================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the period ended February 29, 2008
[ ] 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.
--------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 13-2635899
------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
400 Oser Avenue, Hauppauge, NY 11788
--------------------------------------------------------------------------------
(Address of principal executive offices)
631-231-0333
(Registrant's telephone number)
(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
4,568,012 shares of common stock, par value $.01 per share, as of March 31, 2008
================================================================================
Page 1
TSR, INC. AND SUBSIDIARIES
INDEX
Page
Number
------
PART I. FINANCIAL INFORMATION:
ITEM 1. FINANCIAL STATEMENTS:
Condensed Consolidated Balance Sheets -
February 29, 2008 and May 31, 2007.......................... 3
Condensed Consolidated Statements of Income -
For the three months and nine months ended
February 29, 2008 and February 28, 2007 .................... 4
Condensed Consolidated Statements of Cash Flows -
For the nine months ended February 29, 2008 and
February 28, 2007........................................... 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................................................. 17
ITEM 4. CONTROLS AND PROCEDURES....................................... 17
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 February 29, May 31,
2008 2007
----------- -----------
(Unaudited) (Note 1)
Current Assets:
Cash and cash equivalents .................................. $ 449,181 $ 1,900,264
Marketable securities ...................................... 5,937,762 6,395,131
Accounts receivable, net of allowance for
doubtful accounts of $325,459 and $354,649 ............ 9,804,871 8,156,651
Other receivables .......................................... 58,498 99,015
Prepaid expenses ........................................... 57,878 54,928
Prepaid and recoverable income taxes ....................... 65,942 153,618
Deferred income taxes ...................................... 132,000 145,000
----------- -----------
Total current assets .................................. 16,506,132 16,904,607
Marketable securities ........................................... 999,648 996,445
Equipment and leasehold improvements, at cost (net of accumulated
depreciation and amortization of $391,501 and $380,838) .... 28,747 46,290
Other assets .................................................... 49,653 49,653
Deferred income taxes ........................................... 62,000 62,000
----------- -----------
Total assets .................................................... $17,646,180 $18,058,995
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts and other payables ................................ $ 256,386 $ 306,695
Accrued expenses and other current liabilities ............. 1,890,805 2,191,212
Advances from customers .................................... 1,549,312 1,591,324
Income taxes payable ....................................... 7,927 --
----------- -----------
Total current liabilities ............................. 3,704,430 4,089,231
----------- -----------
Minority Interest ............................................... 45,831 17,500
----------- -----------
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 .......................................... 20,793,210 20,849,555
----------- -----------
25,927,220 25,983,565
Less: Treasury stock, 1,660,314 shares, at cost ............ 12,031,301 12,031,301
----------- -----------
Total stockholders' equity ...................................... 13,895,919 13,952,264
----------- -----------
Total liabilities and stockholders' equity ...................... $17,646,180 $18,058,995
=========== ===========
The accompanying notes are an integral part of these
condensed consolidated financial statements.
Page 3
TSR, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
FOR THE THREE AND NINE MONTHS ENDED FEBRUARY 29, 2008 AND FEBRUARY 28, 2007
(UNAUDITED)
Three Months Ended Nine Months Ended
February 29, February 28, February 29, February 28,
2008 2007 2008 2007
------------ ------------ ------------ ------------
Revenues, net ............................................. $ 12,411,619 $ 11,773,704 $ 39,178,822 $ 36,775,393
------------ ------------ ------------ ------------
Cost of sales ............................................. 10,227,614 9,722,403 31,996,418 29,977,510
Selling, general and administrative expenses .............. 1,866,485 1,777,553 5,587,002 5,331,297
------------ ------------ ------------ ------------
12,094,099 11,499,956 37,583,420 35,308,807
------------ ------------ ------------ ------------
Income from operations .................................... 317,520 273,748 1,595,402 1,466,586
Other income (expense):
Interest and dividend income ......................... 89,457 118,965 300,922 346,214
Realized and unrealized gain (loss) from marketable
securities, net .................................... (4,889) (1,228) (1,769) 1,472
Minority interest in subsidiary operating profits .... (16,622) (6,227) (70,577) (36,802)
------------ ------------ ------------ ------------
Income before income taxes ................................ 385,466 385,258 1,823,978 1,777,470
Provision for income taxes ................................ 171,000 184,000 784,000 720,000
------------ ------------ ------------ ------------
Net income ................................................ $ 214,466 $ 201,258 $ 1,039,978 $ 1,057,470
============ ============ ============ ============
Basic and diluted net income per common share ............. $ 0.05 $ 0.04 $ 0.23 $ 0.23
============ ============ ============ ============
Weighted average number of basic and 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
consolidated condensed financial statements.
