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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 August 31, 1997
[ ] 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)
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 September 30, 1997.
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Page 1
TSR, INC. AND SUBSIDIARIES
INDEX
Page
Number
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Part I. Financial Information:
Item 1. Financial Statements:
Consolidated Condensed Balance Sheets -
August 31, 1997 and May 31, 1997.................................3
Consolidated Condensed Statements of Earnings -
For the three months ended August 31, 1997 and 1996..............4
Consolidated Condensed Statements of Cash Flows -
For the three months ended August 31, 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 SHEETS
August 31, May 31,
ASSETS 1997 1997
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Current Assets:
Cash and cash equivalents (Note 6).......................... $ 2,724,989 $ 2,931,180
Marketable securities (Note 7).............................. 30,125 26,175
Accounts receivable (net of allowance for doubtful
accounts of $173,000) 11,312,087 10,408,542
Other receivables........................................... 59,632 57,333
Prepaid expenses............................................ -- 3,860
Prepaid and recoverable income taxes........................ 50 11,095
Deferred income taxes ...................................... 59,000 59,000
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Total current assets ................................. 14,185,883 13,497,185
Equipment and leasehold improvements, at cost (net of
accumulated depreciation and amortization of $764,000
and $687,000) ........ ...................................... 755,633 459,902
Other assets................................................... 45,195 57,782
Deferred income taxes ......................................... 36,000 29,000
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$15,022,711 $14,043,869
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LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts and other payables................................ $ 321,241 $ 207,074
Accrued and other liabilities.............................. 2,623,594 2,486,788
Income taxes payable....................................... 320,622 135,173
Advances from customers ................................... 857,209 783,892
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Total current liabilities ............................. 4,122,666 3,612,927
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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 2,941,138 shares 29,141 29,141
Additional paid-in capital................................. 907,588 907,588
Retained earnings ......................................... 9,963,316 9,494,213
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10,900,045 10,430,942
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$15,022,711 $14,043,869
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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 MONTHS ENDED AUGUST 31, 1997 AND 1996
Three Months Ended
August 31,
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1997 1996
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Revenues..................................................... $15,778,845 $9,906,821
Cost of sales................................................ 11,947,018 7,418,799
Research and development..................................... 165,254 13,487
Selling, general and administrative expenses................. 2,814,215 1,935,964
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14,926,487 9,368,250
Income from operations...................................... 852,358 538,571
Other income:
Interest and dividend income.............................. 31,195 53,109
Gains on marketable securities, net....................... 3,950 12,021
Gain from sales of assets................................. 8,600 77,650
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Income before income taxes.................................. 896,103 681,351
Provision for income taxes.................................. 427,000 296,000
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Net income ............................................... $ 469,103 $ 385,351
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Net income per common share................................. $ 0.16 $ 0.13
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Weighted average number of common shares outstanding*. ..... $ 2,947,662 $2,914,138
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* Adjusted for a stock split in the form of a 100% stock dividend on November
14, 1996.
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 THREE MONTHS ENDED AUGUST 31, 1997 AND 1996
Three Months Ended
August 31,
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1997 1996
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Cash flows from operating activities:
Net income................................................ $ 469,103 $ 385,351
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation and amortization......................... 77,598 35,049
Gain from sales of assets ........................... (8,600) (77,650)
Deferred income taxes................................. (7,000) 16,000
Gain on sales of marketable securities, net........... (3,950) (12,021)
Changes in assets and liabilities:
Accounts receivable................................. (903,545) (1,246,558)
Other receivables................................... (2,299) 163
Prepaid expenses.................................... 3,860 33,771
Prepaid and recoverable income taxes................ 11,045 29,850
Other assets........................................ 12,587 1,500
Accounts payable and accrued expenses............... 250,973 95,901
Income taxes payable................................ 185,449 177,263
Advances from customers ............................. 73,317 (10,004)
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Total adjustments...................................... (310,565) (956,736)
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Net cash provided by (used in) operating activities...... 158,538 (571,385)
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Cash flows from investing activities:
Proceeds from maturities and sales of marketable
securities.............................................. -- 1,307,789
Purchases of marketable securities........................ -- (1,588,242)
Purchases of fixed assets................................. (373,329) (74,523)
Proceeds from sales of assets............................. 8,600 77,650
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Net cash used in investing activities...................... (364,729) (277,326)
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Net decrease in cash and cash equivalents................... (206,191) (848,711)
Cash and cash equivalents at beginning of period............ 2,931,180 2,958,922
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Cash and cash equivalents at end of period.................. $2,724,989 $2,110,211
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Supplemental Disclosures:
Income tax payments....................................... $ 238,000 $ 73,000
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Interest paid............................................. $ -- $ --
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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
AUGUST 31, 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 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, 1997.
