other Income
------------
Other income resulted primarily from interest and dividend income, which
increased by $31,000 to $115,000 due to higher interest rates in the quarter
ended November 30, 2006. Additionally, the Company had unrealized gains of
$1,000 in both the quarter ended November 30, 2006 and the quarter ended
November 30, 2005 from marketable securities due to mark to market adjustments
of its trading securities equity portfolio.
Page 11
TSR, INC. AND SUBSIDIARIES
Income Taxes
------------
The effective income tax rate of 38.3% for the quarter ended November 30, 2006
decreased from a rate of 41.7% in the quarter ended November 30, 2005 due to
lower state and local taxes and reversal of prior years' income tax over
accruals.
Six months ended November 30, 2006 compared with six months ended November 30,
------------------------------------------------------------------------------
2005
----
Six Months Ended
November 30,
(Dollar amounts in Thousands)
2006 2005
--------------------------- ---------------------------
% of % of
Amount Revenues Amount Revenues
------------ ------------ ------------ ------------
Revenues .......................................... $ 25,002 100.0 $ 24,294 100.0
Cost of sales ..................................... 20,255 81.0 19,399 79.9
------------ ------------ ------------ ------------
Gross profit ...................................... 4,747 19.0 4,895 20.1
Selling, general, and administrative expenses ..... 3,554 14.2 3,342 13.8
------------ ------------ ------------ ------------
Income from operations ............................ 1,193 4.8 1,553 6.3
Other income ...................................... 199 0.8 114 0.5
------------ ------------ ------------ ------------
Income before income taxes ........................ 1,392 5.6 1,667 6.8
Provision for income taxes ........................ 536 2.2 709 2.9
------------ ------------ ------------ ------------
Net income ........................................ $ 856 3.4 $ 958 3.9
============ ============ ============ ============
Revenues
--------
Revenues consist primarily of revenues from computer programming consulting
services. Revenues for the six months ended November 30, 2006 increased $708,000
or 2.9% from the comparable period in fiscal 2006. Due to the contract
suspension with the NYC Department of Education (DOE), the consultants on
billing with DOE decreased from 41 at May 31, 2006 to 11 at the end of the
current period. The Company expects a further reduction to six at the end of the
next quarter due to placements that will expire February 28, 2007. Despite this
reduction in the number of consultants on billing at DOE, the overall average
number of consultants on billing only decreased from 347 in the prior year
period to 345 for the current period. Additional placements at other accounts,
many at higher billing rates, have offset most of the reduction at DOE and,
therefore, revenues have increased.
Page 12
Cost of Sales
-------------
Cost of sales for the six months ended November 30, 2006, increased $856,000 or
4.4% to $20,255,000 from $19,399,000 in the prior year period. Cost of sales as
a percentage of revenues increased from 79.9% in the six months ended November
30, 2005 to 81.0% in the six months ended November 30, 2006. The increase in
cost of sales as a percentage of revenues was primarily attributable to discount
programs instituted or expanded by customers. These discount programs decrease
revenues without allowing offsetting cost reductions.
Cost of sales as a percentage of revenues increased because of a decline in
revenues at AT&T, the Company's largest customer, due to Procurestaff offering
further discounts to AT&T to maintain its relationship. This required the
Company to reduce what it received from Procurestaff, which further reduced the
Company's margins on its AT&T business.
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 $212,000 or 6.3%
from $3,342,000 in the six months ended November 30, 2005 to $3,554,000 in the
six months ended November 30, 2006. This increase was primarily attributable to
an increase in the number of technical recruiters and sales executives.
Additional personnel have been hired to address increasing competition.
Income from Operations
----------------------
In spite of the increase in revenues, income from operations decreased $360,000
or 23.2% from $1,553,000 in the six months ended November 30, 2005 to $1,193,000
in the six months ended November 30, 2006. The discount programs which have
caused an increase in cost of sales as a percentage of revenues, along with the
expenses related to the hiring of additional sales and recruiting personnel,
have reduced income from operations.
Other Income
------------
Other income resulted primarily from interest and dividend income, which
increased by $65,000 to $227,000 due to higher interest rates in the six months
ended November 30, 2006. Additionally, the Company had an unrealized gain of
$3,000 in the six months ended November 30, 2006 from marketable securities due
to mark to market adjustments of its trading securities equity portfolio.
Income Taxes
------------
The effective income tax rate of 38.5% for the six months ended November 30,
2006 decreased from a rate of 42.5% in the six months ended November 30, 2005
due to lower state and local taxes and reversal of prior years' income tax over
accruals.
Page 13
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, 2006, the Company had working capital of $12,984,000 and cash
and cash equivalents of $2,130,000 as compared to working capital of $12,368,000
and cash and cash equivalents of $2,661,000 at May 31, 2006. The Company's
working capital also included $6,387,000 and $5,407,000 of marketable securities
with maturities of less than one year at November 30, 2006 and May 31, 2006,
respectively. The working capital and marketable securities increased due to the
reclassification of a security from long-term to current.
Net cash provided by operating activities of $729,000 for the six months ended
November 30, 2006, compared to no cash provided for the six months ended
November 30, 2005. The cash provided by operating activities resulted primarily
from the Company's net income and a decrease in prepaid and recoverable income
taxes, offset by an increase in accounts receivables. The accounts receivable
increased due to delays in payments from the NYC Department of Education (DOE).
