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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 February 28, 1999
[ ] 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 Identification No.)
incorporation or organization)
400 OSER AVENUE, HAUPPAUGE, NY 11788
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(Address of principal executive offices)
516-231-0333
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(Registrant's telephone number)
NONE
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(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. [X] Yes [ ] No
SHARES OUTSTANDING
5,899,626 shares of common stock, par value $.01 per share,
as of March 31, 1999
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Page 1
<PAGE>
TSR, INC. AND SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
Page
Number
------
<S> <C>
Part I. Financial Information:
Item 1. Financial Statements:
Consolidated Condensed Balance Sheets --
February 28, 1999 and May 31, 1998.................................................. 3
Consolidated Condensed Statements of Earnings --
For the three months and nine months ended February 28, 1999 and 1998 .............. 4
Consolidated Condensed Statements of Cash Flows --
For the nine months ended February 28, 1999 and 1998................................ 5
Notes to Consolidated Condensed Financial Statements..................................... 6
Item 2. Management's Discussion and Analysis..................................................... 7
Part II. Other Information.......................................................................... 12
Signatures........................................................................................... 13
</TABLE>
Page 2
<PAGE>
Part I. Financial Information
Item 1. Financial Statements
TSR, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
February 28, May 31,
ASSETS 1999 1998
----------- ------------
(unaudited)
<S> <C> <C>
Current Assets:
Cash and cash equivalents (Note 6)............................................ $ 4,079,786 $ 2,425,122
Marketable securities (Note 7)................................................ 5,424,841 1,575,945
Accounts receivable (net of allowance for
doubtful accounts of $173,000)............................................ 14,985,381 15,037,995
Other receivables............................................................. 170,557 86,772
Prepaid expenses.............................................................. 25,681 67,449
Prepaid and recoverable income taxes.......................................... 224,501 90,823
Deferred income taxes......................................................... 59,000 59,000
----------- -----------
Total current assets...................................................... 24,969,747 19,343,106
Equipment and leasehold improvements, at cost (net of accumulated
depreciation and amortization of $1,600,000 and $952,000) 428,216 1,008,776
Other assets....................................................................... 92,799 90,995
Deferred income taxes.............................................................. 107,000 73,000
----------- -----------
$25,597,762 $20,515,877
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts and other payables................................................... $ 398,498 $ 278,410
Accrued and other liabilities................................................. 3,594,308 2,950,986
Income taxes payable.......................................................... 144,260 173,377
Advances from customers....................................................... 1,439,961 946,257
----------- ----------
Total current liabilities................................................. 5,577,027 4,349,030
----------- ----------
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 6,078,726 shares and 5,988,276 shares 60,787 59,883
Additional paid-in capital.................................................... 4,007,699 3,183,246
Retained earnings............................................................. 16,500,124 12,923,718
----------- -----------
20,568,610 16,166,847
Less: Treasury stock 62,000 shares at cost .................................. 547,875 --
----------- -----------
20,020,735 16,166,847
----------- -----------
$25,597,762 $20,515,877
=========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated condensed
financial statements.
Page 3
<PAGE>
TSR, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF EARNINGS
FOR THE THREE AND NINE MONTHS ENDED FEBRUARY 28, 1999 AND 1998
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
February 28, February 28,
----------------------------- -------------------------------
1999 1998 1999 1998
------------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenues......................................... $20,817,633 $17,966,457 $62,965,539 $51,260,976
Cost of sales.................................... 15,460,007 12,808,402 46,408,135 37,426,481
Selling, general and administrative expenses 3,311,912 3,093,832 10,197,263 8,996,869
Research and development......................... 49,139 211,696 277,620 588,880
----------- ----------- ----------- -----------
18,821,058 16,113,930 56,883,018 47,012,230
----------- ----------- ----------- -----------
Income from operations........................... 1,996,575 1,852,527 6,082,521 4,248,746
Other income:
Interest and dividend income .................. 105,361 28,876 251,934 101,146
Gain (loss) from marketable
securities, net .............................. (4,168) 6,200 (8,049) 13,560
Gain from sales of assets ..................... -- -- -- 8,600
----------- ----------- ----------- -----------
Income before income taxes....................... 2,097,768 1,887,603 6,326,406 4,372,052
Provision for income taxes....................... 900,000 838,000 2,750,000 1,972,000
----------- ----------- ----------- -----------
Net income.................................. $ 1,197,768 $ 1,049,603 $ 3,576,406 $ 2,400,052
=========== =========== =========== ===========
Basic net income per common share ............... $ 0.20 $ 0.18 $ 0.60 $ 0.41
=========== =========== =========== ===========
Weighted average number of
common shares outstanding..................... 6,026,801 5,881,609 6,001,118 5,846,054
=========== =========== =========== ===========
Diluted net income per common share ............. $ 0.20 $ 0.17 $ 0.60 $ 0.40
=========== =========== =========== ===========
Weighted average number of
diluted common shares outstanding ............ 6,039,793 6,165,503 6,003,070 5,977,381
=========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated condensed
financial statements.
