-----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, Fy1gKQCM66yZ/ve9HzTQYjVW/UdNXAWABA7szod8onPBo4Rdwc/ddPHVtxDkWzyE yMveIK4HiNB+tgRnxCpD5Q== 0001072613-07-002375.txt : 20071012 0001072613-07-002375.hdr.sgml : 20071012 20071012173043 ACCESSION NUMBER: 0001072613-07-002375 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20070831 FILED AS OF DATE: 20071012 DATE AS OF CHANGE: 20071012 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: 071170355 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_15467.txt FORM 10-Q FOR QUARTER ENDED 8-31-07 ================================================================================ 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 August 31, 2007 [ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from ________ to ________ Commission File Number: 0-8656 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 large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of "accelerated filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check one): Large accelerated filer [ ] Accelerated filer [ ] Non-accelerated filer [X] Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). [ ] Yes [X] No SHARES OUTSTANDING - -------------------------------------------------------------------------------- 4,568,012 shares of common stock, par value $.01 per share, as of September 30, 2007 ================================================================================ Page 1 TSR, INC. AND SUBSIDIARIES INDEX Page Number ------ Part I. Financial Information: Item 1. Financial Statements: Condensed Consolidated Balance Sheets - August 31, 2007 and May 31, 2007.............................. 3 Condensed Consolidated Statements of Income - For the three months ended August 31, 2007 and 2006........... 4 Condensed Consolidated Statements of Cash Flows - For the three months ended August 31, 2007 and 2006........... 5 Notes to Condensed Consolidated Financial Statements.......... 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations........................... 10 Item 3. Quantitative and Qualitative Disclosure About Market Risk..... 15 Item 4. Controls and Procedures....................................... 15 Part II. Other Information................................................ 15 Item 1A. Risk Factors................................................. 15 Item 6. Exhibits...................................................... 15 Signatures................................................................. 15 Page 2 Part I. Financial Information Item 1. Financial Statements TSR, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS August 31, May 31, 2007 2007 ----------- ----------- (Unaudited) (Note 1) Current Assets: Cash and cash equivalents ............................................. $ 1,490,071 $ 1,900,264 Marketable securities ................................................. 6,404,529 6,395,131 Accounts receivable, net of allowance for doubtful accounts of $355,000 9,463,345 8,156,651 Other receivables ..................................................... 96,114 99,015 Prepaid expenses ...................................................... 59,183 54,928 Prepaid and recoverable income taxes .................................. 5,156 153,618 Deferred income taxes ................................................. 145,000 145,000 ----------- ----------- Total current assets ............................................. 17,663,398 16,904,607 Marketable securities ...................................................... 996,484 996,445 Equipment and leasehold improvements, net of accumulated depreciation and amortization of $387,980 and $380,838 .......................... 40,589 46,290 Other assets ............................................................... 49,653 49,653 Deferred income taxes ...................................................... 62,000 62,000 ----------- ----------- Total assets ............................................................... $18,812,124 $18,058,995 =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Accounts and other payables ........................................... $ 324,495 $ 306,695 Accrued expenses and other current liabilities ........................ 2,365,797 2,191,212 Advances from customers ............................................... 1,520,674 1,591,324 Dividends payable ..................................................... 365,441 -- Income taxes payable .................................................. 159,153 -- ----------- ----------- Total current liabilities ........................................ 4,735,560 4,089,231 ----------- ----------- Minority Interest .......................................................... 42,273 17,500 ----------- ----------- Stockholders' Equity: Preferred stock, $1 par value, authorized 1,000,000 shares; none issued .................................... -- -- Common stock, $.01 par value, authorized 25,000,000 shares; issued 6,228,326 shares ....................... 62,283 62,283 Additional paid-in capital ............................................ 5,071,727 5,071,727 Retained earnings ..................................................... 20,931,582 20,849,555 ----------- ----------- 26,065,592 25,983,565 Less: Treasury stock, 1,660,314 shares, at cost ....................... 12,031,301 12,031,301 ----------- ----------- Total stockholders' equity ................................................. 14,034,291 13,952,264 ----------- ----------- Total liabilities and stockholders' equity ................................. $18,812,124 $18,058,995 =========== =========== The accompanying notes are an integral part of these condensed consolidated financial statements.
