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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the period ended February 28, 2007
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from ____________ to ____________
Commission File Number: 0-8656
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TSR, Inc.
(Exact name of registrant as specified in its charter)
Delaware 13-2635899
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
400 Oser Avenue, Hauppauge, NY 11788
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(Address of principal executive offices)
631-231-0333
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(Registrant's telephone number)
None
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(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. [X] Yes [ ] No
Indicate by check mark whether the Registrant is large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check
one):
Large accelerated filer [ ] Accelerated filer [ ] Non-accelerated filer [X]
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). [ ] Yes [X] No
SHARES OUTSTANDING
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4,568,012 shares of common stock, par value $.01 per share, as of March 31, 2007
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Page 1
TSR, INC. AND SUBSIDIARIES
INDEX
Page
Number
------
Part I. Financial Information:
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets -
February 28, 2007 and May 31, 2006..................................................... 3
Condensed Consolidated Statements of Income -
For the three months and nine months ended February 28, 2007 and 2006.................. 4
Condensed Consolidated Statements of Cash Flows -
For the nine months ended February 28, 2007 and 2006................................... 5
Notes to Condensed Consolidated Financial Statements.................................... 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations... 10
Item 3. Quantitative and Qualitative Disclosure About Market Risk............................... 16
Item 4. Controls and Procedures.................................................................. 16
Part II. Other Information........................................................................... 17
Item 1A. Risk Factors............................................................................ 17
Item 6. Exhibits................................................................................. 17
Signatures............................................................................................ 17
Page 2
Part I. Financial Information
Item 1. Financial Statements
TSR, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS February 28, May 31,
2007 2006
----------- -----------
(Unaudited)
Current Assets:
Cash and cash equivalents (Note 3) ......................... $ 2,109,166 $ 2,660,739
Marketable securities (Note 5) ............................. 6,390,606 5,406,830
Accounts receivable (net of allowance for
doubtful accounts of $355,000) ........................ 8,208,416 8,272,963
Other receivables .......................................... 95,932 90,172
Prepaid expenses ........................................... 65,645 48,793
Prepaid and recoverable income taxes ....................... 79,271 320,156
Deferred income taxes ...................................... 150,000 150,000
----------- -----------
Total current assets .................................. 17,099,036 16,949,653
Marketable securities (Note 5) .................................. 998,125 1,490,547
Equipment and leasehold improvements, at cost (net of accumulated
depreciation and amortization of $541,583 and $544,946) .... 46,987 36,134
Other assets .................................................... 49,653 49,653
Deferred income taxes ........................................... 109,000 109,000
----------- -----------
$18,302,801 $18,634,987
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts and other payables ................................ $ 286,503 $ 209,840
Accrued expenses and other current liabilities ............. 2,487,498 2,730,202
Advances from customers .................................... 1,541,443 1,538,985
Income taxes payable ....................................... -- 102,974
----------- -----------
Total current liabilities ............................. 4,315,444 4,582,001
----------- -----------
Minority Interest ............................................... 4,975 31,751
----------- -----------
Stockholders' Equity:
Preferred stock, $1 par value, authorized
1,000,000 shares; none issued ......................... -- --
Common stock, $.01 par value, authorized
25,000,000 shares; issued 6,228,326 shares ............ 62,283 62,283
Additional paid-in capital ................................. 5,071,727 5,071,727
Retained earnings .......................................... 20,879,673 20,918,526
----------- -----------
26,013,683 26,052,536
Less: Treasury stock, 1,660,314 shares, at cost ............ 12,031,301 12,031,301
----------- -----------
13,982,382 14,021,235
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$18,302,801 $18,634,987
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The accompanying notes are an integral part of these
Condensed Consolidated Financial Statements.
