-----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, N9KbJtMmfUKJny2WQG5QgLSSuv49BK/VFnyCtdedLxkGQfBPVQ3zlEa2GrOYKVhw kLmiVs4XABTC41Gcp1hbJg== 0001072613-05-000015.txt : 20050104 0001072613-05-000015.hdr.sgml : 20050104 20050104111658 ACCESSION NUMBER: 0001072613-05-000015 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20041130 FILED AS OF DATE: 20050104 DATE AS OF CHANGE: 20050104 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: 1934 Act SEC FILE NUMBER: 000-08656 FILM NUMBER: 05504627 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 form10q_13182.txt 10-Q FOR THE PERIOD ENDED NOVEMBER 30, 2004 ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-Q [X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the period ended November 30, 2004 [ ] 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 incorporation or organization) Identification No.) 400 Oser Avenue, Hauppauge, NY 11788 - -------------------------------------------------------------------------------- (Address of principal executive offices) 631-231-0333 - -------------------------------------------------------------------------------- (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 Indicate by check mark whether the Registrant is an accelerated filer (as defined by Rule 12b-2 of the Exchange Act). [ ] Yes [X] No SHARES OUTSTANDING - -------------------------------------------------------------------------------- 4,568,012 shares of common stock, par value $.01 per share, as of December 31, 2004 Page 1 ================================================================================ TSR, INC. AND SUBSIDIARIES INDEX Page Number ------ Part I. Financial Information: Item 1. Financial Statements: Condensed Consolidated Balance Sheets - November 30, 2004 and May 31, 2004........................ 3 Condensed Consolidated Statements of Income - For the three months and six months ended November 30, 2004 and 2003......................................... 4 Condensed Consolidated Statements of Cash Flows - For the six months ended November 30, 2004 and 2003....... 5 Notes to Condensed Consolidated Financial Statements........ 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations............. 9 Item 3. Quantitative and Qualitative Disclosure About Market Risk...14 Item 4. Procedures and Controls.....................................15 Part II. Other Information...................................................15 Item 6. Exhibits and Reports on Form 8-K...........................15 Signatures...................................................................15 Page 2 Part I. Financial Information Item 1. Financial Statements TSR, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS
November 30, May 31, ASSETS 2004 2004 ----------- ----------- (Unaudited) Current Assets: Cash and cash equivalents (Note 3) .......................... $ 4,250,596 $ 2,268,796 Marketable securities (Note 5) .............................. 5,961,414 6,498,839 Accounts receivable (net of allowance for doubtful accounts of $430,000) ......................... 8,191,951 9,904,620 Other receivables ........................................... 35,092 29,700 Prepaid expenses ............................................ 17,051 38,918 Prepaid and recoverable income taxes ........................ 3,545 15,483 Deferred income taxes ....................................... 180,000 180,000 ----------- ----------- Total current assets ................................... 18,639,649 18,936,356 Equipment and leasehold improvements, at cost (net of accumulated depreciation and amortization of $739,774 and $731,581) ..... 31,470 24,001 Other assets ..................................................... 49,892 84,893 Deferred income taxes ............................................ 148,000 143,000 Acquired client relationships, (net of accumulated amorization of $171,608 and $157,308) .................................. -- 14,300 ----------- ----------- $18,869,011 $19,202,550 =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Accounts and other payables ................................. $ 162,189 $ 144,391 Accrued expenses and other current liabilities .............. 1,982,435 2,139,799 Advances from customers ..................................... 1,489,415 1,532,642 Income taxes payable ........................................ 166,585 143,553 ----------- ----------- Total current liabilities .............................. 3,800,624 3,960,385 ----------- ----------- Minority Interest ................................................ 69,942 50,161 ----------- ----------- 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 and 6,204,326 shares 62,283 62,283 Additional paid-in capital .................................. 5,081,927 5,079,027 Retained earnings ........................................... 21,885,536 22,081,995 ----------- ----------- 27,029,746 27,223,305 Less: Treasury Stock, 1,660,314 shares, at cost ............. 12,031,301 12,031,301 ----------- ----------- 14,998,445 15,192,004 ----------- ----------- $18,869,011 $19,202,550 =========== ===========
