UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or
15(d) of the Securities Exchange Act of 1934
For the period ended November 30, 1996
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[ ] 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 Identification No.)
incorporation or organization)
400 Oser Avenue, Hauppauge, NY 11788
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(Address of principal executive offices)
516-231-0333
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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
SHARES OUTSTANDING
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2,914,138 shares of common stock, par value $.01 per share,
as of December 31, 1996.
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Page 1
TSR, INC. AND SUBSIDIARIES
INDEX
Page
Number
------
Part I. Financial Information:
Item 1. Financial Statements:
Consolidated Condensed Balance Sheets--
November 30, 1996 and May 31, 1996................... 3
Consolidated Condensed Statements of Earnings--
For the three months and six months ended
November 30, 1996 and 1995........................... 4
Consolidated Condensed Statements of Cash Flows--
For the six months ended November 30, 1996 and 1995.. 5
Notes to Consolidated Condensed Financial Statements.... 6
Item 2. Management's Discussion and Analysis..................... 7
Part II. Other Information............................................. 10
Signatures.............................................................. 10
Page 2
Part I. Financial Information
Item 1. Financial Statements
TSR, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEET
November 30, May 31,
ASSETS 1996 1996
------------ -------
Current Assets:
Cash and cash equivalents (Note 5)................................ $ 678,169 $ 2,958,922
Marketable securities (Note 6).................................... 1,226,313 1,691,462
Accounts receivable (net of allowance for
doubtful accounts of $166,000 and $164,000).................... 9,713,107 6,022,264
Other receivables................................................. 53,458 35,315
Prepaid expenses.................................................. 54,137 34,039
Prepaid and recoverable income taxes.............................. 47,725 29,875
Deferred income taxes............................................. 93,000 118,000
----------- -----------
Total current assets............................................ 11,865,909 10,889,877
Equipment and leasehold improvements, at cost (net of accumulated
depreciation and amortization of $754,000 and $699,000)........... 287,064 220,723
Other assets........................................................ 33,045 34,091
Deferred income taxes............................................... 24,000 22,000
----------- -----------
$12,210,018 $11,166,691
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts and other payables....................................... $ 137,369 $ 159,797
Accrued and other liabilities..................................... 2,032,426 1,841,107
Income taxes payable.............................................. 75,658 130,695
Advances from customers........................................... 579,355 399,945
----------- -----------
Total current liabilities.................................... 2,824,808 2,531,544
Shareholders' Equity:
Preferred stock, $1 par value, authorized
1,000,000 shares; none issued................................... -- --
Common stock, $.01 par value, authorized 4,000,000
shares; issued 2,914,138 and 2,469,596 shares................... 29,141 24,696
Additional paid-in capital........................................ 1,562,973 1,562,973
Retained earnings................................................. 7,793,096 10,334,277
Less: 1,012,527 common shares in treasury, at cost.............. -- (3,286,799)
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9,385,210 8,635,147
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$12,210,018 $11,166,691
=========== ===========
The accompanying notes are an integral part of these
consolidated condensed financial statements.
Page 3
TSR, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF EARNINGS
FOR THE THREE AND SIX MONTHS ENDED NOVEMBER 30, 1996 AND 1995
Three Months Ended Six Months Ended
November 30, November 30,
1996 1995 1996 1995
------ ------ ------ ------
Revenues.................................. $11,792,516 $7,608,136 $21,699,337 $15,189,180
Cost of sales............................. 8,887,196 5,527,348 16,305,995 11,031,196
Selling, general and
administrative expenses................. 2,270,166 1,800,042 4,219,617 3,500,153
----------- ---------- ----------- ------------
11,157,362 7,327,390 20,525,612 14,531,349
----------- ---------- ----------- ------------
Income from operations.................... 635,154 280,746 1,173,725 657,831
Other income:
Interest and dividend income............ 36,672 61,812 89,781 130,617
Gain (loss) from sales of securities.... (5,114) -- 6,907 --
Gain (loss) from sales of assets........ -- 5,567 77,650 (1,924)
----------- ---------- ----------- ------------
Income before income taxes................ 666,712 348,125 1,348,063 786,524
Provision for income taxes................ 302,000 156,000 598,000 349,000
----------- ---------- ----------- ------------
Net income.............................. $ 364,712 $ 192,125 $ 750,063 $ 437,524
=========== ========== =========== ============
Net income per common share............... $ 0.13 $ 0.06 $ 0.26 $ 0.14
=========== ========== =========== ============
Weighted average number of
common shares outstanding............... 2,914,138 3,029,138 2,914,138 3,029,138
=========== ========== =========== ============
The accompanying notes are an integral part of these
consolidated condensed financial statements.