Page 3
TSR, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF EARNINGS
FOR THE THREE AND NINE MONTHS ENDED FEBRUARY 28, 2007 AND 2006
(UNAUDITED)
Three Months Ended Nine Months Ended
February 28, February 28, February 28, February 28,
2007 2006 2007 2006
------------ ------------ ------------ ------------
Revenues, net .......................................... $ 11,773,704 $ 11,594,872 $ 36,775,393 $ 35,888,975
Cost of sales .......................................... 9,722,403 9,486,969 29,977,510 28,886,196
Selling, general and administrative expenses ........... 1,777,553 1,683,686 5,331,297 5,025,334
------------ ------------ ------------ ------------
11,499,956 11,170,655 35,308,807 33,911,530
------------ ------------ ------------ ------------
Income from operations ................................. 273,748 424,217 1,466,586 1,977,445
Other income (expense):
Interest and dividend income ...................... 118,965 93,644 346,214 255,243
Realized and unrealized gain (loss) from marketable
securities, net ................................. (1,228) (4,864) 1,472 (5,088)
Minority interest in subsidiary operating profits . (6,227) (9,377) (36,802) (57,245)
------------ ------------ ------------ ------------
Income before income taxes ............................. 385,258 503,620 1,777,470 2,170,355
Provision for income taxes ............................ 184,000 214,000 720,000 923,000
------------ ------------ ------------ ------------
Net income .......................................... $ 201,258 $ 289,620 $ 1,057,470 $ 1,247,355
============ ============ ============ ============
Basic and diluted net income per common share .......... $ 0.04 $ 0.06 $ 0.23 $ 0.27
============ ============ ============ ============
Weighted average number of basic common shares
outstanding ............................................ 4,568,012 4,568,012 4,568,012 4,568,012
============ ============ ============ ============
Weighted average number of diluted common
shares outstanding ................................... 4,568,012 4,568,012 4,568,012 4,568,012
============ ============ ============ ============
The accompanying notes are an integral part of these
consolidated condensed financial statements.
Page 4
TSR, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED FEBRUARY 28, 2007 AND 2006
(UNAUDITED)
Nine Months Ended
February 28,
2007 2006
------------ ------------
Cash flows from operating activities:
Net income ................................................... $ 1,057,470 $ 1,247,355
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization ............................. 20,546 16,100
Realized and unrealized (gain) loss from
marketable securities, net .............................. (1,472) 5,088
Minority interest in subsidiary operating profits ........ 36,802 57,245
Deferred income tax benefit ............................... -- 69,000
Recovery of bad debt expense .............................. -- (75,000)
Changes in assets and liabilities:
Accounts receivable - trade ............................. 64,547 (513,586)
Other receivables ....................................... (5,760) (9,063)
Prepaid expenses ........................................ (16,852) 9,845
Prepaid and recoverable income taxes .................... 240,885 (69,253)
Other assets ............................................ -- 240
Accounts payable and accrued expenses ................... (166,041) (464,318)
Income taxes payable .................................... (102,974) 11,276
Advances from customers ................................ 2,458 15,552
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Net cash provided by operating activities ................... 1,129,609 300,481
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Cash flows from investing activities:
Proceeds from maturities and sales of marketable securities 7,332,461 10,342,372
Purchases of marketable securities ........................ (7,822,343) (9,330,925)
Purchases of fixed assets ................................. (31,399) (15,783)
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Net cash (used in) provided by investing activities ........... (521,281) 995,664
------------ ------------
Cash flows from financing activities:
Distributions to minority interest ........................ (63,578) (61,318)
Cash dividends paid ...................................... (1,096,323) (1,416,084)
------------ ------------
Net cash used in financing activities ......................... (1,159,901) (1,477,402)
------------ ------------
Net decrease in cash and cash equivalents ......................... (551,573) (181,257)
Cash and cash equivalents at beginning of period .................. 2,660,739 2,571,276
------------ ------------
Cash and cash equivalents at end of period ........................ $ 2,109,166 $ 2,390,019
============ ============
Supplemental Disclosures:
Income tax payments ........................................ $ 576,000 $ 912,000
============ ============
The accompanying notes are an integral part of these
consolidated condensed financial statements.
Page 5
TSR, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FEBRUARY 28, 2007
(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 and nine months ended February 28, 2007,
are unaudited; however, in the opinion of management, such statements
include all adjustments (consisting of normal recurring accruals) necessary
to present fairly the consolidated financial position, results of
operations, and cash flows of the Company for the periods presented. The
results of operations for the interim periods presented are not necessarily
indicative of the results that might be expected for future interim periods
or for the full year ending May 31, 2007. These interim financial
statements should be read in conjunction with the Company's consolidated
financial statements and notes thereto included in the Company's Annual
Report on Form 10-K for the year ended May 31, 2006.
