10-Q 1 form10q_13408.txt FORM 10-Q FOR YEAR ENDED FEBRUARY 28, 2005 ================================================================================ 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, 2005 [ ] 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) 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 March 31, 2005 -------------------------------------------------------------------------------- ================================================================================ Page 1 TSR, INC. AND SUBSIDIARIES INDEX Page Number ------ Part I. Financial Information: Item 1. Financial Statements: Condensed Consolidated Balance Sheets - February 28, 2005 and May 31, 2004.......................... 3 Condensed Consolidated Statements of Income - For the three months and nine months ended February 28, 2005 and 2004.................................. 4 Condensed Consolidated Statements of Cash Flows - For the nine months ended February 28, 2005 and 2004........ 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. Controls and Procedures.......................................... 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
ASSETS February 28, May 31, 2004 2005 ----------- ----------- (Unaudited) Current Assets: Cash and cash equivalents (Note 3) ......................... $ 4,385,419 $ 2,268,796 Marketable securities (Note 5) ............................. 5,948,143 6,498,839 Accounts receivable (net of allowance for doubtful accounts of $430,000) ........................ 7,708,989 9,904,620 Other receivables .......................................... 37,460 29,700 Prepaid expenses ........................................... 37,123 38,918 Prepaid and recoverable income taxes ....................... 13,795 15,483 Deferred income taxes ...................................... 180,000 180,000 ----------- ----------- Total current assets .................................. 18,310,929 18,936,356 Equipment and leasehold improvements, at cost (net of accumulated depreciation and amortization of $744,002 and $731,581) .... 29,460 24,001 Other assets .................................................... 49,893 84,893 Deferred income taxes ........................................... 148,000 143,000 Acquired client relationships, (net of accumulated amorization of $171,608 and $157,308) ................................. -- 14,300 ----------- ----------- $18,538,282 $19,202,550 =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Accounts and other payables ................................ $ 275,497 $ 144,391 Accrued expenses and other current liabilities ............. 1,776,952 2,139,799 Advances from customers .................................... 1,510,635 1,532,642 Income taxes payable ....................................... 178,835 143,553 ----------- ----------- Total current liabilities ............................. 3,741,919 3,960,385 ----------- ----------- Minority Interest ............................................... 22,134 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 shares ............ 62,283 62,283 Additional paid-in capital ................................. 5,090,627 5,079,027 Retained earnings .......................................... 21,652,620 22,081,995 ----------- ----------- 26,805,530 27,223,305 Less: Treasury Stock, 1,660,314 shares, at cost ............ 12,031,301 12,031,301 ----------- ----------- 14,774,229 15,192,004 ----------- ----------- $18,538,282 $19,202,550 =========== ===========
The accompanying notes are an integral part of these condensed consolidated financial statements. Page 3 TSR, INC. AND SUBSIDIARIES CONSOLIDATED CONDENSED STATEMENTS OF EARNINGS FOR THE THREE AND NINE MONTHS ENDED FEBRUARY 28, 2005 AND FEBRUARY 29, 2004 (UNAUDITED)
Three Months Ended Nine Months Ended February 28, February 29, February 28, February 29, 2005 2004 2005 2004 ------------ ------------ ------------ ------------ Revenues, net ............................................... $ 12,432,714 $ 12,570,591 $ 38,951,953 $ 38,304,036 Cost of sales ............................................. 9,841,597 9,903,894 30,526,592 29,792,770 Selling, general and administrative expenses ................ 1,856,245 1,925,110 5,629,414 5,801,298 ------------ ------------ ------------ ------------ 11,697,842 11,829,004 36,156,006 35,594,068 ------------ ------------ ------------ ------------ Income from operations ..................................... 734,872 741,587 2,795,947 2,709,968 Other income (expense): Interest and dividend income ........................... 49,076 25,774 110,555 92,040 Realized and unrealized gain (loss) from marketable securities, net .................................... 704 (255) (3,124) 9,778 Minority interest in subsidiary operating profits ...... (13,367) (13,863) (49,148) (51,421) ------------ ------------ ------------ ------------ Income before income taxes .................................. 771,285 753,243 2,854,230 2,760,365 Provision for income taxes ................................. 319,000 317,000 1,228,000 1,182,000 ------------ ------------ ------------ ------------ Net income ............................................... $ 452,285 $ 436,243 $ 1,626,230 $ 1,578,365 ============ ============ ============ ============ Basic and diluted net income per common share ............... $ 0.10 $ 0.10 $ 0.36 $ 0.35 ============ ============ ============ ============ Weighted average number of basic common shares outstanding .. 4,568,012 4,548,012 4,568,012 4,538,345 ============ ============ ============ ============ Weighted average number of diluted common shares outstanding 4,571,019 4,550,772 4,570,112 4,544,718 ============ ============ ============ ============
