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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
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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, 1998
[ ] Transition Report Pursuant to Section 13 or
15(d) of the Securities Exchange Act of 1934
For the transition period from ________ to ________
Commission File Number: 0-8656
TSR, INC.
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(Exact name of registrant as specified in its charter)
Delaware 13-2635899
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(State or other jurisdiction of (I.R.S. Employer
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
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5,988,276 shares of common stock, par value $.01 per share,
as of September 30, 1998.
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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 --
August 31, 1998 and May 31, 1998....................... 3
Consolidated Condensed Statements of Earnings --
For the three months ended August 31, 1998 and 1997.... 4
Consolidated Condensed Statements of Cash Flows --
For the three months ended August 31, 1998 and 1997.... 5
Notes to Consolidated Condensed Financial Statements..... 6
Item 2. Management's Discussion and Analysis..................... 7
PART II. OTHER INFORMATION................................................ 10
SIGNATURES................................................................. 11
Page 2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
TSR, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
August 31, May 31,
ASSETS 1998 1998
----------- -----------
Current Assets:
Cash and cash equivalents (Note 6) ........................................ $ 4,806,433 $ 2,425,122
Marketable securities (Note 7) ............................................ 1,535,218 1,575,945
Accounts receivable (net of allowance for
doubtful accounts of $173,000) ........................................ 15,044,964 15,037,995
Other receivables ......................................................... 110,592 86,772
Prepaid expenses .......................................................... 13,198 67,449
Prepaid and recoverable income taxes ...................................... 31,132 90,823
Deferred income taxes ..................................................... 59,000 59,000
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Total current assets .................................................. 21,600,537 19,343,106
Equipment and leasehold improvements, at cost (net of accumulated
depreciation and amortization of $1,083,000 and $952,000) ................. 899,556 1,008,776
Other assets ................................................................... 105,162 90,995
Deferred income taxes .......................................................... 85,000 73,000
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$22,690,255 $20,515,877
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LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts and other payables ............................................... $ 160,268 $ 278,410
Accrued and other liabilities ............................................. 3,639,198 2,950,986
Income taxes payable ...................................................... 654,240 173,377
Advances from customers ................................................... 981,873 946,257
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Total current liabilities ............................................. 5,435,579 4,349,030
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Shareholders' Equity:
Preferred stock, $1 par value, authorized
1,000,000 shares; none issued ......................................... -- --
Common stock, $.01 par value, authorized
25,000,000 shares; issued 5,988,276 shares * .......................... 59,883 59,883
Additional paid-in capital ................................................ 3,183,246 3,183,246
Retained earnings ......................................................... 14,011,547 12,923,718
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17,254,676 16,166,847
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$22,690,255 $20,515,877
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* Adjusted for a stock split in the form of a 100% stock dividend on November 17, 1997.
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, 1998 AND 1997
Three Months Ended
August 31,
-----------------------------
1998 1997
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Revenues ............................................................. $20,465,532 $15,778,845
Cost of sales ........................................................ 15,060,372 11,947,018
Selling, general and administrative expenses ......................... 3,359,264 2,814,215
Research and development expenses .................................... 148,171 165,254
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18,567,807 14,926,487
Income from operations ............................................... 1,897,725 852,358
Other income:
Interest and dividend income .................................... 67,886 31,195
Gain (loss) from marketable securities, net ..................... (27,782) 3,950
Gain from sales of assets ....................................... -- 8,600
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Income before income taxes ........................................... 1,937,829 896,103
Provision for income taxes ........................................... 850,000 427,000
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Net income ...................................................... $ 1,087,829 $ 469,103
=========== ===========
Basic net income per common share .................................... $ 0.18 $ 0.08
=========== ===========
Weighted average number of common shares outstanding* ................ 5,988,276 5,985,324
=========== ===========
Diluted net income per common share .................................. $ 0.18 $ 0.08
=========== ===========
Weighted average number of diluted common shares outstanding* ........ 5,988,276 5,985,324
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* Adjusted for a stock split in the form of a 100% stock dividend on November 17, 1997.
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, 1998 AND 1997
Three Months Ended
August 31,
--------------------------
1998 1997
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Cash flows from operating activities:
Net income ......................................................... $1,087,829 $ 469,103
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation and amortization .................................. 139,534 77,598
Gain from sales of assets ...................................... -- (8,600)
Deferred income taxes .......................................... (12,000) (7,000)
Loss (gain) from marketable securities, net .................... 27,782 (3,950)
Changes in assets and liabilities:
Accounts receivable ........................................ (6,969) (903,545)
Other receivables .......................................... (23,820) (2,299)
Prepaid expenses ........................................... 54,251 3,860
Prepaid and recoverable income taxes ....................... 59,691 11,045
Other assets ............................................... (22,500) 12,587
Accounts payable and accrued expenses ...................... 570,070 250,973
Income taxes payable ....................................... 480,863 185,449
Advances from customers .................................... 35,616 73,317
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Total adjustments .............................................. 1,302,518 (310,565)
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Net cash provided by operating activities .......................... 2,390,347 158,538
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Cash flows from investing activities:
Proceeds from maturities and sales of marketable securities .... 487,185 --
Purchases of marketable securities ............................. (474,240) --
Purchases of fixed assets ...................................... (21,981) (373,329)
Proceeds from sales of assets .................................. -- 8,600
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Net cash used in investing activities .......................... (9,036) (364,729)
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Net increase (decrease) in cash and cash equivalents .................... 2,381,311 (206,191)
Cash and cash equivalents at beginning of period ........................ 2,425,122 2,931,180
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Cash and cash equivalents at end of period .............................. $4,806,433 $2,724,989
========== ==========
Supplemental Disclosures:
Income tax payments ................................................ $ 321,000 $ 238,000
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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, 1998
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, 1998.