2. NET INCOME PER COMMON SHARE
Basic net income per common share is computed by dividing income available
to common stockholders (which for the Company equals its net income) by the
weighted average number of common shares outstanding, and diluted net
income per common share adds the dilutive effect of stock options and other
common stock equivalents. No options covering shares of common stock have
been omitted from the calculations of diluted net income per common share
for the three and nine month periods ended February 28, 2007 and 2006,
respectively, because there are no options outstanding.
3 CASH AND CASH EQUIVALENTS
The Company considers short-term highly liquid investments with maturities
of three months or less at the time of purchase to be cash equivalents.
Cash and cash equivalents were comprised of the following as of February
28, 2007:
Cash in banks ............................. $ --
Money Market Funds ........................ 2,109,166
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$ 2,109,166
4. REVENUE RECOGNITION
The Company's contract computer programming services are generally provided
under time and materials agreements with customers. Accordingly, the
Company recognizes such revenues as services are provided. Advances from
customers represent amounts received from customers prior to the Company's
provision of the related services, credit balances from overpayments and
certain escheat liabilities.
Reimbursements received by the Company for out-of-pocket expenses are
characterized as revenue in accordance with Emerging Issues Task Force
(EITF) Issue 01-14 "Income Statement of Characterization of Reimbursements
Received for `Out-of-Pocket' Expenses Incurred."
Page 6
TSR, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
FEBRUARY 28, 2007
(UNAUDITED)
5. MARKETABLE SECURITIES
The Company accounts for its marketable securities in accordance with
Statement of Financial Accounting Standards No. 115 "Accounting for Certain
Investments in Debt and Equity Securities." Accordingly, the Company
classifies its marketable securities at acquisition as either (i)
held-to-maturity, (ii) trading, or (iii) available-for-sale. Based upon the
Company's intent and ability to hold its US Treasury securities to maturity
(which maturities are mostly less than one year), such securities have been
classified as held-to -maturity and are carried at amortized cost. The
Company's equity securities are classified as trading securities, which are
carried at fair value with unrealized gains and losses included in
earnings. The Company's marketable securities are summarized as follows:
Gross Gross
Unrealized Unrealized
Amortized Holding Holding Recorded
Current Cost Gains Losses Value
United States Treasury
Securities $ 6,374,719 -- -- $ 6,374,719
Equity Securities 16,866 -- (979) 15,887
----------- ---------- ------- -----------
$ 6,391,585 $ -- $ (979) $ 6,390,606
=========== ========== ======= ===========
Long - Term
United States Treasury
Securities $ 998,125 $ -- $ -- $ 998,125
=========== ========== ======= ===========
Page 7
TSR, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
FEBRUARY 28, 2007
(UNAUDITED)
6. STOCK OPTIONS
The Company has one stock-based employee compensation plan in effect.
Effective June 1, 2006, the Company accounts for all transactions under
which employees receive shares of stock or other equity instruments in the
Company in accordance with the revised provisions of SFAS No. 123,
"Statement of Financial Accounting Standards No. 123 (FAS123 (R))," which
requires that the fair market value of all share based payment transactions
be recognized in the financial statements. This Statement establishes fair
value as the measurement objective in accounting for share based payment
arrangements and requires all entities to apply a fair value based
measurement method in accounting for share based transactions with
employees except for equity instruments held by employee share ownership
plans. The Company adopted FAS123(R) at the beginning of fiscal 2007. The
Company has not issued any share based payments as of February 28, 2007.
The Company previously accounted for share-based employee compensation in
accordance with the provisions of Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees".
7. RECENT ACCOUNTING PRONOUNCEMENTS
In July 2006, the Financial Accounting Standards Board (FASB) issued FASB
Interpretation No. 48 - "Accounting for Uncertainty in Income Taxes" (FIN
48). This guidance is intended to provide increased consistency in the
application of FASB Statement No. 109 - "Accounting for Income Taxes" by
providing guidance with regard to the recognition and measurement of tax
positions, and provide increased disclosure requirements. In particular,
this interpretation requires uncertain tax positions to be recognized only
if they are "more-likely-than-not" to be upheld based on their technical
merits. Additionally, the measurement of the tax position will be based on
the largest amount that is determined to have greater than a 50% likelihood
of realization upon ultimate settlement. Any resulting cumulative effect of
applying the provisions of FIN 48 upon adoption would be reported as an
adjustment to the beginning balance of retained earnings (deficit) in the
period of adoption. Management is in the process of evaluating the effects
of this guidance which is effective for fiscal years beginning after
December 15, 2006.
