-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, GKiiTKRFjUT4C6hgI35/2xOhtiYXwPJYEYc3ya3SGqb39KNbHimSmiPNdqOVl7fI 5FovVsxzSP6Zem/R7iTK4w== 0000950110-98-000420.txt : 19980414 0000950110-98-000420.hdr.sgml : 19980414 ACCESSION NUMBER: 0000950110-98-000420 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980228 FILED AS OF DATE: 19980413 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: TSR INC CENTRAL INDEX KEY: 0000098338 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-COMPUTER PROGRAMMING SERVICES [7371] IRS NUMBER: 132635899 STATE OF INCORPORATION: DE FISCAL YEAR END: 0531 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-08656 FILM NUMBER: 98592462 BUSINESS ADDRESS: STREET 1: 400 OSER AVE CITY: HAUPPAUGE STATE: NY ZIP: 11788 BUSINESS PHONE: 5162310333 MAIL ADDRESS: STREET 1: 400 OSER AVENUE CITY: HAUPPAUGE STATE: NY ZIP: 11788 FORMER COMPANY: FORMER CONFORMED NAME: TIME SHARING RESOURCES INC DATE OF NAME CHANGE: 19840129 10-Q 1 FORM 10-Q 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, 1998 ----------------- [ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from ______ to ______ Commission File Number: 0-8656 ------------------------------------------------------- TSR, Inc. - ------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) Delaware 13-2635899 - ----------------------------------- ---------------------------------------- (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 400 Oser Avenue, Hauppauge, NY 11788 - ------------------------------------------------------------------------------- (Address of principal executive offices) 516-231-0333 - ------------------------------------------------------------------------------- (Registrant's telephone number) None - ------------------------------------------------------------------------------- (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 SHARES OUTSTANDING ------------------ 5,988,276 shares of common stock, par value $.01 per share, as of March 31, 1998. ----------------------------------------------------------- Page 1 TSR, INC. AND SUBSIDIARIES INDEX Page Number ------ Part I. Financial Information: Item 1. Financial Statements: Consolidated Condensed Balance Sheets-- February 28, 1998 and May 31, 1997..................... 3 Consolidated Condensed Statements of Earnings-- For the three months and nine months ended February 28, 1998 and 1997........................... 4 Consolidated Condensed Statements of Cash Flows-- For the nine months ended February 28, 1998 and 1997............................................. 5 Notes to Consolidated Condensed Financial Statements... 6 Item 2. Management's Discussion and Analysis..................... 7 Part II. Other Information............................................... 12 Signatures............................................................... 12 Page 2
Part I. Financial Information Item 1. Financial Statements TSR, INC. AND SUBSIDIARIES CONSOLIDATED CONDENSED BALANCE SHEETS February 28, May 31, 1998 1997 ------------ -------- ASSETS Current Assets: Cash and cash equivalents (Note 6)............................................ $ 3,139,316 $ 2,931,180 Marketable securities (Note 7)................................................ 631,922 26,175 Accounts receivable (net of allowance for doubtful accounts of $173,000)............................................ 14,049,715 10,408,542 Other receivables............................................................. 99,470 57,333 Prepaid expenses.............................................................. 13,923 3,860 Prepaid and recoverable income taxes.......................................... 40,185 11,095 Deferred income taxes......................................................... 59,000 59,000 ----------- ----------- Total current assets...................................................... 18,033,531 13,497,185 Equipment and leasehold improvements, at cost (net of accumulated depreciation and amortization of $999,000 and $687,000)....................... 1,017,355 459,902 Other assets....................................................................... 65,995 57,782 Deferred income taxes.............................................................. 68,000 29,000 ----------- ----------- $19,184,881 $14,043,869 =========== =========== LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities: Accounts and other payables................................................... $ 140,030 $ 207,074 Accrued and other liabilities................................................. 2,785,074 2,486,788 Income taxes payable.......................................................... 159,709 135,173 Advances from customers....................................................... 962,674 783,892 ----------- ----------- Total current liabilities................................................. 4,047,487 3,612,927 ----------- ----------- Shareholders' Equity: Preferred stock, $1 par value, authorized 1,000,000 shares; none issued............................................. -- -- Common stock, $.01 par value, authorized 25,000,000 shares; issued 5,988,276* and 5,828,276*.................................. 59,883 58,283 Additional paid-in capital ................................................... 3,183,246 878,446 Retained earnings............................................................. 11,894,265 9,494,213 ----------- ----------- 15,137,394 10,430,942 ----------- ----------- $19,184,881 $14,043,869 =========== ===========