Page 4
TSR, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED FEBRUARY 29, 2008 AND FEBRUARY 28, 2007
(UNAUDITED)
Nine Months Ended
February 29, February 28,
2008 2007
----------- -----------
Cash flows from operating activities:
Net income ........................................................ $ 1,039,978 $ 1,057,470
Adjustments to reconcile net income
to net cash provided by (used in) operating activities:
Depreciation and amortization ..................................... 18,984 20,546
Realized and unrealized (gain) loss from marketable securities, net 1,769 (1,472)
Minority interest in subsidiary operating profits ................. 70,577 36,802
Deferred income taxes ............................................. 13,000 --
Changes in operating assets and liabilities:
Accounts receivable - trade ....................................... (1,648,220) 64,547
Other receivables ................................................. 40,517 (5,760)
Prepaid expenses .................................................. (2,950) (16,852)
Prepaid and recoverable income taxes .............................. 87,676 240,885
Accounts payable and accrued expenses ............................. (350,716) (166,041)
Income taxes payable .............................................. 7,927 (102,974)
Advances from customers ........................................... (42,012) 2,458
----------- -----------
Net cash provided by (used in) operating activities .................... (763,470) 1,129,609
----------- -----------
Cash flows from investing activities:
Proceeds from maturities and sales of marketable securities ....... 8,818,667 7,332,461
Purchases of marketable securities ................................ (8,366,270) (7,822,343)
Purchases of fixed assets ......................................... (1,441) (31,399)
----------- -----------
Net cash (used in) provided by investing activities .................... 450,956 (521,281)
----------- -----------
Cash flows from financing activities:
Distributions to minority interest ................................ (42,246) (63,578)
Cash dividends paid ............................................... (1,096,323) (1,096,323)
----------- -----------
Net cash used in financing activities .................................. (1,138,569) (1,159,901)
----------- -----------
Net decrease in cash and cash equivalents .............................. (1,451,083) (551,573)
Cash and cash equivalents at beginning of period ....................... 1,900,264 2,660,739
----------- -----------
Cash and cash equivalents at end of period ............................. $ 449,181 $ 2,109,166
=========== ===========
Supplemental disclosures of cash flows:
Income taxes paid ................................................. $ 675,000 $ 576,000
=========== ===========
The accompanying notes are an integral part of these
consolidated condensed financial statements.
Page 5
TSR, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FEBRUARY 29, 2008
(UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying condensed consolidated interim financial statements
include the accounts of TSR, Inc. and its subsidiaries (the "Company"). All
significant inter-company balances and transactions have been eliminated in
consolidation. These interim financial statements have been prepared in
accordance with accounting principles generally accepted in the United
States of America applying to interim financial information and with the
instructions to Form 10-Q of Regulation S-X of the Securities and Exchange
Commission. Accordingly, certain information and footnote disclosures
required by accounting principles generally accepted in the United States
of America and normally included in the Company's annual financial
statements have been condensed or omitted. These interim financial
statements as of and for the nine months ended February 29, 2008 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, 2008. The consolidated balance sheet at May 31,
2007 has been derived from the audited financial statements at that date.
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, 2007.
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. The Company had no stock options or other common
stock equivalents outstanding during any of the periods presented.
3 CASH AND CASH EQUIVALENTS
The Company considers short-term highly liquid investments with maturities
of three months or less at the time of purchase to be cash equivalents.