Page 4
TSR, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED NOVEMBER 30, 1996 AND 1995
Six Months Ended
November 30,
1996 1995
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Cash flows from operating activities:
Net income...................................................... $ 750,063 $ 437,524
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Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation and amortization................................ 76,072 85,479
Provision for losses on accounts receivable.................. -- --
Gain on sales of securities.................................. (6,907) (8,111)
Deferred income taxes........................................ 23,000 (4,000)
Loss (gain) on sales of assets........................... (77,650) 1,924
Changes in assets and liabilities:
Trade accounts receivable................................ (3,690,843) (832,447)
Other accounts receivable................................ (18,143) 43,134
Prepaid expenses......................................... (20,098) (43,323)
Prepaid and recoverable income taxes..................... (17,850) 10,001
Other assets............................................. 1,046 (10,640)
Accounts payable and accrued expenses.................... 168,891 (35,797)
Income taxes payable..................................... (55,037) (3,568)
Advances from customers.................................. 179,410 28,544
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Total adjustments............................................ (3,438,109) (768,804)
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Net cash provided by (used in) operating activities............. (2,688,046) (331,280)
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Cash flows from investing activities:
Proceeds from sales of marketable securities................. 2,937,168 3,426,751
Purchase of marketable securities............................ (2,465,112) (972,803)
Purchase of fixed assets..................................... (142,413) (134,740)
Proceeds from sales of assets................................ 77,650 14,256
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Net cash provided by investing activities....................... 407,293 2,333,464
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Cash flows from financing activities:
Cash dividends .............................................. -- (605,828)
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Net cash used in financing activities........................... -- (605,828)
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Net increase (decrease) in cash and cash equivalents................ (2,280,753) 1,396,356
Cash and cash equivalents at beginning of period.................... 2,958,922 633,656
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Cash and cash equivalents at end of period.......................... $ 678,169 $2,030,012
=========== ==========
Supplemental Disclosures:
Income tax payments (refunds), net.............................. $ 643,000 $ 347,000
=========== ==========
Interest paid................................................... $ -- $ --
=========== ==========
The accompanying notes are an integral part of these
consolidated condensed financial statements.
Page 5
TSR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
NOVEMBER 30, 1996
1. The accompanying unaudited consolidated condensed financial statements have
been prepared in accordance with generally accepted accounting principles
for interim financial information and with the instructions of Form 10- Q
of Regulation S-X. Accordingly, they do not include all the information and
notes required by generally accepted accounting principles for complete
financial statements. For further information refer to the Registrant's
consolidated financial statements and notes thereto included in the
Registrant's Annual Report on Form 10-K for the year ended May 31, 1996.
2. In the opinion of the Registrant, the accompanying unaudited consolidated
condensed financial statements contain all adjustments (consisting of only
normal recurring accruals) necessary to present fairly the consolidated
financial position, the consolidated results of operations, and
consolidated cash flows for the periods presented.
3. The Registrant is engaged primarily in the business of providing contract
computer programming services. In addition, the Registrant provides
maintenance and support for its conversion software and provides program
updating and consulting services to American Express Bank, Ltd. (AEBL).
Previously, until March 1, 1996, the Registrant provided construction
specifications databases on magnetic media, and until October 8, 1995,
provided temporary nursing services and nurses' aides to health care
facilities and home care patients. The results of operations for the six
month period ended November 30, 1996 are not necessarily indicative of the
results to be expected for the full year.
4. The consolidated condensed financial statements include the accounts of
TSR, Inc. and its subsidiaries. All significant intercompany balances and
transactions have been eliminated in consolidation.
5. Marketable securities consist primarily of United States Treasury Bills
with a maturity at acquisition in excess of 90 days. Such investments are
expected to be held to maturity and are carried at amortized cost. Included
with marketable securities are the Registrant's trading securities which
consist of those investments the Registrant considers short-term in nature.
