WWW.EXFILE.COM -- 888-775-4789 -- TSR, INC. -- FORM 10-Q -- 16679
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, 2009
 
o
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
State or other jurisdiction of
Incorporation or organization)
  
13-2635899
(I.R.S. Employer Identification No.)

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   o  No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  o  Yes   o  No (Registrant not subject to requirement)

Indicate by check mark whether the registrant is large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company.  See definition of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.  (Check one):

Large Accelerated Filer  o
Accelerated Filer  o
Non-Accelerated filer  o
(Do not check if a smaller reporting company)
Smaller Reporting Company  x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).   oYes   x  No

As of December 31, 2009, there were 4,050,488 shares of common stock, par value $.01 per share, issued and outstanding.

Page 1
 
 
TSR, INC. AND SUBSIDIARIES
INDEX

     
Page
  
Part I.
Financial Information:
Number
  
         
 
Item 1.
Financial Statements:
    
         
   
Condensed Consolidated Balance Sheets –
    
   
November 30, 2009 and May 31, 2009
3
  
         
   
Condensed Consolidated Statements of Income –
    
   
For the three months and six months ended November 30, 2009 and 2008
4
  
         
   
Condensed Consolidated Statements of Equity –
    
   
For the six months ended November 30, 2009 and 2008
5
  
         
   
Condensed Consolidated Statements of Cash Flows –
    
   
For the six months ended November 30, 2009 and 2008
6
  
         
   
Notes to Condensed Consolidated Financial Statements
7
  
         
 
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
11
  
         
 
Item 4T.
Controls and Procedures
18
  
         
Part II.
Other Information
18
  
         
 
Item 6.
Exhibits
18
  
         
Signatures
  
18
  


 
Page 2


Part I. 
Financial Information
Item 1. Financial Statements

TSR, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
 
 
 
ASSETS
  
November
30,
2009
    
May 
31,
2009
  
   
(Unaudited)
    
(Note 1)
  
             
Current Assets:
            
Cash and cash equivalents
   $ 4,310,110     $ 4,075,213  
Marketable securities
     3,514,813       4,509,346  
Accounts receivable, net of allowance for doubtful accounts of $202,000 and $302,000
     7,201,960       6,345,374  
Other receivables
     15,668       20,580  
Prepaid expenses
     54,313       72,429  
Prepaid and recoverable income taxes
     134,128       101,791  
Deferred income taxes
     91,000       133,000  
Total Current Assets
     15,321,992       15,257,733  
                 
                 
Equipment and leasehold improvements, net of accumulated depreciation and amortization of $425,050 and $415,963
     12,312       19,115  
Other assets
     49,653       49,653  
Deferred income taxes
     59,000       61,000  
Total Assets
   $ 15,442,957     $ 15,387,501  
                 
LIABILITIES AND EQUITY
                
                 
Current Liabilities:
                
Accounts and other payables
   $ 252,449     $ 274,284  
Accrued expenses and other current liabilities
     1,170,755       1,247,355  
Advances from customers
     1,423,740       1,447,740  
Total Current Liabilities
     2,846,944       2,969,379  
                 
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
     20,660,778       20,517,707  
      25,794,788       25,651,717  
Less: Treasury stock, 2,177,838 shares, at cost
     13,251,231       13,251,231  
Total TSR, Inc. Stockholders’ Equity
     12,543,557       12,400,486  
                 
Noncontrolling Interest
     52,456       17,636  
                 
Total Equity
     12,596,013       12,418,122  
                 
Total Liabilities and Equity
   $ 15,442,957     $ 15,387,501  
 
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
Page 3
TSR, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
For The Three Months and Six Months Ended November 30, 2009 and 2008
(UNAUDITED)

                           
 
    Three Months Ended     Six Months Ended  
   
November 30,
2009
    
November 30,
2008
    
November 30,
2009
    
November 30,
2008
  
Revenue, net
   $ 9,340,341     $ 11,536,160     $ 18,432,643     $ 23,685,980  
                                 
Cost of sales
     7,654,462       9,467,256       15,100,963       19,495,076  
Selling, general and administrative expenses
     1,516,003       1,695,928       3,042,045       3,495,574  
      9,170,465       11,163,184       18,143,008       22,990,650  
Income from operations
     169,876       372,976       289,635       695,330  
                                 
Other income (expense):
                                
Interest and dividend income
     14,176       34,969       32,472       102,266  
Unrealized gain (loss) on marketable securities, net
     (896 )     (7,256 )     2,784       (7,504 )
                                 
Income before income taxes
     183,156       400,689       324,891       790,092  
Provision for income taxes
     82,000       165,000       141,000       330,000  
                                 
Net income
     101,156       235,689       183,891       460,092  
Less: Net income attributable to noncontrolling interest
     (21,463 )      (15,530 )      (40,820 )      (24,883 ) 
                                 
Net income attributable to TSR, Inc.
  $ 79,693     $ 220,159     $ 143,071     $ 435,209  
                                 
Basic and diluted net income per TSR, Inc. common share
   $ 0.02     $ 0.05     $ 0.04     $ 0.10  
                                 
Weighted average number of basic and diluted common shares outstanding
     4,050,488       4,277,128       4,050,488       4,420,957  


The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.