Cash and cash equivalents were comprised of the following as of February
29, 2008 and May 31, 2007:
February 29, May 31,
2008 2007
----------- -----------
Cash in banks.................... $ 281,398 $ 390,370
Money market funds............... 167,783 1,509,894
----------- -----------
$ 449,181 $ 1,900,264
=========== ===========
4. REVENUE RECOGNITION
The Company's contract computer programming services are generally provided
under time and materials agreements with customers. Revenue is recognized
in accordance with Staff Accounting Bulletin (SAB) 104, "Revenue
Recognition," when persuasive evidence of an arrangement exists, the
services have been rendered, the price is fixed or determinable, and
collectability is reasonably assured. Advances from customers represent
amounts received from customers prior to the Company's provision of the
related services and credit balances from overpayments.
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
FEBRUARY 29, 2008
(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 at February 29, 2008 and May
31, 2007 are summarized as follows:
Gross Gross
Unrealized Unrealized
Amortized Holding Holding Recorded
February 29, 2008 Cost Gains Losses Value
---------- ---------- ---------- ----------
Current
-------
United States Treasury Securities...... $5,921,787 $ -- $ -- $5,921,787
Equity Securities...................... 16,866 -- (891) 15,975
---------- ---------- ---------- ----------
$5,938,653 $ -- $ (891) $5,937,762
========== ========== ========== ==========
Long - Term
-----------
United States Treasury Securities...... $ 999,648 $ -- $ -- $ 999,648
========== ========== ========== ==========
Gross Gross
Unrealized Unrealized
Amortized Holding Holding Recorded
May 31, 2007 Cost Gains Losses Value
---------- ---------- ---------- ----------
Current
-------
United States Treasury Securities...... $6,377,387 $ -- $ -- $6,377,387
Equity Securities...................... 16,866 878 -- 17,744
---------- ---------- ---------- ----------
$6,394,253 $ 878 $ -- $6,395,131
========== ========== ========== ==========
Long - Term
-----------
United States Treasury Securities...... $ 996,445 $ -- $ -- $ 996,445
========== ========== ========== ==========
Page 7
TSR, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
FEBRUARY 29, 2008
(UNAUDITED)
6. STOCK OPTIONS
The Company had one stock-based employee compensation plan in effect which
expired on April 30, 2007. Effective June 1, 2006, the Company accounted
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, ("FAS123(R)"), which requires that the fair market value
of all share based payment transactions be recognized in the financial
statements. FAS123(R) 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 February 29, 2008.
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,
FIN 48 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. The adoption of FIN 48 at the beginning of the 2008
fiscal year did not have a material effect on the Company's consolidated
financial statements.
The Company may from time to time be assessed interest and/or penalties by
major taxing jurisdictions, although any such assessments historically have
been minimal and immaterial to the Company's financial results. In the
event the Company has received an assessment for interest and/or penalties,
it has been classified in the statement of income in selling, general and
administrative expenses.
On September 15, 2006, the FASB issued SFAS No. 157, "Fair Value
Measurements" ("SFAS No. 157"). 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. SFAS No. 157 applies whenever other
standards require (or permit) assets or liabilities to be measured at fair
value. SFAS No. 157 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.
In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for
Financial Assets and Financial Liabilities - including an amendment of FASB
Statement No. 115" ("SFAS No. 159"). SFAS No. 159 permits entities to elect
to measure many financial instruments and certain other items at fair
value. Upon adoption of SFAS No. 159, an entity may elect the fair value
option for eligible items that exist at the adoption date. Subsequent to
the initial adoption, the election of the fair value option should only be
made at initial recognition of the asset or liability or upon a
re-measurement event that gives rise to new-basis accounting. SFAS No. 159
does not affect any existing accounting literature that requires certain
assets and liabilities to be carried at fair value nor does it eliminate
disclosure requirements included in other accounting standards. SFAS No.
159 is effective for fiscal years beginning after November 15, 2007. The
Company is currently assessing the impact of SFAS No. 159 on its
consolidated financial statements.
Page 8
TSR, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
FEBRUARY 29, 2008
(UNAUDITED)
8. DIVIDENDS
On April 4, 2008 the Board of Directors of the Company declared that a
regular quarterly cash dividend of $0.08 per share for the quarter ended
February 29, 2008 would be paid on May 5, 2008 to shareholders of record as
of April 18, 2008. 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, the Company will not be able to make new placements or renew
existing placements with the DOE. The DOE accounted for approximately 13%
of the Company's revenues during the Company's fiscal year ended May 31,
2006 and 4% during fiscal 2007. 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 were not renewed.