Page 4
<PAGE>
TSR, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED FEBRUARY 28, 1999 AND 1998
(unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
February 28,
------------------------------
1999 1998
----------- ----------
<S> <C> <C>
Cash flows from operating activities:
Net income.................................................................... $ 3,576,406 $ 2,400,052
Adjustments to reconcile net income
to net cash provided by (used in) operating activities:
Depreciation and amortization............................................. 713,855 312,534
Loss (gain) from marketable securities, net............................... 8,049 (13,560)
Deferred income taxes..................................................... (34,000) (39,000)
Gain on sales of assets................................................... -- (8,600)
Changes in assets and liabilities:
Accounts receivable................................................... 52,614 (3,641,173)
Other receivables..................................................... (83,785) (42,137)
Prepaid expenses...................................................... 41,768 (10,063)
Prepaid and recoverable income taxes.................................. (133,678) (29,090)
Other assets.......................................................... (26,804) (8,213)
Accounts payable and accrued expenses................................. 763,410 231,242
Income taxes payable.................................................. (29,117) 24,536
Advances from customers............................................... 493,704 178,782
----------- -----------
Net cash provided by (used in) operating activities........................... 5,342,422 (644,690)
----------- -----------
Cash flows from investing activities:
Proceeds from maturities and sales of marketable securities 974,054 --
Purchase of marketable securities......................................... (4,830,999) (592,187)
Purchase of fixed assets.................................................. (108,295) (869,987)
Proceeds from sales of assets............................................. -- 8,600
----------- -----------
Net cash used in investing activities......................................... (3,965,240) (1,453,574)
----------- -----------
Cash flows from Financing Activities
Issuance of common stock.................................................. -- 2,306,400
Exercise of stock options................................................. 825,357 --
Purchase of treasury stock................................................ (547,875) --
----------- -----------
Net cash provided by financing activities..................................... 277,482 2,306,400
----------- -----------
Net increase in cash and cash equivalents.......................................... 1,654,664 208,136
Cash and cash equivalents at beginning of period................................... 2,425,122 2,931,180
----------- -----------
Cash and cash equivalents at end of period......................................... $ 4,079,786 $ 3,139,316
=========== ===========
Supplemental Disclosures:
Income tax payments........................................................... $ 2,947,000 $ 2,016,000
=========== ===========
Interest paid................................................................. $ -- $ --
=========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated condensed
financial statements.
Page 5
<PAGE>
TSR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
FEBRUARY 28, 1999
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 February
28, 1999:
Cash in banks ............................. $ 810,192
Money Market Funds......................... 2,775,134
United States Treasury Bills............... 494,460
----------
$4,079,786
==========
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 February
28, 1999: are as follows:
<TABLE>
<CAPTION>
Gross Gross
Unrealized Unrealized
Amortized Holding Holding
Cost Gains Losses Fair Value
----------- ------------ ----------- ----------
<S> <C> <C> <C> <C>
United States Treasury Bills....... $5,305,091 -- -- $5,305,091
Equity Securities.................. 133,289 20,338 33,877) 119,750
---------- ------- -------- ----------
$5,438,380 $20,338 $(33,877) $5,424,841
========== ======= ======== ==========
</TABLE>
Page 6
<PAGE>
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:
Three months ended February 28, 1999 compared with three months ended February
28, 1998
<TABLE>
<CAPTION>
3 Months Ended
February 28,
---------------------------------------------------
1999 1998
---- ----
% of % of
Amount Revenues Amount Revenues
-------- -------- ------- --------
(Dollar amounts in Thousands)
<S> <C> <C> <C> <C>
Revenues ........................................................... $20,818 100.0 $17,967 100.0
Cost of Sales ...................................................... 15,460 74.3 12,808 71.3
------- ----- ------- -----
Gross Profit ....................................................... 5,358 25.7 5,159 28.7
Selling, General, and Administrative Expenses ...................... 3,312 15.9 3,094 17.2
Research and Development ........................................... 49 0.2 212 1.2
------- ----- ------- -----
Income from Operations ............................................. 1,997 9.6 1,853 10.3
Other Income ....................................................... 101 0.5 35 0.2
------- ----- ------- -----
Income Before Income Taxes ......................................... 2,098 10.1 1,888 10.5
Provision for Income Taxes ......................................... 900 4.3 838 4.7
------- ----- ------- -----
Net Income ......................................................... $ 1,198 5.8 $ 1,050 5.8
======= ===== ======= =====
</TABLE>
Revenues
Revenues consist primarily of revenues from computer programming consulting
services. In addition, the Company's revenues for the quarters ended February
28, 1999 and 1998 included revenues from its Year 2000 business which was
commenced in fiscal 1997. Revenues for the quarter ended February 28, 1999
increased $2,851,000 or 15.9% over the comparable period in fiscal 1998.