The accompanying notes are an integral part of these consolidated condensed financial statements. Page 4 TSR, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE NINE MONTHS ENDED FEBRUARY 28, 2005 AND FEBRUARY 29, 2004 (UNAUDITED)
Nine Months Ended February 28, February 29, 2005 2004 ------------ ------------ Cash flows from operating activities: Net income .......................................................... $ 1,626,230 $ 1,578,365 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization .................................... 26,721 58,666 Realized and unrealized loss (gain) from marketable securities, net 3,124 (9,778) Stock based compensation expense .................................. 11,600 80,100 Minority interest in subsidiary operating profit .................. 49,148 51,421 Deferred income taxes ............................................. (5,000) -- Changes in assets and liabilities: Accounts receivable ............................................. 2,195,631 446,990 Other receivables ............................................... (7,760) 31,996 Prepaid expenses ................................................ 1,795 9,640 Prepaid and recoverable income taxes ............................ 1,688 (36,005) Other assets .................................................... 35,000 911 Accounts payable and accrued expenses ........................... (231,741) (207,847) Income taxes payable ............................................ 35,282 (56,006) Advances from customers ........................................ (22,007) (240,954) ------------ ------------ Net cash provided by operating activities ............................ 3,719,711 1,707,499 ------------ ------------ Cash flows from investing activities: Proceeds from maturities and sales of marketable securities ....... 9,450,593 12,925,210 Purchases of marketable securities ................................ (8,903,021) (5,472,505) Purchases of fixed assets ......................................... (17,880) (5,205) ------------ ------------ Net cash provided by investing activities ............................ 529,692 7,447,500 ------------ ------------ Cash flows from financing activities: Distribution to minority interest ................................ (77,175) (57,644) Proceeds from exercise of stock options ........................... -- 829,688 Cash dividends paid ............................................... (2,055,605) (10,451,228) ------------ ------------ Net cash used in financing activities ................................. (2,132,780) (9,679,184) ------------ ------------ Net increase (decrease) in cash and cash equivalents ...................... 2,116,623 (524,185) Cash and cash equivalents at beginning of period .......................... 2,268,796 5,063,098 ------------ ------------ Cash and cash equivalents at end of period ................................ $ 4,385,419 $ 4,538,913 ============ ============ Supplemental Disclosures: Income tax payments ................................................ $ 1,196,000 $ 1,274,000 ============ ============
The accompanying notes are an integral part of these consolidated condensed financial statements. Page 5 TSR, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FEBRUARY 28, 2005 (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 nine months ended February 28, 2005, 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 6,993 and 7,240; and 7,900 and 19,627 shares of common stock have been omitted from the calculations of diluted net income per common share for the three month and nine month periods ended February 28, 2005 and 2004, 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 February 28, 2005: Cash in banks............................... $ 846,203 Money Market Funds.......................... 