The last remaining consultants were terminated in April 2007.
DOE also asserted a claim against the Company for a reimbursement due to
the Company's subcontracting without written authorization. While the
Company believes that its subcontracting did not result in overcharges to
DOE, it has settled the matter in order to avoid the expense and
uncertainty of litigation. The related $900,000 reserve established at May
31, 2006 was sufficient for the settlement which was finalized in May 2007.
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 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. The
Company is under no obligation to publicly update or revise forward looking
statements.
Results of Operations
---------------------
The following table sets forth for the periods indicated certain financial
information derived from the Company's condensed consolidated statements of
income. There can be no assurance that trends in operating results will continue
in the future:
Three months ended February 29, 2008 compared with three months ended February
------------------------------------------------------------------------------
28, 2007
--------
(Dollar Amounts in Thousands)
Three Months Ended
February 29, February 28,
2008 2007
---- ----
%of %of
Amount Revenues Amount Revenues
-------- -------- -------- --------
Revenues, net.................. $ 12,412 100.0 $ 11,774 100.0
Cost of sales.................. 10,228 82.4 9,722 82.6
-------- ----- -------- -----
Gross profit................... 2,184 17.6 2,052 17.4
Selling, general, and
administrative expenses........ 1,867 15.0 1,778 15.1
-------- ----- -------- -----
Income from operations......... 317 2.6 274 2.3
Other income, net.............. 68 0.5 111 1.0
-------- ----- -------- -----
Income before income taxes..... 385 3.1 385 3.3
Provision for income taxes..... 171 1.4 184 1.6
-------- ----- -------- -----
Net income..................... $ 214 1.7 $ 201 1.7
======== ===== ======== =====
Page 10
TSR, INC. AND SUBSIDIARIES
Revenues
--------
Revenues consist primarily of revenues from computer programming consulting
services. Revenues for the quarter ended February 29, 2008 increased $638,000 or
5.4% from the quarter ended February 28, 2007. The average number of consultants
on billing with customers increased to approximately 329 for the quarter ended
February 29, 2008 from approximately 326 for the quarter ended February 28,
2007. Changes in the business mix toward higher level skills allowed the Company
to increase its average billing rates to customers, resulting in the revenue
increase.
As a result of the merger of AT&T with SBC Communications, Inc. in November
2005, Procurestaff, which had been the sole 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 a series of changes which have been implemented
since the merger, the Company experienced a significant decrease in new
placements with AT&T beginning in the second quarter of fiscal 2007. This has
reduced the number of consultants on billing with AT&T from 79 at February 28,
2007 to 50 at February 29, 2008. The Company expects that these changes will
continue to impact the Company's business relationship with AT&T, resulting in
fewer opportunities to place new consultants with AT&T.
The Company's contract to provide services to the DOE was terminated in June
2006. There were 41 consultants on billing with the DOE at May 31, 2006 and 11
at February 28, 2007. The last remaining consultants were terminated in April
2007.
Although there had been some improvement in market conditions during the past
few years prior to the recent economic downturn, the Company's revenues have not
improved significantly. The Company has not yet fully adapted its business model
to more effectively deal with changing market factors such as vendor management
and off-shore IT operations. A focus of the Company's plan has been to hire
additional experienced account executives and technical recruiters to address
increased competition and to promote revenue growth. This process has taken
longer than expected due to a combination of limited qualified candidates and
increased compensation expectations of qualified candidates.
As a result of the recent economic downturn and, specifically, the impact of the
adverse conditions in the credit markets on the financial services industry, the
Company expects that IT spending will decrease in the short term and that the
impact is likely to be greater in the financial services industry. These
economic conditions have reduced the opportunities to place new consultants on
billing with clients. The Company currently derives 15 to 20 percent of its
revenues from the financial services industry.
Cost of Sales
-------------
Cost of sales for the quarter ended February 29, 2008, increased $506,000 or
5.2% to $10,228,000 from $9,722,000 in the prior year period. The increase in
cost of sales resulted primarily from increased amounts paid to consultants on
billing with clients due to increased skill level which was also reflected in
higher billing rates to customers. Cost of sales as a percentage of revenues
decreased from 82.6% in the quarter ended February 28, 2007 to 82.4% in the
quarter ended February 29, 2008.
