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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the period ended August 31, 2006
[_] Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the transition period from to
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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)
631-231-0333
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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
Indicate by check mark whether the Registrant is large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check
one):
Large accelerated filer [_] Accelerated filer [_] Non-accelerated filer [X]
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). [_] Yes [X] No
SHARES OUTSTANDING
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4,568,012 shares of common stock, par value $.01 per share,
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as of September 30, 2006
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TSR, INC. AND SUBSIDIARIES
INDEX
Page
Number
------
Part I. Financial Information:
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets -
August 31, 2006 and May 31, 2006.......................... 3
Condensed Consolidated Statements of Income -
For the three months ended August 31, 2006 and 2005....... 4
Condensed Consolidated Statements of Cash Flows -
For the three months ended August 31, 2006 and 2005....... 5
Notes to Condensed Consolidated Financial Statements........ 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations...................................10
Item 3. Quantitative and Qualitative Disclosure About Market Risk...14
Item 4. Controls and Procedures.....................................14
Part II. Other Information....................................................15
Item 1A. Risk Factors................................................15
Item 6. Exhibits....................................................15
Signatures....................................................................15
Page 2
Part I. Financial Information
Item 1. Financial Statements
TSR, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
August 31, May 31,
2006 2006
------------ ------------
(Unaudited)
ASSETS
Current Assets:
Cash and cash equivalents (Note 3) ......................... $ 3,441,163 $ 2,660,739
Marketable securities (Note 5) ............................. 5,896,143 5,406,830
Accounts receivable (net of allowance for
doubtful accounts of $355,000) ........................... 8,520,831 8,272,963
Other receivables .......................................... 85,396 90,172
Prepaid expenses ........................................... 48,899 48,793
Prepaid and recoverable income taxes ....................... 145,425 320,156
Deferred income taxes ...................................... 150,000 150,000
------------ ------------
Total current assets ..................................... 18,287,857 16,949,653
Marketable securities (Note 5) .................................. 993,867 1,490,547
Equipment and leasehold improvements, at cost (net of accumulated
depreciation and amortization of $551,086 and $544,946) .... 37,859 36,134
Other assets .................................................... 49,653 49,603
Deferred income taxes ........................................... 109,000 109,000
------------ ------------
$ 19,478,236 $ 18,634,987
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts and other payables ................................ $ 209,913 $ 209,840
Accrued expenses and other current liabilities ............. 3,153,066 2,730,202
Advances from customers .................................... 1,527,474 1,538,985
Dividends payable .......................................... 365,441 --
Income taxes payable ....................................... 78,699 102,974
------------ ------------
Total current liabilities ................................ 5,334,593 4,582,001
------------ ------------
Minority Interest ............................................... 44,187 31,751
------------ ------------
Stockholders' Equity:
Preferred stock, $1 par value, authorized
1,000,000 shares; none issued ............................ -- --
Common stock, $.01 par value, authorized
25,000,000 shares; issued 6,228,326 shares ............... 62,283 62,283
Additional paid-in capital ................................. 5,071,727 5,071,727
Retained earnings .......................................... 20,996,747 20,918,526
------------ ------------
26,130,757 26,052,536
Less: Treasury stock, 1,660,314 shares, at cost ............ 12,031,301 12,031,301
------------ ------------
14,099,456 14,021,235
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$ 19,478,236 $ 18,634,987
============ ============
The accompanying notes are an integral part of
these condensed consolidated financial statements.
Page 3
TSR, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE MONTHS ENDED AUGUST 31, 2006 AND 2005
(UNAUDITED)
Three Months Ended
August 31,
---------------------------
2006 2005
------------ ------------
Revenues, net ................................................... $ 12,375,689 $ 12,464,701
Cost of sales ................................................... 9,998,545 9,939,448
Selling, general and administrative expenses .................... 1,748,723 1,740,602
------------ ------------
11,747,268 11,680,050
Income from operations .......................................... 628,421 784,651
Other income (expense):
Interest and dividend income ............................... 112,437 78,149
Unrealized gain (loss) from marketable securities, net ..... 1,240 (992)
Minority interest in subsidiary operating profits .......... (18,436) (24,945)
------------ ------------
Income before income taxes ...................................... 723,662 836,863
Provision for income taxes ...................................... 280,000 363,000
------------ ------------
Net income ................................................. $ 443,662 $ 473,863
============ ============
Basic and diluted net income per common share ................... $ 0.10 $ 0.10
============ ============
Weighted average number of basic common shares outstanding ...... 4,568,012 4,568,012
============ ============
Weighted average number of diluted common shares outstanding .... 4,568,012 4,568,012
============ ============
The accompanying notes are an integral part of
these condensed consolidated financial statements.