3,539,216 ----------- $ 4,385,419 =========== 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 FEBRUARY 28, 2005 (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 $5,928,871 -- -- 5,928,871 Equity Securities 16,866 2,406 -- 19,272 ---------- ------- ---------- ----------- $5,945,737 $ 2,406 $ -- $ 5,948,143 ========== ======= ========== =========== 6. RECENT ACCOUNTING PRONOUNCEMENTS In December 2004, the FASB issued a revision of SFAS No. 123, "Statement of Financial Accounting Standards No. 123 (revised 2004)," which requires that the cost resulting from all share based payment transactions be recognized in the financial statements. This Statement establishes fair value as the measurement objective in accounting for share based payment arrangements and requires all entities to apply a fair value based measurement method in accounting for share based payment transactions with employees except for equity instruments held by employee share ownership plans. This Statement is effective as of the beginning of the first interim or annual reporting period that begins after June 15, 2005. The Company does not expect the adoption of the revised SFAS No. 123 to have a material impact on its consolidated financial statements. Page 7 TSR, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED FEBRUARY 28, 2005 (UNAUDITED) 7. 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 such outstanding options, all of which were vested, as of February 28, 2005 and 2004 respectively which are now subject to variable accounting treatment. Accordingly, the Company recorded a non-cash compensation charge of $8,700 and $36,580 for the three months ended February 28, 2005 and 2004 and $11,600 and $80,100 for the nine months ended February 28, 2005 and 2004 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 Nine Months Ended February 28, February 29, February 28, February 29, 2005 2004 2005 2004 ----------- ----------- ----------- ----------- Net income: As reported............................ $ 452,285 $ 436,243 $ 1,626,230 $ 1,578,365 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 included in reported net income, net of related tax effect................................... 8,700 36,580 11,600 80,100 Proforma net income.................... $ 460,985 $ 472,823 $ 1,637,830 $ 1,658,465 =========== =========== =========== =========== Basic net income per share: As reported............................ $ 0.10 $ 0.10 $ 0.36 $ 0.35 =========== =========== =========== =========== Proforma................................. $ 0.10 $ 0.10 $ 0.36 $ 0.37 =========== =========== =========== ===========
There were no options granted in fiscal 2005 and 2004. 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, uncertainty as to the operating results of the Company's new legacy systems migration service and the impact of the change in pricing methodology of the Company's largest customer and other risks and uncertainties set forth in the Company's filings with the Securities and Exchange Commission. RESULTS OF OPERATIONS The following table sets forth for the periods indicated certain financial information derived from the Company's condensed consolidated statements of earnings. There can be no assurance that trends in operating results will continue in the future: THREE MONTHS ENDED FEBRUARY 28, 2005 COMPARED WITH THREE MONTHS ENDED FEBRUARY 29, 2004
(Dollar amounts in Thousands) Three Months Ended February 28, 2005 February 29, 2004 ----------------- ----------------- % of % of Amount Revenues Amount Revenues ------ -------- ------ -------- Revenues .................................... $12,433 100.0 $12,571 100.0 Cost of sales ............................... 9,842 79.2 9,904 78.8 ------- ------- ------- ------- Gross profit ................................ 2,591 20.8 2,667 21.2 Selling, general, and administrative expenses 1,856 14.9 1,925 15.3 ------- ------- ------- ------- Income from operations ...................... 735 5.9 742 5.9 Other income ................................ 36 0.3 11 0.1 ------- ------- ------- ------- Income before income taxes .................. 771 6.2 753 6.0 Provision for income taxes .................. 319 2.6 317 2.5 ------- ------- ------- ------- Net income .................................. $ 452 3.6 $ 436 3.5 ======= ======= ======= =======
Page 9 TSR, INC. AND SUBSIDIARIES REVENUES Revenues consist primarily of revenues from computer programming consulting services. Revenues for the quarter ended February 28, 2005 decreased $138,000 or 1.1% from the comparable period in fiscal 2004. At the beginning of the current calendar year, the Company experienced more consultants not being extended on projects than were hired on new assignments causing the average number of consultants on billing with customers to decrease 4.1% from 389 for the quarter ending February 28, 2004 to 373 for the current quarter. A change in the business mix toward placing consultants with higher skill levels and therefore higher billing rates lessened the decrease in revenues and earnings. The Company's largest customer, AT&T, which accounted for approximately 20% of revenues for the quarter, is changing its procurement practices and instituting a program under which it will only pay for consulting services on a cost (subject to a cap) plus basis. This change will reduce the amount the Company can bill for each consultant. It is expected that this change will significantly reduce revenues and gross profit from this client. The Company is currently discussing this change with the client and anticipates that the change will be implemented by the end of April, 2005. COST OF SALES Cost of sales for the quarter ended February 28, 2005, decreased $62,000 or 0.6% to $9,842,000 from $9,904,000 in the prior year period. Cost of sales as a percentage of revenues increased from 78.8% in the quarter ended February 29, 2004 to 79.2% in the quarter ended February 28, 2005. 