Such investments are carried at their fair market value. At November 30,
1996, the amortized cost was approximately $21,610 above fair market value
and therefore were adjusted with a charge to earnings. A breakdown of the
investments are as follows:
Held to maturity....... $ 960,063
Trading securities..... 266,250
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$1,226,313
==========
6. On July 18, 1995, the Board of Directors of the Company declared a cash
dividend of $0.40 per share on Common Stock payable on August 28,1995 to
shareholders of record on July 31, 1995. The Company funded such dividend
from its available cash and United States Treasury Bills. This dividend,
which amounted to $605,828, did not have a material impact on the liquidity
of the Company. The Registrant has not adopted a policy of paying dividends
on a regular periodic basis.
7. On October 8, 1995, the Registrant discontinued its health care services
business by transferring the existing caseload to another licensed home
care agency, which did not result in a gain or loss to the Company. Based
on the agreement, the purchasing agency pays the Company 50% of the gross
profit generated from the transferred accounts for a period of two years,
which amounted to $84,000 included in revenue in the six month period of
fiscal 1997.
8. The Registrant's exclusive license to market construction specifications
databases expired March 1, 1996. In June 1996, the Company sold its
customer database for $76,850 which was recorded as non-operating income in
the first quarter of fiscal 1997. As of November 30, 1996, the Registrant
had an accrued liability of $99,700 which it deems adequate for ongoing
customer support costs associated with the terminated business.
9. On October 10, 1996, the Board of Directors of the Company declared a two
for one stock split on the shares of Common Stock, payable November 14,
1996 to stockholders of record as of October 28, 1996. Also, prior to the
split, the Board of Directors authorized the retirement of 1,012,527 shares
of Treasury Stock. Prior period earnings per share and weighted average
shares outstanding have been adjusted accordingly.
Page 6
Part I. Financial Information
Item 2.
TSR, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
The following discussion and analysis should be read in conjunction with the
consolidated condensed financial statements and the notes to the consolidated
condensed financial statements.
Results of Operations
- ---------------------
Three Months Ended November 30, 1996 as compared with November 30, 1995
- ------------------------------------------------------------------------
For the quarter ended November 30, 1996, revenues increased $4,184,000 or 55%
over the prior year period. In the prior year quarter construction
specifications and health care services revenues were $568,000, while such
revenues were only $45,000 in the current quarter due to the discontinuance of
these businesses in fiscal 1996. Contract computer programming services revenues
increased $4,707,000, or 67% over the prior year period, which resulted
primarily from further penetration within existing accounts by the sales
personnel, mostly with AT&T, which was recently split up into three separate
companies. The Registrant ended the quarter ended November 30, 1996 with 400
contract computer programming consultants on billing with customers, the highest
level that the Registrant has attained, as compared to 290 consultants at May
31, 1996 and 240 consultants at November 30, 1995. The number of consultants on
billing during the quarter ending February 28, 1997 has continued at
approximately the same number as at November 30, 1996. Orders for consultants
placed on billing during the quarter ended November 30, 1996 were generally for
large blocks of consultants and a significant portion of the consultants placed
by the Registrant have been concentrated at relatively few accounts. During the
quarter ended November 30, 1996, the Registrant observed a tightening in the
number of computer programmers available in the market place. To date such
tightening has not limited the Registrant's ability to obtain consultants for
placements with customers (or the costs of obtaining consultants). However, in
the future, further tightening of the available supply of consultants may have
such impacts.
Cost of sales increased $3,360,000 or 61% over the prior year quarter. This
increase resulted from additional costs of $3,517,000 from contract computer
programming, which resulted primarily from the above-mentioned revenue increase.
The additional costs included $58,000 associated with a pilot project to test
the Registrant's Year 2000 conversion software. The increase in cost of sales
was offset to an extent by increased margins in the contract computer
programming business. Gross margins for the quarter ended November 30, 1996 were
24.4% compared to 23.7% for the prior year period. The increase in gross margins
continues the trend started in the fourth quarter of fiscal 1996 and is
attributable to increased billing rates on a portion of the Registrant's lower
margin business. Cost of sales decreased by $157,000 in the construction
specifications and health care service businesses, as compared to the prior year
period, due to the termination of these businesses.