*Adjusted for a stock split in the form of a 100% stock dividend on November 17, 1997. The accompanying notes are an integral part of these consolidated condensed financial statements. Page 3
TSR, INC. AND SUBSIDIARIES CONSOLIDATED CONDENSED STATEMENTS OF EARNINGS FOR THE THREE AND NINE MONTHS ENDED FEBRUARY 28, 1998 AND 1997 Three Months Ended Nine Months Ended February 28, February 28, ------------------------------ ----------------------------- 1998 1997 1998 1997 ----------- ----------- ----------- ----------- Revenues......................................... $17,966,457 $13,046,530 $51,260,976 $34,745,867 Cost of sales.................................... 12,808,402 9,961,255 37,426,481 26,261,275 Research and development expenses................ 211,696 96,419 588,880 190,386 Selling, general and administrative expenses....................... 3,093,832 2,259,650 8,996,869 6,391,275 ----------- ----------- ----------- ----------- 16,113,930 12,317,324 47,012,230 32,842,936 ----------- ----------- ----------- ----------- Income from operations........................... 1,852,527 729,206 4,248,746 1,902,931 Other income: Interest and dividend income................ 28,876 32,062 101,146 121,843 Gain on marketable securities............... 6,200 50,444 13,560 57,351 Gain from sales of assets................... -- -- 8,600 77,650 ----------- ----------- ----------- ----------- Income before income taxes....................... 1,887,603 811,712 4,372,052 2,159,775 Provision for income taxes....................... 838,000 358,000 1,972,000 956,000 ----------- ----------- ----------- ----------- Net income.................................. $ 1,049,603 $ 453,712 $ 2,400,052 $ 1,203,775 =========== =========== =========== =========== Basic net income per common share*............... $ 0.18 $ 0.08 $ 0.41 $ 0.21 =========== =========== =========== =========== Diluted net income per common share*............. $ 0.17 $ 0.08 $ 0.40 $ 0.21 =========== =========== =========== =========== Weighted average number of diluted common shares outstanding*............ 6,165,503 5,828,276 5,977,381 5,828,276 =========== =========== =========== ===========
* Adjusted for a stock split in the form of a 100% stock dividend on November 17, 1997. The accompanying notes are an integral part of these consolidated condensed financial statements. Page 4
TSR, INC. AND SUBSIDIARIES CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS FOR THE NINE MONTHS ENDED FEBRUARY 28, 1998 AND 1997 Nine Months Ended February 28, ------------------------------- 1998 1997 ----------- ----------- Cash flows from operating activities: Net income.................................................................... $ 2,400,052 $ 1,203,775 ----------- ----------- Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization............................................. 312,534 116,377 Gain from marketable securities........................................... (13,560) (57,351) Deferred income taxes..................................................... (39,000) 35,000 Gain on sales of assets................................................... (8,600) (77,650) Changes in assets and liabilities: Accounts receivable................................................... (3,641,173) (4,192,702) Other receivables..................................................... (42,137) (59,403) Prepaid expenses...................................................... (10,063) 9,639 Prepaid and recoverable income taxes.................................. (29,090) 15,637 Other assets.......................................................... (8,213) 196 Accounts payable and accrued expenses................................. 231,242 849,987 Income taxes payable.................................................. 24,536 (39,347) Advances from customers............................................... 178,782 347,908 ----------- ----------- Total adjustments......................................................... (3,044,742) (3,051,709) ----------- ----------- Net cash used in operating activities......................................... (644,690) (1,847,934) ----------- ----------- Cash flows from investing activities: Proceeds from maturities and sales of marketable securities............... - 3,655,638 Purchase of marketable securities......................................... (592,187) (2,865,303) Purchase of fixed assets.................................................. (869,987) (213,045) Proceeds from sales of assets............................................. 