The accompanying notes are an integral part of these condensed consolidated financial statements. Page 3 TSR, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS FOR THE THREE AND SIX MONTHS ENDED NOVEMBER 30, 2004 AND 2003 (UNAUDITED)
Three Months Ended Six Months Ended November 30, November 30, 2004 2003 2004 2003 ------------ ------------ ------------ ------------ Revenues, net .............................................. $ 13,138,281 $ 12,996,626 $ 26,519,239 $ 25,733,445 Cost of sales ............................................. 10,231,397 10,016,017 20,684,995 19,888,876 Selling, general and administrative expenses ............... 1,906,599 1,889,646 3,773,169 3,876,188 ------------ ------------ ------------ ------------ 12,137,996 11,905,663 24,458,164 23,765,064 ------------ ------------ ------------ ------------ Income from operations .................................... 1,000,285 1,090,963 2,061,075 1,968,381 Other income (expense): Interest and dividend income ......................... 34,012 24,656 61,479 66,266 Realized and unrealized gain (loss) from marketable securities, net .................................... 1,184 3,367 (3,828) 10,033 Minority interest in subsidiary operating profits ..... (20,071) (19,653) (35,781) (37,558) ------------ ------------ ------------ ------------ Income before income taxes ................................. 1,015,410 1,099,333 2,082,945 2,007,122 Provision for income taxes ............................... 440,000 461,000 909,000 865,000 ------------ ------------ ------------ ------------ Net income ............................................. $ 575,410 $ 638,333 $ 1,173,945 $ 1,142,122 ============ ============ ============ ============ Basic and diluted net income per common share .............. $ 0.13 $ 0.14 $ 0.26 $ 0.25 ============ ============ ============ ============ Weighted average number of basic common shares outstanding . 4,568,012 4,544,012 4,568,012 4,533,512 ============ ============ ============ ============ Weighted average number of diluted common shares outstanding 4,569,649 4,551,732 4,569,563 4,541,286 ============ ============ ============ ============
The accompanying notes are an integral part of these condensed consolidated financial statements. Page 4 TSR, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE SIX MONTHS ENDED NOVEMBER 30, 2004 AND 2003 (UNAUDITED)
Six Months Ended November 30, 2004 2003 ---- ---- Cash flows from operating activities: Net income ........................................ $ 1,173,945 $ 1,142,122 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization .................. 22,493 41,490 Realized and unrealized loss (gain) from marketable securities, net ................... 3,828 (10,033) Stock based compensation expense ............... 2,900 43,520 Minority interest in subsidiary operating profit 35,781 37,558 Deferred income taxes .......................... (5,000) -- Changes in assets and liabilities: Accounts receivable .......................... 1,712,669 (132,261) Other receivables ............................ (5,392) 28,499 Prepaid expenses ............................. 21,867 20,756 Prepaid and recoverable income taxes ......... 11,938 (35,281) Other assets ................................. 35,001 1,151 Accounts payable and accrued expenses ........ (139,566) (378,170) Income taxes payable ......................... 23,032 (20,755) Advances from customers ...................... (43,227) (217,273) ------------ ------------ Net cash provided by operating activities ......... 2,850,269 521,323 ------------ ------------ Cash flows from investing activities: Proceeds from maturities and sales of marketable securities ........................ 6,476,443 12,925,210 Purchases of marketable securities ............. (5,942,846) (2,984,810) Purchases of fixed assets ...................... (15,662) (1,767) ------------ ------------ Net cash provided by investing activities .......... 517,935 9,938,633 ------------ ------------ Cash flows from financing activities: Distribution to minority interest ............... (16,000) -- Proceeds from exercise of stock options ......... -- 696,938 Cash dividends paid ............................. (1,370,404) (9,769,626) ------------ ------------ Net cash used in financing activities .............. (1,386,404) (9,072,688) ------------ ------------ Net increase in cash and cash equivalents .............. 1,981,800 1,387,268 Cash and cash equivalents at beginning of period ....... 2,268,796 5,063,098 ------------ ------------ Cash and cash equivalents at end of period ............. $ 4,250,596 $ 6,450,366 ============ ============ Supplemental Disclosures: Income tax payments ............................. $ 879,000 $ 921,000 ============ ============