Computer programming consulting services revenues increased $3,818,000 or 25%
from $15,390,000 in the quarter ended February 28, 1998 to $19,208,000 in the
quarter ended February 28, 1999. This increase resulted from an overall increase
in the number of programmers on billing with clients from an average of
approximately 452 in the quarter ended February 28, 1998 to approximately 532 in
the quarter ended February 28, 1999. Increased billing rates to clients have
also impacted the revenue growth. The Company believes that the rate of growth
in revenues from consulting services in the quarter ended February 28, 1999
would have been higher except that there was a slowdown in new projects
commenced by clients in the last two months of the quarter. The Company believes
that this slowdown is attributable to an industry-wide trend in which companies
have delayed new IT projects because they are devoting their resources to Year
2000 testing. The Company ordinarily experiences a decline in the number of
programmers on billing with clients after December 31 of each year as projects
are completed or terminated at year end. Generally, programmers on billing with
clients increase during the first few months of the following year as clients
commence new projects in the new year. However, due to the trend referred to
above, the number of new projects commenced has declined, resulting in a delay
in the increase in programmers on billing with clients. The Company believes
that this impact is likely to be temporary.
Revenues from the Company's Year 2000 business, were $1,610,000 for the quarter
ended February 28, 1999 as compared to $2,561,000 for the quarter ended February
28, 1998. During the current quarter the Company used its proprietary Catch/21
Software Solution on conversion projects to remediate approximately 3,000,000
lines of code for client software applications for a total of ten customers. The
Company's Year 2000 revenues during the third quarter of fiscal 1999 were less
than the second quarter revenues and while, as previously disclosed, the Company
anticipated a decline in Year 2000 revenues, the decline of third quarter
revenues was less than anticipated.
Page 7
<PAGE>
The Company expects these revenues may decline more rapidly during the remainder
of fiscal 1999. As a result, the Company has reduced its marketing efforts and
sales force in the Year 2000 area.
The agreements under which the Year 2000 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 only for conversion projects where management
believes that acceptance is probable.
Cost of Sales
Cost of sales as a percentage of revenues increased from 71.3% in the quarter
ended February 28, 1998 to 74.3% in the quarter ended February 28, 1999. This
increase is attributable to increases in cost of sales as a percentage of
revenues in the computer programming consulting services business. As well as a
shift in the mix of revenues as the higher margin Year 2000 business revenues
decline as a percentage of total revenues.
In the computer programming consulting services business, cost of sales as a
percentage of sales increased from 77.4% in the quarter ended February 28, 1998
to 79.0% in the quarter ended February 28, 1999. 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 $282,000 in the quarter ended
February 28, 1999 versus $900,000 in the prior year quarter. These costs
consisted primarily of salaries of software analysts and quality assurance
personnel which personnel were significantly reduced in anticipation of reduced
revenues. The Company expects cost of sales from the Year 2000 business to
continue to decrease as the related revenues decrease.
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 $218,000 or 7.0%
from $3,094,000 in the quarter ended February 28, 1998 to $3,312,000 in the
quarter ended February 28, 1999. Selling, general and administrative expenses
related to computer programming consulting services increased $379,000 over the
prior year period to $2,745,000. 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 February 28, 1999, approximately $567,000 in selling,
general and administrative expenses were attributable to the Year 2000 business.