Page 3 TSR, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF INCOME FOR THE THREE MONTHS ENDED AUGUST 31, 2007 AND 2006 (UNAUDITED)
Three Months Ended August 31, 2007 2006 ------------ ------------ Revenues, net ........................................................ $ 13,525,652 $ 12,375,689 ------------ ------------ Cost of sales ........................................................ 11,016,350 9,998,545 Selling, general and administrative expenses ......................... 1,798,871 1,748,723 ------------ ------------ 12,815,221 11,747,268 ------------ ------------ Income from operations ............................................... 710,431 628,421 Other income (expense): Interest and dividend income ................................ 112,454 112,437 Unrealized gain on marketable securities, net ............... 2,856 1,240 Minority interest in subsidiary operating profits ........... (30,273) (18,436) ------------ ------------ Income before income taxes ........................................... 795,468 723,662 Provision for income taxes ........................................... 348,000 280,000 ------------ ------------ Net income ........................................................... $ 447,468 $ 443,662 ============ ============ Basic and diluted net income per common share ........................ $ 0.10 $ 0.10 ============ ============ Weighted average number of basic and diluted common shares outstanding 4,568,012 4,568,012 ============ ============ 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 THREE MONTHS ENDED AUGUST 31, 2007 AND 2006 (UNAUDITED)
Three Months Ended August 31, 2007 2006 ------------ ------------ Cash flows from operating activities: Net income....................................................... $ 447,468 $ 443,662 Adjustments to reconcile net income to net cash (used in) provided by operating activities: Depreciation and amortization.................................. 7,142 6,140 Unrealized gain on marketable securities, net................ (2,856) (1,240) Minority interest in subsidiary operating profits.............. 30,273 18,436 Changes in assets and liabilities: Accounts receivable.............................................. (1,306,694) (247,868) Other receivables................................................ 2,901 4,777 Prepaid expenses................................................. (4,255) (106) Prepaid and recoverable income taxes............................. 148,462 174,731 Other assets..................................................... -- -- Accounts payable and accrued expenses............................ 192,385 422,936 Income taxes payable............................................. 159,153 (24,275) Advances from customers.......................................... (70,650) (11,511) ------------ ------------ Net cash (used in) provided by operating activities................... (396,671) 785,682 ------------ ------------ Cash flows from investing activities: Proceeds from maturities of marketable securities................ 2,934,269 2,444,806 Purchases of marketable securities............................... (2,940,850) (2,436,199) Purchase of fixed assets......................................... (1,441) (7,865) ------------ ------------ Net cash (used in) provided by investing activities................... (8,022) 742 ------------ ------------ Cash flows from financing activities Distribution to minority interest.................................. (5,500) (6,000) ------------ ------------ Net cash used in financing activities................................. (5,500) (6,000) ------------ ------------ Net increase (decrease) in cash and cash equivalents.................. (410,193) 780,424 Cash and cash equivalents at beginning of period...................... 1,900,264 2,660,739 ------------ ------------ Cash and cash equivalents at end of period............................ $ 1,490,071 $ 3,441,163 ============ ============ Supplemental disclosures of cash flow data: Income taxes paid.............................................. $ 40,000 $ 130,000 ============ ============ 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 AUGUST 31, 2007 (UNAUDITED) 1. BASIS OF PRESENTATION The accompanying condensed consolidated interim financial statements include the accounts of TSR, Inc. and its subsidiaries (the "Company"). All significant inter-company balances and transactions have been eliminated in consolidation. These interim financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America applying to interim financial information and with the instructions to Form 10-Q of Regulation S-X of the Securities and Exchange Commission. Accordingly, certain information and footnote disclosures required by accounting principles generally accepted in the United States of America and normally included in the Company's annual financial statements have been condensed or omitted. These interim financial statements as of and for the three months ended August 31, 2007 are unaudited; however, in the opinion of management, such statements include all adjustments (consisting of normal recurring accruals) necessary to present fairly the consolidated financial position, results of operations and cash flows of the Company for the periods presented. The results of operations for the interim periods presented are not necessarily indicative of the results that might be expected for future interim periods or for the full year ending May 31, 2008. The balance sheet at May 31, 2007 has been derived from the audited financial statements at that date. 