The accompanying notes are an integral part of these condensed consolidated financial statements. Page 5 TSR, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS NOVEMBER 30, 2004 (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 six months ended November 30, 2004, 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, 2005. 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, 2004. 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. Options covering 8,363 and 26,280; and 8,449 and 26,226 shares of common stock have been omitted from the calculations of diluted net income per common share for the three month and six month periods ended November 30, 2004 and November 30, 2003, respectively, as their effect would have been antidilutive. 3 Cash and Cash Equivalents ------------------------- The Company considers short-term highly liquid investments with maturities of three months or less at the time of purchase to be cash equivalents. Cash and cash equivalents were comprised of the following as of November 30, 2004: Cash in banks............................... $ 429,150 Money Market Funds.......................... 3,821,446 ------------ $ 4,250,596 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 and credit balances from overpayments. Page 6 TSR, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED NOVEMBER 30, 2004 (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 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 Cost Gains Losses Value ---- ----- ------ ----- United States Treasury Securities............. $5,942,846 -- -- 5,942,846 Equity Securities........ 16,866 1,702 -- 18,568 ---------- ------ --------- ----------- $5,959,712 $1,702 $ $ 5,961,414 ========== ====== ========= =========== Page 7 TSR, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED NOVEMBER 30, 2004 (UNAUDITED) 6. Stock Options ------------- On July 28, 2003 the Company paid a large nonrecurring cash dividend of $2.00 per share to shareholders of record as of July 11, 2003. The dividend paid amounted to $9,088,024. Guidance under Emerging Issues Task Force (EITF) 00-23, ISSUES RELATED TO THE ACCOUNTING FOR STOCK COMPENSATION UNDER APB OPINION NO.25 AND FASB INTERPRETATION NO.44, requires modification for outstanding stock options by adjusting the price and/or the number of shares under a fixed stock option award as a result of a large nonrecurring cash dividend. The Company did not adjust the terms of any outstanding stock options and, given the circumstances, a new measurement date and variable accounting treatment was required for its outstanding options at the dividend payment date. The Company had 10,000 and 34,000 such outstanding options, all of which were vested, as of November 30, 2004 and 2003 respectively which are now subject to variable accounting treatment. Accordingly, the Company recorded a non-cash compensation charge (recovery) of $10,500 and $(6,460) for the three months ended November 30, 2004 and 2003 and $2,900 and $43,520 for the six months ended November 30, 2004 and 2003 and will continue to adjust the compensation charge associated with these options through the earlier of their exercise, forfeiture or expiration dates. The Company has one stock-based employee compensation plan in effect. The Company accounts for all transactions under which employees receive shares of stock or other equity instruments in the Company based on the price of its stock in accordance with the provisions of Accounting Principles Board Opinion No. 25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES. All options granted under the plan had an exercise price equal to the market value of the underlying common stock, and the number of shares represented by such options were known and fixed, on the date of grant. However, as a result of the large nonrecurring cash dividend, the remaining outstanding 10,000 options are now treated as variable options. The following table illustrates the effect on net income and earnings per share if the Company had applied the fair value recognition provisions of Statement of Financial Accounting Standards (SFAS) No. 123 ACCOUNTING FOR STOCK-BASED COMPENSATION.