Page 4
TSR, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED AUGUST 31, 2006 AND 2005
(UNAUDITED)
Three Months Ended
August 31,
---------------------------
2006 2005
------------ ------------
Cash flows from operating activities:
Net income ................................................. $ 443,662 $ 473,863
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization .............................. 6,140 5,028
Unrealized (gain) loss from marketable securities, net ..... (1,240) 992
Minority interest in subsidiary operating profits .......... 18,436 24,945
Deferred income tax benefit ................................ -- 8,000
Recovery of bad debt expense ............................... -- (25,000)
Changes in assets and liabilities:
Accounts receivable - trade ................................ (247,868) (448,493)
Other receivables .......................................... 4,777 (1,706)
Prepaid expenses ........................................... (106) 13,390
Prepaid and recoverable income taxes ....................... 174,731 (22,017)
Other assets ............................................... -- --
Accounts payable and accrued expenses ...................... 422,936 62,464
Income taxes payable ....................................... (24,275) 221,384
Advances from customers .................................... (11,511) (13,636)
------------ ------------
Net cash provided by operating activities ....................... 785,682 299,214
------------ ------------
Cash flows from investing activities:
Proceeds from maturities and sales of marketable securities. 2,444,806 2,960,175
Purchases of marketable securities ......................... (2,436,199) (2,949,220)
Purchase of fixed assets ................................... (7,865) (9,806)
------------ ------------
Net cash provided by investing activities ....................... 742 1,149
------------ ------------
Cash flows from financing activities
Distribution to minority interest .......................... (6,000) (19,000)
Cash dividends paid ........................................ -- (685,202)
------------ ------------
Net cash used in financing activities ........................... (6,000) (704,202)
------------ ------------
Net increase (decrease) in cash and cash equivalents ............ 780,424 (403,839)
Cash and cash equivalents at beginning of period ................ 2,660,739 2,571,276
------------ ------------
Cash and cash equivalents at end of period ...................... $ 3,441,163 $ 2,167,437
============ ============
Supplemental Disclosures:
Income tax payments ........................................ $ 130,000 $ 156,000
============ ============
The accompanying notes are an integral part of
these condensed consolidated financial statements.
Page 5
TSR, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AUGUST 31, 2006
(UNAUDITED)
1. Basis of Presentation
---------------------
The accompanying condensed consolidated interim financial statements
include the accounts of TSR, Inc. and its subsidiaries (the "Company"). All
significant inter-company balances and transactions have been eliminated in
consolidation. These interim financial statements have been prepared in
accordance with accounting principles generally accepted in the United
States of America applying to interim financial information and with the
instructions to Form 10-Q of Regulation S-X of the Securities and Exchange
Commission. Accordingly, certain information and footnote disclosures
required by accounting principles generally accepted in the United States
of America and normally included in the Company's annual financial
statements have been condensed or omitted. These interim financial
statements as of and for the three months ended August 31, 2006, are
unaudited; however, in the opinion of management, such statements include
all adjustments (consisting of normal recurring accruals) necessary to
present fairly the consolidated financial position, results of operations,
and cash flows of the Company for the periods presented. The results of
operations for the interim periods presented are not necessarily indicative
of the results that might be expected for future interim periods or for the
full year ending May 31, 2007. These interim financial statements should be
read in conjunction with the Company's consolidated financial statements
and notes thereto included in the Company's Annual Report on Form 10-K for
the year ended May 31, 2006.