8,600 77,650 ----------- ----------- Net cash provided by (used in) investing activities........................... (1,453,574) 654,940 ----------- ----------- Cash flows from financing activities: Issuance of common stock.................................................. 2,306,400 -- ----------- ----------- Net cash provided by financing activities..................................... 2,306,400 -- ----------- ----------- Net increase (decrease) in cash and cash equivalents............................... 208,136 (1,192,994) Cash and cash equivalents at beginning of period................................... 2,931,180 2,958,922 ----------- ----------- Cash and cash equivalents at end of period......................................... $ 3,139,316 $ 1,765,928 =========== =========== Supplemental Disclosures: Income tax payments, net...................................................... $ 2,016,000 $ 945,000 =========== =========== Interest paid................................................................. $ -- $ -- =========== ===========
The accompanying notes are an integral part of these consolidated condensed financial statements. Page 5 TSR, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS FEBRUARY 28, 1998 1. The accompanying unaudited consolidated condensed financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions of Form 10- Q of Regulation S-X. Accordingly, they do not include all the information and notes required by generally accepted accounting principles for complete financial statements. For further information refer to 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, 1997. 2. In the opinion of the Company, the accompanying unaudited consolidated condensed financial statements contain all adjustments (consisting of only normal recurring accruals) necessary to present fairly the consolidated financial position, the consolidated results of operations, and consolidated cash flows for the periods presented. 3. The Company provides contract computer programming services and Year 2000 compliance solutions to its clients. The Company, in its contract computer programming service business, provides technical computer personnel to companies to supplement their in-house information technology capabilities. In addition, the Company has developed Catch/21, a Year 2000 compliance software solution that corrects, on a substantially automated basis, problems which may occur in computer software as a result of the century change in the year 2000. The Company has recently commenced providing conversion services to customers to make software applications Year 2000 compliant. 4. The consolidated condensed financial statements include the accounts of TSR, Inc. and its wholly-owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation. 5. The Company recognizes contract computer programming services revenues as services are provided. Revenues from the maintenance and support of the Company's proprietary software are recognized monthly as services are rendered. Provided that acceptance is probable, revenue from code conversion is recognized as services are rendered. 6. 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, 1998: Cash in banks ............................. $ 683,180 Money Market Funds......................... 1,962,551 United States Treasury Bills............... 493,585 ---------- $3,139,316 ========== 7. Marketable securities consists of United States Treasury Bills and equity securities. The treasury bills with maturities at acquisition in excess of 90 days, are classified as held to maturity investments. The Company's equity securities are classified as trading securities. The amortized cost, gross unrealized holding gains, gross unrealized holding losses and fair value for marketable securities by major security type at February 28, 1998 are as follows:
Gross Gross Unrealized Unrealized Amortized Holding Holding Cost Gains Losses Fair Value -------- ------- ------ ---------- United States Treasury Bills.......... $487,184 $ -- $ -- $487,184 Equity Securities.................... 133,290 11,448 -- 144,738 -------- ------- ------ -------- $620,474 $11,448 $ -- $631,922 ======== ======= ====== ========
8. The Company's exclusive license to market construction specifications databases expired March 1, 1996. In June 1996, the Company sold its customer database for $76,850 which was recorded as non-operating income in the first quarter of fiscal 1997. 9. On October 22, 1997 the Board of Directors of the Company declared a stock split in the form of a 100% stock dividend on the shares of Common Stock payable November 17, 1997 to stockholders of record as of November 3, 1997. All data for prior periods has been adjusted accordingly. 10. On January 30, 1998, the Company sold 160,000 shares of common stock at $16 per share in a private placement. The net proceeds to the Company after expenses were $2,306,400. Page 6 Part I. Financial Information Item 2. TSR, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION The following discussion and analysis should be read in conjunction with the consolidated condensed financial statements and the notes to the consolidated condensed financial statements. Results of Operations The following table sets forth for the periods indicated certain financial information derived from the Company's consolidated statements of earnings. There can be no assurance that trends in sales growth or operating results will continue in the future: Three Months Ended February 28, 1998 as compared with three months ended February 28, 1997
