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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, 2009
[_] 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
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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
Incorporation or organization) Identification No.)
400 Oser Avenue, Hauppauge, NY 11788
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(Address of principal executive offices)
631-231-0333
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(Registrant's telephone number)
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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 has submitted electronically and
posted on its corporate website, if any, every Interactive Data File required to
be submitted and posted pursuant to Rule 405 of Regulation S-T during the
preceding 12 months (or for such shorter period that the registrant was required
to submit and post such files). [_] Yes [_] No (Registrant not subject to
requirement)
Indicate by check mark whether the registrant is large accelerated filer, an
accelerated filer, a non-accelerated filer or a smaller reporting company. See
definition of "large accelerated filer", "accelerated filer" and "smaller
reporting company" in Rule 12b-2 of the Exchange Act. (Check one):
Large Accelerated Filer [_] Accelerated Filer [_]
Non-Accelerated filer [_] Smaller Reporting Company [X]
(Do not check if a smaller
reporting company)
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act).
[_] Yes [X] No
As of September 30, 2009, there were 4,050,488 shares of common stock, par
value $.01 per share, issued and outstanding.
Page 1
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TSR, INC. AND SUBSIDIARIES
INDEX
Page
Part I. Financial Information: Number
------
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets -
August 31, 2009 and May 31, 2009....................... 3
Condensed Consolidated Statements of Income -
For the three months ended August 31, 2009 and 2008.... 4
Condensed Consolidated Statements of Equity -
For the three months ended August 31, 2009 and 2008.... 5
Condensed Consolidated Statements of Cash Flows -
For the three months ended August 31, 2009 and 2008.... 6
Notes to Condensed Consolidated Financial Statements...... 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.............................. 11
Item 4T. Controls and Procedures................................... 16
Part II. Other Information.................................................. 16
Item 6. Exhibits.................................................. 16
Signatures.................................................................. 16
Page 2
Part I. Financial Information
Item 1. Financial Statements
TSR, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
August May
ASSETS 31, 31,
2009 2009
------------ ------------
(Unaudited) (Note 1)
Current Assets:
Cash and cash equivalents ............................................................. $ 3,858,914 $ 4,075,213
Marketable securities ................................................................. 4,513,026 4,509,346
Accounts receivable, net of allowance for doubtful accounts of $302,000 ............... 6,749,581 6,345,374
Other receivables ..................................................................... 25,393 20,580
Prepaid expenses ...................................................................... 80,524 72,429
Prepaid and recoverable income taxes .................................................. 77,773 101,791
Deferred income taxes ................................................................. 133,000 133,000
------------ ------------
Total Current Assets ........................................................... 15,438,211 15,257,733
Equipment and leasehold improvements, net of accumulated depreciation
and amortization of $420,507 and $415,963 ............................................. 16,855 19,115
Other assets ................................................................................. 49,653 49,653
Deferred income taxes ........................................................................ 60,000 61,000
------------ ------------
Total Assets ................................................................................. $ 15,564,719 $ 15,387,501
============ ============
LIABILITIES AND EQUITY
Current Liabilities:
Accounts and other payables ........................................................... $ 300,140 $ 274,284
Accrued expenses and other current liabilities ........................................ 1,336,982 1,247,355
Advances from customers ............................................................... 1,432,740 1,447,740
------------ ------------
Total Current Liabilities ...................................................... 3,069,862 2,969,379
------------ ------------
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 ..................................................................... 20,581,085 20,517,707
------------ ------------
25,715,095 25,651,717
Less: Treasury stock, 2,177,838 shares, at cost ....................................... 13,251,231 13,251,231
------------ ------------
Total TSR, Inc. Stockholders' Equity ........................................... 12,463,864 12,400,486
Noncontrolling Interest ...................................................................... 30,993 17,636
------------ ------------
Total Equity ................................................................................. 12,494,857 12,418,122
------------ ------------
Total Liabilities and Equity ................................................................. $ 15,564,719 $ 15,387,501
============ ============
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, 2009 and 2008
(UNAUDITED)
Three Months Ended
August 31, August 31,
2009 2008
------------ ------------
Revenue, net ............................................................. $ 9,092,302 $ 12,149,820
------------ ------------
Cost of sales ............................................................ 7,446,501 10,027,820
Selling, general and administrative expenses ............................. 1,526,042 1,799,646
------------ ------------
8,972,543 11,827,466
------------ ------------
Income from operations ................................................... 119,759 322,354
Other income (expense):
Interest and dividend income ......................................... 18,296 67,297
Unrealized gain (loss) on marketable securities, net ................. 3,680 (248)
------------ ------------
Income before income taxes ............................................... 141,735 389,403
Provision for income taxes ............................................... 59,000 165,000
------------ ------------
Net income ............................................................... 82,735 224,403
Less: Net income attributable to noncontrolling interest ................. (19,357) (9,353)
------------ ------------
Net income attributable to TSR, Inc. ..................................... $ 63,378 $ 215,050
============ ============
Basic and diluted net income per TSR, Inc. common
share ................................................................... $ 0.02 $ 0.05
============ ============
Weighted average number of basic and diluted common shares outstanding ... 4,050,488 4,564,787
============ ============
The accompanying notes are an integral part of these condensed
consolidated financial statements.