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 $89,000 or 5.0% from
$1,778,000 in the quarter ended February 28, 2007 to $1,867,000 in the quarter
ended February 29, 2008. This increase was primarily attributable to an increase
in the number of account executives. Additional account executives have been
hired to bring about future growth.
Page 11
TSR, INC. AND SUBSIDIARIES
Income from Operations
----------------------
Income from operations increased $43,000 or 15.7% from $274,000 in the quarter
ended February 28, 2007 to $317,000 in the quarter ended February 29, 2008.
Income from operations included $83,000 in the quarter ended February 29, 2008
and $31,000 in the quarter ended February 28, 2007 from the Company's majority
owned subsidiary. The minority owner's share of this income, which equaled
$17,000 and $6,000, respectively, is deducted from "Other income."
Other Income
------------
Other income resulted primarily from interest and dividend income, which
declined to approximately $89,000 for the quarter ended February 29, 2008 from
$119,000 for the quarter ended February 28, 2007. The rate of interest earned on
the Company's U.S. Treasury securities and money market accounts decreased in
the period. Other income also decreased because improved profits from the
Company's majority owned subsidiary resulted in the amount allocated to the
minority interest to increase to $17,000 from $6,000 in the prior year quarter.
Income Taxes
------------
The effective income tax rate of 44.4% for the quarter ended February 29, 2008
decreased from a rate of 47.8% in the quarter ended February 28, 2007. The
higher effective rate in the prior year period was the result of an additional
amount provided due to a change in estimate associated with prior year taxes.
Nine months ended February 29, 2008 compared with nine months ended February 28,
--------------------------------------------------------------------------------
2007
----
(Dollar Amounts in Thousands)
Nine Months Ended
February 29, February 28,
2008 2007
---- ----
%of %of
Amount Revenues Amount Revenues
-------- -------- -------- --------
Revenues, net.................. $ 39,179 100.0 $ 36,775 100.0
Cost of sales.................. 31,997 81.7 29,978 81.5
-------- ----- -------- -----
Gross profit................... 7,182 18.3 6,797 18.5
Selling, general, and
administrative expenses........ 5,587 14.2 5,331 14.5
-------- ----- -------- -----
Income from operations......... 1,595 4.1 1,466 4.0
Other income, net.............. 229 0.6 311 0.8
-------- ----- -------- -----
Income before income taxes..... 1,824 4.7 1,777 4.8
Provision for income taxes..... 784 2.0 720 1.9
-------- ----- -------- -----
Net income..................... $ 1,040 2.7 $ 1,057 2.9
======== ===== ======== =====
Revenues
--------
Revenues consist primarily of revenues from computer programming consulting
services. Revenues for the nine months ended February 29, 2008 increased
$2,404,000 or 6.5% from the nine months ended February 28, 2007. The average
number of consultants on billing with customers decreased from approximately 339
for the nine months ended February 28, 2007 to approximately 338 for the nine
months ended February 29, 2008. Changes in the business mix toward higher level
skills allowed the Company to increase its average billing rates to customers,
offsetting the slight decrease in the average number of consultants on billing
with customers.
Page 12
TSR, INC. AND SUBSIDIARIES
As a result of the merger of AT&T with SBC Communications, Inc. in 2005,
Procurestaff, which had been the sole 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 a series of changes which have been implemented
since the merger, the Company experienced a significant decrease in new
placements with AT&T beginning in the second quarter of fiscal 2007. This has
reduced the number of consultants on billing with AT&T from 79 at February 28,
2007 to 50 at February 29, 2008. The Company expects that these changes will
continue to impact the Company's business relationship with AT&T, resulting in
fewer opportunities to place new consultants with AT&T.
The Company's contract to provide services to the DOE was terminated in June
2006. There were 41 consultants on billing with the DOE at May 31, 2006 and 11
at February 28, 2007. The last remaining consultants were terminated in April
2007.