These expenses consisted primarily of marketing, management, and facilities
expenses. Such expenses are expected to decline due to lower demand for Year
2000 remediation services. Comparable Year 2000 selling, general and
administrative expenses in the quarter ended February 28, 1998 were $726,000.
Research and Development
Research and development costs of $49,000 in the quarter ended February 28, 1999
represent amounts expended by the Company on the Company's Year 2000 compliance
solution product offerings primarily related to 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 February 28,
1998 were $212,000. The Company expects to continue to reduce research and
development expenditures.
Income from Operations
In the quarter ended February 28, 1999, the computer programming consulting
service business contributed $1,285,000 or 64.3% of the income from operations,
while the Year 2000 business contributed the remaining $712,000 or 35.7%. In the
prior year quarter, the computer programming consulting service business
contributed $1,116,000 or 60.2% of income from operations, the Year 2000
business contributed $723,000 or 39.0%, and there was $14,000 or 0.8% from other
sources.
Page 8
<PAGE>
Other Income
Other income resulted primarily from interest and dividend income which
increased by $76,000 to $105,000 due to higher average available investable
funds in the quarter ended February 28, 1999. There was also an unrealized loss
of $4,000 on the Company's equity securities.
Income Taxes
The effective income tax rate decreased to 42.9% in the quarter ended February
28, 1999 from 44.4% in the quarter ended February 28, 1998 because of a lower
percentage of non-deductible expenses.
Nine months ended February 28, 1999 compared with nine months ended February 28,
1998.
<TABLE>
<CAPTION>
9 Months Ended
February 28,
---------------------------------------------------------
1999 1998
---- ----
% of % of
Amount Revenues Amount Revenues
------- --------- ------- --------
(Dollar amounts in Thousands)
<S> <C> <C> <C> <C>
Revenues ................................................... $62,966 100.0 $51,261 100.0
Cost of Sales .............................................. 46,408 73.7 37,426 73.0
------- ----- ------- -----
Gross Profit ............................................... 16,558 26.3 13,835 27.0
Selling, General, and Administrative Expenses .............. 10,197 16.2 8,997 17.6
Research and Development ................................... 278 0.4 589 1.1
------- ----- ------- -----
Income from Operations ..................................... 6,083 9.7 4,249 8.3
Other Income ............................................... 244 0.4 123 0.2
------- ----- ------- -----
Income Before Income Taxes ................................. 6,327 10.1 4,372 8.5
Provision for Income Taxes ................................. 2,750 4.4 1,972 3.8
------- ----- ------- -----
Net Income ................................................. $ 3,577 5.7 $ 2,400 4.7
======= ===== ======= =====
</TABLE>
Revenues
Revenues consist primarily of revenues from computer programming consulting
services. In addition, the Company's revenues for the nine months ended February
28, 1999 and 1998 included revenues from its Year 2000 business which was
commenced in fiscal 1997. Revenues for the nine months ended February 28, 1999
increased $11,705,000 or 22.8% over the comparable period in fiscal 1998.
Computer programming consulting services revenues increased $10,317,000 or 22%
from $46,486,000 in the nine months ended February 28, 1998 to $56,803,000 in
the nine months ended February 28, 1999. This increase resulted from an overall
increase in the number of programmers on billing with clients from an average of
approximately 456 in the nine months ended February 28, 1998 to approximately
508 in the nine months ended February 28, 1999. Increased billing rates to
clients have also impacted the revenue growth.
Revenues from the Company's Year 2000 business, were $6,163,000 for the nine
months ended February 28, 1999 as compared to $4,726,000 in the nine months
ended February 28, 1998. During the current nine month period the Company used
its proprietary Catch/21 Software Solution on conversion projects to remediate
approximately 19,500,000 lines of code for client software applications for a
total of seventeen customers. While the Company's revenues for Year 2000
services increased over the comparable nine month period in fiscal 1998, the
Company expects its Year 2000 revenues to decline during the remainder of fiscal
1999.
Page 9
<PAGE>
Cost of Sales
Cost of sales as a percentage of revenues increased from 73.0% in the nine
months ended February 28, 1998 to 73.7% in the nine months ended February 28,
1999. This increase is primarily attributable to the increases in cost of sales
as percentage of revenues in the computer programming consulting services
business.