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 and discounts. 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 $69,000 or 3.6% from $1,925,000 in the quarter February 29, 2004 to $1,856,000 in the quarter ended February 28, 2005. This decrease was primarily attributable to a decrease in legal expenses. Also, the decrease would have been higher except for $43,000 in expenses incurred in establishing the Company's new "Transformer" service offering. 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 into more modern, flexible applications that are less expensive to operate and maintain. The Company has begun to market the service to potential customers. The first transformation project has commenced for a data services provider in the brokerage industry. In performing this project, the Company will transform the major modules in a financial instruments pricing application from a dated architecture and programming language (FORTRAN) to a well structured object-oriented language (C++). 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 and marketing of this service or whether it will realize significant revenues from this service offering. OTHER INCOME Other income resulted primarily from interest and dividend income, which increased by $23,000 to $49,000 due to higher interest rates in the quarter ended February 28, 2005. Additionally, the Company had a net unrealized loss of $255 in the quarter ended February 29, 2004 versus a gain of $704 in the quarter ended February 28, 2005 from marketable securities due to mark to market adjustments of its trading securities equity portfolio. INCOME TAXES The effective income tax rate of 41.4% for the quarter ended February 28, 2005 decreased from a rate of 42.1% in the quarter ended February 29, 2004. Page 10 TSR, INC. AND SUBSIDIARIES Nine months ended February 28, 2005 compared with nine months ended February 29, 2004 (Dollar amounts in Thousands) Nine Months Ended February 28, 2005 February 29, 2004 ----------------- ----------------- % of % of Amount Revenues Amount Revenues ------ -------- ------ -------- Revenues $ 38,952 100.0 $ 38,304 100.0 Cost of sales 30,527 78.4 29,793 77.8 -------- ------ -------- ------ Gross profit 8,425 21.6 8,511 22.2 Selling, general, and administrative expenses 5,629 14.4 5,801 15.1 -------- ------ -------- ------ Income from operations 2,796 7.2 2,710 7.1 Other income 58 0.1 50 0.1 -------- ------ -------- ------ Income before income taxes 2,854 7.3 2,760 7.2 Provision for income taxes 1,228 3.1 1,182 3.1 -------- ------ -------- ------ Net income $ 1,626 4.2 $ 1,578 4.1 ======== ====== ======== ====== REVENUES Revenues consist primarily of revenues from computer programming consulting services. Revenues for the nine months ended February 28, 2005 increased $648,000 or 1.7% from the comparable period in fiscal 2004. Increased opportunities to place consultants on billing with existing clients in the first quarter of the current nine month period was partially offset by a budget reduction at the Company's largest client in the second quarter of the current period and a less than expected rate of contract extensions in the third quarter of the current period. This resulted in the average number of consultants on billing with clients decreasing to 382 for the nine months ended February 28, 2005 from 384 in the nine months ended February 29, 2004. A change in business mix toward clients using consultants with higher level skill levels and therefore higher billing rates resulted in the revenue increase. COST OF SALES Cost of sales for the nine months ended February 28, 2005, increased $734,000 or 2.5% to $30,527,000 from $29,793,000 in the prior year period. Cost of sales as a percentage of revenues increased from 77.8% in the nine months ended February 29, 2004 to 78.4% in the nine months ended February 28, 2005. 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 and discounts. 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 $172,000 or 3.0% from $5,801,000 in the nine months ended February 29, 2004 to $5,629,000 in the nine months ended February 28, 2005. 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 $168,000 of expenses incurred in establishing the Company's new "Transformer" service offering. 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 into more modern, flexible applications that are less expensive to operate and maintain. The Company has begun to market the service to potential customers. The first transformation project has commenced for a data services provider in the brokerage industry. In performing this project, the Company will transform the major modules in a financial instruments pricing application from a dated architecture and programming language (FORTRAN) to a well structured object-oriented language (C++). 