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| TSRI > SEC Filings for TSRI > Form 10-K on 18-Aug-2009 | All Recent SEC Filings |
18-Aug-2009
Annual Report
Results of Operations
The following table sets forth for the periods indicated certain financial
information derived from the Company's consolidated statements of income. There
can be no assurance that historical trends in operating results will continue in
the future:
Year Ended May 31,
(Dollar Amounts in Thousands)
2009 2008
------ ------
% of % of
Amount Revenue Amount Revenue
------- ------- ------- -------
Revenue $42,801 100.0% $51,723 100.0%
Cost of Sales 35,118 82.1 42,305 81.8
------- ------- ------- -------
Gross Profit 7,683 17.9 9,418 18.2
Selling, General and
Administrative Expenses 6,685 15.6 7,447 14.4
-------- ------- ------- -------
Income from Operations 998 2.3 1,971 3.8
Other Income, Net. 96 0.2 276 0.6
-------- ------- ------- -------
Income Before Income Taxes 1,094 2.5 2,247 4.4
Provision for Income Taxes 473 1.1 971 1.9
-------- ------- ------- -------
Net Income $ 621 1.4% $1,276 2.5%
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Revenue
Revenue consists primarily of revenue from computer programming consulting
services. Revenue for the fiscal year ended May 31, 2009 decreased $8,922,000 or
17.2% from fiscal 2008. The average number of consultants on billing with
customers decreased from approximately 332 for the fiscal year ended May 31,
2008 to 264 for the fiscal year ended May 31, 2009. The continuing impact of the
current economic environment has significantly decreased the number of
consultants on billing with customers and also decreased the opportunities to
place new consultants on billing with customers. The revenue decrease is also
the result of the continued reduction in consultants placed with AT&T and lower
billing rates caused by discounts and other rate reductions instituted by
customers.
As a result of the merger of AT&T with SBC Communications, Inc., the Company experienced a decrease in new placements with AT&T beginning in the second quarter of fiscal 2007. This has reduced the number of consultants on billing with AT&T from 100 at August 31, 2006 to 45 at May 31, 2008 and to 14 at May 31, 2009. The Company expects that these changes will continue to impact the Company's business relationship with AT&T, resulting in few opportunities to place new consultants at AT&T.
The Company's revenue from programmers on billing continue to be affected by discounts, such as prompt payment and volume discounts, required by major customers as a condition to remaining on their approved vendor lists and the reduction in the number of vendors on the approval vendor lists to increase pricing competition among the remaining vendors. In addition, most of the Company's major customers have retained third parties to provide vendor management services and centralize the consultant hiring process. Under this system, the third party retains the Company to provide contract computer
programming services, the Company bills the third party and the third party bills the ultimate customer. This process has weakened the relationships the Company has built with its client contacts, the project managers, who the Company would normally work directly with to place consultants. Instead, the Company is required to interface with the vendor management provider, making it more difficult to maintain its relationships with its customers and preserve and expand its business. These changes have also reduced the Company's profit margins because the vendor management company is retained for the purpose of keeping costs down for the end client and receives a processing fee which is deducted from the payment to the Company. Revenue has also been impacted by the increased use of offshore development companies, particularly in India, over the past few years to provide technology related work and projects. The Company is unable to predict the long-term effects of these changes.
As a result of the current economic downturn and, specifically, the impact of the adverse conditions in the credit markets on the financial services industry, the Company has experienced a decrease in the number of consultants on billing with customers as a result of decreased IT spending. These economic conditions have also reduced the opportunities to place new consultants on billing with customers. The Company expects that these conditions will continue to affect the number of consultants on billing with customers and the Company's revenue.
The Company provided services to Lehman Brothers Holdings, Inc. ("LBHI") through its contract with Beeline.com, Inc. ("Beeline"), a vendor management company. LBHI filed a petition under Chapter 11 of the U.S. Bankruptcy Code on September 15, 2008. The Company has received payment in full for amounts due for services rendered through the date of the bankruptcy filing. Following the bankruptcy filing, the consultants on billing with LBHI decreased from 13 as of August 31, 2008 to 3 as of May 31, 2009. The Company cannot determine the impact the bankruptcy filing and purchase of Lehman Brothers, Inc. ("LBI") by Barclays Capital, Inc. will have on the remaining consultants on billing with LBI and its affiliates. LBHI and its subsidiaries constituted approximately 6% of the Company's revenue in fiscal 2008 and 4% in fiscal 2009.
