-----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, GjT+SkYLX+yVkTNsqtR0/QejkGBwSn8LpKqdeAPmlkz48XwCh14x1C8KGiD30/Sb oBcGNRuriE6vl62YlW3v8Q== 0000950110-99-000487.txt : 19990408 0000950110-99-000487.hdr.sgml : 19990408 ACCESSION NUMBER: 0000950110-99-000487 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990228 FILED AS OF DATE: 19990407 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: 99588516 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, 1999 [ ] 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 5,899,626 shares of common stock, par value $.01 per share, as of March 31, 1999 ================================================================================ Page 1 TSR, INC. AND SUBSIDIARIES INDEX
Page Number ------ Part I. Financial Information: Item 1. Financial Statements: Consolidated Condensed Balance Sheets -- February 28, 1999 and May 31, 1998.................................................. 3 Consolidated Condensed Statements of Earnings -- For the three months and nine months ended February 28, 1999 and 1998 .............. 4 Consolidated Condensed Statements of Cash Flows -- For the nine months ended February 28, 1999 and 1998................................ 5 Notes to Consolidated Condensed Financial Statements..................................... 6 Item 2. Management's Discussion and Analysis..................................................... 7 Part II. Other Information.......................................................................... 12 Signatures........................................................................................... 13
Page 2 Part I. Financial Information Item 1. Financial Statements TSR, INC. AND SUBSIDIARIES CONSOLIDATED CONDENSED BALANCE SHEETS
February 28, May 31, ASSETS 1999 1998 ----------- ------------ (unaudited) Current Assets: Cash and cash equivalents (Note 6)............................................ $ 4,079,786 $ 2,425,122 Marketable securities (Note 7)................................................ 5,424,841 1,575,945 Accounts receivable (net of allowance for doubtful accounts of $173,000)............................................ 14,985,381 15,037,995 Other receivables............................................................. 170,557 86,772 Prepaid expenses.............................................................. 25,681 67,449 Prepaid and recoverable income taxes.......................................... 224,501 90,823 Deferred income taxes......................................................... 59,000 59,000 ----------- ----------- Total current assets...................................................... 24,969,747 19,343,106 Equipment and leasehold improvements, at cost (net of accumulated depreciation and amortization of $1,600,000 and $952,000) 428,216 1,008,776 Other assets....................................................................... 92,799 90,995 Deferred income taxes.............................................................. 107,000 73,000 ----------- ----------- $25,597,762 $20,515,877 =========== =========== LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities: Accounts and other payables................................................... $ 398,498 $ 278,410 Accrued and other liabilities................................................. 3,594,308 2,950,986 Income taxes payable.......................................................... 144,260 173,377 Advances from customers....................................................... 1,439,961 946,257 ----------- ---------- Total current liabilities................................................. 5,577,027 4,349,030 ----------- ---------- 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 6,078,726 shares and 5,988,276 shares 60,787 59,883 Additional paid-in capital.................................................... 4,007,699 3,183,246 Retained earnings............................................................. 16,500,124 12,923,718 ----------- ----------- 20,568,610 16,166,847 Less: Treasury stock 62,000 shares at cost .................................. 547,875 -- ----------- ----------- 20,020,735 16,166,847 ----------- ----------- $25,597,762 $20,515,877 =========== ===========
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, 1999 AND 1998 (unaudited)
Three Months Ended Nine Months Ended February 28, February 28, ----------------------------- ------------------------------- 1999 1998 1999 1998 ------------- ------------ ------------ ------------ Revenues......................................... $20,817,633 $17,966,457 $62,965,539 $51,260,976 Cost of sales.................................... 15,460,007 12,808,402 46,408,135 37,426,481 Selling, general and administrative expenses 3,311,912 3,093,832 10,197,263 8,996,869 Research and development......................... 49,139 211,696 277,620 588,880 ----------- ----------- ----------- ----------- 18,821,058 16,113,930 56,883,018 47,012,230 ----------- ----------- ----------- ----------- Income from operations........................... 1,996,575 1,852,527 6,082,521 4,248,746 Other income: Interest and dividend income .................. 105,361 28,876 251,934 101,146 Gain (loss) from marketable securities, net .............................. (4,168) 6,200 (8,049) 13,560 Gain from sales of assets ..................... -- -- -- 8,600 ----------- ----------- ----------- ----------- Income before income taxes....................... 