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, 2007. 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. The Company has had no stock options or other common stock equivalents outstanding during any of the periods presented. 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 August 31, 2007 and May 31, 2007: August 31, May 31, 2007 2007 Cash in banks........................ $ 226,146 $ 390,370 Money market funds................... 1,263,925 1,509,894 ----------- ----------- $ 1,490,071 $ 1,900,264 =========== =========== 4. REVENUE RECOGNITION The Company's contract computer programming services are generally provided under time and materials agreements with customers. Revenue is recognized in accordance with Staff Accounting Bulletin (SAB) 104, "Revenue Recognition," when persuasive evidence of an arrangement exits, the services have been rendered, the price is fixed or determinable, and collectability is reasonably assured. Advances from customers represent amounts received from customers prior to the Company's provision of the related services and credit balances from overpayments. Reimbursements received by the Company for out-of-pocket expenses are characterized as revenue in accordance with Emerging Issues Task Force (EITF) Issue 01-14 "Income Statement of Characterization of Reimbursements Received for `Out-of-Pocket' Expenses Incurred." Page 6 TSR, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED AUGUST 31, 2007 (UNAUDITED) 5. MARKETABLE SECURITIES The Company accounts for its marketable securities in accordance with Statement of Financial Accounting Standards No. 115 "Accounting for Certain Investments in Debt and Equity Securities." Accordingly, the Company classifies its marketable securities at acquisition as either (i) held-to-maturity, (ii) trading or (iii) available-for-sale. Based upon the Company's intent and ability to hold its US Treasury securities to maturity (which maturities are mostly less than one year), such securities have been classified as held-to-maturity and are carried at amortized cost. The Company's equity securities are classified as trading securities, which are carried at fair value with unrealized gains and losses included in earnings. The Company's marketable securities at August 31, 2007 and May 31, 2007 are summarized as follows:
Gross Gross August 31, 2007 Unrealized Unrealized Amortized Holding Holding Recorded Current Cost Gains Losses Value ------- ---------- --------- --------- ---------- United States Treasury Securities...... $6,383,929 $ -- $ -- $6,383,929 Equity Securities...................... 16,866 3,734 -- 20,600 ---------- --------- --------- ---------- $6,400,795 $ 3,734 $ -- $6,404,529 ========== ========= ========= ========== Long - Term ----------- United States Treasury Securities...... $ 996,484 $ -- $ -- $ 996,484 ========== ========= ========= ========== Gross Gross May 31, 2007 Unrealized Unrealized Amortized Holding Holding Recorded Current Cost Gains Losses Value ------- ---------- --------- --------- ---------- United States Treasury Securities...... $6,377,387 $ -- $ -- $6,377,387 Equity Securities...................... 16,866 878 -- 17,744 ---------- --------- --------- ---------- $6,394,253 $ 878 $ -- $6,395,131 ========== ========= ========= ========== Long - Term ----------- United States Treasury Securities...... $ 996,445 $ -- $ -- $ 996,445 ========== ========= ========= ==========
Page 7 TSR, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED AUGUST 31, 2007 (UNAUDITED) 6. STOCK OPTIONS The Company had one stock-based employee compensation plan in effect which expired on April 30, 2007. Effective June 1, 2006, the Company accounted for all transactions under which employees receive shares of stock or other equity instruments in the Company in accordance with the revised provisions of SFAS No. 123, ("FAS123 (R)"), which requires that the fair market value of all share based payment transactions be recognized in the financial statements. FAS123 (R) establishes fair value as the measurement objective in accounting for share based payment arrangements and requires all entities to apply a fair value based measurement method in accounting for share based transactions with employees except for equity instruments held by employee share ownership plans. The Company adopted FAS123(R) at the beginning of fiscal 2007. The Company has not issued any share based payments as of August 31, 2007. 