 

Page 4
 
TSR, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EQUITY
 For The Six Months Ended November 30, 2009 and 2008
(UNAUDITED)


   
Shares of
common
stock
    
Common
stock
    
Additional
paid-in
capital
    
Retained
earnings
    
Treasury
stock
    
Non-
controlling
Interest
    
Total
equity
  
                                           
Balance at May 31, 2008.
     6,228,326     $ 62,283     $ 5,071,727     $ 20,663,925     $ (12,031,301 )   $ 53,533     $ 13,820,167  
                                                         
Net income attributable to noncontrolling interest
     —       —       —       —       —       24,883       24,883  
                                                         
Distribution to noncontrolling interest
     —       —       —       —       —       (14,000 )     (14,000 )
                                                         
Purchases of treasury stock
     —       —       —       —       (1,219,930 )     —       (1,219,930 )
                                                         
Dividends declared
     —       —       —       (565,085 )     —       —       (565,085 )
                                                         
Net income attributable to TSR, Inc.
     —       —       —       435,209       —       —       435,209  
                                                         
Balance at Nov. 30, 2008
     6,228,326     $ 62,283     $ 5,071,727     $ 20,534,049     $ (13,251,231 )   $ 64,416     $ 12,481,244  
                                                         
                                                         
Balance at May 31, 2009
     6,228,326     $ 62,283     $ 5,071,727     $ 20,517,707     $ (13,251,231 )   $ 17,636     $ 12,418,122  
                                                         
Net income attributable to noncontrolling interest
     —       —       —       —       —       40,820       40,820  
                                                         
Distribution to noncontrolling interest
     —       —       —       —       —       (6,000 )     (6,000 )
                                                         
Net income attributable to TSR, Inc.
     —       —       —       143,071       —       —       143,071  
                                                         
Balance at Nov. 30, 2009
     6,228,326     $ 62,283     $ 5,071,727     $ 20,660,778     $ (13,251,231 )   $ 52,456     $ 12,596,013  

 
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.


Page 5
 
TSR, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For The Six Months Ended November 30, 2009 and 2008
(UNAUDITED)
 
    Six Months Ended  
   
November 30,
2009
    
November 30,
2008
  
Cash flows from operating activities:
            
Net income
   $ 183,891     $ 460,092  
 
                
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
                
Depreciation and amortization
     9,087       9,942  
Unrealized (gain) loss on marketable securities, net
     (2,784 )     7,504  
Deferred income taxes
     44,000       9,000  
                 
Changes in operating assets and liabilities:
                
Accounts receivable
     (856,586 )     222,586  
Other receivables
     4,912       14,643  
Prepaid expenses
     18,116       (16,156 )
Prepaid and recoverable income taxes
     (32,337 )     (8,591 )
Accounts and other payables and accrued expenses and other current liabilities
     (98,435 )     (542,688 )
Advances from customers
     (24,000 )      (77,917 ) 
                 
Net cash provided by (used in) operating activities
     (754,136 )     78,415  
                 
Cash flows from investing activities:
                
Proceeds from maturities of marketable securities
     2,996,508       5,941,717  
Purchases of marketable securities
     (1,999,191 )     (3,962,494 )
Purchases of equipment and leasehold improvements
     (2,284 )     (9,635 )
                 
Net cash provided by investing activities
     995,033       1,969,588  
                 
                 
Cash flows from financing activities:
                
Purchases of treasury stock
     —       (1,219,930 ) 
Cash dividends paid
     —       (565,085 ) 
Distribution to noncontrolling interest
     (6,000 )     (14,000 )
                 
Net cash used in financing activities
     (6,000 )     (1,799,015 )
                 
                 
Net increase in cash and cash equivalents
     234,897       248,988  
Cash and cash equivalents at beginning of period
     4,075,213       1,588,443  
                 
Cash and cash equivalents at end of period
   $ 4,310,110     $ 1,837,431  
                 
                 
Supplemental disclosures of cash flow data:
                
Income taxes paid
   $ 130 ,000     $ 336,000  
                 
 
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

Page 6
 
TSR, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
November 30, 2009
(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 three months and six months ended November 30, 2009 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, 2010.  The balance sheet at May 31, 2009 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, 2009.

The Company has evaluated subsequent events through the time of filing these condensed consolidated financial statements with the Securities and Exchange Commission (“SEC”) on January 8, 2010.
 
 
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 has 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 November 30, 2009 and May 31, 2009:
 
   
November 30,
2009
    
May 31,
2009
  
Cash in banks
   $ 2,213,903     $ 2,008,349  
Money market funds
     2,096,207       2,066,864  
    $ 4,310,110     $ 4,075,213  
 
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.  These conditions occur when a customer agreement is effected and the consultant performs the authorized services.  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.