(Amounts in Thousands) 3 Months Ended February 28, -------------------------------------------------- 1998 1997 ---------------------- -------------------- % of % of Amount Revenues Amount Revenues ------- -------- ------- -------- Revenues .................................................... $17,967 100.0 $13,046 100.0 Cost of Sales ............................................... 12,808 71.3 9 76.4 ------- ----- ------- ----- Gross Profit ................................................ 5,159 28.7 3,085 23.6 Research and Development Expenses............................ 212 1.2 96 0.7 Selling, General, and Administrative Expenses ............... 3,094 17.2 17.3 ------- ----- ------- ----- Income from Operations ...................................... 1,853 10.3 729 5.6 Other Income ................................................ 35 0 83 .6 ------- ----- ------- ----- Income Before Income Taxes .................................. 1,888 10.5 812 6.2 Provision for Income Taxes .................................. 838 4.7 358 2.7 ------- ----- ------- ----- Net Income .................................................. $ 1,050 5.8 $ 454 3.5 ======= ===== ======= =====
Revenues Revenues consist primarily of revenues from contract computer programming services. In addition, the Company's revenues for the quarter ended February 28, 1998 included revenues from its Year 2000 business which was commenced in fiscal 1997. Revenues for the quarter ended February 28, 1998 increased $4,921,000 or 37.7% over the comparable period in fiscal 1997. Contract computer programming services revenues increased $2,408,000 from $12,982,000 in the quarter ended February 28, 1997 to $15,390,000 in the quarter ended February 28, 1998. This increase resulted from an overall increase in the number of programmers on billing with clients from approximately 425 at February 28, 1997 to approximately 450 at February 28, 1998. Revenue growth during the quarter ended February 28, 1998 was affected due to the discontinuance of a significant project by the Company's largest customer, as a result of which computer programming personnel for the project provided by the Company were no longer required. Revenues from the Company's Year 2000 business, which was commenced in fiscal 1997, were $2,561,000 for the quarter ended February 28, 1998. During the current quarter the Company used its proprietary Catch/21 Software Solution on conversion projects to remediate approximately 10,000,000 lines of code for client software applications for a total of sixteen customers. Revenues for the Year 2000 business in the prior year period were $45,000. The agreements under which the Year 2000 business revenues were recognized provide that all payments under the agreements are subject to satisfactory conversion of the applications. Revenues include amounts billed or paid prior to the final acceptance by the customer based upon management's belief that acceptance is probable. Page 7 The Company received its initial revenues from the Year 2000 business during its 1997 fiscal year, and its revenues increased to $2,561,000 for the quarter ended February 28, 1998. However, the Company's Year 2000 business is still in the relatively early stages and, as a result, its quarterly revenues can be significantly impacted by the timing of releases of code by the Company's customers to the Company's conversion facility, as well as the timing of entering into agreements with new customers. At the present time, the Company has received less code from customers than it had expected based on customers' original estimates. In addition, the Company is experiencing more intense competition, which in turn is creating longer sales cycles and has impacted obtaining new customers. While the Company believes that its customers have been satisfied with the Company's Year 2000 conversion services and the performance of its Catch/21 software and that it is well positioned to expand its Year 2000 business, the above factors and the conditions of the Year 2000 industry generally make it difficult actually to predict near term revenues. Cost of Sales Cost of sales as a percentage of revenues decreased from 76.4% in the quarter ended February 28, 1997 to 71.3% in the quarter ended February 28, 1998. This decrease is primarily attributable to the cost of sales as a percentage of revenues in the Year 2000 business being less than the contract computer programming business. In the contract computer programming services business, cost of sales as a percentage of sales increased from 76.3% in the quarter ended February 28, 1997 to 77.4% in the quarter ended February 28, 1998. This increase is attributable to increases in amounts paid to qualified programming professionals