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 and marketing of this service or whether it will realize significant revenues from this service offering. OTHER INCOME Other income resulted primarily from interest and dividend income, which increased by $19,000 to $111,000 due to higher interest rates in the nine months ended February 28, 2005. Additionally, the Company also had a net unrealized gain of $10,000 in the nine months ended February 29, 2004 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 nine months ended February 28, 2005 from the sale of marketable securities due to a merger. INCOME TAXES The effective income tax rate of 43.0% for the nine months ended February 28, 2005 increased from a rate of 42.8% in the nine months ended February 29, 2004. 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 February 28, 2005, the Company had working capital of $14,569,000 and cash and cash equivalents of $4,385,000 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 $5,948,000 and $6,499,000 of marketable securities at February 28, 2005 and May 31, 2004, respectively. Net cash provided by operating activities of $3,720,000 for the nine months ended February 28, 2005, compared to cash provided of $1,707,000 for the nine months ended February 29, 2004. 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 $530,000 for the nine months ended February 28, 2005 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 $2,056,000 and distributions to the minority interest of $77,000. The Company's capital resource commitments at February 28, 2005 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, 2005. 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 February 28, 2005, 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.................... 388,000 245,000 143,000 -- -- Purchase Obligations................ -- -- -- -- -- Employment Agreements............... 1,640,000 779,000 861,000 -- -- Other Long-Term Liabilities Reflected on the Registrant's Balance Sheet under GAAP............ -- -- -- -- -- ---------- ---------- ---------- ---------- ---------- Total............................... $2,028,000 $1,024,000 $1,004,000 $ -- $ -- ========== ========== ========== ========== ==========
Page 13 TSR, INC. AND SUBSIDIARIES RECENT ACCOUNTING PRONOUNCEMENTS In December 2004, the FASB issued a revision of SFAS No. 123, "Statement of Financial Accounting Standards No. 123 (revised 2004)," which requires that the cost resulting from all share based payment transactions be recognized in the financial statements. This Statement establishes fair value as the measurement objective in accounting for share based payment arrangements and requires all entities to apply a fair value based measurement method in accounting for share based payment transactions with employees except for equity instruments held by employee share ownership plans. This Statement is effective as of the beginning of the first interim or annual reporting period that begins after June 15, 2005. The Company does not expect the adoption of the revised SFAS No. 123 to have a material impact on its consolidated financial statements. 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 February 28, 2005, 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. Page 14 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK The Company's earnings and cash flows are subject to fluctuations due to (i) changes in interest rates primarily affecting its income from the investment of available cash balances in money market funds and (ii) changes in market values of its investments in trading equity securities. Under its current policies, the Company does not use interest rate derivative instruments to manage exposure to interest rate changes. The Company's present exposure to changes in the market value of its investments in equity securities is not significant. ITEM 4. CONTROLS AND PROCEDURES DISCLOSURE CONTROLS AND PROCEDURES. The Company conducted an evaluation, under the supervision and with the participation of the principal executive officer and principal financial officer, of the Company's disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934 (the "Exchange Act")). Based on this evaluation, the principal executive officer and principal financial officer concluded that, as of the end of the period covered by this report, the Company's disclosure controls and procedures are effective. INTERNAL CONTROL OVER FINANCIAL REPORTING. There was no change in the Company's internal control over financial reporting (as such term is defined in Rule 13a-15(f) under the Exchange Act) during the Company's most recently reported completed fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting. 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: April 5, 2005 /s/ J.F. Hughes --------------------------------------------- J.F. Hughes, Chairman, President and Treasurer Date: April 5, 2005 /s/ John G. Sharkey --------------------------------------------- John G. Sharkey, Vice President Finance Page 15