Page 7
\
TSR, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, Continued
November 30, 2009
(Unaudited)

5.  
Marketable Securities
 
In fiscal 2009, the Company adopted new accounting standards related to fair value measurements. The Company has characterized its investments in marketable securities, based on the priority of the inputs used to value the investments, into a three-level fair value hierarchy. The fair value hierarchy gives the highest priority to quoted prices in active markets for identical assets or liabilities (Level 1), and lowest priority to unobservable inputs   (Level 3). If the inputs used to measure the investments fall within different levels of the hierarchy, the categorization is based on the lowest level input that is significant to the fair value measurement of the instrument.

Investments recorded in the accompanying consolidated balance sheets are categorized based on the inputs to valuation techniques as follows:

Level 1- These are investments where values are based on unadjusted quoted prices for identical assets in an active market the Company has the ability to access.

Level 2- These are investments where values are based on quoted market prices that are not active or model derived valuations in which all significant inputs are observable in active markets.

Level 3- These are investments where values are derived from techniques in which one or more significant inputs are unobservable.

The following are the major categories of assets measured at fair value on a recurring basis during the fiscal year ended May 31, 2010 using quoted prices in active markets for identical assets (Level 1), significant other observable inputs (Level 2) and significant unobservable inputs (Level 3):
 
November 30, 2009
  
Level 1
    
Level 2
    
Level 3
    
Total
  
US Treasury securities
   $ 1,499,816     $ —     $ —     $ 1,499,816  
Certificates of deposit
     —       1,999,637       —       1,999,637  
Equity securities
     15,360       —       —       15,360  
    $ 1,515,176     $ 1,999,637     $ —     $ 3,514,813  
 
Based upon the Company’s intent and ability to hold its US Treasury securities to maturity (which maturities range up to twenty-four months at purchase), such securities have been classified as held-to-maturity and are carried at amortized cost, which approximates market value. The Company’s equity securities are classified as trading securities, which are carried at fair value, as determined by quoted market prices, which is Level 1 input, as established by the fair value hierarchy. The related unrealized gains and losses are included in earnings.  The Company’s marketable securities at November 30, 2009 and May 31, 2009 are summarized as follows:

 
November 30, 2009
Current
  
 
Amortized
Cost
    
Gross
Unrealized
Holding
Gains
    
Gross
Unrealized
Holding
Losses
    
 
Recorded
Value
  
                         
US Treasury Securities
   $ 1,499,816     $ —     $ —     $ 1,499,816  
Certificates of Deposit
     1,999,637       —       —       1,999,637  
Equity Securities
     16,866       —       1,506       15,360  
    $ 3,516,319     $ —     $ 1,506     $ 3,514,813  

 
Page 8
 
TSR, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, Continued
November 30, 2009
(Unaudited)

 
May 31, 2009
Current
  
 
Amortized
Cost
    
Gross
Unrealized
Holding
Gains
    
Gross
Unrealized
Holding
Losses
    
 
Recorded
Value
  
                         
US Treasury Securities
   $ —2,497,133     $ —     $ —     $ 2,497,133  
Certificates of Deposit
     1,999,637       —       —       1,999,637  
Equity Securities
     16,866       —       4,290       12,576  
    $ 4,513,636     $ —     $ 4,290     $ 4,509,346  


The Company’s investments in marketable securities consist primarily of investments in US Treasury securities and certificates of deposit. Market values were determined for each individual security in the investment portfolio.  When evaluating the investments for other-than –temporary impairment, the Company reviews factors such as length of time and extent to which fair value has been below cost basis, the financial condition of the issuer, and the Company’s ability and intent to hold the investment for a period of time, which may be sufficient for anticipated recovery in market values.

6. 
Fair Value of Financial Instruments
 
Accounting Standards Codification (“ASC”) Topic 825, “Financial Instruments”, requires disclosure of the fair value of certain financial instruments. For cash and cash equivalents, accounts receivable, accounts and other payables, accrued liabilities and advances from customers, the amounts presented in the condensed consolidated financial statements approximate fair value because of the short-term maturities of these instruments.

7. 
Stockholders’ Equity
 
During the six months ended November 30, 2008, the Company purchased a total of 517,524 shares of its common stock for $1,219,930.  This consisted of 61,001 shares purchased in various transactions on the open market for $169,927 under a previously announced repurchase plan of 300,000 shares and an additional 456,523 shares purchased in a private transaction for $1,050,003.  The Company has not made any purchases under its repurchase plan since September 2008.

8. 
Other Matters
 
From time to time, the Company is party to various lawsuits, some involving material amounts. Management is not aware of any lawsuits that would have a material adverse impact on the consolidated financial position of the Company.