2,097,768 1,887,603 6,326,406 4,372,052 Provision for income taxes....................... 900,000 838,000 2,750,000 1,972,000 ----------- ----------- ----------- ----------- Net income.................................. $ 1,197,768 $ 1,049,603 $ 3,576,406 $ 2,400,052 =========== =========== =========== =========== Basic net income per common share ............... $ 0.20 $ 0.18 $ 0.60 $ 0.41 =========== =========== =========== =========== Weighted average number of common shares outstanding..................... 6,026,801 5,881,609 6,001,118 5,846,054 =========== =========== =========== =========== Diluted net income per common share ............. $ 0.20 $ 0.17 $ 0.60 $ 0.40 =========== =========== =========== =========== Weighted average number of diluted common shares outstanding ............ 6,039,793 6,165,503 6,003,070 5,977,381 =========== =========== =========== ===========
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, 1999 AND 1998 (unaudited)
Nine Months Ended February 28, ------------------------------ 1999 1998 ----------- ---------- Cash flows from operating activities: Net income.................................................................... $ 3,576,406 $ 2,400,052 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization............................................. 713,855 312,534 Loss (gain) from marketable securities, net............................... 8,049 (13,560) Deferred income taxes..................................................... (34,000) (39,000) Gain on sales of assets................................................... -- (8,600) Changes in assets and liabilities: Accounts receivable................................................... 52,614 (3,641,173) Other receivables..................................................... (83,785) (42,137) Prepaid expenses...................................................... 41,768 (10,063) Prepaid and recoverable income taxes.................................. (133,678) (29,090) Other assets.......................................................... (26,804) (8,213) Accounts payable and accrued expenses................................. 763,410 231,242 Income taxes payable.................................................. (29,117) 24,536 Advances from customers............................................... 493,704 178,782 ----------- ----------- Net cash provided by (used in) operating activities........................... 5,342,422 (644,690) ----------- ----------- Cash flows from investing activities: Proceeds from maturities and sales of marketable securities 974,054 -- Purchase of marketable securities......................................... (4,830,999) (592,187) Purchase of fixed assets.................................................. (108,295) (869,987) Proceeds from sales of assets............................................. -- 8,600 ----------- ----------- Net cash used in investing activities......................................... (3,965,240) (1,453,574) ----------- ----------- Cash flows from Financing Activities Issuance of common stock.................................................. -- 2,306,400 Exercise of stock options................................................. 825,357 -- Purchase of treasury stock................................................ (547,875) -- ----------- ----------- Net cash provided by financing activities..................................... 277,482 2,306,400 ----------- ----------- Net increase in cash and cash equivalents.......................................... 1,654,664 208,136 Cash and cash equivalents at beginning of period................................... 2,425,122 2,931,180 ----------- ----------- Cash and cash equivalents at end of period......................................... $ 4,079,786 $ 3,139,316 =========== =========== Supplemental Disclosures: Income tax payments........................................................... $ 2,947,000 $ 2,016,000 =========== =========== 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, 1999 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, 1998. 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 is primarily engaged in the business of providing computer programming consulting services. The Company provides technical computer personnel to companies to supplement their in-house information technology capabilities. In addition, during fiscal 1997, the Company developed Catch/21, a Year 2000 compliance software solution which enables the Company to correct, on a substantially automated basis, problems which may occur in computer software as a result of the century change in the year 2000. Toward the end of fiscal 1997 the Company commenced providing services to customers to make 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 computer programming consulting 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 Catch/21 code conversion is recognized when the converted code is delivered. 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, 1999: Cash in banks ............................. $ 810,192 Money Market Funds......................... 2,775,134 United States Treasury Bills............... 494,460 ---------- $4,079,786 ========== 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, 1999: are as follows:
Gross Gross Unrealized Unrealized Amortized Holding Holding Cost Gains Losses Fair Value ----------- ------------ ----------- ---------- United States Treasury Bills....... $5,305,091 -- -- $5,305,091 Equity Securities.................. 133,289 20,338 33,877) 119,750 ---------- ------- -------- ---------- $5,438,380 $20,338 $(33,877) $5,424,841 ========== ======= ======== ==========
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, 1999 compared with three months ended February 28, 1998
3 Months Ended February 28, --------------------------------------------------- 1999 1998 ---- ---- % of % of Amount Revenues Amount Revenues -------- -------- ------- -------- (Dollar amounts in Thousands) Revenues ........................................................... $20,818 100.0 $17,967 100.0 Cost of Sales ...................................................... 15,460 74.3 12,808 71.3 ------- ----- ------- ----- Gross Profit ....................................................... 5,358 25.7 5,159 28.7 Selling, General, and Administrative Expenses ...................... 3,312 15.9 3,094 17.2 Research and Development ........................................... 49 0.2 212 1.2 ------- ----- ------- ----- Income from Operations ............................................. 1,997 9.6 1,853 10.3 Other Income ....................................................... 101 0.5 35 0.2 ------- ----- ------- ----- Income Before Income Taxes ......................................... 2,098 10.1 1,888 10.5 Provision for Income Taxes ......................................... 900 4.3 838 4.7 ------- ----- ------- ----- Net Income ......................................................... $ 1,198 5.8 $ 1,050 5.8 ======= ===== ======= =====
Revenues Revenues consist primarily of revenues from computer programming consulting services. In addition, the Company's revenues for the quarters ended February 28, 1999 and 1998 included revenues from its Year 2000 business which was commenced in fiscal 1997. Revenues for the quarter ended February 28, 1999 increased $2,851,000 or 15.9% over the comparable period in fiscal 1998. Computer programming consulting services revenues increased $3,818,000 or 25% from $15,390,000 in the quarter ended February 28, 1998 to $19,208,000 in the quarter ended February 28, 1999. This increase resulted from an overall increase in the number of programmers on billing with clients from an average of approximately 452 in the quarter ended February 28, 1998 to approximately 532 in the quarter ended February 28, 1999. Increased billing rates to clients have also impacted the revenue growth. The Company believes that the rate of growth in revenues from consulting services in the quarter ended February 28, 1999 would have been higher except that there was a slowdown in new projects commenced by clients in the last two months of the quarter. The Company believes that this slowdown is attributable to an industry-wide trend in which companies have delayed new IT projects because they are devoting their resources to Year 2000 testing. The Company ordinarily experiences a decline in the number of programmers on billing with clients after December 31 of each year as projects are completed or terminated at year end. Generally, programmers on billing with clients increase during the first few months of the following year as clients commence new projects in the new year. However, due to the trend referred to above, the number of new projects commenced has declined, resulting in a delay in the increase in programmers on billing with clients. The Company believes that this impact is likely to be temporary. Revenues from the Company's Year 2000 business, were $1,610,000 for the quarter ended February 28, 1999 as compared to $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 3,000,000 lines of code for client software applications for a total of ten customers. The Company's Year 2000 revenues during the third quarter of fiscal 1999 were less than the second quarter revenues and while, as previously disclosed, the Company anticipated a decline in Year 2000 revenues, the decline of third quarter revenues was less than anticipated. Page 7 The Company expects these revenues may decline more rapidly during the remainder of fiscal 1999. As a result, the Company has reduced its marketing efforts and sales force in the Year 2000 area. The agreements under which the Year 2000 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 only for conversion projects where management believes that acceptance is probable. Cost of Sales Cost of sales as a percentage of revenues increased from 71.3% in the quarter ended February 28, 1998 to 74.3% in the quarter ended February 28, 1999. This increase is attributable to increases in cost of sales as a percentage of revenues in the computer programming consulting services business. As well as a shift in the mix of revenues as the higher margin Year 2000 business revenues decline as a percentage of total revenues. In the computer programming consulting services business, cost of sales as a percentage of sales increased from 77.4% in the quarter ended February 28, 1998 to 79.0% in the quarter ended February 28, 1999. This increase is attributable to increases in amounts being 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 $282,000 in the quarter ended February 28, 1999 versus $900,000 in the prior year quarter. These costs consisted primarily of salaries of software analysts and quality assurance personnel which personnel were significantly reduced in anticipation of reduced revenues. The Company expects cost of sales from the Year 2000 business to continue to decrease as the related revenues decrease. 