The Company has not been notified by the DOE that it is disputing the amounts
due. The absence of cash provided by operating activities for the six months
ending November 30, 2005 resulted primarily from net income being offset by an
increase in accounts receivables and a decrease in accounts payable and accrued
expenses.
Net cash used in investing activities of $512,000 for the six months ended
November 30, 2006 primarily resulted from purchasing US Treasury Securities in
excess of maturities.
Net cash used in financing activities of $748,000 resulted primarily from cash
dividends paid during the period.
The Company's capital resource commitments at November 30, 2006 consisted of
lease obligations on its branch and corporate facilities. The Company intends to
finance these lease commitments from cash flow provided by operations, available
cash and short-term marketable securities.
The Company's cash and marketable securities were sufficient to enable it to
meet its cash requirements during the six months ended November 30, 2006. The
Company has available a revolving line of credit of $5,000,000 with a major
money center bank through October 6, 2007. As of November 30, 2006, no amounts
were outstanding under this line of credit.
Tabular Disclosure of Contractual Obligations
---------------------------------------------
=====================================================================================================================
Payments Due By Period
=====================================================================================================================
Contractual Obligations
----------------------- LESS THAN 1 MORE THAN 5
TOTAL YEAR 1-3 YEARS 3-5 YEARS YEARS
------------ ------------ ------------ ------------ ------------
Long-Term Debt . . . . . . . . . . -- -- -- -- --
Capital Lease Obligations. . . . . -- -- -- -- --
Operating Leases . . . . . . . . . 612,000 281,000 254,000 77,000 --
Purchase Obligations . . . . . . . -- -- -- -- --
Employment Agreements . . . . . . 774,000 399,000 300,000 75,000 --
Consulting Contract. . . . . . . . 100,000 100,000 -- -- --
Other Long-Term Liabilities
Reflected on the Registrant's
Balance Sheet under GAAP . . . . . -- -- -- -- --
------------ ------------ ------------ ------------ ------------
Total. . . . . . . . . . . . . . . $ 1,486,000 $ 780,000 $ 554,000 $ 152,000 $ --
============ ============ ============ ============ ============
Page 14
TSR, INC. AND SUBSIDIARIES
Recent Account Pronouncements
-----------------------------
In July 2006, the Financial Accounting Standards Board (FASB) issued FASB
Interpretation No. 48 - "Accounting for Uncertainty in Income Taxes" (FIN 48).
This guidance is intended to provide increased consistency in the application of
FASB Statement No. 109 - "Accounting for Income Taxes" by providing guidance
with regard to the recognition and measurement of tax positions, and provide
increased disclosure requirements. In particular, this interpretation requires
uncertain tax positions to be recognized only if they are "more-likely-than-not"
to be upheld based on their technical merits. Additionally, the measurement of
the tax position will be based on the largest amount that is determined to have
greater than a 50% likelihood of realization upon ultimate settlement. Any
resulting cumulative effect of applying the provisions of FIN 48 upon adoption
would be reported as an adjustment to the beginning balance of retained earnings
(deficit) in the period of adoption. Management is in the process of evaluating
the effects of this guidance which is effective for fiscal years beginning after
December 15, 2006.
On September 15, 2006, the FASB issued SFAS No. 157, "Fair Value Measurements".
SFAS No. 157 is effective for fiscal years beginning after November 15, 2007,
and interim periods within those fiscal years. SFAS No. 157 provides guidance
related to estimating fair value and requires expanded disclosures. The standard
applies whenever other standards require (or permit) assets or liabilities to be
measured at fair value. The standard does not expand the use of fair value in
any new circumstances. The Company is evaluating SFAS No. 157 and its impact on
the Company's consolidated financial statements.
Page 15
TSR, INC. AND SUBSIDIARIES
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, 2006
Annual Report on Form 10-K, as filed with the SEC. The Company believes that
those accounting policies require the application of management's most
difficult, subjective or complex judgments. There have been no changes in the
Company's significant accounting policies as of November 30, 2006.
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.
Page 16
Part II. Other Information
Item 1A. Risk Factors
There are no material changes to the risk factors described in the
Form 10-K, filed on September 12, 2006, except as follows:
Dependence on Significant Customers
-----------------------------------
As described under Part I, Item 2, the Company's relationship with
AT&T has changed due to the merger of AT&T with SBC Communications and
the resulting change in the relationship with AT&T of Procurestaff,
through which the Company contracts with AT&T. This change has had a
further impact on the Company's profit margins on consultants placed
with AT&T and recently created a decrease in new placements with AT&T.
The Company cannot predict the extent to which this change will
adversely affect the number of consultants placed with AT&T.
As more fully described Footnote 9 to the Company's Condensed
Financial Statements, the Company has agreed in principle to settle a
claim by the New York City Department of Education (DOE). This
settlement has not been finalized and, therefore, there can be no
assurance that the Company will be able to continue to provide
consultants to DOE. At the end of the quarter ended November 30, 2006,
there were eleven consultants remaining on billing at DOE. The Company
expects a further reduction to six at the end of the next quarter due
to placements that will expire February 28, 2007.
Item 6. Exhibits
(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.
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 5, 2007 /s/ J.F. Hughes
----------------------------------------
J.F. Hughes, Chairman and President
Date: January 5, 2007 /s/ John G. Sharkey
----------------------------------------
John G. Sharkey, Vice President Finance
Page 17