Cost of Sales
Cost of sales decreased by $7,187,000 or 17.0%, in fiscal 2009 from fiscal 2008.
Cost of sales as a percentage of revenue increased to 82.1% in fiscal 2009 from
81.8% in fiscal 2008. The decrease in cost of sales resulted primarily from
decreased revenue. The increase in cost of sales as a percentage of revenue is
due to additional mandatory discount and rate reduction programs, as discussed
above under "Revenue".
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 decreased $762,000, or 10.2%,
to $6,685,000 in fiscal 2009 from $7,447,000 in fiscal 2008. This decrease was
primarily attributable to a decrease in the number of technical recruiters and
account executives. Technical recruiters and account executives have been
terminated in order to lessen the impact of the Company's reduced level of
business activity.
Other Income
Fiscal 2009 other income resulted primarily from interest and dividend income of
$149,000, which decreased by $212,000 from the level realized in 2008 due to
lower rates of interest earned on the Company's US Treasury securities and money
market accounts.
Income Taxes
The effective income tax rate remained at 43.2% in both fiscal 2009 and fiscal
2008.
Net Income
Net income decreased $655,000 or 51.3% in fiscal 2009 from fiscal 2008. Net
income decreased primarily due to lower revenue from a decreased number of
consultants on billing with clients and lower interest income earned on the
Company's US Treasury securities and money market accounts.
Liquidity, Capital Resources and Changes in Financial Condition
The Company expects that cash flow generated from operations together with its
available cash and marketable securities will be sufficient to provide the
Company with adequate resources to meet its liquidity requirements for the next
12 months.
At May 31, 2009, the Company had working capital (total current assets in excess of total current liabilities) of $12,288,000 including cash and cash equivalents of $4,075,000 as compared to working capital of $12,693,000 including cash and cash equivalents of $1,588,000 at May 31, 2008. The Company's working capital also included $4,509,000 and $6,460,000 of marketable securities with maturities of less than one year at May 31, 2009 and 2008, respectively. The majority of the decrease in working capital occurred due to purchases of treasury stock of $1,220,000 and cash dividends paid exceeding net income by $146,000, offset to some extent by the reclassification of $1,000,000 of marketable securities to current assets.
Net cash flow of $1,628,000 was provided by operations during fiscal 2009 as compared to $1,268,000 of net cash flow from operations in fiscal 2008. The cash provided by operations for fiscal 2009 primarily resulted from net income of $621,000 and a decrease in accounts receivable of $1,832,000. The cash provided by operations for fiscal 2008 primarily resulted from net income of $1,276,000 and a decrease in accounts payable and accrued expenses of $265,000.
Net cash provided by investing activities amounted to $2,929,000 for fiscal 2009, compared to $69,000 in net cash used in investing activities in fiscal 2008. The net cash provided by investing activities in fiscal 2009 primarily resulted from not reinvesting maturities of treasury securities. The net cash used in investing activities in fiscal 2008 primarily resulted from higher prices paid for reinvesting in treasury securities.
Net cash used in financing activities during the fiscal year ended May 31, 2009 resulted from purchases of treasury securities of $1,220,000, cash dividends paid of $768,000 and distributions of $83,000 to the minority interest. The purchases of treasury stock consisted of $1,050,000 in a private transaction and $170,000 in open market transactions. The Board of Directors of the Company approved a plan in December 2007 authorizing the repurchase of shares of common stock and approximately 239,000 shares remain available for purchase under this previously announced plan. The Company has not made any purchases under this plan since September 2008. The Company does not intend to make further purchases under this plan unless there is a change in the market for the Company's common stock. Net cash used in financing activities during the fiscal year ended May 31, 2008 resulted primarily from cash dividends paid of $1,462,000 and distributions of $49,000 to the minority interest. The Board of Directors determined to suspend the payment of further dividends effective after the dividend paid February 9, 2009 for the second quarter of fiscal 2009. The Board of Directors may reevaluate the Company's dividend policy once the economic conditions stabilize.
The Company's capital resource commitments at May 31, 2009 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 liquidity requirements during fiscal 2009. The Company has available a revolving line of credit of $5,000,000 with a major money center bank through October 31, 2009. As of May 31, 2009, no amounts were outstanding under this line of credit.