7. RECENT ACCOUNTING PRONOUNCEMENTS In July 2006, the Financial Accounting Standards Board ("FASB") issued FASB Interpretation No. 48 "Accounting for Uncertainty in Income Taxes" ("FIN 48"). This guidance is intended to provide increased consistency in the application of FASB Statement No. 109 "Accounting for Income Taxes" by providing guidance with regard to the recognition and measurement of tax positions, and provide increased disclosure requirements. In particular, FIN 48 requires uncertain tax positions to be recognized only if they are "more-likely-than-not" to be upheld based on their technical merits. Additionally, the measurement of the tax position will be based on the largest amount that is determined to have greater than a 50% likelihood of realization upon ultimate settlement. Any resulting cumulative effect of applying the provisions of FIN 48 upon adoption would be reported as an adjustment to the beginning balance of retained earnings (deficit) in the period of adoption. The adoption of FIN 48 at the beginning of the 2008 fiscal year did not have a material effect on the Company's consolidated financial statements. The Company may from time to time be assessed interest and/or penalties by major taxing jurisdictions, although any such assessments historically have been minimal and immaterial to our financial results. In the event we have received an assessment for interest and/or penalties, it has been classified in the statement of operations in selling, general and administrative expenses. On September 15, 2006, the FASB issued SFAS No. 157, "Fair Value Measurements" ("SFAS No. 157"). SFAS No. 157 is effective for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. SFAS No. 157 provides guidance related to estimating fair value and requires expanded disclosures. SFAS No. 157 applies whenever other standards require (or permit) assets or liabilities to be measured at fair value. SFAS No. 157 does not expand the use of fair value in any new circumstances. The Company is evaluating SFAS No. 157 and its impact on the Company's consolidated financial statements. In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for Financial Assets and Financial Liabilities - including an amendment of FASB Statement No. 115" ("SFAS No. 159"). SFAS No. 159 permits entities to elect to measure many financial instruments and certain other items at fair value. Upon adoption of SFAS No. 159, an entity may elect the fair value option for eligible items that exist at the adoption date. Subsequent to the initial adoption, the election of the fair value option should only be made at initial recognition of the asset or liability or upon a re-measurement event that gives rise to new-basis accounting. SFAS No. 159 does not affect any existing accounting literature that requires certain assets and liabilities to be carried at fair value nor does it eliminate disclosure requirements included in other accounting standards. SFAS No. 159 is effective for fiscal years beginning after November 15, 2007. The Company is currently assessing the impact of SFAS No. 159 on its consolidated financial statements. Page 8 TSR, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED AUGUST 31, 2007 (UNAUDITED) 8. DIVIDENDS On August 3, 2007, the Board of Directors of the Company declared that a regular quarterly cash dividend of $0.08 per share for the quarter ended May 31, 2007 would be paid on September 12, 2007 to stockholders of record as of August 24, 2007. This dividend will amount to approximately $365,000 and will be paid from the Company's cash and marketable securities. 9. MAJOR CUSTOMERS In June 2006, the New York State Office of General Services, Procurement Services Group ("OGS") terminated its contract with the Company. The OGS actions were due to the report of an investigation by the Office of the Special Commissioner of Investigation of the New York City Department of Education ("DOE"). The investigative report concluded that the Company operated improperly from 2001 through the spring of 2003 by using a subcontracting arrangement to obtain programmers for positions with the DOE. The subcontracting was with a small firm that was owned by an individual who worked as a consultant under contract at the DOE in a supervising capacity and sometimes was involved in decisions to select consultants that financially benefited both him and the Company. The investigative report also suggested that the Company received advanced information as to new positions from this individual and that the subcontracting increased the costs to the DOE since two firms, instead of one, profited from this arrangement. All new placements with the DOE, including renewals of existing placements, were being made under this OGS contract prior to its termination. As a result, the Company will not be able to make new placements or renew existing placements with the DOE. The DOE accounted for approximately 13% of the Company's revenues during the Company's fiscal year ended May 31, 2006 and 4% during fiscal 2007. At May 31, 2006, the Company had forty-one consultants placed with the DOE. As a result of the termination, consultants placed with the DOE who came up for renewal were not renewed. The last remaining consultants were terminated in April 2007. DOE also asserted a claim against the Company for a reimbursement due to the Company's subcontracting without written authorization. While the Company believes that its subcontracting did not result in overcharges to DOE, it has settled the matter in order to avoid the expense and uncertainty of litigation. The related $900,000 reserve established at May 31, 2006 was sufficient for the settlement which was finalized in May 2007. Page 9 PART I. FINANCIAL INFORMATION ITEM 2. TSR, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis should be read in conjunction with the condensed consolidated financial