2. Net Income Per Common Share
---------------------------
Basic net income per common share is computed by dividing income available
to common stockholders (which for the Company equals its net income) by the
weighted average number of common shares outstanding, and diluted net
income per common share adds the dilutive effect of stock options and other
common stock equivalents. No options covering shares of common stock have
been omitted from the calculations of diluted net income per common share
for the three month periods ended August 31, 2006 and 2005, respectively,
because their effect would have been antidilutive.
3. Cash and Cash Equivalents
-------------------------
The Company considers short-term highly liquid investments with maturities
of three months or less at the time of purchase to be cash equivalents.
Cash and cash equivalents were comprised of the following as of August 31,
2006:
Cash in banks. . . . . . . . . . . . . . . . . . . $ 6,833
Money Market Funds . . . . . . . . . . . . . . . . 3,434,330
----------
$3,441,163
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4. Revenue Recognition
-------------------
The Company's contract computer programming services are generally provided
under time and materials agreements with customers. Accordingly, the
Company recognizes such revenues as services are provided. Advances from
customers represent amounts received from customers prior to the Company's
provision of the related services and credit balances from overpayments.
Reimbursements received by the Company for out-of-pocket expenses are
characterized as revenue in accordance with Emerging Issues Task Force
(EITF) Issue 01-14 "Income Statement of Characterization of Reimbursements
Received for 'Out-of-Pocket' Expenses Incurred."
Page 6
TSR, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
AUGUST 31, 2006
(UNAUDITED)
5. Marketable Securities
---------------------
The Company accounts for its marketable securities in accordance with
Statement of Financial Accounting Standards No. 115 "Accounting for Certain
Investments in Debt and Equity Securities." Accordingly, the Company
classifies its marketable securities at acquisition as either (i)
held-to-maturity, (ii) trading, or (iii) available-for-sale. Based upon the
Company's intent and ability to hold its US Treasury securities to maturity
(which maturities are mostly less than one year), such securities have been
classified as held-to -maturity and are carried at amortized cost. The
Company's equity securities are classified as trading securities, which are
carried at fair value with unrealized gains and losses included in
earnings. The Company's marketable securities are summarized as follows:
Gross Gross
Unrealized Unrealized
Amortized Holding Holding Recorded
Current Cost Gains Losses Value
------- ------------ ------------ ------------ ------------
United States Treasury Securities ........ $ 5,880,487 -- -- $ 5,880,487
Equity Securities ........................ 16,866 -- (1,210) 15,656
------------ ------------ ------------ ------------
$ 5,897,353 $ -- $ (1,210) $ 5,896,143
============ ============ ============ ============
Long - Term
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United States Treasury Securities ........ $ 993,867 $ -- $ -- $ 993,867
============ ============ ============ ============
Page 7
TSR, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
AUGUST 31, 2006
(UNAUDITED)
6. Stock Options
-------------
The Company has one stock-based employee compensation plan in effect. The
Company accounts for all transactions under which employees receive shares
of stock or other equity instruments in the Company based on the price of
its stock in accordance with the provisions of Accounting Principles Board
Opinion No. 25, Accounting for Stock Issued to Employees. All options
granted under the plan have had an exercise price equal to the market value
of the underlying common stock, and the number of shares represented by
such options were known and fixed, on the date of grant. There were no
options granted in fiscal 2007 and 2006.
7. Recent Accounting Pronouncements
--------------------------------
In December 2004, the FASB issued a revision of SFAS No. 123, "Statement of
Financial Accounting Standards No. 123 (FAS123 (R))," which requires that
the fair market value of all share based payment transactions be recognized
in the financial statements. This Statement establishes fair value as the
measurement objective in accounting for share based payment arrangements
and requires all entities to apply a fair value based measurement method in
accounting for share based transactions with employees except for equity
instruments held by employee share ownership plans. This Statement is
effective as of the beginning of the first annual reporting period that
begins after June 15, 2005. Therefore, the Company has adopted FAS123(R) at
the beginning of fiscal 2007. The Company has not issued any share based
payments as of August 31, 2006. The Company does not expect the adoption of
the FAS 123(R) to have a material impact on its consolidated financial
statements.