9. 
Recent Accounting Pronouncements
 
In December 2007, the Financial Accounting Standards Board (“FASB”) issued an accounting standard requiring an acquirer to measure the identifiable assets acquired, the liabilities assumed and any noncontrolling interest in the acquiree at their fair values on the acquisition date, with goodwill being the excess value over the net identifiable assets acquired. This accounting standard is effective for financial statements issued for fiscal years beginning after December 15, 2008.  The adoption of this accounting standard was subsequently codified into ASC Topic 805, “Business Combinations.”

Page 9
 
TSR, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, Continued
November 30, 2009
(Unaudited)


 
Effective for financial statements issued for fiscal years beginning after December 15, 2008, an acquirer is required to measure identifiable assets acquired, the liabilities assumed and any noncontrolling interest in the acquiree at their fair values on the acquisition date with goodwill being the excess value over net identifiable assets acquired. Noncontrolling interest in a subsidiary should be reported as equity in the unaudited condensed consolidated balance sheets. The amount of consolidated net income or loss attributable to the parent and to the noncontrolling interest should also be reported in the unaudited condensed consolidated statements of income. Changes in a parent’s ownership percentage and the valuation of retained noncontrolling equity investments when a subsidiary is deconsolidated should be disclosed in the unaudited condensed consolidated financial statements. The Company adopted this accounting standard in the first quarter of fiscal 2010.  As a result of the adoption, the Company has reported noncontrolling interests as a component of equity in the unaudited condensed balance sheets and the net income attributable to noncontrolling interests has been separately identified in the unaudited condensed consolidated statements of income. The prior periods presented have also been retrospectively restated to conform to the current classification requirements. Other than the change in presentation of noncontrolling interests, the adoption of this standard had no impact on the unaudited condensed consolidated financial statements.
 
 
In April 2009, the FASB issued an accounting standard to require that disclosures concerning the fair value of financial instruments be presented in interim as well as in annual financial statements. This accounting standard was subsequently codified into ASC Topic 825, “Financial Instruments.” In addition, the FASB issued an accounting standard to provide additional guidance for determining the fair value of a financial asset or financial liability when the volume and level of activity for such asset or liability have decreased significantly and to also provide guidance for determining whether a transaction is an orderly one. This accounting standard was subsequently codified into ASC Topic 820, “Fair Value Measurements and Disclosures.” The FASB also issued an accounting standard which revised and expanded the guidance concerning the recognition and measurement of other-than-temporary impairments of debt securities classified as available-for-sale or held-to-maturity. In addition, it required enhanced disclosures concerning such impairment for both debt and equity securities. This accounting standard was subsequently codified into ASC Topic 320, “Investments – Debt and Equity Securities.” The requirements of these three accounting standards are effective for interim reporting periods ending after June 15, 2009. Early adoption is permitted for interim periods ending after March 15, 2009, but only if the election is made to adopt all these accounting standards. Disclosures for earlier periods presented for comparative purposes at initial adoption are not required. In periods after initial adoption, comparative disclosures are required only for periods ending after initial adoption. The Company has adopted the accounting standards for the first quarter of fiscal 2010.
 
 
In May 2009, the FASB issued an accounting standard which provides guidance to establish general standards of accounting for and disclosures of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. It requires entities to disclose the date through which subsequent events were evaluated as well as the rationale for why the date was selected. This accounting standard is effective for interim and annual periods ending after June 15, 2009 and, accordingly, was adopted by the Company during the first quarter of fiscal 2010. It requires public entities evaluate subsequent events through the date that the financial statements are issued. This accounting standard was subsequently codified into ASC Topic 855, “Subsequent Events.” The Company has evaluated subsequent events through the time of filing these condensed consolidated financial statements with the Securities and Exchange Commission (“SEC”) on January 8, 2010.
 
 
 
In June 2009, the FASB issued an accounting standard which established the Codification to become the single source of authoritative accounting principles generally accepted in the United States of America (“GAAP”) recognized by the FASB to be applied by nongovernmental entities, with the exception of guidance issued by the SEC and its staff. All guidance contained in the Codification carries an equal level of authority. The Codification is not intended to change GAAP, but rather is expected to simplify accounting research by reorganizing current GAAP into approximately 90 accounting topics and providing all the authoritative literature related to a topic in one place. The Company adopted this accounting standard in preparing the condensed consolidated financial statements for the quarter ended November 30, 2009 and all subsequent public filings will reference the Codification as the sole source of authoritative literature.  The adoption of this accounting standard, which was subsequently codified into ASC Topic 105, “Generally Accepted Accounting Principles,” had no impact on retained earnings and will have no impact on the Company’s statements of income.
 

Page 10
 
TSR, INC. AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Part I. 
Financial Information
Item 2.
 