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 is primarily engaged in the business of providing computer
programming consulting services. The Company provides technical computer
personnel to companies to supplement their in-house information technology
capabilities. In addition, during fiscal 1997, the Company developed
Catch/21, a Year 2000 compliance software solution which enables the
Company to correct, on a substantially automated basis, problems which may
occur in computer software as a result of the century change in the year
2000. Toward the end of fiscal 1997 the Company commenced providing
services to customers to make applications Year 2000 compliant.
4. The consolidated condensed financial statements include the accounts of
TSR, Inc. and its wholly-owned subsidiaries. All significant intercompany
balances and transactions have been eliminated in consolidation.
5. The Company recognizes computer programming consulting 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 Catch/21 code
conversion is recognized when the converted code is delivered.
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,
1998:
Cash in banks ............................. $ 40,632
Money Market Funds......................... 4,765,801
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$4,806,433
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7. Marketable securities consists of United States Treasury Bills and equity
securities. The treasury bills with maturities at acquisition in excess of
90 days, are classified as held to maturity investments. 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,
1998 are as follows:
Gross Gross
Unrealized Unrealized
Amortized Holding Holding
Cost Gains Losses Fair Value
---------- ---------- ---------- ----------
United States Treasury Bills.. $1,435,200 -- -- $1,435,200
Equity Securities............. 133,289 5,323 (38,594) 100,018
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$1,568,489 $5,323 $(38,594) $1,535,218
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8. On October 22, 1997 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 17, 1997 to stockholders of record as of November 3,
1997. All data for prior periods has been adjusted accordingly.
9. On January 30, 1998, the Company sold 160,000 shares of common stock at
$16 per share in a private placement. The net proceeds to the Company
after expenses were $2,306,400.
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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1998 1997
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% of % of
Amount Revenues Amount Revenues
------- -------- ------- --------
(Amounts in Thousands)
Revenues ...................................... $20,466 100.0 $15,779 100.0
Cost of Sales ................................. 15,061 73.6 11,947 75.7
------- ----- ------- -----
Gross Profit .................................. 5,405 26.4 3,832 24.3
Selling, General, and Administrative expenses.. 3,359 16.4 2,815 17.8
Research and Development expenses ............. 148 0.7 165 1.1
------- ----- ------- -----
Income from Operations ........................ 1,898 9.3 852 5.4
Other Income .................................. 40 0.2 44 0.3
------- ----- ------- -----
Income Before Income Taxes .................... 1,938 9.5 896 5.7
Provision for Income Taxes .................... 850 4.2 427 2.7
------- ----- ------- -----
Net Income .................................... $ 1,088 5.3 $ 469 3.0
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REVENUES
Revenues consist primarily of revenues from computer programming consulting
services. In addition, the Company's revenues for the quarter ended August 31,
1998 included revenues from its Year 2000 business which was commenced in fiscal
1997. Revenues for the quarter ended August 31, 1998 increased $4,687,000 or
29.7% over the comparable period in fiscal 1998.
Computer programming consulting services revenues increased $2,960,000 from
$15,175,000 in the quarter ended August 31, 1997 to $18,135,000 in the quarter
ended August 31, 1998. This increase resulted from an overall increase in the
number of programmers on billing with clients from an average of approximately
448 in the quarter ended August 31, 1997 to approximately 477 in the quarter
ended August 31, 1998.
Revenues from the Company's Year 2000 business, which was commenced in fiscal
1997, were $2,331,000 for the quarter ended August 31, 1998. During the current
quarter the Company used its proprietary Catch/21 Software Solution on
conversion projects to remediate approximately 9,000,000 lines of code for
client software applications for a total of fifteen customers. The Company's
Year 2000 revenues during the first quarter of fiscal 1999 were slightly less
than the fiscal 1998 fourth quarter revenues and the Company expects these
revenues may decline more rapidly during the remainder of fiscal 1999. The
Company has received less code from customers than it had expected based on
customers' original estimates. In addition, the Company is experiencing more
intense competition which has impacted obtaining new customers.
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 certain amounts billed or paid prior to the final
acceptance by the customer only for conversion projects where upon management
believes that acceptance is probable.
COST OF SALES
Cost of sales as a percentage of revenues decreased from 75.7% in the quarter
ended August 31, 1997 to 73.6% in the quarter ended August 31, 1998. This
decrease is primarily attributable to the increase in Year 2000 revenues for
which cost of sales as a percentage of revenues is less than the computer
programming consulting business.