2. In the opinion of the Company, 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 Company provides contract computer programming services and Year 2000
compliance solutions to its clients. The Company, in its contract computer
programming service business, provides technical computer personnel to
companies to supplement their in-house information technology capabilities.
In addition, the Company has developed Catch/21, a Year 2000 compliance
software solution that corrects, on a substantially automated basis,
problems which may occur in computer software as a result of the century
change in the year 2000. The Company has recently commenced providing
conversion services to customers to make software applications Year 2000
compliant.
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. The Company recognizes contract computer programming services revenues as
services are provided. Revenues from the maintenance and support of the
Company's proprietary software are recognized monthly as services are
rendered. Provided that acceptance is probable, revenue from code
conversion is recognized as services are rendered.
6. 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,
1997:
1997
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Cash in banks ..................... $ 317,129
Money Market Funds................. 1,420,906
US Treasury Bills.................. 986,954
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$2,724,989
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7. The Company's equity securities are classified as trading securities. The
amortized cost, gross unrealized holding gains, gross unrealized holding
losses and fair value for marketable securities by major security type at
August 31, 1997 are as follows:
Gross Gross
Unrealized Unrealized
Amortized Holding Holding
Cost Gains Losses Fair Value
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Equity Securities..... $28,287 $1,838 $ -- $30,125
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8. The Company'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.
9. On October 10, 1996 the Board of Directors of the Company declared a stock
split in the form of a 100% stock dividend on the shares of Common stock
payable November 14, 1996 to stockholders of record as of October 28, 1996.
All data for prior periods has 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
The following table sets forth for the periods indicated certain financial
information derived from the Company's consolidated statements of earnings.
There can be no assurance that trends in sales growth or operating results will
continue in the future:
3 Months Ended
August 31,
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1997 1996
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(Amounts in Thousands)
% of % of
Amount Revenues Amount Revenues
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Revenues .................. $15,779 100.0 $9,907 100.0
Cost of Sales ............. 11,947 75.7 7,419 74.9
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Gross Profit .............. 3,832 24.3 2,488 25.1
Research and Development .. 165 1.1 13 0.1
Selling, General, and
Administrative expenses . 2,815 17.8 1,936 19.5
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Income from Operations .... 852 5.4 539 5.5
Other Income .............. 44 0.3 142 1.4
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Income Before Income
Taxes ................... 896 5.7 681 6.9
Provision for Income
Taxes .................. 427 2.7 296 3.0
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Net Income ............... $ 469 3.0 $ 385 3.9
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Revenues
Revenues consist primarily of revenues from contract computer programming
services. In addition, the Company's revenues for the quarter ended August 31,
1997 included revenues from its Year 2000 business which was commenced in fiscal
1997. Revenues for the quarter ended August 31, 1997 increased $5,872,000 or
59.3% over the comparable period in fiscal 1997.
Contract computer programming services revenues increased $5,306,000 from
$9,869,000 in the quarter ended August 31, 1996 to $15,175,000 in the quarter
ended August 31, 1997. This increase resulted from an overall increase in the
number of programmers on billing with clients from an average of approximately
305 in the quarter ended August 31, 1996 to approximately 448 in the quarter
ended August 31, 1997.
At the end of fiscal 1997 a large project for AT&T ended which slowed the rate
of growth in contract computer programming revenues in the first quarter of
fiscal 1998 compared with the quarter ended May 31, 1997. The Company does not
expect that its revenues in fiscal 1998 will increase at the rate of growth
experienced in fiscal 1997, as it does not anticipate the same opportunity for
large staffing projects in fiscal 1998 as it had in fiscal 1997.
Revenues from the Company's Year 2000 business, which was commenced in fiscal
1997, were $585,000 for the quarter ended August 31, 1997. During the current
quarter the Company used its proprietary Catch/21 Software Solution on
conversion projects to remediate approximately 4,000,000 lines of code for
client software applications for a total of eight customers. These projects are
in various stages and the Company expects, assuming successful completion of
these projects, to receive additional conversion projects from many of these
companies.