statements and the notes to such financial statements. FORWARD-LOOKING STATEMENTS Certain statements contained in Management's Discussion and Analysis of Financial Condition and Results of Operations, including statements concerning the Company's future prospects and the Company's future cash flow requirements are forward looking statements, as defined in the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those projections in the forward looking statements which statements involve risks and uncertainties, including but not limited to the following: risks relating to the competitive nature of the markets for contract computer programming services; the extent to which market conditions for the Company's contract computer consulting services will continue to adversely affect the Company's business; the concentration of the Company's business with certain customers; uncertainty as to the Company's ability to maintain its relations with existing customers and expand its contract computer consulting services business; the impact on the Company's business due to the merger of AT&T and SBC Communications, Inc.; the impact of changes in the industry, such as the use of vendor management companies in connection with the consulting procurement process, the increase in customers moving IT operations offshore and other risks and uncertainties set forth in the Company's filings with the Securities and Exchange Commission. The Company is under no obligation to publicly update or revise forward looking statements. RESULTS OF OPERATIONS The following table sets forth for the periods indicated certain financial information derived from the Company's condensed consolidated statements of income. There can be no assurance that trends in operating results will continue in the future: Three months ended August 31, 2007 compared with three months ended August 31, 2006 Three Months Ended August 31, (Dollar amounts in Thousands) 2007 2006 ---- ---- % of % of Amount Revenues Amount Revenues Revenues....................... $ 13,526 100.0 $ 12,376 100.0 Cost of sales.................. 11,017 81.4 9,999 80.8 -------- ----- -------- ----- Gross profit................... 2,509 18.6 2,377 19.2 Selling, general, and administrative expenses....... 1,799 13.3 1,749 14.1 -------- ----- -------- ----- Income from operations......... 710 5.3 628 5.1 Other income, net.............. 85 0.6 96 0.8 -------- ----- -------- ----- Income before income taxes..... 795 5.9 724 5.9 Provision for income taxes..... 348 2.6 280 2.3 -------- ----- -------- ----- Net income..................... $ 447 3.3 $ 444 3.6 ======== ===== ======== ===== Page 10 TSR, INC. AND SUBSIDIARIES REVENUES Revenues consist primarily of revenues from computer programming consulting services. Revenues for the quarter ended August 31, 2007 increased $1,150,000 or 9.3% from the quarter ended August 31, 2006. The average number of consultants on billing with customers decreased from approximately 342 for the quarter ended August 31, 2006 to 336 for the quarter ended August 31, 2007. Changes in the business mix toward higher level skills allowed the Company to increase its average billing rates to customers, offsetting the slight decrease in the average number of consultants on billing with customers. As a result of the merger of AT&T with SBC Communications, Inc., Procurestaff, which had been the sole vendor management company for AT&T, is currently one of many vendors to the new AT&T and no longer serves as the primary vendor manager. Due to these changes, the Company experienced a decrease in new placements with AT&T beginning in the second quarter of fiscal 2007. This has reduced the number of consultants on billing with AT&T from 100 at August 31, 2006 to 68 at August 31, 2007. The Company is unable to predict whether this change in relationship will continue to impact the Company's business relationship with AT&T. The Company's contract to provide services to the DOE was terminated in June 2006. There were 41 consultants on billing with the DOE at May 31, 2006 and 13 at August 31, 2006. The last remaining consultants were terminated in April 2007. Although there has been some improvement in market conditions during the past few years, revenues have not improved significantly since the Company has not yet fully adapted its business model to more effectively deal with changing market factors such as vendor management and off-shore IT operations. A focus of the Company's plan has been to hire additional experienced account executives and technical recruiters to address increased competition and to promote revenue growth. This process has taken longer than expected due to a combination of limited qualified candidates and increased compensation expectations of qualified candidates. COST OF SALES Cost of sales for the quarter ended August 31, 2007, increased $1,018,000 or 10.2% to $11,017,000 from $9,999,000 in the prior year period. The increase in cost of sales resulted primarily from increased amounts paid to consultants on billing with clients due to skill level and increased competition. Cost of sales as a percentage of revenues increased from 80.8% in the quarter ended August 31, 2006 to 81.4% in the quarter ended August 31, 2007. The increase in cost of sales as a percentage of revenues was primarily attributable to discount programs instituted or expanded by customers. These discount programs decrease revenues without allowing offsetting cost reductions. 