On September 15, 2006, the FASB issued SFAS No. 157, "Fair Value
Measurements". SFAS No. 157 is effective for fiscal years beginning after
November 15, 2007, and interim periods within those fiscal years. SFAS No.
157 provides guidance related to estimating fair value and requires
expanded disclosures. The standard applies whenever other standards require
(or permit) assets or liabilities to be measured at fair value. The
standard does not expand the use of fair value in any new circumstances.
The Company is evaluating SFAS No. 157 and its impact on the Company's
consolidated financial statements.
Page 8
TSR, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
FEBRUARY 28, 2007
(UNAUDITED)
8. DIVIDENDS
On March 30, 2007 the Board of Directors of the Company declared that a
regular quarterly cash dividend of $0.08 per share for the quarter ended
February 28, 2007 would be paid on May 1, 2007 to shareholders of record as
of April 16, 2007. This dividend will amount to approximately $365,000 and
will be paid from the Company's cash and marketable securities.
9. MAJOR CUSTOMER
In June 2006, the New York State Office of General Services, Procurement
Services Group ("OGS") terminated its contract with the Company. The OGS
actions were due to the report of an investigation by the Office of the
Special Commissioner of Investigation of the New York City Department of
Education ("DOE"). The investigative report concluded that the Company
operated improperly from 2001 through the spring of 2003 by using a
subcontracting arrangement to obtain programmers for positions with the
DOE. The subcontracting was with a small firm that was owned by an
individual who worked as a consultant under contract at the DOE in a
supervising capacity and sometimes was involved in decisions to select
consultants that financially benefited both him and the Company. The
investigative report also suggested that the Company received advanced
information as to new positions from this individual and that the
subcontracting increased the costs to the DOE since two firms, instead of
one, profited from this arrangement.
All new placements with the DOE, including renewals of existing placements,
were being made under this OGS contract prior to its termination. As a
result, until a new OGS contract is entered into, the Company will not be
able to make new placements or renew existing placements with the DOE. The
termination does not affect existing placements with the DOE until the date
such positions are scheduled to expire. At May 31, 2006 the Company had
forty-one consultants placed with the DOE. As a result of the termination,
consultants placed with the DOE who came up for renewal have not been
renewed.
DOE also asserted a claim against the Company for a reimbursement due to
the Company's subcontracting without written authorization. On August 29,
2006, the DOE and the Company agreed in principle to resolve these claims
and permit the Company to be treated as a "responsible vendor" upon making
a payment to DOE and appointment of an independent compliance monitor to
monitor the Company's compliance with the DOE agreement. Due to the claim
asserted by DOE and the proposed settlement, the Company established a
reserve of $900,000 as of May 31, 2006. While the Company believes that its
subcontracting did not result in overcharges to DOE, it has agreed to
settle the matter in order to avoid the expense and uncertainty of
litigation. In addition to the settlement of the claim, the Company and the
DOE were also negotiating an agreement which would have enabled the Company
to continue placing new consultants with the DOE, which included, among
other things, a monitoring agreement. The Company and the DOE have not been
able to finalize the terms of this agreement. The Company does not expect
the failure to reach this agreement to affect the agreement in principle to
settle the DOE claim. As a result, the DOE has advised the Company that the
11 remaining consultants will be terminated in the near future.
Page 9
PART I. FINANCIAL INFORMATION
ITEM 2.
TSR, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with the
Condensed Consolidated Financial Statements and the notes to such financial
statements.
Forward-Looking Statements
--------------------------
Certain statements contained in Management's Discussion and Analysis of
Financial Condition and Results of Operations, including statements concerning
the Company's future prospects and the Company's future cash flow requirements
are forward looking statements, as defined in the Private Securities Litigation
Reform Act of 1995. Actual results may differ materially from those projections
in the forward looking statements which statements involve risks and
uncertainties, including but not limited to the following: risks relating to the
competitive nature of the markets for contract computer programming services;
the extent to which market conditions for the Company's contract computer
consulting services will continue to adversely affect the Company's business;
the concentration of the Company's business with certain customers; uncertainty
as to the Company's ability to maintain its relations with existing customers
and expand its contract computer consulting services business; the settlement
with the NYC Department of Education (DOE) and the Company's ability to continue
to provide consultants to the DOE; the impact on the Company's business due to
the merger of AT&T and SBC Communications, Inc.; the impact of changes in the
industry, such as the use of vendor management companies in connection with the
consulting procurement process, the increase in customers moving IT operations
offshore and other risks and uncertainties set forth in the Company's filings
with the Securities and Exchange Commission.
