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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
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FORM 10-Q
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[X] Quarterly Report Pursuant to Section 13 or
15(d) of the Securities Exchange Act of 1934
For the period ended February 28, 1997
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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:
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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 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
2,914,138 shares of common stock, par value $.01 per share, as of
March 31, 1997.
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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 --
February 28, 1997 and May 31, 1996.................................... 3
Consolidated Condensed Statements of Earnings --
For the three months and nine months ended February 28, 1997 and 1996. 4
Consolidated Condensed Statements of Cash Flows --
For the nine months ended February 28, 1997 and 1996.................. 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
February 28, May 31,
1997 1996
------------ ------------
ASSETS
Current Assets:
Cash and cash equivalents ..................................... $ 1,765,928 $ 2,958,922
Marketable securities (Note 5).................................. 958,478 1,691,462
Accounts receivable (net of allowance for
doubtful accounts of $166,000 and $164,000).................. 10,214,966 6,022,264
Other receivables............................................... 94,718 35,315
Prepaid expenses................................................ 24,400 34,039
Prepaid and recoverable income taxes............................ 14,238 29,875
Deferred income taxes........................................... 81,000 118,000
----------- -----------
Total current assets......................................... 13,153,728 10,889,877
Equipment and leasehold improvements, at cost (net of accumulated
depreciation and amortization of $795,000 and $699,000)......... 317,391 220,723
Other assets........................................................ 33,895 34,091
Deferred income taxes............................................... 24,000 22,000
----------- -----------
$13,529,014 $11,166,691
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts and other payables..................................... $ 180,804 $ 159,797
Accrued and other liabilities................................... 2,670,087 1,841,107
Income taxes payable............................................ 91,348 130,695
Advances from customers......................................... 747,853 399,945
---------- ----------
Total current liabilities.................................... 3,690,092 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............................................... 8,246,808 10,334,277
Less: 1,012,527 common shares in treasury, at cost........... -- (3,286,799)
----------- -----------
9,838,922 8,635,147
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$13,529,014 $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 NINE MONTHS ENDED FEBRUARY 28, 1997 AND 1996
Three Months Ended Nine Months Ended
February 28, February 28,
1997 1996 1997 1996
------------ ------------ ------------ ------------
Revenues ................................ $ 13,046,530 $ 7,988,438 $ 34,745,867 $ 23,177,618
Cost of sales ........................... 10,016,593 5,884,589 26,322,588 16,915,219
Selling, general and
administrative expenses .............. 2.300,731 1,797,778 6,520,348 5,298,497
------------ ------------ ------------ ------------
12,317,324 7,682,367 32,842,936 22,213,716
------------ ------------ ------------ ------------
Income from operations .................. 729,206 306,071 1,902,931 963,902
Other income:
Interest and dividend income ........ 32,062 53,059 121,843 175,565
Gain (loss) from sales of securities 50,444 4,131 57,351 12,242
Gain (loss) from sales of assets .... -- 1,500 77,650 (424)
------------ ------------ ------------ ------------
Income before income taxes .............. 811,712 364,761 2,159,775 1,151,285
Provision for income taxes .............. 358,000 164,000 956,000 513,000
------------ ------------ ------------ ------------
Net income.......................... $ 453,712 $ 200,761 $ 1,203,775 $ 638,285
============ ============ ============ ============
Net income per common share............. $ 0.16 $ 0.07 $ 0.41 $ 0.21
============ ============ ============ ============
Weighted average number of
common shares outstanding ............ 2,914,138 2,984,472 2,914,138 3,014,250
============ ============ ============ ============
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 NINE MONTHS ENDED FEBRUARY 28, 1997 AND 1996
Nine Months Ended
February 28,
1997 1996
----------- -----------
Cash flows from operating activities:
Net income ...................................................... $ 1,203,775 $ 638,285
----------- -----------
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation and amortization ................................ 116,377 118,299
Provision for losses on accounts receivable .................. -- 10,000
Gain on sales of securities .................................. (57,351) (12,242)
Deferred income taxes ........................................ 35,000 (7,000)
Loss (gain) on sales of assets ............................... (77,650) 424
Changes in assets and liabilities:
Trade accounts receivable ................................ (4,192,702) (976,277)
Other accounts receivable ................................ (59,403) 44,940
Prepaid expenses ......................................... 9,639 (15,762)
Prepaid and recoverable income taxes ..................... 15,637 25,106
Other assets ............................................. 196 (9,645)
Accounts payable and accrued expenses .................... 849,987 49,531
Income taxes payable ..................................... (39,347) (8,134)
Advances from customers .................................. 347,908 129,703
----------- -----------
Total adjustments ............................................ (3,051,709) (651,057)
----------- -----------
Net cash provided by (used in) operating activities ............. (1,847,934) (12,772)
----------- -----------
Cash flows from investing activities:
Proceeds from sales of marketable securities ................. 3,655,638 4,633,298
Purchase of marketable securities ............................ (2,865,303) (2,640,233)
Purchase of fixed assets ..................................... (213,045) (139,351)
Proceeds from sales of assets ................................ 77,650 15,756
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Net cash provided by investing activities ....................... 654,940 1,869,470
----------- -----------
Cash flows from financing activities:
Purchase of treasury stocks .................................. -- (246,475)
Cash dividends ............................................... -- (605,828)
----------- -----------
Net cash used in financing activities ........................... -- (852,303)
----------- -----------
Net increase (decrease) in cash and cash equivalents ................ (1,192,994) 1,004,395
Cash and cash equivalents at beginning of period .................... 2,958,922 633,656
----------- -----------
Cash and cash equivalents at end of period .......................... $ 1,765,928 $ 1,638,051
=========== ===========
Supplemental Disclosures:
Income tax payments (refunds), net .............................. $ 945,000 $ 503,000
=========== ===========
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
FEBRUARY 28, 1997