In the computer programming consulting services business, cost of sales as a
percentage of sales increased from 76.6% in the nine months ended February 28,
1998 to 77.7% in the nine months ended February 28, 1999. 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 $2,270,000 in the nine months
ended February 28, 1999 versus $1,808,000 in the prior year period. These costs
consisted primarily of salaries of software analysts and quality assurance
personnel which personnel were significantly reduced in anticipation of reduced
revenues. The Company expects cost of sales from the Year 2000 business to
continue to decrease as the related revenues decrease.
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 $1,200,000 or 13.3%
from $8,997,000 in the nine months ended February 28, 1998 to $10,197,000 in the
nine months ended February 28, 1999. Selling, general and administrative
expenses related to computer programming consulting services increased
$1,144,000 over the prior year period to $8,267,000. The increase was primarily
attributable to additional sales commissions 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 nine months ended February 28, 1999, approximately $1,930,000 in selling,
general and administrative expenses were attributable to the Year 2000 business.
These expenses consisted primarily of marketing, management, and facilities
expenses. Comparable Year 2000 selling, general and administrative expenses in
the nine months ended February 28, 1998 were $1,873,000.
Research and Development
Research and development costs of $277,000 in the nine months ended February 28,
1999 represent amounts expended by the Company on the Company's Year 2000
compliance solution product offerings primarily related to XRAY/2000 which
stands for Examination, Repair, and Audit for Year 2000 Compliance, and various
testing utilities. Research and development expenses in the nine months ended
February 28, 1998 were $589,000.
Income from Operations
In the nine months ended February 28, 1999, the computer programming consulting
service business contributed $4,397,000 or 72.3% of the income from operations,
while the Year 2000 business contributed the remaining $1,686,000 or 27.7%. In
the prior year period, the computer programming consulting service business
contributed $3,745,000 of income from operations, the Year 2000 business
contributed $456,000, and there was $48,000 from other sources.
Other Income
Other income resulted primarily from interest and dividend income which
increased by $151,000 to $252,000 due to higher average available investable
funds in the nine months ended February 28, 1999. This interest and dividend
increase was partially offset by an unrealized loss of $8,000 on the Company's
equity securities.
Income Taxes
The effective income tax rate decreased to 43.5% in the nine months ended
February 28, 1999 from 45.1% in the period ended February 28, 1998 because of a
lower percentage of non-deductible expenses.
Page 10
<PAGE>
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 February 28, 1999, the Company had working capital of $19,393,000 and cash
and cash equivalents of $4,080,000 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 nine months ended February 28, 1999.
The Company had positive net cash flow of $5,342,000 from operations during the
nine months ended February 28, 1999 as compared to negative net cash flow from
operations of $645,000 in the nine months ended February 28, 1998. The Company
had net income of $3,576,000, in the nine month ended February 28, 1999 as
compared to $2,400,000 in the nine months ended February 28, 1998. Cash flow
also benefited from a small decrease in accounts receivable despite the
significant increase in revenues because the rate of increase in collections on
accounts receivable exceeded the rate of growth in revenues during the nine
months ended February 28, 1999. Also, the decrease in revenues from the Year
2000 business has provided cash as receivables are collected and not replaced by
new revenues. The Company also had additional cash flow as a result of the
increase in the accounts payable and accrued expenses of $763,000. The increase
in accounts payable and accrued expense resulted primarily from the increase in
cost of sales.
Cash flow used in investing activities resulted primarily from the purchase of
US Treasury Bills with a maturity in excess of three months and the purchase of
fixed assets in the current period of $108,000. The fixed asset additions were
$870,000 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.
Cash flow from financing activities for the nine months ended February 28, 1999
consisted of employee stock option exercises on 90,450 shares at $9.125 or
proceeds of $825,357 less treasury stock repurchases of 60,200 shares at an
average price of $9.10 or a total cost of $547,875. As of March 31, 1999 the
Company has repurchased a total of 178,700 shares at an average price of $8.17
or a total cost of $1,460,710. The Company's board of directors has authorized
the repurchase of up to 600,000 shares of its common stock. No time limit has
been placed on the duration of the share repurchases. Subject to applicable
securities laws, such purchases will be at times and in amounts as the Company
deems appropriate and may be discontinued at any time. The Company has no
obligation or commitment to repurchase all or any portion of the shares covered
by the authorization.