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 $218,000 or 7.0% from $3,094,000 in the quarter ended February 28, 1998 to $3,312,000 in the quarter ended February 28, 1999. Selling, general and administrative expenses related to computer programming consulting services increased $379,000 over the prior year period to $2,745,000. The increase was primarily attributable to additional commission based compensation based on higher gross profits. In addition, this increase resulted from expenses relating to the hiring of additional account executives and technical recruiting professionals to broaden 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, 1999, approximately $567,000 in selling, general and administrative expenses were attributable to the Year 2000 business. These expenses consisted primarily of marketing, management, and facilities expenses. Such expenses are expected to decline due to lower demand for Year 2000 remediation services. Comparable Year 2000 selling, general and administrative expenses in the quarter ended February 28, 1998 were $726,000. Research and Development Research and development costs of $49,000 in the quarter ended February 28, 1999 represent amounts expended by the Company on the Company's Year 2000 compliance solution product offerings primarily related to XRAY/2000 which stands for Examination, Repair, and Audit for Year 2000 Compliance, and various testing utilities. Research and development expenses in the quarter ended February 28, 1998 were $212,000. The Company expects to continue to reduce research and development expenditures. Income from Operations In the quarter ended February 28, 1999, the computer programming consulting service business contributed $1,285,000 or 64.3% of the income from operations, while the Year 2000 business contributed the remaining $712,000 or 35.7%. In the prior year quarter, the computer programming consulting service business contributed $1,116,000 or 60.2% of income from operations, the Year 2000 business contributed $723,000 or 39.0%, and there was $14,000 or 0.8% from other sources. Page 8 Other Income Other income resulted primarily from interest and dividend income which increased by $76,000 to $105,000 due to higher average available investable funds in the quarter ended February 28, 1999. There was also an unrealized loss of $4,000 on the Company's equity securities. Income Taxes The effective income tax rate decreased to 42.9% in the quarter ended February 28, 1999 from 44.4% in the quarter ended February 28, 1998 because of a lower percentage of non-deductible expenses. Nine months ended February 28, 1999 compared with nine months ended February 28, 1998.
9 Months Ended February 28, --------------------------------------------------------- 1999 1998 ---- ---- % of % of Amount Revenues Amount Revenues ------- --------- ------- -------- (Dollar amounts in Thousands) Revenues ................................................... $62,966 100.0 $51,261 100.0 Cost of Sales .............................................. 46,408 73.7 37,426 73.0 ------- ----- ------- ----- Gross Profit ............................................... 16,558 26.3 13,835 27.0 Selling, General, and Administrative Expenses .............. 10,197 16.2 8,997 17.6 Research and Development ................................... 278 0.4 589 1.1 ------- ----- ------- ----- Income from Operations ..................................... 6,083 9.7 4,249 8.3 Other Income ............................................... 244 0.4 123 0.2 ------- ----- ------- ----- Income Before Income Taxes ................................. 6,327 10.1 4,372 8.5 Provision for Income Taxes ................................. 2,750 4.4 1,972 3.8 ------- ----- ------- ----- Net Income ................................................. $ 3,577 5.7 $ 2,400 4.7 ======= ===== ======= =====
Revenues Revenues consist primarily of revenues from computer programming consulting services. In addition, the Company's revenues for the nine months ended February 28, 1999 and 1998 included revenues from its Year 2000 business which was commenced in fiscal 1997. Revenues for the nine months ended February 28, 1999 increased $11,705,000 or 22.8% over the comparable period in fiscal 1998. Computer programming consulting services revenues increased $10,317,000 or 22% from $46,486,000 in the nine months ended February 28, 1998 to $56,803,000 in the nine months ended February 28, 1999. This increase resulted from an overall increase in the number of programmers on billing with clients from an average of approximately 456 in the nine months ended February 28, 1998 to approximately 508 in the nine months ended February 28, 1999. Increased billing rates to clients have also impacted the revenue growth. Revenues from the Company's Year 2000 business, were $6,163,000 for the nine months ended February 28, 1999 as compared to $4,726,000 in the nine months ended February 28, 1998. During the current nine month period the Company used its proprietary Catch/21 Software Solution on conversion projects to remediate approximately 19,500,000 lines of code for client software applications for a total of seventeen customers. While the Company's revenues for Year 2000 services increased over the comparable nine month period in fiscal 1998, the Company