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:  the impact of current adverse conditions in the credit markets and current adverse economic conditions on the Company’s business; risks relating to the competitive nature of the markets for contract computer programming services; the extent to which market conditions for the Company’s contract computer consulting services will continue to adversely affect the Company’s business; the concentration of the Company’s business with certain customers; uncertainty as to the Company’s ability to maintain its relations with existing customers and expand its contract computer consulting services business; the impact of changes in the industry, such as the use of vendor management companies in connection with the consultant 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 November 30, 2009 compared with three months ended November 30, 2008
 
    (Dollar amounts in thousands)
Three Months Ended
  
   
November 30,
2009
    
November 30, 
2008
  
   
 Amount
    
% of
Revenue
    
 Amount
    
% of
Revenue
  
Revenue, net
   $ 9,340       100.0 %   $ 11,536       100.0 %
Cost of sales
     7,654       81.9 %     9,467       82.1 %
Gross profit
     1,686       18.1 %     2,069       17.9 %
                                 
Selling, general and administrative expenses
     1,516       16.2 %     1,696       14.7 %
Income from operations
     170       1.9 %     373       3.2 %
                                 
Other income, net
     13       0.1 %     28       0.2 %
Income before income taxes
     183       2.0 %     401       3.4 %
Provision for income taxes
     82       0.9 %     165       1.4 %
Net income
   $ 101       1.1 %   $ 236       2.0 %


Page 11

TSR, INC. AND SUBSIDIARIES

Revenue
 
Revenue consists primarily of revenue from computer programming consulting services.  Revenue for the quarter ended November 30, 2009 decreased $2,196,000 or 19.0% from the prior year quarter.  The average number of consultants on billing with customers decreased from approximately 281 for the quarter ended November 30, 2008 to 222 for the quarter ended November 30, 2009.  The continuing impact of the current economic environment has significantly decreased the number of consultants on billing with customers and also decreased the opportunities to place new consultants on billing with customers. The revenue decrease is also the result of the continued reduction in consultants placed with AT&T and lower billing rates caused by discounts and other rate reductions instituted by customers.

As a result of the merger of AT&T with SBC Communications, Inc., the Company experienced a 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 53 at November 30, 2007 to 25 at November 30, 2008 and to 4 at November 30, 2009.  The Company expects that these changes will continue to impact the Company’s business relationship with AT&T, resulting in few, if any, opportunities to place new consultants at AT&T.

The Company’s revenue from programmers on billing continue to be affected by discounts, such as prompt payment and volume discounts, required by major customers as a condition to remaining on their approved vendor lists and the reduction in the number of vendors on the approved vendor lists to increase pricing competition among the remaining vendors.  In addition, most of the Company’s major customers have retained third parties to provide vendor management services and centralize the consultant hiring process.  Under this system, the third party retains the Company to provide contract computer programming services, the Company bills the third party and the third party bills the ultimate customer.  This process has weakened the relationships the Company has built with its client contacts, the project managers, who the Company would normally work directly with to place consultants.  Instead, the Company is required to interface with the vendor management provider, making it more difficult to maintain its relationships with its customers and preserve and expand its business.  These changes have also reduced the Company’s profit margins because the vendor management company is retained for the purpose of keeping costs down for the end client and receives a processing fee which is deducted from the payment to the Company.  Revenue has also been impacted by the increased use of offshore development companies, particularly in India, over the past few years to provide technology related work and projects.  The Company is unable to predict the long-term effects of these changes.

As a result of the current economic downturn and, specifically, the impact of the adverse conditions in the credit markets on the financial services industry, the Company  has experienced a decrease in the number of consultants on billing with customers as a result of decreased IT spending.  These economic conditions have also reduced the opportunities to place new consultants on billing with customers. The Company expects that these conditions will continue to affect the number of consultants on billing with customers and the Company’s revenue.

The Company provided services to Lehman Brothers Holdings, Inc. (“LBHI”) through its contract with Beeline.com, Inc. (“Beeline”), a vendor management company. LBHI filed a petition under Chapter 11 of the U.S. Bankruptcy Code on September 15, 2008. The Company has received payment in full for amounts due for services rendered through the date of the bankruptcy filing. Following the bankruptcy filing, the consultants on billing with LBHI decreased from 13 as of August 31, 2008 to 2 as of November 30, 2009.  LBHI and its subsidiaries constituted approximately 6% of the Company’s revenue in fiscal 2008 and 4% in fiscal 2009.

Cost of Sales
 
Cost of sales for the quarter ended November 30, 2009, decreased $1,813,000 or 19.2% to $7,654,000 from $9,467,000 in the prior year period.  The decrease in cost of sales resulted primarily from the decrease in the number of consultants on billing with clients.  Cost of sales as a percentage of revenue decreased from 82.1% in the quarter ended November 30, 2008 to 81.9% in the quarter ended November 30, 2009.  The decrease in cost of sales as a percentage of revenue was primarily attributable to the significant reduction of consultants on billing with AT&T, which has historically been the Company’s lowest margin (highest cost of sales as a percentage of revenue) business.