Page 7
The agreements under which the revenues were recognized provide that all
payments under the agreements are subject to satisfactory conversion of the
applications. Revenues include amounts billed or paid prior to the final
acceptance by the customer based upon management's belief that acceptance is
probable.
Cost of Sales
Cost of sales as a percentage of revenues increased from 74.9% in the quarter
ended August 31, 1996 to 75.7% in the quarter ended August 31, 1997. This
increase is primarily attributable to increases in amounts being paid to
qualified programming professionals outpacing the Company's ability to pass
these increases on to customers due to competitive market pressures in the
industry.
In the contract computer programming services business, cost of sales as a
percentage of sales increased from 75.2% in the quarter ended August 31, 1996 to
76.2% in the quarter ended August 31, 1997. This increase is attributable to
increases in amounts being paid to qualified programming professionals outpacing
the Company's ability to pass these increases on to customers due to competitive
market pressures in the industry.
The Year 2000 business incurred cost of sales of $386,000 in the quarter ended
August 31, 1997. These costs consisted primarily of salaries of software
analysts and quality assurance personnel. The Company expects cost of sales from
the Year 2000 business to continue to increase due to the hiring and training of
additional personnel in anticipation of future conversion projects. There were
no cost of sales for the Year 2000 business in the quarter ended August 31,
1996.
Research and Development
Research and development costs of $165,000 in the quarter ended August 31, 1997
represent amounts expended by the Company to develop and enhance its Catch/21
Software Solution. Currently, the Catch/21 Software Solution can convert IBM
mainframe COBOL and RPG applications. The development expenditures are expected
to continue during fiscal 1998 as the Company seeks to expand its product
offerings into additional computer platforms and languages such as PL/1,
Assembler and several fourth generation language platforms which the Company
expects to complete, subject to customer demand, during the next year. Research
and development expenses in the quarter ended August 31, 1996 were $13,000.
Selling, General and Administrative Expenses
Selling, general and administrative expenses consist primarily of expenses
relating to account executives, technical recruiters, facilities costs,
management and corporate overhead. These expenses increased $879,000 or 45.4%
from $1,936,000 in the quarter ended August 31, 1996 to $2,814,000 in the
quarter ended August 31, 1997. Selling, general and administrative expenses
related to contract computer programming services increased $418,000 over the
prior year period to $1,842,000. The increase was primarily attributable to
additional sales commissions based on higher gross profits. In addition, this
increase resulted, to a lesser extent, from expenses relating to the hiring of
additional account executives and technical recruiting professionals to expand
the Company's client base and recruit additional technical consultants in
connection with the continuation of the Company's planned expansion.
In the quarter ended August 31, 1997, approximately $554,000 in selling, general
and administrative expenses were attributable to the Year 2000 business. These
expenses consisted primarily of marketing, advertising and facilities expenses
of which approximately $150,000 related to a magazine advertising program
promoting the Catch/21 Software Solution which program is not expected to
continue. Comparable Year 2000 selling, general and administrative expenses in
the quarter ended August 31, 1996 were $14,000.
Other Income
Other income resulted primarily from interest and dividend income which
decreased by $22,000 to $31,000 due to lower average available investable funds
in the quarter ended August 31, 1997. During the first quarter of fiscal 1997
the Company recorded other income of $77,000 in connection with the termination
agreement for its construction specifications subsidiary.
Page 8
Income Taxes
The effective income tax rate increased to 47.7% in the quarter ended August 31,
1997 from 43.5% in the quarter ended August 31, 1996 because the losses incurred
by the Year 2000 business, operated out of the Company's Hauppauge, New York
location, were not available to offset state and local income taxes other than
for New York State.
Liquidity, Capital Resources and Changes in Financial Condition
Subject to continued profitability, the Company expects that cash flow generated
from operations together with its cash and marketable securities and available
credit facilities will be sufficient to provide the Company with adequate
resources to meet its requirements with respect to its existing business. The
Company also expects its cash flow from operations, cash and short-term
marketable securities to be sufficient for the foreseeable future to meet its
cash requirements, including further acquisition of fixed assets and other
investments in the Year 2000 business.