Page 4
TSR, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EQUITY
For The Three Months Ended August 31, 2009 and 2008
(UNAUDITED)
Shares of Additional Non-
common Common paid-in Retained Treasury controlling Total
stock stock capital earnings stock Interest equity
------------ ------------ ------------ ------------ ------------ ------------ ------------
Balance at May 31, 2008 ..... 6,228,326 $ 62,283 $ 5,071,727 $ 20,663,925 $(12,031,301) $ 53,533 $ 13,820,167
Net income attributable to
noncontrolling interest ..... -- -- -- -- -- 9,353 9,353
Distribution to
noncontrolling interest ..... -- -- -- -- -- (7,000) (7,000)
Purchases of treasury stock..
-- -- -- -- (104,305) -- (104,305)
Dividends declared .......... -- -- -- (365,441) -- -- (365,441)
Net income attributable to
TSR, Inc. ................... -- -- -- 215,050 -- -- 215,050
------------ ------------ ------------ ------------ ------------ ------------ ------------
Balance at Aug. 31, 2008 .... 6,228,326 $ 62,283 $ 5,071,727 $ 20,513,534 $(12,135,606) $ 55,886 $ 13,567,824
============ ============ ============ ============ ============ ============ ============
Balance at May 31, 2009 ..... 6,228,326 $ 62,283 $ 5,071,727 $ 20,517,707 $(13,251,231) $ 17,636 $ 12,418,122
Net income attributable to
noncontrolling interest ..... -- -- -- -- -- 19,357 19,357
Distribution to
noncontrolling interest ..... -- -- -- -- -- (6,000) (6,000)
Net income attributable to
TSR, Inc. ................... -- -- -- 63,378 -- -- 63,378
------------ ------------ ------------ ------------ ------------ ------------ ------------
Balance at Aug. 31, 2009 .... 6,228,326 $ 62,283 $ 5,071,727 $ 20,581,085 $(13,251,231) $ 30,993 $ 12,494,857
============ ============ ============ ============ ============ ============ ============
The accompanying notes are an integral part of these condensed
consolidated financial statements.
