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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.
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(Exact name of registrant as specified in its charter)
Delaware 13-2635899
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
400 Oser Avenue, Hauppauge, NY
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11788 (Address of principal executive offices)
631-231-0333
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(Registrant's telephone number)
None
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(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
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4,568,012 shares of common stock, par value $.01 per share,
as of September 30, 2007
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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 $ --
========== ========== ========== ========== ==========
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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
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