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 $50,000 or 2.9% from $1,749,000 in the quarter ended August 31, 2006 to $1,799,000 in the quarter ended August 31, 2007. This increase was primarily attributable to an increase in the number of technical recruiters. Additional recruiters have been hired to address increasing competition. Page 11 TSR, INC. AND SUBSIDIARIES INCOME FROM OPERATIONS Income from operations increased $82,000 or 13.1% from $628,000 in the quarter ended August 31, 2006 to $710,000 in the quarter ended August 31, 2007. The increased revenues were sufficient to provide additional income, in spite of the increase in cost of sales as a percentage of revenues. OTHER INCOME Other income resulted primarily from interest and dividend income, which remained at approximately $112,000 for the periods ended August 31, 2007 and 2006. INCOME TAXES The effective income tax rate of 43.7% for the quarter ended August 31, 2007 increased from a rate of 38.7% in the quarter ended August 31, 2006. The lower effective rate in the prior year period was the result of a credit taken due to a change in estimate associated with prior year taxes. The lower effective rate in the prior year period was the primary reason that net income did not increase, as expected, with the increase in income from operations in the current quarter. 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 August 31, 2007, the Company had working capital of $12,928,000 including cash and cash equivalents of $1,490,000 as compared to working capital of $12,815,000 including cash and cash equivalents of $1,900,000 at May 31, 2007. The Company's working capital also included $6,405,000 and $6,395,000 of marketable securities with maturities of less than one year at August 31, 2007 and May 31, 2007, respectively. For the three months ended August 31, 2007, net cash used in operating activities was $397,000 compared to cash provided of $786,000 for the three months ended August 31, 2006, or a decrease of $1,183,000. The cash used in operating activities primarily resulted from an increase in accounts receivable of $1,307,000. The increase in accounts receivable resulted primarily from delayed payments from two vendor management accounts. The Company believes that these increases are temporary and the amounts will be collected. The cash provided by operating activities in the three months ended August 31, 2006, resulted primarily from the Company's net income and an increase in accounts payable and accrued expenses. Net cash used in investing activities of $8,000 for the three months ended August 31, 2007 primarily resulted from reinvesting all of the proceeds of maturing US Treasury Securities with decreasing interest rates. Net cash used in financing activities resulted primarily from distributions to the minority interest of $6,000. The Company's capital resource commitments at August 31, 2007 consisted of lease obligations on its branch and corporate facilities. The Company intends to finance these lease commitments from cash flow provided by operations, available cash and short-term marketable securities. The Company's cash and marketable securities were sufficient to enable it to meet its cash requirements during the three months ended August 31, 2007. The Company has available a revolving line of credit of $5,000,000 with a major money center bank through October 6, 2007. The Company is in process of negotiating a renewal of this line of credit with the bank. As of August 31, 2007, no amounts were outstanding under this line of credit. TABULAR DISCLOSURE OF CONTRACTUAL OBLIGATIONS --------------------------------------------- PAYMENTS DUE BY PERIOD
CONTRACTUAL OBLIGATIONS ----------------------- LESS THAN MORE THAN TOTAL 1 YEAR 1-3 YEARS 3-5 YEARS 5 YEARS ---------- ---------- ---------- ---------- ---------- Operating Leases............. $1,037,000 $ 341,000 $ 411,000 $ 285,000 $ -- Employment Agreements........ 1,381,000 $ 375,000 706,000 300,000 -- ---------- ---------- ---------- ---------- ---------- Total........................ $2,418,000 $ 716,000 $1,117,000 $ 585,000 $ -- ========== ========== ========== ========== ==========
Page 13 TSR, INC. AND SUBSIDIARIES RECENT ACCOUNT PRONOUNCEMENTS In July 2006, the Financial Accounting Standards Board ("FASB") issued FASB Interpretation No. 48 "Accounting for Uncertainty in Income Taxes" ("FIN 48"). This guidance is intended to provide increased consistency in the application of FASB Statement No. 109 "Accounting for Income Taxes" by providing guidance with regard to the recognition and measurement of tax positions, and provide increased disclosure requirements. In particular, FIN 48 requires uncertain tax positions to be recognized only if they are "more-likely-than-not" to be upheld based on their technical merits. Additionally, the measurement of the tax position will be based on the largest amount that is determined to have greater than a 50% likelihood of realization upon ultimate settlement. Any resulting cumulative effect of applying the provisions of FIN 48 upon adoption would be reported as an adjustment to the beginning