Page 5
TSR, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For The Three Months Ended August 31, 2009 and 2008
(UNAUDITED)
Three Months Ended
August 31, August 31,
2009 2008
------------ ------------
Cash flows from operating activities:
Net income ........................................................................... $ 82,735 $ 224,403
Adjustments to reconcile net income to net cash used in operating activities:
Depreciation and amortization .................................................... 4,544 4,732
Unrealized (gain) loss on marketable securities, net ............................. (3,680) 248
Deferred income taxes ............................................................ 1,000 6,000
Changes in operating assets and liabilities:
Accounts receivable .............................................................. (404,207) (719,073)
Other receivables ................................................................ (4,813) (10,403)
Prepaid expenses ................................................................. (8,095) (3,886)
Prepaid and recoverable income taxes ............................................. 24,018 13,967
Accounts and other payables and accrued expenses and other current liabilities ... 115,483 (271,477)
Income taxes payable ............................................................. -- 103,722
Advances from customers .......................................................... (15,000) (62,917)
------------ ------------
Net cash used in operating activities ................................................... (208,015) (714,684)
------------ ------------
Cash flows from investing activities:
Proceeds from maturities of marketable securities ................................... 250,000 2,466,482
Purchases of marketable securities .................................................. (250,000) (2,474,350)
Purchases of equipment and leasehold improvements ................................... (2,284) (7,067)
------------ ------------
Net cash used in investing activities ................................................... (2,284) (14,935)
------------ ------------
Cash flows from financing activities:
Purchases of treasury stock ......................................................... -- (104,305)
Distribution to noncontrolling interest ............................................. (6,000) (7,000)
------------ ------------
Net cash used in financing activities ................................................... (6,000) (111,305)
------------ ------------
Net decrease in cash and cash equivalents ............................................... (216,299) (840,924)
Cash and cash equivalents at beginning of period ........................................ 4,075,213 1,588,443
------------ ------------
Cash and cash equivalents at end of period .............................................. $ 3,858,914 $ 747,519
============ ============
Supplemental disclosures of cash flow data:
Income taxes paid .................................................................. $ 35,000 $ 41,000
============ ============
The accompanying notes are an integral part of these condensed
consolidated financial statements.
Page 6
TSR, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
August 31, 2009
(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, 2009 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, 2010. The balance sheet at
May 31, 2009 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, 2009.
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, 2009 and May 31, 2009:
August 31, May 31,
2009 2009
----------- -----------
Cash in banks................. $ 2,182,117 $ 2,008,349
Money market funds............ 1,676,797 2,066,864
----------- -----------
$ 3,858,914 $ 4,075,213
=========== ===========
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
exists, the services have been rendered, the price is fixed or
determinable, and collectability is reasonably assured. These
conditions occur when a customer agreement is effected and the
consultant performs the authorized services. 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 7
TSR, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, Continued
August 31, 2009
(Unaudited)
5. Marketable Securities
---------------------
In fiscal 2009, the Company adopted the provisions of Statement of
Financial Accounting Standards ("SFAS") No. 157 "Fair Value
Measurements" ("SFAS No. 157"). Using the provisions within SFAS No.
157, the Company has characterized its investments in marketable
securities, based on the priority of the inputs used to value the
investments, into a three-level fair value hierarchy. The fair value
hierarchy gives the highest priority to quoted prices in active
markets for identical assets or liabilities (Level 1), and lowest
priority to unobservable inputs (Level 3). If the inputs used to
measure the investments fall within different levels of the hierarchy,
the categorization is based on the lowest level input that is
significant to the fair value measurement of the instrument.
Investments recorded in the accompanying consolidated balance sheets
are categorized based on the inputs to valuation techniques as
follows:
Level 1- These are investments where values are based on
unadjusted quoted prices for identical assets in an active market
the Company has the ability to access.
Level 2- These are investments where values are based on quoted
market prices that are not active or model derived valuations in
which all significant inputs are observable in active markets.
Level 3- These are investments where values are derived from
techniques in which one or more significant inputs are
unobservable.
The following are the major categories of assets measured at fair
value on a recurring basis during the fiscal year ended May 31, 2010
using quoted prices in active markets for identical assets (Level 1),
significant other observable inputs (Level 2) and significant
unobservable inputs (Level 3):
August 31, 2009 Level 1 Level 2 Level 3 Total
--------------- ----------- ----------- ----------- -----------
US Treasury securities $ 2,497,133 $ -- $ -- $ 2,497,133
Certificates of deposit -- 1,999,637 -- 1,999,637
Equity securities 16,256 -- -- 16,256
----------- ----------- ----------- -----------
$ 2,513,389 $ 1,999,637 $ -- $ 4,513,026
=========== =========== =========== ===========
Based upon the Company's intent and ability to hold its US Treasury
securities to maturity (which maturities range up to twenty-four
months at purchase), such securities have been classified as
held-to-maturity and are carried at amortized cost, which approximates
market value. The Company's equity securities are classified as
trading securities, which are carried at fair value, as determined by
quoted market prices, which is Level 1 input, as established by the
fair value hierarchy under SFAS No. 157. The related unrealized gains
and losses are included in earnings. The Company's marketable
securities at August 31, 2009 and May 31, 2009 are summarized as
follows:
Page 8
TSR, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, Continued
August 31, 2009
(Unaudited)
Gross Gross
August 31, 2009 Unrealized Unrealized
--------------- Amortized Holding Holding Recorded
Current Cost Gains Losses Value
------- ---------- ---------- ---------- ----------
United States Treasury Securities...... $2,497,133 $ -- $ -- $2,497,133
Certificates of Deposit................ 1,999,637 -- -- 1,999,637
Equity Securities...................... 16,866 -- 610 16,256
---------- ---------- ---------- ----------
$4,513,636 $ -- $ 610 $4,513,026
========== ========== ========== ==========
Gross Gross
May 31, 2009 Unrealized Unrealized
------------ Amortized Holding Holding Recorded
Current Cost Gains Losses Value
------- ---------- ---------- ---------- ----------
United States Treasury Securities...... $2,497,133 $ -- $ -- $2,497,133
Certificates of Deposit................ 1,999,637 -- -- 1,999,637
Equity Securities...................... 16,866 -- 4,290 12,576
---------- ---------- ---------- ----------
$4,513,636 $ -- $ 4,290 $4,509,346
========== ========== ========== ==========
The Company's investments in marketable securities consist primarily
of investments in US Treasury securities and certificates of deposit.