In July 2006, the Financial Accounting Standards Board (FASB) issued FASB
Interpretation No. 48 - "Accounting for Uncertainty in Income Taxes" (FIN
48). This guidance is intended to provide increased consistency in the
application of FASB Statement No. 109 - "Accounting for Income Taxes" by
providing guidance with regard to the recognition and measurement of tax
positions, and provide increased disclosure requirements. In particular,
this interpretation requires uncertain tax positions to be recognized only
if they are "more-likely-than-not" to be upheld based on their technical
merits. Additionally, the measurement of the tax position will be based on
the largest amount that is determined to have greater than a 50% likelihood
of realization upon ultimate settlement. Any resulting cumulative effect of
applying the provisions of FIN 48 upon adoption would be reported as an
adjustment to the beginning balance of retained earnings (deficit) in the
period of adoption. Management is in the process of evaluating the effects
of this guidance which is effective for fiscal years beginning after
December 15, 2006.
In May 2005, the FASB issued SFAS 154, "Accounting for Changes and Error
Corrections - a replacement of APB Opinion No. 20 and FASB Statement No.
3." SFAS 154 changes the requirements with regard to the accounting for and
reporting a change in an accounting principle. The provisions of SFAS 154
require, unless impracticable, retrospective application to prior periods
presented in financial statements for all voluntary changes in an
accounting principle and changes required by the adoption of a new
accounting pronouncement in the unusual instance that the pronouncement
does not indicate a specific transition method. SFAS 154 also requires that
a change in depreciation, amortization or depletion method for long-lived,
non-financial assets be accounted for as a change in an accounting
estimate, which requires prospective application of the new method. SFAS
154 is effective for all changes in an accounting principle made in fiscal
years beginning after December 15, 2005. The Company has adopted SFAS 154
as of June 1, 2006. Because SAS 154 is directly dependent upon future
events, the Company cannot determine what effect, if any, the expected
adoption of SFAS 154 will have on its financial condition, results of
operations or cash flows.
In November 2005, the FASB issued FSP 115-1 and FSP 124-1, "The Meaning of
Other-Than-Temporary Impairment and Its Application to Certain Investments"
which nullify certain requirements of EITF 03-1 and supersede EITF D-44.
The FSPs provide guidance for identifying impaired investments and new
disclosure requirements for investments that are deemed to be temporarily
impaired. The FSPs are effective for fiscal years beginning after December
15, 2005. The Company has adopted the FSPs as of the beginning of fiscal
2007 and it has not had a material impact on its financial position,
results of operations or cash flows.
Page 8
TSR, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
AUGUST 31, 2006
(UNAUDITED)
8. Dividends
---------
On August 15, 2006 the Board of Directors of the Company declared that a
regular quarterly cash dividend of $0.08 per share for the quarter ended
May 31, 2006 would be paid on September 14, 2006 to shareholders of record
as of August 29, 2006. This dividend will amount to approximately $365,000
and will be paid from the Company's cash and marketable securities.
9. Major Customer
--------------
In June 2006, the New York State Office of General Services, Procurement
Services Group ("OGS") terminated its contract with the Company. The OGS
actions were due to the report of an investigation by the Office of the
Special Commissioner of Investigation of the New York City Department of
Education ("DOE"). The investigative report concluded that the Company
operated improperly from 2001 through the spring of 2003 by using a
subcontracting arrangement to obtain programmers for positions with the
DOE. The subcontracting was with a small firm that was owned by an
individual who worked as a consultant under contract at the DOE in a
supervising capacity and sometimes was involved in decisions to select
consultants that financially benefited both him and the Company. The
investigative report also suggested that the Company received advanced
information as to new positions from this individual and that the
subcontracting increased the costs to the DOE since two firms, instead of
one, profited from this arrangement.
All new placements with the DOE, including renewals of existing placements,
were being made under this OGS contract prior to its termination. As a
result, until a new OGS contract is entered into, the Company will not be
able to make new placements or renew existing placements with the DOE. The
termination does not affect existing placements with the DOE until the date
such positions are scheduled to expire. At May 31, 2006 the Company had
forty-one consultants placed with the DOE. As a result of the termination,
consultants placed with the DOE who came up for renewal have not been
renewed. Of the remaining thirteen consultants, four are scheduled to end
in February 2007 and nine in May 2010.