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 and Year 2000 software solutions. 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
nine month period ended February 28, 1997 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 February 28,
1997, the amortized cost was approximately $ 12,000 above fair market value
and therefore were adjusted with a credit to earnings. A breakdown of the
investments are as follows:
Held to maturity....... $ 473,105
Trading securities..... 485,373
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$ 958,478
==========
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 $ 103,000 included in revenue in the nine 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 February 28, 1997, the Registrant had an
accrued liability of $ 64,000 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 February 28, 1997 as compared with February 28, 1996
For the quarter ended February 28, 1997, revenues increased $5,058,000 or 63%
over the prior year period. In the prior year quarter construction
specifications and health care services revenues were $468,000, while such
revenues were only $20,000 in the current quarter due to the discontinuance of
these businesses in fiscal 1996. In the current quarter the Registrant recorded
its first revenue from its Year 2000 software solutions business which amounted
to $ 45,000. Contract computer programming services revenues increased
$5,462,000, or 73% over the prior year period, which resulted primarily from
further penetration within existing accounts by the sales personnel, mostly with
the three companies which resulted from the split up of AT&T. The Registrant
ended the quarter ended February 28, 1997 with 425 contract computer programming
consultants on billing with customers, the highest level that the Registrant has
attained, as compared with 400 consultants at November 30, 1996 and 250
consultants at February 28, 1997. The increase in consultants on billing
occurred primarily during the first and second quarters of fiscal 1997. Orders
for consultants placed on billing during those quarters 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 February 28, 1997, the Registrant observed a continuing trend of 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 $4,132,000 or 70% over the prior year quarter. This
increase resulted from additional costs of $4,097,000 from contract computer
programming, which resulted primarily from the above-mentioned revenue increase.
The additional costs included $117,000 associated with pilot projects to test
the Registrant's Year 2000 conversion software. Year 2000 development and
production costs are expected to rise by an estimated $200,000 in the fourth
quarter as planned as additional test projects are undertaken. 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 February 28,
1997 were 23.7% compared to 22.8% 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 $82,000 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 $503,000, or 28% over
the prior year period. The increase in expenses in the contract computer
programming business of $679,000, 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. This new office also
added to facility costs. 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 $40,000 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 $216,000 in expenses.
Interest and dividend income decreased by $21,000 in the quarter, primarily due
to a decrease of investable funds, which has occurred due to the increase in
accounts receivable. Gains 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 February 28, 1997.
Page 7
TSR, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION, CONTINUED
Nine Months Ended February 28, 1997 as compared with February 28, 1996
For the nine months ended February 28, 1997, revenues increased $11,568,000 or
50% over the prior year period. In the prior year period construction
specifications and health care services revenues were $1,783,000, while such
revenues were only $103,000 in the current period due to the discontinuance of
these businesses in fiscal 1996. Contract computer programming services revenues
increased by $13,203,000, or 62% over the prior year period, which resulted
primarily from further penetration within existing accounts by the sales
personnel, mostly with the three companies which resulted from the split up of
AT&T. In the current nine month period the Registrant recorded its first
revenues amounting to $45,000 from its Year 2000 conversion practice.
Cost of sales increased $9,407,000 or 56% over the prior year period. This
increase included additional costs of $9,716,000 from contract computer
programming, which resulted primarily from the above-mentioned revenue increase.
The additional costs included $201,000 associated with pilot projects to test
the Registrant's Year 2000 conversion software. Year 2000 development and
production costs are expected to rise by an estimated $200,000 in the fourth
quarter as planned as additional test projects are undertaken. The increase in
cost of sales was offset to an extent by increased margins in the contract
computer programming business. Gross margins for the nine months ended February
28, 1997 were 24.5% as compared to 23.3% 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 $510,000 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 $1,222,000, or 23% over
the prior year period. The contract computer programming business increases of
$1,840,000 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. This new office also added to facility
costs. 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 $102,000 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
$720,000 in expenses.
Interest and dividend income decreased by almost $54,000 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 ($10,214,966
at February 28, 1997 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 nine 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 $10,214,966 at
February 28, 1997 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 February 28, 1997 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 and has been advised that such
company is very satisfied with the results. The Registrant is currently
discussing a broad agreement with this company, although there can be no
assurance that an agreement will be entered into. In addition, a number of other
companies are conducting field tests of the Registrant's Catch/21 conversion
software in which the Registrant is converting small COBOL application software
programs to be Year 2000 compliant in order to enable such other companies to
evaluate the overall effectiveness of the Registrant's conversion software.
Based on feedback to date, the Registrant is optimistic that the field tests
currently being conducted will result in contracts for conversion of software
programs, which could result in meaningful revenues. However, there can be no
assurance that the test results will be satisfactory to these companies or that,
even if the results are satisfactory, it will result in contracts for conversion
of software programs 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 operates this business through a newly-created
subsidiary which is 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 27: Financial Data Schedule
(b). Reports on Form 8K: None
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
TSR, INC.
------------------------------
(Registrant)
Date: April 10, 1997 /s/ J.F. HUGHES
----------------------------------------------
J.F. Hughes, Chairman, President and Treasurer
Date: April 10, 1997 /s/ JOHN G. SHARKEY
----------------------------------------------
John G. Sharkey, Vice President, Finance
Page 10