-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, ABbtB0zZCxbTs8ZwkD5WDTdCFKWvTcRG33mCdMRb7UGERYwG5ajb/+tnfaH4fwD0 9ngFm1Yt7lBwKJtMSriH2Q== 0000950110-99-000029.txt : 19990113 0000950110-99-000029.hdr.sgml : 19990113 ACCESSION NUMBER: 0000950110-99-000029 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19981130 FILED AS OF DATE: 19990112 FILER: COMPANY DATA: COMPANY CONFORMED NAME: TSR INC CENTRAL INDEX KEY: 0000098338 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-COMPUTER PROGRAMMING SERVICES [7371] IRS NUMBER: 132635899 STATE OF INCORPORATION: DE FISCAL YEAR END: 0531 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-08656 FILM NUMBER: 99504934 BUSINESS ADDRESS: STREET 1: 400 OSER AVE CITY: HAUPPAUGE STATE: NY ZIP: 11788 BUSINESS PHONE: 5162310333 MAIL ADDRESS: STREET 1: 400 OSER AVENUE CITY: HAUPPAUGE STATE: NY ZIP: 11788 FORMER COMPANY: FORMER CONFORMED NAME: TIME SHARING RESOURCES INC DATE OF NAME CHANGE: 19840129 10-Q 1 FORM 10-Q ================================================================================ 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 November 30, 1998 [ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from ________ to ________ Commission File Number: 0-8656 TSR, INC. ------------------------------------------------------ (Exact name of registrant as specified in its charter) DELAWARE 13-2635899 - ------------------------------- ------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 400 OSER AVENUE, HAUPPAUGE, NY 11788 ---------------------------------------- (Address of principal executive offices) 516-231-0333 ------------------------------- (Registrant's telephone number) NONE ---------------------------------------------------- (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 ----------------------------------------------------------- 5,998,276 shares of common stock, par value $.01 per share, as of December 31, 1998 ================================================================================ Page 1 TSR, INC. AND SUBSIDIARIES INDEX Page Number ------ PART I. FINANCIAL INFORMATION: Item 1. Financial Statements: Consolidated Condensed Balance Sheets -- November 30, 1998 and May 31, 1998.................... 3 Consolidated Condensed Statements of Earnings -- For the three months and six months ended November 30, 1998 and 1997 ............................ 4 Consolidated Condensed Statements of Cash Flows -- For the six months ended November 30, 1998 and 1997.... 5 Notes to Consolidated Condensed Financial Statements..... 6 Item 2. Management's Discussion and Analysis...................... 7 PART II. OTHER INFORMATION................................................. 12 SIGNATURES................................................................. 13 Page 2 PART I. FINANCIAL INFORMATION Item 1. Financial Statements TSR, INC. AND SUBSIDIARIES CONSOLIDATED CONDENSED BALANCE SHEETS
November 30, May 31, 1998 1998 ----------- ----------- (unaudited) ASSETS Current Assets: Cash and cash equivalents (Note 6) .............................. $ 4,724,772 $ 2,425,122 Marketable securities (Note 7) .................................. 2,527,694 1,575,945 Accounts receivable (net of allowance for doubtful accounts of $173,000) .............................. 15,327,932 15,037,995 Other receivables ............................................... 152,885 86,772 Prepaid expenses ................................................ 9,383 67,449 Prepaid and recoverable income taxes ............................ 80,857 90,823 Deferred income taxes ........................................... 59,000 59,000 ----------- ----------- Total current assets ........................................ 22,882,523 19,343,106 Equipment and leasehold improvements, at cost (net of accumulated depreciation and amortization of $1,326,000 and $952,000) ....... 652,822 1,008,776 Other assets ......................................................... 102,428 90,995 Deferred income taxes ................................................ 97,000 73,000 ----------- ----------- $23,734,773 $20,515,877 =========== =========== LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities: Accounts and other payables ..................................... $ 232,469 $ 278,410 Accrued and other liabilities ................................... 4,011,865 2,950,986 Income taxes payable ............................................ 35,436 173,377 Advances from customers ......................................... 909,518 946,257 ----------- ----------- Total current liabilities ................................... 5,189,288 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 5,988,276 shares ............................. 59,883 59,883 Additional paid-in capital ...................................... 3,183,246 3,183,246 Retained earnings ............................................... 15,302,356 12,923,718 ----------- ----------- 18,545,485 16,166,847 ----------- ----------- $23,734,773 $20,515,877 =========== =========== The accompanying notes are an integral part of these consolidated condensed financial statements.