Although there had been some improvement in market conditions during the past
few years prior to the recent economic downturn, the Company's revenues had not
improved significantly. The Company has not yet fully adapted its business model
to more effectively deal with changing market factors such as vendor management
and off-shore IT operations. A focus of the Company's plan has been to hire
additional experienced account executives and technical recruiters to address
increased competition and to promote revenue growth. This process has taken
longer than expected due to a combination of limited qualified candidates and
increased compensation expectations of qualified candidates.
As a result of the recent economic downturn and, specifically, the impact of the
adverse conditions in the credit markets on the financial services industry, the
Company expects that IT spending will decrease in the short term and that the
impact is likely to be greater in the financial services industry. These
economic conditions have reduced the opportunities to place new consultants on
billing with clients. The Company currently derives 15 to 20 percent of its
revenues from the financial services industry.
Cost of Sales
-------------
Cost of sales for the nine months ended February 29, 2008, increased $2,019,000
or 6.7% to $31,997,000 from $29,978,000 in the prior year period. The increase
in cost of sales resulted primarily from increased amounts paid to consultants
on billing with clients due to increased skill level which was also reflected in
higher billing rates to customers. Cost of sales as a percentage of revenues
increased from 81.5% in the nine months ended February 28, 2007 to 81.7% in the
nine months ended February 29, 2008. 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.
Selling, General and Administrative Expenses
--------------------------------------------
Selling, general and administrative expenses consist primarily of expenses
relating to account executives, technical recruiters, facilities costs,
management and corporate overhead. These expenses increased $256,000 or 4.8%
from $5,331,000 in the nine months ended February 28, 2007 to $5,587,000 in the
nine months ended February 29, 2008. This increase was primarily attributable to
an increase in the number of account executives. Additional account executives
have been hired to bring about future growth.
Page 13
TSR, INC. AND SUBSIDIARIES
Income from Operations
----------------------
Income from operations increased $129,000 or 8.8% from $1,466,000 in the nine
months ended February 28, 2007 to $1,595,000 in the nine months ended February
29, 2008. Income from operations included $353,000 in the nine months ended
February 29, 2008 and $184,000 in the nine months ended February 28, 2007 from
the Company's majority owned subsidiary. The minority owner's share of this
income, which equaled $71,000 and $37,000, respectively, is deducted from "Other
income."
Other Income
------------
Other income resulted primarily from interest and dividend income, which
decreased to approximately $301,000 for the nine months ended February 29, 2008
from $346,000 for the nine months ended February 28, 2007. The rate of interest
earned on the Company's U.S. Treasury securities and money market accounts
decreased in the period. Other income also decreased because improved profits
from the Company's majority owned subsidiary resulted in amounts allocated to
the minority interest to increase to $71,000 from $37,000 in the prior year
period.
Income Taxes
------------
The effective income tax rate of 43.0% for the nine months ended February 29,
2008 increased from a rate of 40.5% in the nine months ended February 28, 2007.
The lower effective rate in the prior year period was the result of a credit
taken in the first six months of the prior fiscal year due to a change in
estimate associated with prior year taxes. The lower effective rate in the prior
year period was the primary reason that net income did not increase, as
expected, with the increase in income from operations in the current period.
Page 14
TSR, INC. AND SUBSIDIARIES
Liquidity and Capital Resources
-------------------------------
The Company expects that cash flow generated from operations together with its
cash and marketable securities will be sufficient to provide the Company with
adequate resources to meet its liquidity requirements for the foreseeable
future.
At February 29, 2008, the Company had working capital of $12,802,000 and cash
and cash equivalents of $449,000 as compared to working capital of $12,815,000
and cash and cash equivalents of $1,900,000 at May 31, 2007. The Company's
working capital also included $5,938,000 and $6,395,000 of marketable securities
with maturities of less than one year at February 29, 2008 and May 31, 2007,
respectively.