balance of retained earnings (deficit) in the period of adoption. The adoption of FIN 48 at the beginning of the 2008 fiscal year did not have a material effect on the Company's consolidated financial statements. We may from time to time be assessed interest and/or penalties by major taxing jurisdictions, although any such assessments historically have been minimal and immaterial to our financial results. In the event we have received an assessment for interest and/or penalties, it has been classified in the statement of operations in selling, general and administrative expenses. On September 15, 2006, the FASB issued SFAS No. 157, "Fair Value Measurements" ("SFAS No. 157"). SFAS No. 157 is effective for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. SFAS No. 157 provides guidance related to estimating fair value and requires expanded disclosures. SFAS No. 157 applies whenever other standards require (or permit) assets or liabilities to be measured at fair value. SFAS No. 157 does not expand the use of fair value in any new circumstances. The Company is evaluating SFAS No. 157 and its impact on the Company's consolidated financial statements. In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for Financial Assets and Financial Liabilities - including an amendment of FASB Statement No. 115" ("SFAS No. 159"). SFAS No. 159 permits entities to elect to measure many financial instruments and certain other items at fair value. Upon adoption of SFAS No. 159, an entity may elect the fair value option for eligible items that exist at the adoption date. Subsequent to the initial adoption, the election of the fair value option should only be made at initial recognition of the asset or liability or upon a re-measurement event that gives rise to new-basis accounting. SFAS No. 159 does not affect any existing accounting literature that requires certain assets and liabilities to be carried at fair value nor does it eliminate disclosure requirements included in other accounting standards. SFAS No. 159 is effective for fiscal years beginning after November 15, 2007. The Company is currently assessing the impact of SFAS No. 159 on its consolidated financial statements. 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, 2007 Annual Report on Form 10-K, as filed with the SEC. The Company believes that those accounting policies require the application of management's most difficult, subjective or complex judgments. There have been no changes in the Company's significant accounting policies as of August 31, 2007. 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 accounting 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 accounting 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 1A. RISK FACTORS There are no material changes to the risk factors described in the Form 10-K, filed on August 8, 2007. ITEM 6. EXHIBITS (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. 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: October 12, 2007 /s/ J.F. Hughes -------------------------------------- J.F. Hughes, Chairman and President Date: October 12, 2007 /s/ John G. Sharkey -------------------------------------- John G. Sharkey, Vice President Finance and Chief Financial Officer Page 15 EX-31.1 2 exh31-1_15467.txt 302 CERTIFICATION OF THE C.E.O. 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-15e and 15d-15(e)) 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; and c. Disclosed in this Quarterly Report any change in registrant's internal controls over financial reporting that occurred during the registrant's fourth fiscal quarter that materially affected, or is reasonably likely to materially affect, the registrant's internal controls over financial reporting; 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 over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; 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 over financial reporting. Date: October 12, 2007 /s/ J.F. Hughes - --------------------------- Chairman of the Board, Chief Executive Officer and Director EX-31.2 3 exh31-2_15467.txt 302 CERTIFICATION OF THE C.F.O. 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-15e and 15d-15(e)) 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; and c. Disclosed in this Quarterly Report any change in registrant's internal controls over financial reporting that occurred during the registrant's fourth fiscal quarter that materially affected, or is reasonably likely to materially affect, the registrant's internal controls over financial reporting; 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 over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; 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 over financial reporting. Date: October 12, 2007 /s/ John G. Sharkey - ----------------------- Vice President-Finance and Chief Financial Officer EX-32.1 4 exh32-1_15467.txt 906 CERTIFICATION OF THE C.E.O. 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 August 31, 2007 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 October 12, 2007 EX-32.2 5 exh32-2_15467.txt 906 CERTIFICATION OF THE C.F.O. 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 August 31, 2007 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 October 12, 2007 Page 19 -----END PRIVACY-ENHANCED MESSAGE-----