outpacing the Company's ability to pass these increases on to customers due to competitive market pressures in the industry. The Year 2000 business incurred cost of sales of $900,000 or 35.1% of revenues in the quarter ended February 28, 1998. These costs consisted primarily of salaries of software analysts and quality assurance personnel. The Company has increased cost of sales from the Year 2000 business due to the hiring and training of additional personnel in anticipation of future conversion projects. During the current quarter, approximately 20 additional analysts were hired to increase future capacity. Cost of sales for the Year 2000 business in the quarter ended February 28, 1997 were $62,000. Research and Development Research and development costs of $212,000 in the quarter ended February 28, 1998 represent amounts expended by the Company to further develop and enhance its Catch/21 Software Solution. Currently, the Catch/21 Software Solution can convert IBM mainframe COBOL , PL/1, RPG, Assembler, CA-ADS, and CA-IDEAL applications. Additionally, several of the languages are supported in AS/400 and DEC/VAX environments. The development expenditures are expected to continue during calendar 1998 as the Company seeks to expand its product offerings to enable it to convert software applications which run on additional computer platforms and are written in other languages such as ADABASE/NATURAL, CA-EASYTRIEVE/EASYPLUS and other fourth generation language platforms which the Company expects to complete, subject to customer demand, during the next year. Research and development expenses in the quarter ended February 28, 1997 were $96,000. 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 $834,000 or 36.9% from $2,260,000 in the quarter ended February 28, 1997 to $3,094,000 in the quarter ended February 28, 1998. Selling, general and administrative expenses related to contract computer programming services increased $201,000 over the prior year period to $2,366,000. The increase was primarily attributable to additional sales commissions based on higher gross profits. In addition, this increase resulted, to a lesser extent, from expenses relating to the hiring of additional account executives and technical recruiting professionals to expand the Company's client base and recruit additional technical consultants in connection with the continuation of the Company's planned expansion. In the quarter ended February 28, 1998, approximately $726,000 in selling, general and administrative expenses were attributable to the Year 2000 business. These expenses consisted primarily of marketing, advertising and facilities expenses. During the current quarter four sales people dedicated to the Year 2000 business were hired which will significantly increase selling expenses in the coming quarters. Comparable Year 2000 selling, general and administrative expenses in the quarter ended February 28, 1997 were $40,000. Page 8 Other Income The change in other income occurred primarily due to a net gains of $50,000 in marketable securities in the fiscal 1997 quarter versus gains of $6,000 in the quarter ended February 28, 1998. Income Taxes The effective income tax rate increased to 44.4% in the quarter ended February 28, 1998 from 44.1% in the quarter ended February 28, 1997 due to higher state and local income taxes. Nine months ended February 28, 1998 compared with nine months ended February 28, 1997.
9 Months Ended February 28, ------------------------------------------------------- 1998 1997 ------------------------- ---------------------- % of % of Amount Revenues Amount Revenues -------- -------- ------- -------- Revenues ........................................... $ 51,261 100.0 $34,746 100.0 Cost of Sales ...................................... 37,426 73.0 26,261 75.6 -------- ----- ------- ----- Gross Profit ....................................... 13,835 27.0 8,485 24.4 Research and Development Expenses................... 589 1.1 191 0.5 Selling, General, and Administrative Expenses ...... 8,997 17.6 6,391 18.4 -------- ----- ------- ----- Income from Operations ............................. 4,249 8.3 1,903 5.5 Other Income ....................................... 123 0.2 257 0.7 -------- ----- ------- ----- Income Before Income Taxes ......................... 4,372 8.5 2,160 6.2 Provision for Income Taxes ......................... 1,972 3.8 956 2.7 -------- ----- ------- ----- Net Income ......................................... $ 2,400 4.7 $ 1,204 3.5 ======== ===== ======= =====