Market values were determined for each individual security in the
investment portfolio. When evaluating the investments for other-than
-temporary impairment, the Company reviews factors such as length of
time and extent to which fair value has been below cost basis, the
financial condition of the issuer, and the Company's ability and
intent to hold the investment for a period of time, which may be
sufficient for anticipated recovery in market values.
6. Stockholders' Equity
--------------------
During the three months ended August 31, 2008, the Company purchased a
total of 37,900 shares of its common stock for $104,305. These shares
were purchased in various transactions on the open market under a
previously announced repurchase plan of 300,000 shares. The Company
has not made any purchases under its repurchase plan since September
2008.
7. Other Matters
-------------
From time to time, the Company is party to various lawsuits, some
involving material amounts. Management is not aware of any lawsuits
that would have a material adverse impact on the consolidated
financial position of the Company.
Page 9
TSR, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, Continued
August 31, 2009
(Unaudited)
8. Recent Accounting Pronouncements
--------------------------------
In December 2007, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards ("SFAS") No. 141
(R), "Business Combinations" ("SFAS No.141(R)"), SFAS No.141 (R)
requires an acquirer to measure the identifiable assets acquired, the
liabilities assumed and any noncontrolling interest in the acquiree at
their fair values on the acquisition date, with goodwill being the
excess value over the net identifiable assets acquired. SFAS No. 141
(R) is effective for financial statements issued for fiscal years
beginning after December 15, 2008. The adoption of SFAS No.141 (R) did
not have a material impact on the Company's condensed consolidated
financial statements.
In December 2007, the FASB issued SFAS No. 160,"Noncontrolling
Interests in Consolidated Financial Statements - an amendment of
Accounting Research Bulletin No. 51" ("SFAS No 160"). SFAS No. 160
addresses the accounting and reporting standards for ownership
interests in subsidiaries held by parties other than the parent, the
amount of consolidated net income or loss attributable to the parent
and to the noncontrolling interest, changes in a parent's ownership
interest, and the valuation of retained noncontrolling equity
investments when a subsidiary is deconsolidated. SFAS No. 160 also
establishes disclosure requirements that clearly identify and
distinguish between the interests of the parent and the interests of
the noncontrolling owners. SFAS No. 160 is effective for fiscal years
beginning after December 15, 2008. The Company adopted the provisions
of SFAS No. 160 in the first quarter of fiscal 2010. As a result of
the adoption, the Company has reported noncontrolling interests as a
component of equity in the condensed consolidated balance sheets and
the net income attributable to noncontrolling interests has been
separately identified in the unaudited condensed consolidated
statements of income. The prior periods presented have also been
retrospectively restated to conform to the current classification
required by SFAS No. 160. Other than the change in presentation of
noncontrolling interests, the adoption of SFAS No. 160 had no impact
on the condensed consolidated financial statements.