Results of Operations
---------------------
The following table sets forth for the periods indicated certain financial
information derived from the Company's condensed consolidated statements of
earnings. There can be no assurance that trends in operating results will
continue in the future:
Three months ended February 28, 2007 compared with three months ended February
------------------------------------------------------------------------------
28, 2006
--------
(Dollar amounts in Thousands)
Three Months Ended
February 28,
2007 2006
---- ----
% of % of
Amount Revenues Amount Revenues
Revenues ............................ $11,774 100.0 $11,595 100.0
Cost of sales ....................... 9,722 82.6 9,487 81.8
------- ----- ------- -----
Gross profit ........................ 2,052 17.4 2,108 18.2
Selling, general, and administrative
expenses .......................... 1,778 15.1 1,684 14.5
------- ----- ------- -----
Income from operations .............. 274 2.3 424 3.7
Other income ........................ 111 1.0 80 0.6
------- ----- ------- -----
Income before income taxes .......... 385 3.3 504 4.3
Provision for income taxes .......... 184 1.6 214 1.8
------- ----- ------- -----
Net income .......................... $ 201 1.7 $ 290 2.5
======= ===== ======= =====
Page 10
TSR, INC. AND SUBSIDIARIES
REVENUES
Revenues consist primarily of revenues from computer programming consulting
services. Revenues for the quarter ended February 28, 2007 increased $179,000 or
1.5% from the comparable period in fiscal 2006. Due to the contract suspension
with the NYC Department of Education (DOE), the consultants on billing with DOE
decreased from 41 at May 31, 2006 to 11 at the end of the current quarter.
Despite this reduction in the number of consultants on billing at DOE, the
overall average number of consultants on billing only decreased from 342 in the
prior year quarter to 326 for the current quarter. Additional placements at
other accounts, many at higher billing rates, have offset much of the reduction
at DOE and, therefore, revenues have increased. After the end of the quarter, as
described in Footnote 9 to the Condensed Consolidated Financial Statements, the
DOE has advised the Company that the 11 remaining consultants will be terminated
in the near future.
As a result of the merger of AT&T with SBC Communications, Inc., Procurestaff,
which had been the vendor management company for AT&T is currently one of many
vendors to the new AT&T and no longer serves as the primary vendor manager. Due
to these changes, the Company experienced a decrease in new placements with AT&T
beginning in the second fiscal quarter. This has reduced the number of
consultants on billing with AT&T from 90 at November 30, 2006 to 79 at February
28, 2007. The Company is unable to predict whether this change of relationship
will continue to impact the Company's business relationship with AT&T.
COST OF SALES
Cost of sales for the quarter ended February 28, 2007, increased $235,000 or
2.5% to $9,722,000 from $9,487,000 in the prior year period. Cost of sales as a
percentage of revenues increased from 81.8% in the quarter ended February 28,
2006 to 82.6% in the quarter ended February 28, 2007. The increase in cost of
sales as a percentage of revenues was primarily attributable to discount
programs instituted or expanded by customers. These discount programs decrease
revenues without allowing offsetting cost reductions.
Cost of sales as a percentage of revenues increased, in part, because of a
decline in revenues at AT&T, the Company's largest customer, due to Procurestaff
offering further discounts to AT&T to maintain its relationship. This required
the Company to reduce what it received from Procurestaff, which further reduced
the Company's margins on its AT&T business.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses consist primarily of expenses
relating to account executives, technical recruiters, facilities costs,
management and corporate overhead. These expenses increased $94,000 or 5.6% from
$1,684,000 in the quarter ended February 28, 2006 to $1,778,000 in the quarter
ended February 28, 2007. This increase was primarily attributable to an increase
in the number of technical recruiters and sales executives. Additional personnel
have been hired to address increasing competition. The Company expects to
continue to hire additional experienced sales executives and technical
recruiters.
INCOME FROM OPERATIONS
In spite of the increase in revenues, income from operations decreased $150,000
or 35.4% from $424,000 in the quarter ended February 28, 2006 to $274,000 in the
quarter ended February 28, 2007. The discount programs which have caused an
increase in cost of sales as a percentage of revenues, along with the expenses
related to the hiring of additional sales and recruiting personnel, have reduced
income from operations.