Page 12

TSR, INC. AND SUBSIDIARIES


Selling, General and Administrative Expenses
 
Selling, general and administrative expenses consist primarily of expenses relating to account executives, technical recruiters, facilities costs, management and corporate overhead.   These expenses decreased $180,000 or 10.6% from $1,696,000 in the quarter ended November 30, 2008 to $1,516,000 in the quarter ended November 30, 2009.  This decrease was primarily attributable to a reduction in the number of sales and recruiting personnel and lower commissions paid to the remaining sales and recruiting personnel due to lower revenue. Technical recruiters and account executives have been terminated in order to lessen the impact of the Company’s reduced level of business activity. However, while selling, general and administrative expenses decreased, these expenses as a percentage of revenue increased from 14.7% in the quarter ended November 30, 2008 to 16.2% in the quarter ended November 30, 2009 as a result of lower revenue.

Income from Operations
 
Income from operations decreased $203,000 or 54.5% from $373,000 in the quarter ended November 30, 2008 to $170,000 in the quarter ended November 30, 2009. The decrease was primarily attributable to the reduced revenue from the decrease in the number of consultants on billing with customers.

In November 2009, the Company settled a preference claim asserted by the trustee in bankruptcy of a vendor management company relating to payments received by the Company during the 90 days prior to the bankruptcy filing for $100,000.  The Company had provided for this contingency in prior periods as part of its allowance for doubtful accounts and, as a result, the charge was applied to this reserve. Accordingly, there was no impact on income from operations.

Other Income
 
Other income for the quarter ended November 30, 2009 resulted primarily from interest and dividend income of $14,000, which decreased by $21,000 from the level realized in the quarter ended November 30, 2008 due to lower interest rates earned on the Company’s US Treasury securities, certificates of deposit and money market accounts as well as lower average investable assets.

Income Taxes
 
The effective income tax rate increased from 41.2% in the quarter ended November 30, 2008 to 44.8% in the quarter ended November 30, 2009.  Additional income taxes were provided in the current period as the result of certain state income taxes.

Net Income
 
Net income decreased $135,000 or 57.1% from the quarter ended November 30, 2008 to the quarter ended November 30, 2009.  Net income decreased primarily due to lower revenue from a decreased number of consultants on billing with clients and lower interest income earned on the Company’s US Treasury securities and money market accounts.




Page 13
 
TSR, INC. AND SUBSIDIARIES

Six months ended November 30, 2009 compared with six months ended November 30, 2008
 
    (Dollar amounts in thousands)
Six Months Ended
  
   
November 30,
2009
    
November 30,
2008
  
   
 Amount
    
% of
Revenue
    
 Amount
    
% of
Revenue
  
Revenue, net
   $ 18,433       100.0 %   $ 23,686       100.0 %
Cost of sales
     15,101       81.9 %     19,495       82.3 %
Gross profit
     3,332       18.1 %     4,191       17.7 %
                                 
Selling, general and administrative expenses
     3,042       16.5 %     3,496       14.8 %
Income from operations
     290       1.6 %     695       2.9 %
                                 
Other income, net
     35       0.2 %     95       0.4 %
Income before income taxes
     325       1.8 %     790       3.3 %
Provision for income taxes
     141       0.8 %     330       1.4 %
Net income
   $ 184       1.0 %   $ 460       1.9 %
                                    
 
Revenue
 
Revenue consists primarily of revenue from computer programming consulting services.  Revenue for the six months ended November 30, 2009 decreased $5,253,000 or 22.2% from the prior year period.  The average number of consultants on billing with customers decreased from approximately 290 for the six months ended November 30, 2008 to 219 for the six months ended November 30, 2009.  The continuing impact of the current economic environment has significantly decreased the number of consultants on billing with customers and also decreased the opportunities to place new consultants on billing with customers. The revenue decrease is also the result of the continued reduction in consultants placed with AT&T and lower billing rates caused by discounts and other rate reductions instituted by customers.

Revenues for the six months ended November 30, 2009 were affected by the same factors as previously described in the discussion of the three months ended November 30, 2009.  See page 12.

Cost of Sales
 
Cost of sales for the six months ended November 30, 2009, decreased $4,394,000 or 22.5% to $15,101,000 from $19,495,000 in the prior year period.  The decrease in cost of sales resulted primarily from the decrease in the number of consultants on billing with clients.  Cost of sales as a percentage of revenue decreased from 82.3% in the six months ended November 30, 2008 to 81.9% in the six months ended November 30, 2009.  The decrease in cost of sales as a percentage of revenue was primarily attributable to the significant reduction of consultants on billing with AT&T, which has historically been the Company’s lowest margin (highest cost of sales as a percentage of revenue) business.