Selling, general, and administrative expenses increased $470,000, or 26% over
the prior year period. The increase in expenses in the contract computer
programming business of $700,000, were primarily due to additional commission
based compensation and the hiring of additional sales and recruiting employees,
including those hired to staff a new office in Connecticut. These increases were
made pursuant to the Registrant's plan for growth which seeks to focus on
bringing in new accounts to reduce its concentration of business risk. Included
in this increase is $60,000 of expenses related to the establishment of a Year
2000 software solutions business. The termination in fiscal 1996 of the
construction specifications and health care services businesses was responsible
for a reduction of $230,000 in expenses.
Interest and dividend income decreased by $25,000 in the quarter, primarily due
to a decrease of investable funds, which has occurred due to the increase in
accounts receivable. Losses from the sales of securities resulted from the
purchase and sale of marketable equity securities during the period, along with
adjusting their carrying value to market value at November 30, 1996.
Page 7
TSR, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION, CONTINUED
Six Months Ended November 30, 1996 as compared with November 30, 1995
- ---------------------------------------------------------------------
For the six months ended November 30, 1996, revenues increased $6,510,000 or 43%
over the prior year period. In the prior year period construction specifications
and health care services revenues were $1,314,000, while such revenues were only
$83,000 in the current period due to the discontinuance of these businesses in
fiscal 1996. Contract computer programming services revenues increased by
$7,741,000, or 56% over the prior year period, which resulted primarily from
further penetration within existing accounts by the sales personnel, mostly with
AT&T, which was recently split up into three separate companies.
Cost of sales increased $5,275,000 or 48% over the prior year period. This
increase included additional costs of $5,703,000 from contract computer
programming, which resulted primarily from the above-mentioned revenue increase.
The additional costs included $85,000 associated with the development and
testing of the Registrant's Year 2000 conversion software. The increase in cost
of sales was offset to an extent by increased margins in the contract computer
programming business. Gross margins for the six months ended November 30, 1996
were 24.6% as compared to 23.6% during the prior year period. This increase in
gross margins continues the trend started in the fourth quarter of fiscal 1996
and is attributable to increased billing rates on a portion of the Registrant's
lower margin business. Cost of sales decreased by $428,000 in the construction
specifications and health care service businesses as compared to the prior year
period, due to the termination of these businesses.
Selling, general, and administrative expenses increased $719,000, or 21% over
the prior year period. The contract computer programming business increases of
$1,222,000 were primarily due to additional commission based compensation and
the hiring of additional sales and recruiting employees, including those hired
to staff a new office in Connecticut. These increases are being made pursuant to
the Registrant's plan for growth which seeks to focus on bringing in new
accounts. Included in this increase is $61,000 of expenses related to the
establishment of a Year 2000 software solutions business. The termination in
fiscal 1996 of the construction specifications and health care services was
responsible for a reduction of $503,000 in expenses.
Interest and dividend income decreased by almost $41,000 in the period,
primarily due to a decrease of investable funds, which has occurred due to the
increase in accounts receivable and the dividend paid at the end of the first
quarter of fiscal 1996. Gains from the sales of securities resulted from the
purchase and sale of marketable equity securities during the period. The gain on
sales of assets resulted primarily from the sale of the construction
specifications customer and prospect list for approximately $77,000.
Liquidity, Capital Resources and Changes in Financial Condition
- ---------------------------------------------------------------
The Registrant's cash flow from operations has historically been sufficient to
fund the Registrant's cash requirements. Primarily as a result of the
significant growth in the Registrant's contract computer programming business,
the Registrant's accounts receivable have increased significantly ($9,713,107 at
November 30, 1996 as compared to $6,022,264 at May 31, 1996), resulting in a
reduction in the Registrant's liquid assets. If the growth which the Registrant
has experienced over the past six months in its contract computer programming
business continues or the Registrant requires substantial funding for its Year
2000 code conversion business, the Registrant may require financing in addition
to cash flow from operations and available cash and short-term securities to
meet its needs. In anticipation of possible future requirements, the Registrant
is exploring the establishment of credit facilities with lending institutions.
Net cash flow used in operations resulted primarily from the increase in
accounts receivable, which occurred primarily because of the significant revenue
increase and partly due to a longer collection cycle on a portion of the
Registrant's business. The Registrant's receivables increased to $9,713,107 at
November 30, 1996 from $6,022,264 at May 31, 1996.