Three Months Ended Six Months Ended November 30, November 30, ------------ ------------ 2004 2003 2004 2003 ---- ---- ---- ---- Net income: As reported........................... $ 575,410 $ 638,333 $1,173,945 $1,142,122 Deduct: Total stock-based employee compensation expense determined under fair value method for all awards, net of minority interest and related tax effects................................. -- -- -- -- Add: Stock based employee compensation expense (recovery) included in reported net income, net of related tax effect................... 10,500 (6,460) 2,900 43,520 ---------- ---------- ---------- ---------- Proforma net income................... $ 585,910 $ 631,873 $1,176,845 $1,185,642 ========== ========== ========== ========== Basic net income per share: As reported........................... $ 0.13 $ 0.14 $ 0.26 $ 0.25 ========== ========== ========== ========== Proforma................................ $ 0.13 $ 0.14 $ 0.26 $ 0.26 ========== ========== ========== ==========
There were no options granted in fiscal 2004 and 2003. Page 8 PART I. FINANCIAL INFORMATION ITEM 2. TSR, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis should be read in conjunction with the condensed consolidated financial statements and the notes to such financial statements. Forward-Looking Statements - -------------------------- Certain statements contained in Management's Discussion and Analysis of Financial Condition and Results of Operations, including statements concerning the Company's future prospects and the Company's future cash flow requirements are forward looking statements, as defined in the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those projections in the forward looking statements which statements involve risks and uncertainties, including but not limited to the following: risks relating to the competitive nature of the markets for contract computer programming services; the extent to which market conditions for the Company's contract computer consulting services will continue to adversely affect the Company's business; the concentration of the Company's business with certain customers; uncertainty as to the Company's ability to maintain its relations with existing customers and expand its contract computer consulting services business; the impact 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 uncertainty as to the operating results of the Company's new legacy system migration service 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 November 30, 2004 compared with three months ended November - ------------------------------------------------------------------------------ 30, 2003 - -------- Three Months Ended November 30, (Dollar amounts in Thousands) 2004 2003 ---- ---- % of % of Amount Revenues Amount Revenues Revenues ........................... $ 13,138 100.0 $ 12,997 100.0 Cost of sales ...................... 10,231 77.9 10,016 77.1 -------- ------ -------- ------ Gross profit ....................... 2,907 22.1 2,981 22.9 Selling, general, and administrative expenses........... 1,907 14.5 1,890 14.5 -------- ------ -------- ------ Income from operations ............. 1,000 7.6 1,091 8.4 Other income ....................... 15 0.1 8 0.0 -------- ------ -------- ------ Income before income taxes ......... 1,015 7.7 1,099 8.4 Provision for income taxes ......... 440 3.3 461 3.5 -------- ------ -------- ------ Net income ......................... $ 575 4.4 $ 638 4.9 ======== ====== ======== ====== Page 9 TSR, INC. AND SUBSIDIARIES Revenues - -------- Revenues consist primarily of revenues from computer programming consulting services. Revenues for the quarter ended November 30, 2004 increased $141,000 or 1.1% over the comparable period in fiscal 2004. At the beginning of the current quarter, the Company's largest customer, AT&T, cut back its IT budget for certain of its divisions, resulting in a reduction of approximately 20 consultants on billing. However, the overall business trend with other customers remained positive, causing the average number of consultants on billing with customers to remain at 389 for both the quarters ended November 30, 2004 and 2003. While approximately 100 consultants remain on billing with AT&T, we cannot predict the extent to which further reductions may take place. Cost of Sales - ------------- Cost of sales for the quarter ended November 30, 2004, increased $215,000 or 2.1% to $10,231,000 from $10,016,000 in the prior year period. Cost of sales as a percentage of revenues increased from 77.1% in the quarter ended November 30, 2003 to 77.9% in the quarter ended November 30, 2004. These increases are primarily attributed to the increased costs resulting from a higher percentage of the consultants on billing being direct employees of the Company rather than employees of subcontractors and continued competitive market pressures on rates. 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 $17,000 or 0.9% from $1,890,000 in the quarter November 30, 2003 to $1,907,000 in the quarter ended November 30, 2004. This increase was primarily attributable to expenses of approximately $81,000 incurred in establishing the Company's new "Transformer" service offering. A decrease in legal expenses offset most of these additional expenses. The Company is in the process of developing a new service, "Transformer", aimed at companies with large investments in legacy systems, which will use an automated process to transform the code of older legacy applications, in computer languages such as Fortran, into more modern, flexible applications that are less expensive to operate and maintain. The Company has begun to market the service to potential customers. While the Company believes that the new service offers the potential to generate revenues in the future, the Company cannot predict whether it will be successful