In April 2009, the FASB issued FSP No.FAS 107-1 and APB 28-1 which
amended both SFAS No. 107 and APB Opinion No. 28 to require that
disclosures concerning the fair value of financial instruments be
presented in interim as well as in annual financial statements. In
addition, the FASB issued FSP No.FAS 157-4 which amended SFAS No. 157
to provide additional guidance for determining the fair value of a
financial asset or financial liability when the volume and level of
activity for such asset or liability have decreased significantly. FSP
No.FAS 157-4 also provided guidance for determining whether a
transaction is an orderly one. The FASB also issued FSP No. FAS 115-2
and FAS 124-2 which revised and expanded the guidance concerning the
recognition and measurement of other-than-temporary impairments of
debt securities classified as available-for-sale or held-to-maturity.
In addition, it required enhanced disclosures concerning such
impairment for both debt and equity securities. The requirements of
the FSPs are effective for interim reporting periods ending after June
15, 2009. Disclosures for earlier periods presented for comparative
purposes at initial adoption are not required. In periods after
initial adoption, comparative disclosures are required only for
periods ending after initial adoption. The Company has adopted the
FSPs for the first quarter of fiscal 2010.
In May 2009, the FASB issued SFAS No. 165, "Subsequent Events" ("SFAS
No. 165"), which provides guidance to establish general standards of
accounting for and disclosure of events that occur after the balance
sheet date but before financial statements are issued or are available
to be issued. SFAS No. 165 requires entities to disclose the date
through which subsequent events were evaluated as well as the
rationale for why the date was selected. SFAS No. 165 is effective for
interim and annual periods ending after June 15, 2009 and,
accordingly, the Company adopted SFAS No. 165 during the first quarter
of fiscal 2010. SFAS No. 165 requires public entities evaluate
subsequent events through the date that the financial statements are
issued. The Company has evaluated subsequent events through the time
of filing these condensed consolidated financial statements with the
Securities and Exchange Commission ("SEC") on October 9, 2009.
In June 2009, the FASB issued SFAS No. 168, "The FASB Accounting
Standards Codification(TM) and the Hierarchy of Generally Accepted
Accounting Principles--a replacement of FASB Statement No. 162". The
FASB Accounting Standards Codification (the "Codification") will
become the source of authoritative accounting principles generally
accepted in the United States of America ("U.S. GAAP"). The
Codification, which changes the referencing of financial standards, is
effective for interim or annual financial periods ending after
September 15, 2009. The Codification is not intended to change or
alter existing U.S. GAAP.
Page 10
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: the impact of current
adverse conditions in the credit markets and current adverse economic conditions
on the Company's business; 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 consultant 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, 2009 compared with three months ended August 31,
------------------------------------------------------------------------------
2008
----
(Dollar amounts in thousands)
Three Months Ended
August 31, August 31,
2009 2008
% of % of
Amount Revenue Amount Revenue
-------- -------- -------- --------
Revenue, net................................... $ 9,092 100.0% $ 12,150 100.0%
Cost of sales.................................. 7,446 81.9% 10,028 82.5%
-------- -------- -------- --------
Gross profit................................... 1,646 18.1% 2,122 17.5%
Selling, general and administrative expenses... 1,526 16.8% 1,800 14.8%
-------- -------- -------- --------
Income from operations......................... 120 1.3% 322 2.7%
Other income, net.............................. 22 0.2% 67 0.5%
-------- -------- -------- --------
Income before income taxes..................... 142 1.5% 389 3.2%
Provision for income taxes..................... 59 0.6% 165 1.4%
-------- -------- -------- --------
Net income..................................... $ 83 0.9% $ 224 1.8%
======== ======== ======== ========
Page 11
TSR, INC. AND SUBSIDIARIES
Revenue
-------
Revenue consists primarily of revenue from computer programming consulting
services. Revenue for the quarter ended August 31, 2009 decreased $3,058,000 or
25.2% from the prior year quarter. The average number of consultants on billing
with customers decreased from approximately 299 for the quarter ended August 31,
2008 to 215 for the quarter ended August 31, 2009. The continuing impact of the
current economic environment has significantly decreased the number of
consultants on billing with customers and also decreased the opportunities to
place new consultants on billing with customers. The revenue decrease is also
the result of the continued reduction in consultants placed with AT&T and lower
billing rates caused by discounts and other rate reductions instituted by
customers.