The Company's capital resource commitments at February 28, 1999 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 nine months ended February 28, 1999. The
Company has available a revolving line of credit of $5,000,000 with a major
money center bank which the Company believes provides sufficient available
financing if this need arose. As of February 28, 1999, no amounts were
outstanding under this line of credit.
Year 2000 Information
Readiness for Year 2000
The Company has only limited internal systems which it believes could be
affected by Year 2000 issues. The Company's principal information technology
(IT) systems are its resume search (which contains its databases of IT
professionals), payroll, billing and general ledger systems. The Company
believes that its search, payroll and billing software systems are written in a
language which should be Year 2000 compliant. The Company's general ledger
system will require an upgrade to be Year 2000 compliant and the Company is
currently in the process of testing the upgrade. The Company does not expect the
cost of the upgrade to be material. The Company's management is engaged in an
assessment of the readiness of its systems for handling the Year 2000 and
intends to conduct more extensive tests of its software systems. The Company is
not currently aware of any non-IT systems which are material to the Company and
contain embedded chip systems which have Year 2000 issues. Although the
assessment of the Company's IT and non-IT systems is in the early stages,
management does not believe that it will have material Year 2000 problems
relating to its IT and non-IT systems. The Company's management currently
believes that it will be successful in identifying and resolving any potential
deficiencies in its systems with respect to Year 2000 issues, that all material
systems will be compliant by the Year 2000 and that the cost to address the Year
2000 issues will not be material.
Page 11
<PAGE>
The Company does not materially rely on individual third party vendors and
suppliers and accordingly does not believe that the Year 2000 readiness of third
party vendors or suppliers will have a material impact on its business.
Nonetheless, the Company's business is dependent on third parties, such as
public utilities, electric systems, telecommunication systems, mail and
overnight delivery services. The Company's business could be materially
adversely affected by disruption in services provided by such entities, or by
conditions resulting from Year 2000 issues generally affecting companies with
which it does business.
The Company's management believes the impact of the Year 2000 will not cause any
material disruptions in the Company's operations. However, the impact of such
potential disruptions is difficult to assess and accordingly there is a risk
that there will be disruptions which could have a material adverse effect on the
Company.
As discussed above, the Company is engaged in an ongoing Year 2000 assessment.
Following the completion of the assessment, the Company plans to conduct a
full-scale Year 2000 simulation of its IT systems. The results of this
simulation and the Company's assessment will be taken into account in
determining the nature and extent of any contingency plans.
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.
Part II. Other Information
Item 6. Exhibits and Reports on Form 8K
(a). Exhibit 27: Financial Data Schedule
(b). Reports on Form 8K: None
Page 12
<PAGE>
TSR, INC. AND SUBSIDIARIES
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
TSR, INC.
----------------------------------------------
(Registrant)
Date: April 5, 1999 /s/ J.F. HUGHES
----------------------------------------------
J.F. Hughes, Chairman, President and Treasurer
Date: April 5, 1999 /s/ JOHN G. SHARKEY
---------------------------------------------
John G. Sharkey, Vice President, Finance
Page 13
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
TSR, INC. AND SUBSIDIARIES
EXHIBIT 27
FINANCIAL DATA SCHEDULE TO REPORT ON FORM 10-Q
FEBRUARY 28, 1999
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> MAY-31-1999
<PERIOD-END> FEB-28-1999
<CASH> 4,079,786
<SECURITIES> 5,424,841
<RECEIVABLES> 15,158,645
<ALLOWANCES> 173,264
<INVENTORY> 0
<CURRENT-ASSETS> 24,969,747
<PP&E> 2,028,549
<DEPRECIATION> 1,600,333
<TOTAL-ASSETS> 25,597,762
<CURRENT-LIABILITIES> 5,577,027
<BONDS> 0
0
0
<COMMON> 60,787
<OTHER-SE> 19,959,948
<TOTAL-LIABILITY-AND-EQUITY> 25,597,762
<SALES> 0
<TOTAL-REVENUES> 62,965,539
<CGS> 0
<TOTAL-COSTS> 46,408,135
<OTHER-EXPENSES> 10,474,883
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 6,326,406
<INCOME-TAX> 2,750,000
<INCOME-CONTINUING> 3,576,406
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,576,406
<EPS-PRIMARY> 0.60
<EPS-DILUTED> 0.60
</TABLE>