in completing the development of, and marketing, this service or whether it will realize significant revenues from this service. Other Income - ------------ Other income resulted primarily from interest and dividend income, which increased by $9,000 to $34,000 due to higher interest rates in the quarter ended November 30, 2004. Additionally, the Company had a net unrealized gain of $3,000 in the quarter ended November 30, 2003 versus a gain of $5,000 in the quarter ended November 30, 2004 from marketable securities due to mark to market adjustments of its trading securities equity portfolio. The unrealized gain of $5,000 in the quarter ended November 30, 2004 was offset by a loss of $4,000 on the sale of marketable securities due to a merger. Income Taxes - ------------ The effective income tax rate of 43.3% for the quarter ended November 30, 2004 increased from a rate of 41.9% in the quarter ended November 30, 2003. Page 10 TSR, INC. AND SUBSIDIARIES Six months ended November 30, 2004 compared with six months ended November 30, - ------------------------------------------------------------------------------ 2003 - ---- Six Months Ended November 30, (Dollar amounts in Thousands) 2004 2003 ---- ---- % of % of Amount Revenues Amount Revenues Revenues ........................... $ 26,519 100.0 $ 25,733 100.0 Cost of sales ...................... 20,685 78.0 19,889 77.3 -------- ------ -------- ------ Gross profit ....................... 5,834 22.0 5,844 22.7 Selling, general, and administrative expenses ......................... 3,773 14.2 3,876 15.1 -------- ------ -------- ------ Income from operations ............. 2,061 7.8 1,968 7.6 Other income ....................... 22 -- 39 0.2 -------- ------ -------- ------ Income before income taxes ......... 2,083 7.8 2,007 7.8 Provision for income taxes ......... 909 3.4 865 3.4 -------- ------ -------- ------ Net income ......................... $ 1,174 4.4 $ 1,142 4.4 ======== ====== ======== ====== Revenues - -------- Revenues consist primarily of revenues from computer programming consulting services. Revenues for the six months ended November 30, 2004 increased $786,000 or 3.1% from the comparable period in fiscal 2004. Increased opportunities to place consultants on billing with existing clients in the first quarter of the current six month period was partially offset by a budget reduction at the Company's largest client in the second quarter of the current period. This resulted in the average number of consultants on billing with clients increasing to 387 for the six months ended November 30, 2004 from 380 in the six months ended November 30, 2003. Cost of Sales - ------------- Cost of sales for the six months ended November 30, 2004, increased $796,000 or 4.0% to $20,685,000 from $19,889,000 in the prior year period. Cost of sales as a percentage of revenues increased from 77.3% in the six months ended November 30, 2004 to 78.0% in the six months ended November 30, 2004. These increases are primarily attributable to utilizing a higher percentage of consultants as direct employees of the Company rather than employees of subcontractors and continued competitive market pressures on rates. Page 11 TSR, INC. AND SUBSIDIARIES Selling, General and Administrative Expenses - -------------------------------------------- Selling, general and administrative expenses consist primarily of expenses relating to account executives, technical recruiters, facilities costs, management and corporate overhead. These expenses decreased $103,000 or 2.7% from $3,876,000 in the six months ended November 30, 2003 to $3,773,000 in the six months ended November 30, 2004. This decrease was primarily attributable to decreased legal, technical recruiting and amortization expenses. The decrease in these expenses was offset to some extent by approximately $125,000 of expenses incurred in establishing the Company's new "Transformer" service offering. Other Income - ------------ Other income resulted primarily from interest and dividend income, which decreased by $5,000 to $61,000 due to lower investable balances in the six months ended November 30, 2004. Additionally, the Company also had a net unrealized gain of $10,000 in the six months ended November 30, 2003 from marketable securities due to mark to market adjustments of its trading securities equity portfolio. The Company also had a realized loss of $4,000 in the six months ended November 30, 2004 from the sale of marketable securities due to a merger. Income Taxes - ------------ The effective income tax rate of 43.6% for the six months ended November 30, 2004 increased from a rate of 43.1% in the six months ended November 30, 2003. Page 12 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 November 30, 2004, the Company had working capital of $14,839,000 and cash and cash equivalents of $4,251,000 as compared to working capital of $14,976,000 and cash and cash equivalents of $2,269,000 at May 31, 2004. The Company's working capital also included $5,961,000 and $6,499,000 of marketable securities at November 30, 2004 and May 31, 2004, respectively. Net cash provided by operating activities of $2,850,000 for the six months ended November 30, 2004, compared to cash provided of $521,000 for the six months ended November 30, 2003. The cash provided by operating activities resulted primarily from the Company's net income and a decrease in accounts receivable. This decrease occurred due to increased collections from a major customer who had delayed payments due to administrative issues at May 31, 2004. All amounts outstanding at May 31, 2004 for this client have been collected. Net cash provided by investing activities of $518,000 for the six months ended November 30, 2004 primarily resulted from allowing US Treasury Bills to mature without reinvesting all of the proceeds. Net cash used in financing activities resulted primarily from the payment of a cash dividend of $1,370,000 and distributions to the minority interest of $16,000. The Company's capital resource commitments at November 30, 2004 consisted of lease obligations on its branch and corporate facilities. The Company intends to finance these lease commitments from cash flow provided by operations, available cash and short-term marketable securities. The Company's cash and marketable securities were sufficient to enable it to meet its cash requirements during the six months ended November 30, 2004. The Company has available a revolving line of credit of $5,000,000 with a major money center bank through October 6, 2005. As of November 30, 2004, no amounts were outstanding under this line of credit. Tabular Disclosure of Contractural Obligations