Tabular Disclosure of Contractual Obligations
---------------------------------------------
Payments Due by Period
----------------------
<CAPTION>
Contractual Obligations Total Less than 1 Year 1-3 Years 3-5 Years More than 5 Years
----------------------- ----- ---------------- --------- --------- -----------------
Operating Leases $1,213,000 $ 364,000 $ 629,000 $ 220,000 $ --
Employment Agreements 725,000 375,000 350,000 -- --
---------- ---------- ---------- ---------- ---------
Totals $1,938,000 $ 739,000 $ 979,000 $ 220,000 $ --
========== ========== ========== ========== =========
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Impact of New Accounting Standards
In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements"
("SFAS No. 157"), which, among other requirements, defines fair value,
establishes a framework for measuring fair value, and expands disclosures about
the use of fair value to measure assets and liabilities. SFAS No. 157 prescribes
a single definition of fair value as the price that would be received to sell an
asset or paid to transfer a liability in an orderly transaction between
participants at the measurement date. For financial instruments and certain
nonfinancial assets and liabilities that are recognized or disclosed at fair
value on a recurring basis at least annually, SFAS No. 157 is effective
beginning the first fiscal year that begins after November 15, 2007, which
corresponds to the Company's fiscal year beginning June 1, 2008. For all other
nonfinancial assets and liabilities, the effective date of SFAS no. 157 has been
delayed to the first fiscal year beginning after November 15, 2008, which
corresponds to the Company's fiscal year beginning June 1, 2009. The Company is
still determining the effect SFAS No. 157 will have on its consolidated
financial statements, but it currently does not expect the effect to be
material.
In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for Financial Assets and Financial Liabilities - including an amendment to FASB Statement No. 115" ("SFAS No. 159"). SFAS No. 159 permits entities to elect to measure many financial instruments and certain other items at fair value. Upon adoption of SFAS No. 159, an entity may elect the fair value option for eligible items that exist at the adoption date. Subsequent to the initial adoption, the election of the fair value option should only be made at initial recognition of the asset or liability or upon a re-measurement event that gives rise to new-basis accounting. SFAS No. 159 does not affect any existing accounting literature that requires certain assets and liabilities to be carried at fair value nor does it eliminate disclosure requirements included in other accounting standards. SFAS No. 159 is effective for fiscal years beginning after November 15, 2007. The adoption of SFAS No. 159 did not have a material impact on the Company's consolidated financial statements.
In December 2007, the FASB issued SFAS No. 141 (R), "Business Combinations" ("SFAS No.141(R)"), and SFAS No. 160, "Noncontrolling Interests in Consolidated Financial Statements" ("SFAS No.160"). SFAS No.141 (R) requires an acquirer to measure the identifiable assets acquired, the liabilities assumed and any noncontrolling interest in the acquiree at their fair values on the acquisition date, with goodwill being the excess value over the net identifiable assets acquired. SFAS No. 160 clarifies that a noncontrolling interest in a subsidiary should be reported as equity in the consolidated financial statements. The calculation of earnings per share will continue to be based on income amounts attributable to the parent. SFAS No. 141 (R) and SFAS No. 160 are effective for financial statements issued for fiscal years beginning after December 15, 2008. Early adoption is prohibited. The Company does not expect the adoption of SFAS No.141 (R) and SFAS No. 160 to have a material impact on its consolidated financial statements
In June 2009, the FASB issued SFAS No. 165, "Subsequent Events". SFAS No. 165 incorporates the subsequent events guidance contained in the auditing standards literature into authoritative accounting literature. It also requires entities to disclose the date through which they have evaluated subsequent events and whether the date corresponds with the release of their financial statements. SFAS No.165 is effective for all interim and annual periods ending after June 15, 2009. The Company does not expect the adoption of SFAS No. 165 to have a material impact on its consolidated financial statements.
In June 2009, the FASB issued SFAS No. 168, "The FASB Accounting Standards CodificationTM and the Hierarchy of Generally Accepted Accounting Principles--a replacement of FASB Statement No. 162". The FASB Accounting Standards Codification (the "Codification") will become the source of authoritative U.S. accounting principles generally accepted in the United States of America ("U.S. GAAP"). The Codification, which changes the referencing of financial standards, is effective for interim or annual financial periods ending after September 15, 2009. The Codification is not intended to change or alter existing U.S. GAAP.