Net cash used in operating activities of $763,000 for the nine months ended
February 29, 2008, compared to $1,130,000 of cash provided by operating
activities for the nine months ended February 28, 2007. The cash used in
operating activities in the nine months ended February 29, 2008 resulted
primarily from an increase in accounts receivable. This increase occurred
because a vendor management company, which processed payments for three end
clients, filed a petition in bankruptcy in January 2008. The agreement with the
vendor management company was structured as a subcontracting agreement with the
vendor management company entering into a services agreement directly with the
end clients. As a result of the bankruptcy filing, payments from the end clients
were delayed and only $300,000 of the aggregate amount of $1,600,000 due to the
Company for services rendered prior to the bankruptcy filing were received
before February 29, 2008. The bankruptcy court has issued an order permitting
the end clients to pay the Company directly or to make payments to the company
which acquired the vendor management system, which would, in turn, pay the
Company the amounts due. As a result, the Company has received all but $100,000
of the amounts due from the end clients and expects to be paid the balance. The
Company does not expect to incur any loss as a result of the bankruptcy filing.
In the nine months ended February 28, 2007 cash flow provided by operating
activities resulted primarily from the Company's net income.
Net cash provided by investing activities of $451,000 for the nine months ended
February 29, 2008 primarily resulted from maturities of US Treasury securities
in excess of purchases. Net cash used in investing activities of $521,000 for
the nine months ended February 28, 2007 primarily resulted from purchasing US
Treasury securities in excess of maturities.
Net cash used in financing activities of $1,139,000 and $1,160,000 for the nine
months ended February 29, 2008 and February 28, 2007, respectively, resulted
primarily from cash dividends paid.
The Company's capital resource commitments at February 29, 2008 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 29, 2008. The
Company has available a revolving line of credit of $5,000,000 with a major
money center bank through October 31, 2009. As of February 29, 2008, no amounts
were outstanding under this line of credit.
Tabular Disclosure of Contractual Obligations
---------------------------------------------
Payments Due By Period
LESS THAN 1 MORE THAN
Contractual Obligations TOTAL YEAR 1-3 YEARS 3-5 YEARS 5 YEARS
---------- ---------- ---------- ---------- ----------
Operating Leases......... $ 867,000 $ 271,000 $ 398,000 $ 198,000 $ --
Employment Agreements.... 1,816,000 873,000 743,000 200,000 --
---------- ---------- ---------- ---------- ----------
Total.................... $2,683,000 $1,144,000 $1,141,000 $ 398,000 $ --
========== ========== ========== ========== ==========
Page 15
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, FIN 48 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. The adoption of FIN 48 at the beginning of
the 2008 fiscal year did not have a material effect on the Company's
consolidated financial statements.
The Company may from time to time be assessed interest and/or penalties by major
taxing jurisdictions, although any such assessments historically have been
minimal and immaterial to the Company's financial results. In the event the
Company has received an assessment for interest and/or penalties, it has been
classified in the statement of income in selling, general and administrative
expenses.
On September 15, 2006, the FASB issued SFAS No. 157, "Fair Value Measurements"
("SFAS No. 157"). 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. SFAS No. 157 applies whenever other standards require (or permit)
assets or liabilities to be measured at fair value. SFAS No. 157 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.
In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for
Financial Assets and Financial Liabilities - including an amendment of FASB
Statement No. 115" ("SFAS No. 159"). SFAS No. 159 permits entities to elect to
measure many financial instruments and certain other items at fair value. Upon
adoption of SFAS No. 159, an entity may elect the fair value option for eligible
items that exist at the adoption date. Subsequent to the initial adoption, the
election of the fair value option should only be made at initial recognition of
the asset or liability or upon a re-measurement event that gives rise to
new-basis accounting. SFAS No. 159 does not affect any existing accounting
literature that requires certain assets and liabilities to be carried at fair
value nor does it eliminate disclosure requirements included in other accounting
standards. SFAS No. 159 is effective for fiscal years beginning after November
15, 2007. The Company is currently assessing the impact of SFAS No. 159 on its
consolidated financial statements.
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, 2007
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 February 29, 2008.
Page 16
TSR, INC. AND SUBSIDIARIES
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 1A. RISK FACTORS
There are no material changes to the risk factors described in the Form
10-K, filed on August 8, 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: April 4, 2008 /s/ J.F. Hughes
-----------------------------------------
J.F. Hughes, Chairman and President
Date: April 4, 2008 /s/ John G. Sharkey
-----------------------------------------
John G. Sharkey, Vice President Finance
and Chief Financial Officer
Page 17