expects its Year 2000 revenues to decline during the remainder of fiscal 1999. Page 9 Cost of Sales Cost of sales as a percentage of revenues increased from 73.0% in the nine months ended February 28, 1998 to 73.7% in the nine months ended February 28, 1999. This increase is primarily attributable to the increases in cost of sales as percentage of revenues in the computer programming consulting services business. In the computer programming consulting services business, cost of sales as a percentage of sales increased from 76.6% in the nine months ended February 28, 1998 to 77.7% in the nine months ended February 28, 1999. This increase is attributable to increases in amounts being 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 $2,270,000 in the nine months ended February 28, 1999 versus $1,808,000 in the prior year period. These costs consisted primarily of salaries of software analysts and quality assurance personnel which personnel were significantly reduced in anticipation of reduced revenues. The Company expects cost of sales from the Year 2000 business to continue to decrease as the related revenues decrease. 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 $1,200,000 or 13.3% from $8,997,000 in the nine months ended February 28, 1998 to $10,197,000 in the nine months ended February 28, 1999. Selling, general and administrative expenses related to computer programming consulting services increased $1,144,000 over the prior year period to $8,267,000. The increase was primarily attributable to additional sales commissions based on higher gross profits. In addition, this increase resulted from expenses relating to the hiring of additional account executives and technical recruiting professionals to broaden 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, 1999, approximately $1,930,000 in selling, general and administrative expenses were attributable to the Year 2000 business. These expenses consisted primarily of marketing, management, and facilities expenses. Comparable Year 2000 selling, general and administrative expenses in the nine months ended February 28, 1998 were $1,873,000. Research and Development Research and development costs of $277,000 in the nine months ended February 28, 1999 represent amounts expended by the Company on the Company's Year 2000 compliance solution product offerings primarily related to XRAY/2000 which stands for Examination, Repair, and Audit for Year 2000 Compliance, and various testing utilities. Research and development expenses in the nine months ended February 28, 1998 were $589,000. Income from Operations In the nine months ended February 28, 1999, the computer programming consulting service business contributed $4,397,000 or 72.3% of the income from operations, while the Year 2000 business contributed the remaining $1,686,000 or 27.7%. In the prior year period, the computer programming consulting service business contributed $3,745,000 of income from operations, the Year 2000 business contributed $456,000, and there was $48,000 from other sources. Other Income Other income resulted primarily from interest and dividend income which increased by $151,000 to $252,000 due to higher average available investable funds in the nine months ended February 28, 1999. This interest and dividend increase was partially offset by an unrealized loss of $8,000 on the Company's equity securities. Income Taxes The effective income tax rate decreased to 43.5% in the nine months ended February 28, 1999 from 45.1% in the period ended February 28, 1998 because of a lower percentage of non-deductible expenses. 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. At February 28, 1999, the Company had working capital of $19,393,000 and cash and cash equivalents of $4,080,000 as compared to working capital of $14,994,000 and cash and cash equivalents of $2,425,000 at May 31, 1998. Working capital and cash and cash equivalents increased primarily due to the Company's net income in the nine months ended February 28, 1999. The Company had positive net cash flow of $5,342,000 from operations during the nine months ended February 28, 1999 as compared to negative net cash flow from operations of $645,000 in the nine months ended February 28, 1998. The Company had net income of $3,576,000, in the nine month ended February 28, 1999 as compared to $2,400,000 in the nine months ended February 28, 1998. Cash flow also benefited from a small decrease in accounts receivable despite the significant increase in revenues because the rate of increase in collections on accounts receivable exceeded the rate of growth in revenues during the nine months ended February 28, 1999. Also, the decrease in revenues from the Year 2000 business has provided cash as receivables are collected and not replaced by new revenues. The Company also had additional cash flow as a result of the increase in the accounts payable and accrued expenses of $763,000. The increase in accounts payable and accrued expense resulted primarily from the increase in cost of sales. Cash flow used in investing activities resulted primarily from the purchase of US Treasury Bills with a maturity in excess of three months and the purchase of fixed assets in the current period of $108,000. The fixed asset additions were $870,000 in the prior year period. The significant decrease occurred due to equipment purchased in the prior year period to emulate client computer environments