At August 31, 1997, the Company had working capital of $10,063,000 and cash and
cash equivalents of $2,725,000 as compared to working capital of $9,884,000 and
cash and cash equivalents of $2,931,000 at May 31, 1997. Working capital
increased due to the Company's net income in the quarter ended August 31, 1997.
Cash and equivalents declined from May 31, 1997 to August 31, 1997 primarily due
to an increase in accounts receivable and to the purchase of fixed assets.
The Company had positive net cash flow of $159,000 from operations during the
quarter ended August 31, 1997 as compared to negative net cash flow from
operations of $571,000 in the quarter ended August 31, 1996. The Company had net
income of $469,000, in the quarter ended August 31, 1997. However, the Company
only had positive net cash flow of $159,000, primarily as a result of an
increase in accounts receivable of $904,000 from $10,408,000 at May 31, 1997 to
$11,312,000 at August 31, 1997. The increase in accounts receivable resulted
primarily from the increase in revenues for the quarter. The cash used as a
result of the increase in accounts receivable was offset to some extent by the
increase in the Company's accounts payable and accrued expenses of $251,000 and
an increase in income taxes payable of $185,000. The increase in accounts
payable and accrued expenses resulted from the increase in cost of sales and the
purchase of fixed assets near the end of the quarter. The increase in income
taxes payable occurred because the federal income tax payment for the quarter
was due after the end of the quarter.
Cash flow used in investing activities resulted primarily from the increase in
the purchase of fixed assets in the quarter from $75,000 in fiscal 1997 to
$373,000 in 1998. The significant increase was required for equipment to emulate
client computer environments to enable sufficient testing and quality assurance
of the Catch/21 Software Solution.
The Company's capital resource commitments at August 31, 1997 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.
William Connor, the developer of the Catch/21 Software Solution owned 20% of the
Common Stock of the Company's subsidiary which engages in the Year 2000
business. The Company has purchased Mr. Connor's interest in this subsidiary for
$100,000 payable over a one year period and has entered into a new employment
agreement with Mr. Connor under which he will be entitled to a salary and a
bonus based on a percentage of the Company's revenues from the Catch/21 Software
Solution in excess of $5,000,000 per year.
Although the Company's cash and marketable securities were sufficient to enable
it to meet its cash requirements during the quarter ended August 31, 1997, the
Company may require a credit facility to finance its accounts receivable if its
accounts receivable continue to grow as a result of a significant increase in
revenues. The Company has established a revolving line of credit of $5,000,000
with a major money center bank.
Forward-Looking Statements
Certain statements contained in "Management's Discussion and Analysis of
Financial Condition and Results of Operations", including statements concerning
the development of the Company's Catch/21 software solution, future prospects
and the Company's future cash flow requirements are forward looking statements,
as defined in the Private Securities Litigation Reform Act of 1995. Actual
results may differ materially from those projections in the forward looking
statements which statements involve risks and uncertainties, including but not
limited to the following: risks relating to the competitive nature of the
markets for contract computer programming services and the Year 2000 business,
concentration of the Company's business with certain customers and uncertainty
as to the Company's ability to bring in new customers and the risk that the
Catch/21 software solution will not perform satisfactorily or achieve commercial
acceptance.
Page 9
TSR, INC. AND SUBSIDIARIES
Part II. Other Information
Item 6. Exhibits and Reports on Form 8K
(a). Exhibit 10.1: Agreement to purchase subsidiary minority
interest between TSR, Inc. and William Connor dated
September 1, 1997.
(b). Exhibit 10.2: Employment Agreement dated September 1, 1997
between TSR, Inc. and William Connor.
(c). Exhibit 10.3: Revolving Credit Agreement dated October 6,
1997 among TSR Consulting Services, Inc., TSR, Inc.,
Catch/21 Enterprises Incorporated and The Chase Manhattan
Bank.
(d). Exhibit 27: Financial Data Schedule
(e). 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: October 9, 1997 /s/ J.F. Hughes
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J.F. Hughes, Chairman, President and Treasurer
Date: October 9, 1997 /s/ John G. Sharkey
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John G. Sharkey, Vice President, Finance
Page 10
EXHIBIT INDEX
EXHIBIT NO.
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10.1 Agreement
10.2 Employment Agreement
10.2 Revolving Credit Agreement
27 Financial Data Schedule