As a result of the merger of AT&T with SBC Communications, Inc., 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 68 at August 31, 2007 to 35 at August 31, 2008 and to 4 at August
31, 2009. The Company expects that these changes will continue to impact the
Company's business relationship with AT&T, resulting in few opportunities to
place new consultants at AT&T.
The Company's revenue from programmers on billing continue to be affected by
discounts, such as prompt payment and volume discounts, required by major
customers as a condition to remaining on their approved vendor lists and the
reduction in the number of vendors on the approval vendor lists to increase
pricing competition among the remaining vendors. In addition, most of the
Company's major customers have retained third parties to provide vendor
management services and centralize the consultant hiring process. Under this
system, the third party retains the Company to provide contract computer
programming services, the Company bills the third party and the third party
bills the ultimate customer. This process has weakened the relationships the
Company has built with its client contacts, the project managers, who the
Company would normally work directly with to place consultants. Instead, the
Company is required to interface with the vendor management provider, making it
more difficult to maintain its relationships with its customers and preserve and
expand its business. These changes have also reduced the Company's profit
margins because the vendor management company is retained for the purpose of
keeping costs down for the end client and receives a processing fee which is
deducted from the payment to the Company. Revenue has also been impacted by the
increased use of offshore development companies, particularly in India, over the
past few years to provide technology related work and projects. The Company is
unable to predict the long-term effects of these changes.
As a result of the current economic downturn and, specifically, the impact of
the adverse conditions in the credit markets on the financial services industry,
the Company has experienced a decrease in the number of consultants on billing
with customers as a result of decreased IT spending. These economic conditions
have also reduced the opportunities to place new consultants on billing with
customers. The Company expects that these conditions will continue to affect the
number of consultants on billing with customers and the Company's revenue.
The Company provided services to Lehman Brothers Holdings, Inc. ("LBHI") through
its contract with Beeline.com, Inc. ("Beeline"), a vendor management company.
LBHI filed a petition under Chapter 11 of the U.S. Bankruptcy Code on September
15, 2008. The Company has received payment in full for amounts due for services
rendered through the date of the bankruptcy filing. Following the bankruptcy
filing, the consultants on billing with LBHI decreased from 13 as of August 31,
2008 to 2 as of August 31, 2009. LBHI and its subsidiaries constituted
approximately 6% of the Company's revenue in fiscal 2008 and 4% in fiscal 2009.
The Company has agreed in principle to settle a preference claim asserted by the
trustee in bankruptcy of a vendor management company relating to payments
received by the Company during the 90 days prior to the bankruptcy filing for
$100,000. The Company had provided for this contingency in prior periods as part
of its allowance for doubtful accounts and, as a result, the charge will be
applied to this reserve.
Page 12
TSR, INC. AND SUBSIDIARIES
Cost of Sales
-------------
Cost of sales for the quarter ended August 31, 2009, decreased $2,582,000 or
25.7% to $7,446,000 from $10,028,000 in the prior year period. The decrease in
cost of sales resulted primarily from the decrease in the number of consultants
on billing with clients. Cost of sales as a percentage of revenue decreased from
82.5% in the quarter ended August 31, 2008 to 81.9% in the quarter ended August
31, 2009. The decrease in cost of sales as a percentage of revenue was primarily
attributable to the significant reduction of consultants on billing with AT&T,
which has historically been the Company's lowest margin (highest cost of sales
as a percentage of revenue) business.
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 $274,000 or 15.2%
from $1,800,000 in the quarter ended August 31, 2008 to $1,526,000 in the
quarter ended August 31, 2009. This decrease was primarily attributable to a
reduction in the number of sales and recruiting personnel and lower commissions
paid to the remaining sales and recruiting personnel due to lower revenue.
Technical recruiters and account executives have been terminated in order to
lessen the impact of the Company's reduced level of business activity. However,
while selling, general and administrative expenses decreased, these expenses as
a percentage of revenue increased from 14.8% in the quarter ended August 31,
2008 to 16.8% in the quarter ended August 31, 2009 as a result of lower sales.
Income from Operations
----------------------
Income from operations decreased $202,000 or 62.7% from $322,000 in the quarter
ended August 31, 2008 to $120,000 in the quarter ended August 31, 2009. The
decrease was primarily attributable to the reduced revenue from the decrease in
the number of consultants on billing with customers.