DOE also asserted a claim against the Company for a reimbursement due to
the Company's subcontracting without written authorization. On August 29,
2006, the DOE and the Company agreed in principle to resolve these claims
and permit the Company to be treated as a "responsible vendor" upon making
a payment to DOE and appointment of an independent compliance monitor to
monitor the Company's compliance with the DOE agreement. The treatment as a
responsible vendor would allow the Company to continue to submit
consultants to the DOE in response to DOE bid requests. The Company will
also need to have its agreement with the OGS reinstated to make new
placements with DOE. Due to the claim asserted by DOE and the proposed
settlement, the Company established a reserve of $900,000 as of May 31,
2006. While the Company believes that its subcontracting did not result in
overcharges to DOE, it has agreed to settle the matter in order to avoid
the expense and uncertainty of litigation as well as to protect its
existing business with DOE and maintain the potential to make future
placements with DOE. While the Company has agreed in principle to resolve
this matter, the settlement has not been finalized and, therefore, there
can be no assurance that the Company will be able to continue to provide
consultants to DOE.
Page 9
PART I. FINANCIAL INFORMATION
ITEM 2.
TSR, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with the
condensed consolidated financial statements and the notes to such financial
statements.
FORWARD-LOOKING STATEMENTS
- --------------------------
Certain statements contained in Management's Discussion and Analysis of
Financial Condition and Results of Operations, including statements concerning
the Company's future prospects and the Company's future cash flow requirements
are forward looking statements, as defined in the Private Securities Litigation
Reform Act of 1995. Actual results may differ materially from those projections
in the forward looking statements which statements involve risks and
uncertainties, including but not limited to the following: risks relating to the
competitive nature of the markets for contract computer programming services;
the extent to which market conditions for the Company's contract computer
consulting services will continue to adversely affect the Company's business;
the concentration of the Company's business with certain customers; uncertainty
as to the Company's ability to maintain its relations with existing customers
and expand its contract computer consulting services business; the settlement
with the NYC Department of Education (DOE) and the Company's ability to continue
to provide consultants to the DOE; the impact of changes in the industry, such
as the use of vendor management companies in connection with the consulting
procurement process, the increase in customers moving IT operations offshore and
other risks and uncertainties set forth in the Company's filings with the
Securities and Exchange Commission.
RESULTS OF OPERATIONS
- ---------------------
The following table sets forth for the periods indicated certain financial
information derived from the Company's condensed consolidated statements of
earnings. There can be no assurance that trends in operating results will
continue in the future:
THREE MONTHS ENDED AUGUST 31, 2006 COMPARED WITH THREE MONTHS
- -------------------------------------------------------------
ENDED AUGUST 31, 2005
- ---------------------
Three Months Ended
August 31,
(Dollar amounts in Thousands)
2006 2005
---------------- ----------------
% of % of
Amount Revenues Amount Revenues
-------- -------- -------- --------
Revenues ............................... $ 12,376 100.0 $ 12,465 100.0
Cost of sales .......................... 9,999 80.8 9,939 79.7
-------- ------ -------- ------
Gross profit ........................... 2,377 19.2 2,526 20.3
Selling, general, and administrative
expenses.............................. 1,749 14.1 1,741 14.0
-------- ------ -------- ------
Income from operations ................. 628 5.1 785 6.3
Other income ........................... 96 0.8 52 0.4
-------- ------ -------- ------
Income before income taxes ............. 724 5.9 837 6.7
Provision for income taxes ............. 280 2.3 363 2.9
-------- ------ -------- ------
Net income ............................. $ 444 3.6 $ 474 3.8
======== ====== ======== ======
Page 10
TSR, INC. AND SUBSIDIARIES
REVENUES
- --------
Revenues consist primarily of revenues from computer programming consulting
services. Revenues for the quarter ended August 31, 2006 decreased $89,000 or
0.7% from the comparable period in fiscal 2006. Due to the contract suspension
with the NYC Department of Education (DOE), the consultants on billing with DOE
decreased from 41 at May 31, 2006 to 13 at the end of the current quarter. While
the Company has agreed in principle to resolve this matter with the DOE, the
settlement has not yet been finalized and, therefore, there can be no assurance
that the Company will be able to continue to provide consultants to the DOE.