Revenues Revenues consist primarily of revenues from contract computer programming services. In addition, the Company's revenues for the nine months ended February 28, 1998 included revenues from its Year 2000 business which was commenced in fiscal 1997. Revenues for the nine months ended February 28, 1998 increased $16,515,000 or 47.5% over the comparable period in fiscal 1997. Contract computer programming services revenues increased $11,888,000 from $34,598,000 in the nine months ended February 28, 1997 to $46,486,000 in the nine months ended February 28, 1998. This increase resulted from an overall increase in the number of programmers on billing with clients from approximately 425 at February 28, 1997 to approximately 450 at February 28, 1998. The rate of revenue growth has slowed during the nine months ended February 28, 1998 due to the discontinuance of certain projects by the Company's largest customer, as a result of which computer programming personnel for the projects provided by the Company were no longer required. Revenues from the Company's Year 2000 business, which was commenced in fiscal 1997, were $4,726,000 for the nine months ended February 28, 1998. During the current period the Company used its proprietary Catch/21 Software Solution on conversion projects to remediate approximately 20,000,000 lines of code for client software applications for a total of sixteen customers. Year 2000 revenues for the nine months ended February 28, 19987 were $45,000. The agreements under which the Year 2000 business revenues were recognized provide that all payments under the agreements are subject to satisfactory conversion of the applications. Revenues include amounts billed or paid prior to the final acceptance by the customer based upon management's belief that acceptance is probable. Page 9 Cost of Sales Cost of sales as a percentage of revenues decreased from 75.6% in the nine months ended February 28, 1997 to 73.0% in the nine months ended February 28, 1998. This decrease is primarily attributable to the cost of sales as a percentage of revenues in the Year 2000 business being less than the contract computer programming business. In the contract computer programming services business, cost of sales as a percentage of sales increased from 75.7% in the nine months ended February 28, 1997 to 76.6% in the comparable period ended February 28, 1998. This increase is attributable to increases in amounts paid to qualified programming professionals outpacing the Company's ability to pass these increases on to customers due to competitive market pressures in the industry. The Year 2000 business incurred cost of sales of $1,808,000 or 38.3% of revenues in the nine months ended February 28, 1998. These costs consisted primarily of salaries of software analysts and quality assurance personnel. The Company has increased cost of sales from the Year 2000 business due to the hiring and training of additional personnel in anticipation of future conversion projects. Cost of sales for the Year 2000 business in the period ended February 28, 1997 amounted to $62,000. Research and Development Research and development costs of $589,000 in the nine months ended February 28, 1998 represent amounts expended by the Company to further develop and enhance its Catch/21 Software Solution. Currently, the Catch/21 Software Solution can convert IBM mainframe COBOL , PL/1, RPG, Assembler, CA-ADS, and CA-IDEAL applications. Additionally, several of the languages are supported in AS/400 and DEC/VAX environments. The development expenditures are expected to continue during calendar 1998 as the Company seeks to expand its product offerings to enable it to convert software applications which run on additional computer platforms and are written in other languages such as ADABASE/NATURAL, CA-EASYTRIEVE/EASYPLUS and other fourth generation language platforms which the Company expects to complete, subject to customer demand, during the next year. Research and development expenses in the period ended February 28, 1997 were $191,000. 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 $2,606,000 or 40.8% from $6,391,000 in the nine months ended February 28, 1997 to $8,997,000 in the nine months ended February 28, 1998. Selling, general and administrative expenses related to contract computer programming services increased $1,042,000 over the prior year period to $7,123,000. The increase was primarily attributable to additional sales commissions based on higher gross profits. In addition, this increase resulted, to a lesser extent, from expenses relating to the hiring of additional account executives and technical recruiting professionals to expand the Company's client base and recruit additional technical consultants in connection with the continuation of the Company's planned expansion. In the nine months ended February 28, 1998, approximately $1,873,000 in selling, general and administrative expenses were attributable to the Year 2000 business. These expenses consisted primarily of marketing, advertising and facilities expenses. Comparable Year 2000 selling, general and administrative expenses in the period ended February 28, 1997 were $92,000. Other Income The change in other income occurred primarily due to the sale of the Company's customer database from its construction specification subsidiary for $77,000 in the first quarter of fiscal 1997. Income Taxes The effective income tax rate increased to 45.1% in the nine months ended February 28, 1998 from 44.3% in the nine months ended February 28, 1997 due to higher state and local incomes taxes. Page 10 Liquidity, Capital