Other Income
------------
Other income for the quarter ended August 31, 2009 resulted primarily from
interest and dividend income of $18,000, which decreased by $49,000 from the
level realized in the quarter ended August 31, 2008 due to lower interest rates
earned on the Company's US Treasury securities, certificates of deposit and
money market accounts as well as lower average investable assets.
Income Taxes
------------
The effective income tax rate decreased from 42.4% in the quarter ended August
31, 2008 to 41.5% in the quarter ended August 31, 2009. The net income
attributable to the noncontrolling interest increased, thereby reducing the
effective tax rate.
Net Income
----------
Net income decreased $141,000 or 62.9% in from the quarter ended August 31, 2008
to the quarter ended August 31, 2009. Net income decreased primarily due to
lower revenue from a decreased number of consultants on billing with clients and
lower interest income earned on the Company's US Treasury securities and money
market accounts.
Page 13
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 at least the next 12
months.
At August 31, 2009, the Company had working capital of $12,368,000 including
cash and cash equivalents of $3,859,000 as compared to working capital of
$12,288,000 including cash and cash equivalents of $4,075,000 at May 31, 2009.
The Company's working capital also included $4,513,000 and $4,509,000 of
marketable securities with maturities of less than one year at August 31, 2009
and May 31, 2009, respectively.
For the three months ended August 31, 2009, net cash used in operating
activities was $208,000 compared to cash used of $715,000 for the three months
ended August 31, 2008, or an increase of $507,000. The cash used in operating
activities primarily resulted from an increase in accounts receivable of
$404,000 offset by net income and an increase in accounts and other payables and
accrued expenses and other current liabilities of $115,000. The increase in
accounts receivable resulted primarily from several accounts extending their
payment terms from sixty to ninety days. The cash used by operating activities
in the three months ended August 31, 2008, resulted primarily from an increase
in accounts receivable.
Net cash used in investing activities of $2,000 for the three months ended
August 31, 2009 primarily from the purchase of equipment.
Net cash used in financing activities resulted from distributions to the
noncontrolling interest of $6,000 in the quarter ended August 31, 2009. In the
quarter ended August 31, 2008 net cash used in financing activities resulted
from purchases of treasury stock of $104,000 in open market transactions. The
Board of Directors of the Company approved a plan in December 2007 authorizing
the repurchase of shares of Common Stock and approximately 239,000 shares remain
available for purchase under this previously announced plan. The Company has not
made any purchases under this plan since September 2008. The Company does not
intend to make further purchases under this plan unless there is a change in the
market for the Company's common stock. The Board of Directors determined to
suspend the payment of further dividends effective after the dividend paid on
February 9, 2009 for the second quarter of fiscal 2009. The Board of Directors
may reevaluate the Company's dividend policy once the economic conditions
stabilize.
The Company's capital resource commitments at August 31, 2009 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, 2009. The
Company has available a revolving line of credit of $5,000,000 with a major
money center bank through October 31, 2009. As of August 31, 2009, 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.................... $1,123,000 $ 366,000 $ 600,000 $ 157,000 $ --
Employment Agreements............... 631,000 331,000 300,000 -- --
---------- ---------- ---------- ---------- ----------
Totals.............................. $1,754,000 $ 697,000 $ 900,000 $ 157,000 $ --
========== ========== ========== ========== ==========
Page 14
TSR, INC. AND SUBSIDIARIES
Recent Accounting Pronouncements
--------------------------------
In December 2007, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 141 (R), "Business
Combinations" ("SFAS No.141(R)"). SFAS No.141 (R) requires an acquirer to
measure the identifiable assets acquired, the liabilities assumed and any
noncontrolling interest in the acquiree at their fair values on the acquisition
date, with goodwill being the excess value over the net identifiable assets
acquired. SFAS No. 141 (R) is effective for financial statements issued for
fiscal years beginning after December 15, 2008. The adoption of SFAS No.141 (R)
did not have a material impact on the Company's condensed consolidated financial
statements.