Despite this reduction in the number of consultants on billing at DOE, the
overall average number of consultants on billing only decreased from 349 in the
prior year quarter to 342 for the current quarter. Additional placements at
other accounts have offset most of the reduction at DOE and, therefore, revenues
have only declined slightly.
As a result of the merger of AT&T with SBC Communications, Inc., Procurestaff,
which had been the vendor management company for AT&T is currently one of many
vendors to the new AT&T and no longer serves as the primary vendor manager. The
Company is unable to predict whether and to what extent this change of
relationship will impact the Company's business relationship with AT&T.
COST OF SALES
- -------------
Cost of sales for the quarter ended August 31, 2006, increased $60,000 or 0.6%
to $9,999,000 from $9,939,000 in the prior year period. Cost of sales as a
percentage of revenues increased from 79.7% in the quarter ended August 31, 2005
to 80.8% in the quarter ended August 31, 2006. The increase in cost of sales as
a percentage of revenues was primarily attributable to discount programs
instituted or expanded by customers. These discount programs decrease revenues
without allowing offsetting cost reductions.
Costs of sale as a percentage of revenues increased due to a further decline in
revenues at AT&T, the Company's largest customer, due to Procurestaff, which had
been the vendor management company for AT&T offering further discounts to AT&T
following its merger with SBC Communications to maintain its relationship, which
required the Company to reduce what it received from Procurestaff, and further
reduced the Company's margins on its AT&T business.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
- --------------------------------------------
Selling, general and administrative expenses consist primarily of expenses
relating to account executives, technical recruiters, facilities costs,
management and corporate overhead. These expenses increased $8,000 or 0.5% from
$1,741,000 in the quarter August 31, 2005 to $1,749,000 in the quarter ended
August 31, 2006. This increase was primarily attributable to an increase in the
number of technical recruiters. Additional recruiters have been hired to address
increasing competition.
INCOME FROM OPERATIONS
- ----------------------
Income from operations decreased $157,000 or 20.0% from $785,000 in the quarter
ended August 31, 2005 to $628,000 in the quarter ended August 31, 2006. The
discount programs which have caused an increase in cost of sales as a percentage
of revenues have also caused a greater percentage decline in income from
operations than in revenues.
OTHER INCOME
- ------------
Other income resulted primarily from interest and dividend income, which
increased by $34,000 to $112,000 due to higher interest rates in the quarter
ended August 31, 2006. Additionally, the Company had an unrealized gain of
$1,000 in the quarter ended August 31, 2006 versus an unrealized loss of $1,000
in the quarter ended August 31, 2005 from marketable securities due to mark to
market adjustments of its trading securities equity portfolio.
INCOME TAXES
- ------------
The effective income tax rate of 38.7% for the quarter ended August 31, 2006
decreased from a rate of 43.4% in the quarter ended August 31, 2005 due to lower
state and local taxes and reversal of prior years' income tax over accruals.
Page 11
TSR, INC. AND SUBSIDIARIES
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
The Company expects that cash flow generated from operations together with its
cash and marketable securities will be sufficient to provide the Company with
adequate resources to meet its liquidity requirements for the foreseeable
future.
At August 31, 2006, the Company had working capital of $12,953,000 and cash and
cash equivalents of $3,441,000 as compared to working capital of $12,368,000 and
cash and cash equivalents of $2,661,000 at May 31, 2006. The Company's working
capital also included $5,896,000 and $5,407,000 of marketable securities with
maturities of less than one year at August 31, 2006 and May 31, 2006,
respectively. The working capital and marketable securities increased due to the
reclassification of a security from long-term to current.
Net cash provided by operating activities of $786,000 for the three months ended
August 31, 2006, compared to cash provided of $299,000 for the three months
ended August 31, 2005. The cash provided by operating activities resulted
primarily from the Company's net income and an increase in accounts payable and
accrued expenses. Accounts payable and accrued expenses increased primarily due
to increased amounts accrued for payments to consultants on billing because of
the payroll cut-off dates. The cash provided by operating activities for the
three months ending August 31, 2005 resulted primarily from net income.
Net cash provided by investing activities of $1,000 for the three months ended
August 31, 2006 primarily resulted from reinvesting all of the proceeds of
maturing US Treasury Securities.