- ----------------------------------------------------------------------------------------------------- Payments Due By Period - ----------------------------------------------------------------------------------------------------- Contractural Obligations ------------------------ LESS THAN MORE THAN TOTAL 1 YEAR 1-3 YEARS 3-5 YEARS 5 YEARS ----- ---------- ---------- ---------- ---------- Long-Term Debt..................... -- -- -- -- -- Capital Lease Obligations.......... -- -- -- -- -- Operating Leases................... 476,000 308,000 168,000 -- -- Purchase Obligations............... -- -- -- -- -- Employment Agreements.............. 1,837,000 796,000 1,041,000 -- -- Other Long-Term Liabilities Reflected on the Registrant's Balance Sheet under GAAP.......... -- -- -- -- -- ---------- ---------- ---------- ---------- ---------- Total.............................. $2,313,000 $1,104,000 $1,209,000 $ -- $ -- ========== ========== ========== ========== ==========
Page 13 TSR, INC. AND SUBSIDIARIES Critical Accounting Policies - ---------------------------- The Securities and Exchange Commission ("SEC") issued disclosure guidance for "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, 2004 Annual Report on Form 10-K, as filed with the SEC. The Company believes that the following accounting policies require the application of management's most difficult, subjective or complex judgments: ESTIMATING ALLOWANCES FOR DOUBTFUL ACCOUNTS RECEIVABLE We perform ongoing credit evaluations of our customers and adjust credit limits based upon payment history and the customer's current credit worthiness, as determined by our review of their current credit information. We continuously monitor collections and payments from our customers and maintain a provision for estimated credit losses based upon our historical experience and any specific customer collection issues that we have identified. While such credit losses have historically been within our expectations and the provisions established, we cannot guarantee that we will continue to experience the same credit loss rates that we have in the past. A significant change in the liquidity or financial position of any of our significant customers could have a material adverse effect on the collectibility of our accounts receivable and our future operating results. VALUATION OF DEFERRED TAX ASSETS We regularly evaluate our ability to recover the reported amount of our deferred income taxes considering several factors, including our estimate of the likelihood of the Company generating sufficient taxable income in future years during the period over which temporary differences reverse. Presently, the Company believes that it is more likely than not that it will realize the benefits of its deferred tax assets based primarily on the Company's history of and projections for taxable income in the future. In the event that actual results differ from our estimates or we adjust these estimates in future periods, we may need to establish a valuation allowance against a portion or all of our deferred tax assets, which could materially impact our financial position or results of operations. VALUATION OF LONG-LIVED AND INTANGIBLE ASSETS We assess the recoverability of long-lived assets and intangible assets whenever we determine that events or changes in circumstances indicate that their carrying amount may not be recoverable. Our assessment is primarily based upon our estimate of future cash flows associated with these assets. Although there has been a sustained weakness in our operating results, through November 30, 2004, we have continued to generate net income. Accordingly, we have not determined that there has been an indication of impairment of any of our assets. However, should our operating results deteriorate, we may determine that some portion of our long-lived assets or intangible assets are impaired. Such determination could result in non-cash charges to income that could materially affect our financial position or results of operations for that period. 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. Page 14 Item 4. Controls and Procedures DISCLOSURE CONTROLS AND PROCEDURES. The Company conducted an evaluation, under the supervision and with the participation of the principal executive officer and principal financial officer, of the Company's disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934 (the "Exchange Act")). Based on this evaluation, the principal executive officer and principal financial officer concluded that, as of the end of the period covered by this report, the Company's disclosure controls and procedures are effective. INTERNAL CONTROL OVER FINANCIAL REPORTING. There was no change in the Company's internal control over financial reporting (as such term is defined in Rule 13a-15(f) under the Exchange Act) during the Company's most recently reported completed fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting. Part II. Other Information Item 6. Exhibits and Reports on Form 8K (a). Exhibit 31.1 - Certification by J.F. Hughes pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. Exhibit 31.2 - Certification by John G. Sharkey pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. Exhibit 32.1 - Certification by J.F. Hughes pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. Exhibit 32.2 - Certification by John G. Sharkey pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (b). Reports on Form 8K: - None 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: January 3, 2005 /s/ J.F. Hughes ---------------------------------------------- J.F. Hughes, Chairman, President and Treasurer Date: January 3, 2005 /s/ John G. Sharkey ---------------------------------------------- John G. Sharkey, Vice President Finance Page 15 EX-31.1 2 exh31-1_13182.txt 302 CERTIFICATION OF THE CHAIRMAN EXHIBIT 31.1 ------------ CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 I, J.F. Hughes, Chairman of the Board, Chief Executive Officer and Director, certify that: 1. I have reviewed this Quarterly Report on Form 10-Q of TSR, Inc.; 2. Based on my knowledge, this Quarterly Report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this Quarterly Report; 3. Based on my knowledge, the financial statements, and other financial information included in this Quarterly Report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this Quarterly Report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a. designed such disclosure controls and procedures or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this Quarterly Report is being prepared; b. evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this Quarterly Report our conclusions about the effectiveness of the disclosure controls and procedures as of the end of the period covered by this Quarterly Report based on such evaluation; c. disclosed in this Quarterly Report any change in registrants disclosure controls that occurred during the registrant's fourth fiscal quarter that materially affected, or is reasonably likely to materially affect, the registrant's internal controls; and 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a. all significant deficiencies or material weaknesses in the design or operation of internal controls which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial data; and b. any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls. Date: January 3, 2005 /s/ J.F. Hughes - ----------------------------- Chairman of the Board, Chief Executive Officer and Director EX-31.2 3 exh31-2_13182.txt 302 CERTIFICATION OF THE CHIEF FINANCIAL OFFICER EXHIBIT 31.2 ------------ CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 I, John G. Sharkey, Vice President-Finance and Chief Financial Officer, certify that: 1. I have reviewed this Quarterly Report on Form 10-Q of TSR, Inc.; 2. Based on my knowledge, this Quarterly Report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this Quarterly Report; 3. Based on my knowledge, the financial statements, and other financial information included in this Quarterly Report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this Quarterly Report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a. designed such disclosure controls and procedures or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this Quarterly Report is being prepared; b. evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this Quarterly Report our conclusions about the effectiveness of the disclosure controls and procedures as of the end of the period covered by this Quarterly Report based on such evaluation; c. disclosed in this Quarterly Report any change in registrants disclosure controls that occurred during the registrant's fourth fiscal quarter that materially affected, or is reasonably likely to materially affect, the registrant's internal controls; and 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a. all significant deficiencies or material weaknesses in the design or operation of internal controls which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial data; and b. any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls. Date: January 3, 2005 /s/ John G. Sharkey - ----------------------- Vice President-Finance and Chief Financial Officer EX-32.1 4 exh32-1_13182.txt 906 CERTIFICATION OF THE CHAIRMAN EXHIBIT 32.1 ------------ CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of TSR, Inc. (the "Company") on Form 10-Q for the period ended November 30, 2004 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, J.F. Hughes, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: 1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and 2. The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company. The forgoing certification is incorporated solely for the purposes of complying with the provisions of Section 906 of the Sarbanes-Oxley Act and is not intended to be used for any other purpose. /s/ J.F. Hughes - ------------------------------ Chairman of the Board, Chief Executive Officer and Director January 3, 2005 EX-32.2 5 exh32-2_13182.txt 906 CERTIFICATION OF THE CHIEF FINANCIAL OFFICER EXHIBIT 32.2 ------------ CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of TSR, Inc. (the "Company") on Form 10-Q for the period ended November 30, 2004 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, John G. Sharkey, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: 1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and 2. The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company. The forgoing certification is incorporated solely for the purposes of complying with the provisions of Section 906 of the Sarbanes-Oxley Act and is not intended to be used for any other purpose. /s/ John G. Sharkey - --------------------------- Vice President-Finance and Chief Financial Officer January 3, 2005 -----END PRIVACY-ENHANCED MESSAGE-----