In December 2007, the FASB issued SFAS No. 160,"Noncontrolling Interests in
Consolidated Financial Statements - an amendment of Accounting Research Bulletin
No. 51" ("SFAS No 160"). SFAS No. 160 addresses the accounting and reporting
standards for ownership interests in subsidiaries held by parties other than the
parent, the amount of consolidated net income or loss attributable to the parent
and to the noncontrolling interest, changes in a parent's ownership interest,
and the valuation of retained noncontrolling equity investments when a
subsidiary is deconsolidated. SFAS No. 160 also establishes disclosure
requirements that clearly identify and distinguish between the interests of the
parent and the interests of the noncontrolling owners. SFAS No. 160 is effective
for fiscal years beginning after December 15, 2008. The Company adopted the
provisions of SFAS No. 160 in the first quarter of fiscal 2010. As a result of
the adoption, the Company has reported noncontrolling interests as a component
of equity in the condensed consolidated balance sheets and the net income
attributable to noncontrolling interests has been separately identified in the
unaudited condensed consolidated statements of income. The prior periods
presented have also been retrospectively restated to conform to the current
classification required by SFAS No. 160. Other than the change in presentation
of noncontrolling interests, the adoption of SFAS No. 160 had no impact on the
condensed consolidated financial statements.
In April 2009, the FASB issued FSP No.FAS 107-1 and APB 28-1 which amended both
SFAS No. 107 and APB Opinion No. 28 to require that disclosures concerning the
fair value of financial instruments be presented in interim as well as in annual
financial statements. In addition, the FASB issued FSP No.FAS 157-4 which
amended SFAS No. 157 to provide additional guidance for determining the fair
value of a financial asset or financial liability when the volume and level of
activity for such asset or liability have decreased significantly. FSP No.FAS
157-4 also provided guidance for determining whether a transaction is an orderly
one. The FASB also issued FSP No. FAS 115-2 and FAS 124-2 which revised and
expanded the guidance concerning the recognition and measurement of
other-than-temporary impairments of debt securities classified as
available-for-sale or held-to-maturity. In addition, it required enhanced
disclosures concerning such impairment for both debt and equity securities. The
requirements of the FSPs are effective for interim reporting periods ending
after June 15, 2009. Disclosures for earlier periods presented for comparative
purposes at initial adoption are not required. In periods after initial
adoption, comparative disclosures are required only for periods ending after
initial adoption. The Company has adopted the FSPs for the first quarter of
fiscal 2010.
In May 2009, the FASB issued SFAS No. 165, "Subsequent Events" ("SFAS No. 165"),
which provides guidance to establish general standards of accounting for and
disclosure of events that occur after the balance sheet date but before
financial statements are issued or are available to be issued. SFAS No. 165
requires entities to disclose the date through which subsequent events were
evaluated as well as the rationale for why the date was selected. SFAS No. 165
is effective for interim and annual periods ending after June 15, 2009 and,
accordingly, the Company adopted SFAS No. 165 during the first quarter of fiscal
2010. SFAS No. 165 requires public entities evaluate subsequent events through
the date that the financial statements are issued. The Company has evaluated
subsequent events through the time of filing these condensed consolidated
financial statements with the Securities and Exchange Commission ("SEC") on
October 9, 2009.
In June 2009, the FASB issued SFAS No. 168, "The FASB Accounting Standards
Codification(TM) and the Hierarchy of Generally Accepted Accounting
Principles--a replacement of FASB Statement No. 162". The FASB Accounting
Standards Codification (the "Codification") will become the source of
authoritative accounting principles generally accepted in the United States of
America ("U.S. GAAP"). The Codification, which changes the referencing of
financial standards, is effective for interim or annual financial periods ending
after September 15, 2009. The Codification is not intended to change or alter
existing U.S. GAAP.
Page 15
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, 2009
Annual Report on Form10-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, 2009.
Item 4T. 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 Rules 13a-15(e) and 15d-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 Rules
13a-15(f) and 15d-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
(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 thereto duly authorized.
TSR Inc.
------------
(Registrant)
Date: October 9, 2009 /s/ J.F. Hughes
-------------------------------------------
J.F. Hughes, Chairman and President
Date: October 9, 2009 /s/ John G. Sharkey
-------------------------------------------
John G. Sharkey, Vice President Finance and
Chief Financial Officer
Page 16