Net cash used in financing activities resulted primarily from distributions to
the minority interest of $6,000.
The Company's capital resource commitments at August 31, 2006 consisted of lease
obligations on its branch and corporate facilities. The Company intends to
finance these lease commitments from cash flow provided by operations, available
cash and short-term marketable securities.
The Company's cash and marketable securities were sufficient to enable it to
meet its cash requirements during the three months ended August 31, 2006. The
Company has available a revolving line of credit of $5,000,000 with a major
money center bank through October 6, 2007. The Company is in process of
negotiating a renewal of this line of credit with the bank. As of August 31,
2006, no amounts were outstanding under this line of credit.
Tabular Disclosure of Contractural Obligations
----------------------------------------------
- --------------------------------------------------------------------------------------------------------
Payments Due By Period
- --------------------------------------------------------------------------------------------------------
Contractural Obligations
- ------------------------ LESS THAN 1 MORE THAN 5
TOTAL YEAR 1-3 YEARS 3-5 YEARS YEARS
------------ ------------ ------------ ------------ ------------
Long-Term Debt .............. -- -- -- -- --
Capital Lease Obligations ... -- -- -- -- --
Operating Leases ............ 690,000 306,000 289,000 95,000 --
Purchase Obligations ........ -- -- -- -- --
Employment Agreements ....... 936,000 524,000 300,000 112,000 --
Consulting Contract ......... 150,000 150,000 -- -- --
Other Long-Term Liabilities
Reflected on the Registrant's
Balance Sheet under GAAP .... -- -- -- -- --
------------ ------------ ------------ ------------ ------------
Total ....................... $ 1,776,000 $ 980,000 $ 589,000 $ 207,000 $ --
============ ============ ============ ============ ============
Page 12
TSR, INC. AND SUBSIDIARIES
RECENT ACCOUNT PRONOUNCEMENTS
- -----------------------------
In December 2004, the FASB issued a revision of SFAS No. 123, "Statement of
Financial Accounting Standards No. 123 (FAS123 (R))," which requires that the
fair market value of all share based payment transactions be recognized in the
financial statements. This Statement establishes fair value as the measurement
objective in accounting for share based payment arrangements and requires all
entities to apply a fair value based measurement method in accounting for share
based transactions with employees except for equity instruments held by employee
share ownership plans. This Statement is effective as of the beginning of the
first annual reporting period that begins after June 15, 2005. Therefore, the
Company has adopted FAS123(R) at the beginning of fiscal 2007. The Company has
not issued any share based payments as of August 31, 2006. The Company does not
expect the adoption of the FAS 123(R) to have a material impact on its
consolidated financial statements.
In July 2006, the Financial Accounting Standards Board (FASB) issued FASB
Interpretation No. 48 - "Accounting for Uncertainty in Income Taxes" (FIN 48).
This guidance is intended to provide increased consistency in the application of
FASB Statement No. 109 - "Accounting for Income Taxes" by providing guidance
with regard to the recognition and measurement of tax positions, and provide
increased disclosure requirements. In particular, this interpretation requires
uncertain tax positions to be recognized only if they are "more-likely-than-not"
to be upheld based on their technical merits. Additionally, the measurement of
the tax position will be based on the largest amount that is determined to have
greater than a 50% likelihood of realization upon ultimate settlement. Any
resulting cumulative effect of applying the provisions of FIN 48 upon adoption
would be reported as an adjustment to the beginning balance of retained earnings
(deficit) in the period of adoption. Management is in the process of evaluating
the effects of this guidance which is effective for fiscal years beginning after
December 15, 2006.
In May 2005, the FASB issued SFAS 154, "Accounting for Changes and Error
Corrections - a replacement of APB Opinion No. 20 and FASB Statement No. 3."