Page 14
 
TSR, INC. AND SUBSIDIARIES



Selling, General and Administrative Expenses
 
Selling, general and administrative expenses consist primarily of expenses relating to account executives, technical recruiters, facilities costs, management and corporate overhead.   These expenses decreased $454,000 or 13.0% from $3,496,000 in the six months ended November 30, 2008 to $3,042,000 in the six months ended November 30, 2009.  This decrease was primarily attributable to a reduction in the number of sales and recruiting personnel and lower commissions paid to the remaining sales and recruiting personnel due to lower revenue. Technical recruiters and account executives have been terminated in order to lessen the impact of the Company’s reduced level of business activity. However, while selling, general and administrative expenses decreased, these expenses as a percentage of revenue increased from 14.8% in the six months ended November 30, 2008 to 16.5% in the six months ended November 30, 2009 as a result of lower revenue.

Income from Operations
 
Income from operations decreased $405,000 or 58.3% from $695,000 in the six months ended November 30, 2008 to $290,000 in the six months ended November 30, 2009. The decrease was primarily attributable to the reduced revenue from the decrease in the number of consultants on billing with customers.

In November 2009, the Company settled a preference claim asserted by the trustee in bankruptcy of a vendor management company relating to payments received by the Company during the 90 days prior to the bankruptcy filing for $100,000.  The Company had provided for this contingency in prior periods as part of its allowance for doubtful accounts and, as a result, the charge was applied to this reserve. Accordingly, there was no impact on income from operations.

Other Income
 
Other income for the six months ended November 30, 2009 resulted primarily from interest and dividend income of $32,000, which decreased by $70,000 from the level realized in the six months ended November 30, 2008 due to lower interest rates earned on the Company’s US Treasury securities, certificates of deposit and money market accounts as well as lower average investable assets.

Income Taxes
 
The effective income tax rate increased from 41.8% in the six months ended November 30, 2008 to 43.4% in the six months ended November 30, 2009.  Additional income taxes were provided in the current period as the result of certain state income taxes.

Net Income
 
Net income decreased $276,000 or 60.0% from the six months ended November 30, 2008 to the six months ended November 30, 2009.  Net income decreased primarily due to lower revenue from a decreased number of consultants on billing with clients and lower interest income earned on the Company’s US Treasury securities and money market accounts.






Page 15
 
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 at least the next 12 months.

At November 30, 2009, the Company had working capital of $12,475,000 including cash and cash equivalents of $4,310,000 as compared to working capital of $12,288,000 including cash and cash equivalents of $4,075,000 at May 31, 2009.  The Company’s working capital also included $3,515,000 and $4,509,000 of marketable securities with maturities of less than one year at November 30, 2009 and May 31, 2009, respectively.

For the six months ended November 30, 2009, net cash used in operating activities was $754,000 compared to cash provided by operating activities of $78,000 for the six months ended November 30, 2008, or an increase of $832,000.  The cash used in operating activities primarily resulted from an increase in accounts receivable of $857,000 offset by net income and an increase in accounts and other payables and accrued expenses and other current liabilities of $98,000. The increase in accounts receivable resulted primarily from additional accounts extending their payment terms from sixty to ninety days. The cash provided by operating activities in the six months ended November 30, 2008, resulted primarily from net income.

Net cash provided by investing activities of $995,000 for the six months ended November 30, 2009 primarily resulted from the maturity of US Treasury securities.

Net cash used in financing activities resulted from distributions to the noncontrolling interest of $6,000 in the six months ended November 30, 2009.  In the six months ended November 30, 2008, net cash used in financing activities resulted from purchases of treasury stock of $1,220,000 and cash dividends paid of $565,000.  In December 2009, the Board of Directors of the Company reaffirmed a plan previously approved in December 2007 authorizing the repurchase of shares of Common Stock and approximately 239,000 shares remain available for purchase under this plan. The Company has not made any purchases under this plan since September 2008.  The Board of Directors determined to suspend the payment of further dividends effective after the dividend paid on February 9, 2009 for the second quarter of fiscal 2009.  The Board of Directors may reevaluate the Company’s dividend policy once the economic conditions stabilize.

The Company’s capital resource commitments at November 30, 2009 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, 2009.  The Company has available a revolving line of credit of $5,000,000 with a major money center bank through February 26, 2010.  As of November 30, 2009, no amounts were outstanding under this line of credit.

Tabular Disclosure of Contractual Obligations
 

   
Payments Due By Period
  
Contractual Obligations
  
 Total
    
Less than
1 Year
    
 1-3 Years
    
 3-5 Years
    
More than
 5 Years
  
Operating Leases
   $ 1,032,000     $ 368,000     $ 546,000     $ 118,000     $ -  
Employment Agreements
     763,000       513,000       250,000       -       -  
Totals
   $ 1,795,000     $ 881,000     $ 796,000     $ 118,000     $ -  



Page 16
 
TSR, INC. AND SUBSIDIARIES

Recent Accounting Pronouncements
 
In December 2007, the FASB issued an accounting standard requiring an acquirer to measure the identifiable assets acquired, the liabilities assumed and any noncontrolling interest in the acquiree at their fair values on the acquisition date, with goodwill being the excess value over the net identifiable assets acquired. This accounting standard is effective for financial statements issued for fiscal years beginning after December 15, 2008.  The adoption of this accounting standard was subsequently codified into ASC Topic 805, “Business Combinations.”
 