Page 11
TSR, INC. AND SUBSIDIARIES
OTHER INCOME
Other income resulted primarily from interest and dividend income, which
increased by $25,000 to $119,000 due to higher interest rates in the quarter
ended February 28, 2007. Additionally, the Company had an unrealized loss of
$1,000 in the quarter ended February 28, 2007 versus a net unrealized loss of
$5,000 in the quarter ended February 28, 2006 from marketable securities due to
market adjustments of its trading securities equity portfolio.
INCOME TAXES
The effective income tax rate of 47.8% for the quarter ended February 28, 2007
increased from a rate of 42.5% in the quarter ended February 28, 2007 due to an
adjustment to the reversal of prior years' income tax over accruals taken in the
first two quarters of fiscal 2007.
Nine months ended February 28, 2007 compared with nine months ended February 28,
--------------------------------------------------------------------------------
2006
----
(Dollar amounts in Thousands)
Nine Months Ended
February 28,
2007 2006
---- ----
% of % of
Amount Revenues Amount Revenues
Revenues ............................ $36,775 100.0 $35,889 100.0
Cost of sales ....................... 29,978 81.5 28,886 80.5
------- ----- ------- -----
Gross profit ........................ 6,797 18.5 7,003 19.5
Selling, general, and administrative
expenses 5,331 14.5 5,026 14.0
------- ----- ------- -----
Income from operations .............. 1,466 4.0 1,977 5.5
Other income ........................ 311 0.8 193 0.5
------- ----- ------- -----
Income before income taxes .......... 1,777 4.8 2,170 6.0
Provision for income taxes .......... 720 1.9 923 2.5
------- ----- ------- -----
Net income .......................... $ 1,057 2.9 $ 1,247 3.5
======= ===== ======= =====
REVENUES
Revenues consist primarily of revenues from computer programming consulting
services. Revenues for the nine months ended February 28, 2007 increased
$886,000 or 2.5% from the comparable period in fiscal 2006. Due to the contract
suspension with the NYC Department of Education (DOE), the consultants on
billing with DOE decreased from 41 at May 31, 2006 to 11 at the end of the
current period. Despite this reduction in the number of consultants on billing
at DOE, the overall average number of consultants on billing only decreased from
345 in the prior year period to 339 for the current period. Additional
placements at other accounts, many at higher billing rates, have offset most of
the reduction at DOE and, therefore, revenues have increased. After the end of
the quarter, as described in Footnote 9 to the Condensed Consolidated Financial
Statements, the DOE has advised the Company that the 11 remaining consultants
will be terminated in the near future.
Page 12
COST OF SALES
Cost of sales for the nine months ended February 28, 2007, increased $1,092,000
or 3.8% to $29,978,000 from $28,886,000 in the prior year period. Cost of sales
as a percentage of revenues increased from 80.5% in the nine months ended
February 28, 2006 to 81.5% in the nine months ended February 28, 2007. The
increase in cost of sales as a percentage of revenues was primarily attributable
to discount programs instituted or expanded by customers. These discount
programs decrease revenues without allowing offsetting cost reductions.
Cost of sales as a percentage of revenues increased in part, because of a
decline in revenues at AT&T, the Company's largest customer, due to Procurestaff
offering further discounts to AT&T to maintain its relationship. This required
the Company to reduce what it received from Procurestaff, which further reduced
the Company's margins on its AT&T business.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses consist primarily of expenses
relating to account executives, technical recruiters, facilities costs,
management and corporate overhead. These expenses increased $305,000 or 6.1%
from $5,026,000 in the nine months ended February 28, 2006 to $5,331,000 in the
nine months ended February 28, 2007. This increase was primarily attributable to
an increase in the number of technical recruiters and sales executives.
Additional personnel have been hired to address increasing competition. The
Company expects to continue to hire additional sales executives and technical
recruiters.
INCOME FROM OPERATIONS
In spite of the increase in revenues, income from operations decreased $511,000
or 25.8% from $1,977,000 in the nine months ended February 28, 2006 to
$1,466,000 in the nine months ended February 28, 2007. The discount programs
which have caused an increase in cost of sales as a percentage of revenues,
along with the expenses related to the hiring of additional sales and recruiting
personnel, have reduced income from operations.