to enable sufficient testing and quality assurance of the Catch/21 Software Solution. Cash flow from financing activities for the nine months ended February 28, 1999 consisted of employee stock option exercises on 90,450 shares at $9.125 or proceeds of $825,357 less treasury stock repurchases of 60,200 shares at an average price of $9.10 or a total cost of $547,875. As of March 31, 1999 the Company has repurchased a total of 178,700 shares at an average price of $8.17 or a total cost of $1,460,710. The Company's board of directors has authorized the repurchase of up to 600,000 shares of its common stock. No time limit has been placed on the duration of the share repurchases. Subject to applicable securities laws, such purchases will be at times and in amounts as the Company deems appropriate and may be discontinued at any time. The Company has no obligation or commitment to repurchase all or any portion of the shares covered by the authorization. The Company's capital resource commitments at February 28, 1999 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, 1999. The Company has available a revolving line of credit of $5,000,000 with a major money center bank which the Company believes provides sufficient available financing if this need arose. As of February 28, 1999, no amounts were outstanding under this line of credit. Year 2000 Information Readiness for Year 2000 The Company has only limited internal systems which it believes could be affected by Year 2000 issues. The Company's principal information technology (IT) systems are its resume search (which contains its databases of IT professionals), payroll, billing and general ledger systems. The Company believes that its search, payroll and billing software systems are written in a language which should be Year 2000 compliant. The Company's general ledger system will require an upgrade to be Year 2000 compliant and the Company is currently in the process of testing the upgrade. The Company does not expect the cost of the upgrade to be material. The Company's management is engaged in an assessment of the readiness of its systems for handling the Year 2000 and intends to conduct more extensive tests of its software systems. The Company is not currently aware of any non-IT systems which are material to the Company and contain embedded chip systems which have Year 2000 issues. Although the assessment of the Company's IT and non-IT systems is in the early stages, management does not believe that it will have material Year 2000 problems relating to its IT and non-IT systems. The Company's management currently believes that it will be successful in identifying and resolving any potential deficiencies in its systems with respect to Year 2000 issues, that all material systems will be compliant by the Year 2000 and that the cost to address the Year 2000 issues will not be material. Page 11 The Company does not materially rely on individual third party vendors and suppliers and accordingly does not believe that the Year 2000 readiness of third party vendors or suppliers will have a material impact on its business. Nonetheless, the Company's business is dependent on third parties, such as public utilities, electric systems, telecommunication systems, mail and overnight delivery services. The Company's business could be materially adversely affected by disruption in services provided by such entities, or by conditions resulting from Year 2000 issues generally affecting companies with which it does business. The Company's management believes the impact of the Year 2000 will not cause any material disruptions in the Company's operations. However, the impact of such potential disruptions is difficult to assess and accordingly there is a risk that there will be disruptions which could have a material adverse effect on the Company. As discussed above, the Company is engaged in an ongoing Year 2000 assessment. Following the completion of the assessment, the Company plans to conduct a full-scale Year 2000 simulation of its IT systems. The results of this simulation and the Company's assessment will be taken into account in determining the nature and extent of any contingency plans. 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 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 computer programming consulting services and the Year 2000 compliance solution market, concentration of the Company's business with certain customers and uncertainty as to the Company's ability to bring in new customers. Part II. Other Information Item 6. Exhibits and Reports on Form 8K (a). Exhibit 27: Financial Data Schedule (b). Reports on Form 8K: None Page 12 TSR, INC. AND SUBSIDIARIES 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 5, 1999 /s/ J.F. HUGHES ---------------------------------------------- J.F. Hughes, Chairman, President and Treasurer Date: April 5, 1999 /s/ JOHN G. SHARKEY --------------------------------------------- John G. Sharkey, Vice President, Finance Page 13 EX-27 2 FINANCIAL DATA SCHEDULE
5 TSR, INC. AND SUBSIDIARIES EXHIBIT 27 FINANCIAL DATA SCHEDULE TO REPORT ON FORM 10-Q FEBRUARY 28, 1999 9-MOS MAY-31-1999 FEB-28-1999 4,079,786 5,424,841 15,158,645 173,264 0 24,969,747 2,028,549 1,600,333 25,597,762 5,577,027 0 0 0 60,787 19,959,948 25,597,762 0 62,965,539 0 46,408,135 10,474,883 0 0 6,326,406 2,750,000 3,576,406 0 0 0 3,576,406 0.60 0.60
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