Effective for financial statements issued for fiscal years beginning after December 15, 2008, an acquirer is required to measure identifiable assets acquired, the liabilities assumed and any noncontrolling interest in the acquiree at their fair values on the acquisition date with goodwill being the excess value over net identifiable assets acquired. Noncontrolling interest in a subsidiary should be reported as equity in the unaudited condensed consolidated balance sheets. The amount of consolidated net income or loss attributable to the parent and to the noncontrolling interest should also be reported in the unaudited condensed consolidated statements of income. Changes in a parent’s ownership percentage and the valuation of retained noncontrolling equity investments when a subsidiary is deconsolidated should be disclosed in the unaudited condensed consolidated financial statements. The Company adopted this accounting standard in the first quarter of fiscal 2010.  As a result of the adoption, the Company has reported noncontrolling interests as a component of equity in the unaudited condensed balance sheets and the net income attributable to noncontrolling interests has been separately identified in the unaudited condensed consolidated statements of income. The prior periods presented have also been retrospectively restated to conform to the current classification requirements. Other than the change in presentation of noncontrolling interests, the adoption of this standard had no impact on the unaudited condensed consolidated financial statements.
 
In April 2009, the FASB issued an accounting standard to require that disclosures concerning the fair value of financial instruments be presented in interim as well as in annual financial statements. This accounting standard was subsequently codified into ASC Topic 825, “Financial Instruments.” In addition, the FASB issued an accounting standard to provide additional guidance for determining the fair value of a financial asset or financial liability when the volume and level of activity for such asset or liability have decreased significantly and to also provide guidance for determining whether a transaction is an orderly one. This accounting standard was subsequently codified into ASC Topic 820, “Fair Value Measurements and Disclosures.” The FASB also issued an accounting standard which revised and expanded the guidance concerning the recognition and measurement of other-than-temporary impairments of debt securities classified as available-for-sale or held-to-maturity. In addition, it required enhanced disclosures concerning such impairment for both debt and equity securities. This accounting standard was subsequently codified into ASC Topic 320, “Investments – Debt and Equity Securities.” The requirements of these three accounting standards are effective for interim reporting periods ending after June 15, 2009. Early adoption is permitted for interim periods ending after March 15, 2009, but only if the election is made to adopt all these accounting standards. Disclosures for earlier periods presented for comparative purposes at initial adoption are not required. In periods after initial adoption, comparative disclosures are required only for periods ending after initial adoption. The Company has adopted the accounting standards for the first quarter of fiscal 2010.
 
In May 2009, the FASB issued an accounting standard which provides guidance to establish general standards of accounting for and disclosures of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. It requires entities to disclose the date through which subsequent events were evaluated as well as the rationale for why the date was selected. This accounting standard is effective for interim and annual periods ending after June 15, 2009 and, accordingly, was adopted by the Company during the first quarter of fiscal 2010. It requires public entities evaluate subsequent events through the date that the financial statements are issued. This accounting standard was subsequently codified into ASC Topic 855, “Subsequent Events.” The Company has evaluated subsequent events through the time of filing these condensed consolidated financial statements with the Securities and Exchange Commission (“SEC”) on January 8, 2010.
 
In June 2009, the FASB issued an accounting standard which established the Codification to become the single source of authoritative accounting principles generally accepted in the United States of America (“GAAP”) recognized by the FASB to be applied by nongovernmental entities, with the exception of guidance issued by the SEC and its staff. All guidance contained in the Codification carries an equal level of authority. The Codification is not intended to change GAAP, but rather is expected to simplify accounting research by reorganizing current GAAP into approximately 90 accounting topics and providing all the authoritative literature related to a topic in one place. The Company adopted this accounting standard in preparing the condensed consolidated financial statements for the quarter ended November 30, 2009 and all subsequent public filings will reference the Codification as the sole source of authoritative literature.  The adoption of this accounting standard, which was subsequently codified into ASC Topic 105, “Generally Accepted Accounting Principles,” had no impact on retained earnings and will have no impact on the Company’s statements of income.
 
Page 17
 
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, 2009 Annual Report on Form10-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, 2009.

Item 4T.  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 accounting officer, of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”)).  Based on this evaluation, the principal executive officer and principal accounting 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 Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the Company’s most recently reported completed fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

Part II. 
Other Information

Item 6.   Exhibits
 
(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 thereto duly authorized.
 
 
TSR Inc.
(Registrant)
  
     
     
     
Date:  January 8, 2010
/s/ J.F. Hughes
J.F. Hughes, Chairman and President
  
 
 
  
     
Date:  January 8, 2010
/s/ John G. Sharkey
John G. Sharkey, Vice President Finance and Chief Financial Officer
  

Page 18