OTHER INCOME
Other income resulted primarily from interest and dividend income, which
increased by $91,000 to $346,000 due to higher interest rates in the nine months
ended February 28, 2007. Additionally, the Company had an unrealized gain of
$1,000 in the nine months ended February 28, 2007 versus a net unrealized loss
of $5,000 in the nine months ended February 28, 2006 from marketable securities
due to market adjustments of its trading securities equity portfolio.
INCOME TAXES
The effective income tax rate of 40.5% for the nine months ended February 28,
2007 decreased from a rate of 42.5% in the nine months ended February 28, 2006
due to lower state and local taxes and reversal of prior years' income tax over
accruals.
Page 13
TSR, INC. AND SUBSIDIARIES
LIQUIDITY AND CAPITAL RESOURCES
The Company expects that cash flow generated from operations together with its
cash and marketable securities will be sufficient to provide the Company with
adequate resources to meet its liquidity requirements for the foreseeable
future.
At February 28, 2007, the Company had working capital of $12,784,000 and cash
and cash equivalents of $2,109,000 as compared to working capital of $12,368,000
and cash and cash equivalents of $2,661,000 at May 31, 2006. The Company's
working capital also included $6,391,000 and $5,407,000 of marketable securities
with maturities of less than one year at February 28, 2007 and May 31, 2006,
respectively. The working capital and marketable securities increased primarily
due to the reclassification of a security from long-term to current.
Net cash provided by operating activities of $1,130,000 for the nine months
ended February 28, 2007, compared to $300,000 of cash provided for the nine
months ended February 28, 2006. The cash provided by operating activities in the
nine months ended February 28, 2007 resulted primarily from the Company's net
income. In the nine months ended February 28, 2006 an increase in accounts
receivable and a decrease in accrued expenses significantly reduced the cash
flow provided by the Company's net income.
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 provided by investment activities of $996,000 for
the nine months ended February 28, 2006 primarily resulted from maturities of US
Treasury Securities in excess of purchases.
Net cash used in financing activities of $1,160,000 and $1,477,000 for the nine
month periods ended February 28, 2007 and 2006, respectively, resulted primarily
from cash dividends.
The Company's capital resource commitments at February 28, 2007 consisted of
lease obligations on its branch and corporate facilities. The Company intends to
finance these lease commitments from cash flow provided by operations, available
cash and short-term marketable securities.
The Company's cash and marketable securities were sufficient to enable it to
meet its cash requirements during the nine months ended February 28, 2007. The
Company has available a revolving line of credit of $5,000,000 with a major
money center bank through October 6, 2007. As of February 28, 2007, no amounts
were outstanding under this line of credit.
TABULAR DISCLOSURE OF CONTRACTUAL OBLIGATIONS
PAYMENTS DUE BY PERIOD
LESS THAN MORE THAN
Contractual Obligations TOTAL 1 YEAR 1-3 YEARS 3-5 YEARS 5 YEARS
----------------------- ----- ------ --------- --------- -------
Long-Term Debt ................................ -- -- -- -- --
Capital Lease Obligations ..................... -- -- -- -- --
Operating Leases .............................. 533,000 256,000 219,000 58,000 --
Purchase Obligations .......................... -- -- -- -- --
Consulting Contract ........................... 50,000 50,000 -- -- --
Other Long-Term Liabilities Reflected on
the Registrant's Balance Sheet under GAAP ..... -- -- -- -- --
-------- -------- -------- ------- ------
Total ......................................... $583,000 $306,000 $219,000 $58,000 $ --
======== ======== ======== ======= ======
Page 14
TSR, INC. AND SUBSIDIARIES
RECENT ACCOUNT PRONOUNCEMENTS
In July 2006, the Financial Accounting Standards Board (FASB) issued FASB
Interpretation No. 48 - "Accounting for Uncertainty in Income Taxes" (FIN 48).
This guidance is intended to provide increased consistency in the application of
FASB Statement No. 109 - "Accounting for Income Taxes" by providing guidance
with regard to the recognition and measurement of tax positions, and provide
increased disclosure requirements. In particular, this interpretation requires
uncertain tax positions to be recognized only if they are "more-likely-than-not"
to be upheld based on their technical merits. Additionally, the measurement of
the tax position will be based on the largest amount that is determined to have
greater than a 50% likelihood of realization upon ultimate settlement. Any
resulting cumulative effect of applying the provisions of FIN 48 upon adoption
would be reported as an adjustment to the beginning balance of retained earnings
(deficit) in the period of adoption. Management is in the process of evaluating
the effects of this guidance which is effective for fiscal years beginning after
December 15, 2006.