Resources and Changes in Financial Condition The Company expects that cash flow generated from operations together with its cash and marketable securities and available credit facilities will be sufficient to provide the Company with adequate resources to meet its cash requirements, including further acquisition of fixed assets and other investments in the Year 2000 business. At February 28, 1998, the Company had working capital of $13,986,000 and cash and cash equivalents of $3,139,000 as compared to working capital of $9,884,000 and cash and cash equivalents of $2,931,000 at May 31, 1997. Working capital increased due to the Company's net income in the nine months ended February 28, 1998 and the sale of common stock. Although there was a significant working capital increase, cash and cash equivalents increased to a lesser extent from May 31, 1997 to February 28, 1998 primarily due to an increase in accounts receivable and the purchase of fixed assets. The Company had negative net cash flow of $645,000 from operations during the nine months ended February 28, 1998 as compared to negative net cash flow from operations of $1,848,000 in the nine months ended February 28, 1997. The rate of negative cash flow declined in the nine months ended February 28, 1998 as compared to the nine months ended February 28, 1997 primarily due to higher income from operations. The Company had net income of $2,400,000, in the nine months ended February 28, 1998. However, the Company had an increase in accounts receivable of $3,641,000 from $10,409,000 at May 31, 1997 to $14,050,000 at February 28, 1998. The increase in accounts receivable resulted primarily from the increase in revenues for the period. Cash flow used in investing activities resulted primarily from purchases of fixed assets in the nine month period of $870,000 in fiscal 1998. This compares with fixed asset purchases of $213,000 in fiscal 1997. The significant increase was required for equipment to emulate client computer environments to enable sufficient testing and quality assurance of the Catch/21 Software Solution. Additionally, the Company invested $592,000 in marketable securities during the period, of which $487,000 was invested in United States Treasury Bills. Cash flow from financing activities of $2,306,400 resulted from the sale of 160,000 shares of common stock at $16 per share, less expenses, in a private placement on January 30, 1998. The Company's capital resource commitments at February 28, 1998 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. Although the Company's cash and marketable securities were sufficient to enable it to meet its cash requirements during the nine months ended February 28, 1998, the Company may require a credit facility to finance its accounts receivable if its accounts receivable continue to grow as a result of continued increases in revenues. The Company has established a revolving line of credit of $5,000,000 with a major money center bank. As of February 28, 1998 there were no amounts outstanding under this line of credit. Forward-Looking Statements Certain statements contained in "Management's Discussion and Analysis of Financial Condition and Results of Operations", including statements concerning the development of the Company's Catch/21 software solution, 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 and the Year 2000 business, concentration of the Company's business with certain customers and uncertainty as to the Company's ability to bring in new customers and the risk that the Catch/21 software solution will not achieve increased commercial acceptance. Page 11 TSR, INC. AND SUBSIDIARIES Part II. Other Information Item 2. Changes in Securities On January 30, 1998, the Company sold 160,000 shares of common stock at $16 per share in a private placement to nine institutional and accredited investors identified by Janney Montgomery Scott, Inc. Janney Montgomery Scott, Inc. received a commission of 6% of the gross proceeds from the shares sold in the private placement. The shares were issues pursuant to an exemption provided by Section 506 under the Securities Act of 1933. Item 6. Exhibits and Reports on Form 8K (a). Exhibit 27: Financial Data Schedule (b). Report on Form 8K filed March 23, 1998 regarding the Company's Financial Press Release for the quarter and nine months ended February 28, 1998 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 9, 1998 /s/ J.F. HUGHES ----------------------------------------- J.F. Hughes, Chairman, President and Treasurer Date: April 9, 1998 /s/ JOHN G. SHARKEY ----------------------------------------- John G. Sharkey, Vice President, Finance Page 12 EX-27 2 FDS
5 TSR, INC. AND SUBSIDIARIES Exhibit 27, Financial Data Schedule to Report on Form 10Q, November 30, 1997 9-MOS MAY-31-1998 FEB-28-1998 3,139,316 631,922 14,222,979 173,264 0 18,033,531 2,016,536 999,181 19,184,881 4,047,487 0 0 0 59,883 15,077,511 19,184,881 0 51,260,976 0 37,426,481 9,585,749 0 0 4,372,052 1,972,000 2,400,052 0 0 0 2,400,052 0.41 0.40
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