In the computer programming consulting services business, cost of sales as a
percentage of sales increased from 76.2% in the quarter ended August 31, 1997 to
77.1% in the quarter ended August 31, 1998. 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 $1,080,000 in the quarter ended
August 31, 1998 versus $386,000 in the prior year quarter. 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 decrease in the
coming quarters due to a significant decrease in the number of analysts working
in this area.
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 $544,000 or 19.3%
from $2,815,000 in the quarter ended August 31, 1997 to $3,359,000 in the
quarter ended August 31, 1998. Selling, general and administrative expenses
related to computer programming consulting services increased $460,000 over the
prior year period to $2,721,000. The increase was primarily attributable to
additional commission based compensation based on higher gross profits. In
addition, this increase resulted from expenses relating to the hiring of
additional account executives and technical recruiting professionals to broaden
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, 1998, approximately $638,000 in selling, general
and administrative expenses were attributable to the Year 2000 business. These
expenses consist primarily of marketing, management, and facilities expenses.
Such expenses decreased from the fourth quarter of fiscal 1998 and are expected
to continue to decline due to lower demand for Year 2000 remediation services.
Comparable Year 2000 selling, general and administrative expenses in the quarter
ended August 31, 1997 were $554,000.
RESEARCH AND DEVELOPMENT
Research and development costs of $148,000 in the quarter ended August 31, 1998
represent amounts expended by the Company to expand Catch/21, the Company's Year
2000 compliance solution, product offerings including XRAY/2000 which stands for
Examination, Repair, and Audit for Year 2000 Compliance, and various testing
utilities. Research and development expenses in the quarter ended August 31,
1997 were $165,000.
INCOME FROM OPERATIONS
In the quarter ended August 31, 1998, the computer programming consulting
service business contributed $1,433,000 or 75.5% of the income from operations,
while the Year 2000 business contributed the remaining $465,000 or 24.5%. In the
prior year quarter, the computer programming consulting service business
contributed $1,353,000 of income from operations, the Year 2000 business
incurred a loss of $520,000, and there was $19,000 from other sources.
OTHER INCOME
Other income resulted primarily from interest and dividend income which
increased by $37,000 to $68,000 due to higher average available investable funds
in the quarter ended August 31, 1998. This interest and dividend increase was
offset, to some extent, by an unrealized loss of $28,000 on the Company's
equity securities.
Page 8
INCOME TAXES
The effective income tax rate decreased to 43.9% in the quarter ended August 31,
1998 from 47.7% in the quarter ended August 31, 1997 because the losses incurred
in the prior year quarter 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
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 cash
requirements.
At August 31, 1998, the Company had working capital of $16,165,000 and cash and
cash equivalents of $4,806,000 as compared to working capital of $14,994,000 and
cash and cash equivalents of $2,425,000 at May 31, 1998. Working capital and
cash and cash equivalents increased primarily due to the Company's net income in
the quarter ended August 31, 1998.
The Company had positive net cash flow of $2,390,000 from operations during the
quarter ended August 31, 1998 as compared to positive net cash flow from
operations of $159,000 in the quarter ended August 31, 1997. The Company had net
income of $1,088,000, in the quarter ended August 31, 1998. The Company also had
additional cash flow as a result of the increase in the accounts payable and
accrued expenses of $570,000 and an increase in income taxes payable of
$481,000. The increase in accounts payable and accrued expenses resulted
primarily from the increase in cost of sales. 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 purchase of
fixed assets in the current quarter of $22,000. The fixed asset additions were
$373,000 in the prior year period. The significant decrease occurred due to
equipment purchased in the prior year period 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, 1998 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.
Although the Company's cash and marketable securities were sufficient to enable
it to meet its cash requirements during the quarter ended August 31, 1998, 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 available a revolving line of credit of $5,000,000
with a major money center bank. As of August 31, 1998 no amounts were
outstanding under this line of credit.
YEAR 2000 INFORMATION
The Company is in the process of reviewing the potential impact of the Year 2000
on its computer systems. The Company uses computer systems throughout its entire
operations. The Company has not completed its assessment, but currently believes
that its computer systems are substantially Year 2000 compliant and that any
costs of addressing this issue will not have a material adverse impact on the
Company's financial position. However, if the Company, or third parties upon
which the Company relies, are unable to address the Year 2000 issue in a timely
manner, it could result in a material financial risk to the Company.
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 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
computer programming consulting services and the Year 2000 compliance solution
market, 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 achieve increased commercial
acceptance.
Page 9
TSR, INC. AND SUBSIDIARIES
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8K
(a). Exhibit 10.1: Employment Agreement dated June 1, 1998 between
TSR Consulting Services, Inc. and Ernest G. Bago
(b). Exhibit 27: Financial Data Schedule
(c). Reports on Form 8K: None
Page 10
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
TSR, INC.
(Registrant)
Date: October 9, 1998
/s/ J.F. HUGHES
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J.F. Hughes, Chairman, President
and Treasurer
Date: October 9, 1998
/s/ JOHN G. SHARKEY
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John G. Sharkey, Vice President,
Finance
Page 11