SFAS 154 changes the requirements with regard to the accounting for and
reporting a change in an accounting principle. The provisions of SFAS 154
require, unless impracticable, retrospective application to prior periods
presented in financial statements for all voluntary changes in an accounting
principle and changes required by the adoption of a new accounting pronouncement
in the unusual instance that the pronouncement does not indicate a specific
transition method. SFAS 154 also requires that a change in depreciation,
amortization or depletion method for long-lived, non-financial assets be
accounted for as a change in an accounting estimate, which requires prospective
application of the new method. SFAS 154 is effective for all changes in an
accounting principle made in fiscal years beginning after December 15, 2005. The
Company has adopted SFAS 154 as of June 1, 2006. Because SAS 154 is directly
dependent upon future events, the Company cannot determine what effect, if any,
the expected adoption of SFAS 154 will have on its financial condition, results
of operations or cash flows.
In November 2005, the FASB issued FSP 115-1 and FSP 124-1, "The Meaning of
Other-Than-Temporary Impairment and Its Application to Certain Investments"
which nullify certain requirements of EITF 03-1 and supersede EITF D-44. The
FSPs provide guidance for identifying impaired investments and new disclosure
requirements for investments that are deemed to be temporarily impaired. The
FSPs are effective for fiscal years beginning after December 15, 2005. The
Company has adopted the FSPs as of the beginning of fiscal 2007 and it has not
had a material impact on its financial position, results of operations or cash
flows.
Page 13
TSR, INC. AND SUBSIDIARIES
CRITICAL ACCOUNTING POLICIES
- ----------------------------
The SEC defines "critical accounting policies" as those that require the
application of management's most difficult, subjective or complex judgments,
often as a result of the need to make estimates about the effect of matters that
are inherently uncertain and may change in subsequent periods.
The Company's significant accounting policies are described in Note 1 to the
Company's consolidated financial statements, contained in its May 31, 2006
Annual Report on Form 10-K, as filed with the SEC. The Company believes that
those accounting policies require the application of management's most
difficult, subjective or complex judgments. There have been no changes in the
Company's significant accounting policies as of August 31, 2006.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
---------------------------------------------------------
The Company's earnings and cash flows are subject to fluctuations due to (i)
changes in interest rates primarily affecting its income from the investment of
available cash balances in money market funds and (ii) changes in market values
of its investments in trading equity securities. Under its current policies, the
Company does not use interest rate derivative instruments to manage exposure to
interest rate changes. The Company's present exposure to changes in the market
value of its investments in equity securities is not significant.
ITEM 4. CONTROLS AND PROCEDURES
-----------------------
DISCLOSURE CONTROLS AND PROCEDURES. The Company conducted an evaluation, under
the supervision and with the participation of the principal executive officer
and principal financial officer, of the Company's disclosure controls and
procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of
1934 (the "Exchange Act")). Based on this evaluation, the principal executive
officer and principal financial officer concluded that, as of the end of the
period covered by this report, the Company's disclosure controls and procedures
are effective.
INTERNAL CONTROL OVER FINANCIAL REPORTING. There was no change in the Company's
internal control over financial reporting (as such term is defined in Rule
13a-15(f) under the Exchange Act) during the Company's most recently reported
completed fiscal quarter that has materially affected, or is reasonably likely
to materially affect, the Company's internal control over financial reporting.
Page 14
Part II. Other Information
Item 1A. Risk Factors
There are no material changes to the risk factors described in the Form
10-K, filed on September 12, 2006, except as follows:
Dependence on Significant Customers
-----------------------------------
As described under Part I, Item 2, the Company's relationship with AT&T has
changed due to the merger of AT&T with SBC Communications and the resulting
change in the relationship with AT&T of Procurestaff, through which the
Company contracts with AT&T. This change has had a further impact on the
Company's profit margins on consultants placed with AT&T and the Company
cannot predict whether this change will adversely affect the number of
consultants placed with AT&T.
Item 6. Exhibits
(a). Exhibit 31.1 - Certification by J.F. Hughes pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
Exhibit 31.2 - Certification by John G. Sharkey pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
Exhibit 32.1 - Certification by J.F. Hughes pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
Exhibit 32.2 - Certification by John G. Sharkey pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
TSR Inc.
-------------------------------
(Registrant)
Date: October 2, 2006 /s/ J.F. Hughes
-------------------------------
J.F. Hughes, Chairman and President
Date: October 2, 2006 /s/ John G. Sharkey
-------------------------------
John G. Sharkey, Vice President Finance
Page 15