On September 15, 2006, the FASB issued SFAS No. 157, "Fair Value Measurements".
SFAS No. 157 is effective for fiscal years beginning after November 15, 2007,
and interim periods within those fiscal years. SFAS No. 157 provides guidance
related to estimating fair value and requires expanded disclosures. The standard
applies whenever other standards require (or permit) assets or liabilities to be
measured at fair value. The standard does not expand the use of fair value in
any new circumstances. The Company is evaluating SFAS No. 157 and its impact on
the Company's consolidated financial statements.
Page 15
TSR, INC. AND SUBSIDIARIES
CRITICAL ACCOUNTING POLICIES
The SEC defines "critical accounting policies" as those that require the
application of management's most difficult, subjective or complex judgments,
often as a result of the need to make estimates about the effect of matters that
are inherently uncertain and may change in subsequent periods.
The Company's significant accounting policies are described in Note 1 to the
Company's consolidated financial statements, contained in its May 31, 2006
Annual Report on Form 10-K, as filed with the SEC. The Company believes that
those accounting policies require the application of management's most
difficult, subjective or complex judgments. There have been no changes in the
Company's significant accounting policies as of February 28, 2007.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The Company's earnings and cash flows are subject to fluctuations due to (i)
changes in interest rates primarily affecting its income from the investment of
available cash balances in money market funds and (ii) changes in market values
of its investments in trading equity securities. Under its current policies, the
Company does not use interest rate derivative instruments to manage exposure to
interest rate changes. The Company's present exposure to changes in the market
value of its investments in equity securities is not significant.
ITEM 4. CONTROLS AND PROCEDURES
DISCLOSURE CONTROLS AND PROCEDURES. The Company conducted an evaluation, under
the supervision and with the participation of the principal executive officer
and principal financial officer, of the Company's disclosure controls and
procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of
1934 (the "Exchange Act")). Based on this evaluation, the principal executive
officer and principal financial officer concluded that, as of the end of the
period covered by this report, the Company's disclosure controls and procedures
are effective.
INTERNAL CONTROL OVER FINANCIAL REPORTING. There was no change in the Company's
internal control over financial reporting (as such term is defined in Rule
13a-15(f) under the Exchange Act) during the Company's most recently reported
completed fiscal quarter that has materially affected, or is reasonably likely
to materially affect, the Company's internal control over financial reporting.
Page 16
PART II. OTHER INFORMATION
ITEM 1A. RISK FACTORS
There are no material changes to the risk factors described in the Form
10-K, filed on September 12, 2006, except as follows:
DEPENDENCE ON SIGNIFICANT CUSTOMERS
As described under Part I, Item 2, the Company's relationship with AT&T has
changed due to the merger of AT&T with SBC Communications and the resulting
change in the relationship with AT&T of Procurestaff, through which the
Company contracts with AT&T. This change has had a further impact on the
Company's profit margins on consultants placed with AT&T and recently
created a decrease in new placements with AT&T. The Company cannot predict
the extent to which this change will adversely affect the number of
consultants placed with AT&T.
As more fully described Footnote 9 to the Company's Condensed Consolidated
Financial Statements, the Company has agreed in principle to settle a claim
by the New York City Department of Education (DOE). This settlement has not
been finalized. At the end of the quarter ended February 28, 2007, there
were 11 consultants remaining on billing at DOE. In addition to the
settlement of the claim, the Company and the DOE were also negotiating an
agreement which would have enabled the Company to continue placing new
consultants with the DOE. The Company and the DOE have not been able to
finalize the terms of this agreement. The Company does not expect the
failure to reach this agreement to affect the agreement in principle to
settle the DOE claim. However, as a result, the DOE has advised the Company
that the 11 remaining consultants will be terminated in the near future.
ITEM 6. EXHIBITS
(a). Exhibit 10.1 - Employment Agreement between Christopher Hughes and TSR
Inc. dated March 1, 2007 incorporated by reference to the Form 8-K
filed March 6, 2007.
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 2, 2007 /s/ J.F. Hughes
---------------------------
J.F. Hughes, Chairman and President
Date: April 2, 2007 /s/ John G. Sharkey
---------------------------
John G. Sharkey, Vice President Finance
Page 17