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 its consolidated financial statements, contained elsewhere in this report. The Company believes that the following accounting policies require the application of management's most difficult, subjective or complex judgments:
Estimating Allowances for Doubtful Accounts Receivable We perform ongoing credit evaluations of our customers and adjust credit limits based upon payment history and the customer's current credit worthiness, as determined by our review of their current credit information. We continuously monitor collections and payments from our customers and maintain a provision for estimated credit losses based on our historical experience, customer types, credit worthiness, economic trends and any specific customer collection issues that we have identified. While such credit losses have historically been within our expectations and the provisions established, we cannot guarantee that we will continue to experience the same credit loss rates that we have in the past. A significant change in the liquidity or financial position of any of our significant customers, or in their willingness to pay, could have a material adverse effect on the collectibility of our accounts receivable and our future operating results.
Valuation of Marketable Securities
The Company accounts for its marketable securities in accordance with Statement
of Financial Accounting Standards ("SFAS") 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 range up to 24
months), such securities have been classified as held-to-maturity and are
carried at amortized cost, which approximates market value. The Company's equity
securities are classified as trading securities, which are carried at fair
value, as determined by quoted market price, which is Level 1 input, as
established by the fair value hierarchy under SFAS No. 157, "Fair Value
Measurements" ("SFAS No. 157"). The related unrealized gains and losses are
included in earnings.
Valuation of Deferred Tax Assets
We regularly evaluate our ability to recover the reported amount of our deferred
income taxes considering several factors, including our estimate of the
likelihood of the Company generating sufficient taxable income in future years
during the period over which temporary differences reverse. Presently, the
Company believes that it is more likely than not that it will realize the
benefits of its deferred tax assets based primarily on the Company's history of
and projections for taxable income in the future. In the event that actual
results differ from our estimates or we adjust these estimates in future
periods, we may need to establish a valuation allowance against a portion or all
of our deferred tax assets, which could materially impact our financial position
or results of operations.
Item 8. Financial Statements.
Index to Consolidated Financial Statements
Page
Report of Independent Registered Public Accounting Firm 18
Consolidated Financial Statements:
Consolidated Balance Sheets as of May 31, 2009 and 2008 19
Consolidated Statements of Income for the years ended May 31, 2009 and 2008 21
Consolidated Statements of Stockholders' Equity for the years ended May 31, 2009 and 2008 22
Consolidated Statements of Cash Flows for the years ended May 31, 2009 and 2008 23
Notes to Consolidated Financial Statements 24
Board of Directors and Stockholders
TSR, Inc.
Hauppauge, New York
We have audited the accompanying consolidated balance sheets of TSR, Inc. and subsidiaries as of May 31, 2009 and 2008 and the related consolidated statements of income, stockholders' equity, and cash flows for the years then ended. We have also audited the financial statement schedule for the years ended May 31, 2009 and 2008 as listed on Item 15(a)2. These consolidated financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and schedule are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements and schedule. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements and schedule. We believe that our audits provide a reasonable basis of our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of TSR, Inc. and subsidiaries as of May 31, 2009 and 2008, and their results of operations and cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.
Also, in our opinion, the schedule presents fairly, in all material respects, the information set forth therein.
/s/ J.H. Cohn LLP
Jericho, New York
August 18, 2009
TSR, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
May 31, 2009 and 2008
ASSETS
<CAPTION>
2009 2008
----------- -----------
Current Assets:
Cash and cash equivalents $ 4,075,213 $ 1,588,443
Marketable securities 4,509,346 6,459,832
Accounts receivable:
Trade, net of allowance for doubtful accounts of
$302,000 in 2009 and $326,000 in 2008 6,345,374 8,176,936
Other 20,580 52,375
----------- -----------
6,365,954 8,229,311
Prepaid expenses 72,429 53,788
Prepaid and recoverable income taxes 101,791 48,015
Deferred income taxes 133,000 135,000
----------- -----------
Total Current Assets 15,257,733 16,514,389
----------- -----------
Equipment and leasehold improvements, at cost:
Equipment 237,966 228,329
Furniture and fixtures 117,389 112,196
Automobiles 19,665 19,665
Leasehold Improvements 60,058 60,058
----------- -----------
435,078 420,248
Less accumulated depreciation and amortization 415,963 396,963
----------- -----------
19,115 23,285
Marketable securities -- 999,648
Other assets 49,653 49,653
Deferred income taxes 61,000 55,000
----------- -----------
Total Assets $15,387,501 $17,641,975
=========== ===========
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See accompanying notes to consolidated financial statements.
TSR, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
May 31, 2009 and 2008
LIABILITIES AND STOCKHOLDERS' EQUITY
<CAPTION>
2009 2008
----------- -----------
Current Liabilities:
. . .
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