Page 8
TSR, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION, CONTINUED
Liquidity, Capital Resources and Changes in Financial Condition, Continued
- --------------------------------------------------------------------------
Cash flow provided by investing activities resulted from the Registrant not
rolling over part of its United States Treasury Bill portfolio as it matured.
This resulted in funds being reclassified from marketable securities to cash and
cash equivalents.
The Registrant's capital resource commitments at November 30, 1996 consisted of
lease obligations on its branch and corporate locations. The Registrant intends
to finance these commitments from cash provided from operations.
The Registrant has recently entered the highly competitive market to correct
problems which will occur in client application systems resulting from the
upcoming change in the century on January 1, 2000. The Registrant's approach,
which it believes is innovative, utilizes recently created CATCH/21 conversion
software. CATCH/21 examines the source code of an application and with the
assistance of an analyst builds a date table that identifies all date fields
used in the application program with their formats. Another CATCH/21 program
automates the conversion process. CATCH/21 operates by embedding a subroutine in
the source code of the application which takes control of adjusting the date
information. The subroutine separately adjusts the date information using a
sliding century approach, and returns control to the application program. The
Registrant believes that its approach is more automated than approaches being
used by certain other companies and less expensive (estimated at $0.20
per-line-of-code using CATCH/21) than such approaches. Other companies are also
developing or may in the future develop Year 2000 conversion software, including
MatriDigm Corp. which recently announced development of an automated conversion
program. There can be no assurance that the Registrant will be able to compete
with any conversion software or other approaches developed by others. The
Registrant has recently completed a field test of its system on an 80,000 line
COBOL application with a Fortune 500 company. While the Registrant is satisfied
with the result of this test, it has not yet received feedback from this company
as to its satisfaction with the test results. There can be no assurance that the
test results will be satisfactory to this company or that, even if the results
are satisfactory, it will result in additional work or material revenues. The
Registrant has not yet received any orders for CATCH/21, and there can be no
assurance that the Registrant's approach will receive any significant customer
acceptance, that the Registrant will be successful in the code conversion
market, or that such business will be profitable. The Registrant expects to
operate this business through a newly-created subsidiary which will be 80% owned
by the Registrant and 20% owned by the creator of the software.
Additionally, while the Registrant believes that its approach is innovative and
has filed a patent application with respect to its method, there can be no
assurance that a patent will be issued. Furthermore, even if a patent is issued
with respect to the Registrant's method, the Registrant does not believe that
the patent would prevent others from developing conversion software that could
compete with CATCH/21. There can be no assurance that, if issued, a patent will
afford adequate protection to the Registrant or not be challenged, invalidated,
infringed, or circumvented, or that any rights granted thereunder will provide
competitive advantage to the Registrant.
Forward-Looking Statements
- --------------------------
This Form 10-Q contains certain forward-looking statements within the meaning of
the "safe harbor" provisions of the Private Securities Litigation Reform Act of
1995, including statements concerning the development of the Registrant's
CATCH/21 product, future prospects and the Registrant's future cash flow
requirements, that involve risks and uncertainties, including risks relating to
the competitive nature of the markets for contract computer programming services
and the newly developed code conversion market, concentration of the
Registrant's business with certain customers and uncertainty as to the
Registrant's ability to bring in new customers, and the risk that the CATCH/21
software will not perform satisfactorily or achieve commercial acceptance, as
detailed above and in the Registrant's Annual Report on Form 10-K for the Year
Ended May 31, 1996 and from time to time in the Registrant's filings with the
Securities and Exchange Commission. Such statements are based on management's
current expectations and are subject to a number of factors and uncertainties
which could cause actual results to differ materially from those described in
the forward-looking statements.
Page 9
TSR, INC. AND SUBSIDIARIES
Part II. Other Information
Item 6. Exhibits and Reports on Form 8K
(a). Exhibit 10.1: Subscription and Shareholders Agreement between
TSR, Inc. and William Connor dated
September 30, 1996.
(b). Exhibit 27: Financial Data Schedule
(c). Reports on Form 8K: None
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
TSR, INC.
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(Registrant)
Date: January 9, 1997 /s/ J.F. HUGHES
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J.F. Hughes, Chairman, President and Treasurer
Date: January 9, 1997 /s/ JOHN G. SHARKEY
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John G. Sharkey, Vice President, Finance
Page 10