Page 3 TSR, INC. AND SUBSIDIARIES CONSOLIDATED CONDENSED STATEMENTS OF EARNINGS FOR THE THREE AND SIX MONTHS ENDED NOVEMBER 30, 1998 AND 1997 (unaudited)
Three Months Ended Six Months Ended November 30, November 30, ------------------------- -------------------------- 1998 1997 1998 1997 ----------- ----------- ----------- ------------ Revenues ............................................. $21,682,375 $17,515,674 $42,147,906 $33,294,519 Cost of sales ........................................ 15,887,756 12,671,061 30,948,128 24,618,079 Selling, general and administrative expenses ......... 3,526,087 3,088,822 6,885,351 5,903,037 Research and development ............................. 80,310 211,930 228,481 377,184 ----------- ----------- ----------- ------------ 19,494,153 15,971,813 38,061,960 30,898,300 ----------- ----------- ----------- ------------ Income from operations ............................... 2,188,222 1,543,861 4,085,946 2,396,219 Other income: Interest and dividend income .................... 78,687 41,075 146,573 72,270 Gain (loss) from marketable securities, net .............................. 23,901 3,410 (3,881) 7,360 Gain from sales of assets ....................... -- -- -- 8,600 ----------- ----------- ----------- ------------ Income before income taxes ........................... 2,290,810 1,588,346 4,228,638 2,484,449 Provision for income taxes ........................... 1,000,000 707,000 1,850,000 1,134,000 ----------- ----------- ----------- ------------ Net income ...................................... $ 1,290,810 $ 881,346 $ 2,378,638 $ 1,350,449 =========== =========== =========== ============ Basic net income per common share .................... $ 0.22 $ 0.15 $ 0.40 $ 0.23 =========== =========== =========== ============ Weighted average number of common shares outstanding ......................... 5,988,276 5,966,704 5,988,276 5,942,206 =========== =========== =========== ============ Diluted net income per common share .................. $ 0.22 $ 0.15 $ 0.40 $ 0.23 =========== =========== =========== ============ Weighted average number of diluted common shares outstanding ................. 5,988,276 5,966,704 5,988,276 5,942,206 =========== =========== =========== ============ The accompanying notes are an integral part of these consolidated condensed financial statements.
Page 4 TSR, INC. AND SUBSIDIARIES CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS FOR THE SIX MONTHS ENDED NOVEMBER 30, 1998 AND 1997 (unaudited)
Six Months Ended November 30, -------------------------- 1998 1997 ----------- ----------- Cash flows from operating activities: Net income ........................................................ $ 2,378,638 $ 1,350,449 ----------- ----------- Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization ................................. 431,500 188,097 Loss (gain) from marketable securities, net ................... 3,881 (7,360) Deferred income taxes ......................................... (24,000) (20,000) Gain on sales of assets ....................................... -- (8,600) Changes in assets and liabilities: Accounts receivable ....................................... (289,937) (2,419,092) Other receivables ......................................... (66,113) (50,937) Prepaid expenses .......................................... 58,066 3,860 Prepaid and recoverable income taxes ...................... 9,966 (39,805) Other assets .............................................. (28,100) 20,952 Accounts payable and accrued expenses ..................... 1,014,938 171,566 Income taxes payable ...................................... (137,941) (124,701) Advances from customers ................................... (36,739) (8,528) ----------- ----------- Total adjustments ............................................. 935,521 (2,294,548) ----------- ----------- Net cash provided by (used in) operating activities ............... 3,314,159 (944,099) ----------- ----------- Cash flows from investing activities: Proceeds from maturities and sales of marketable securities ... 974,054 -- Purchase of marketable securities ............................. (1,929,684) (105,002) Purchase of fixed assets ...................................... (58,879) (738,601) Proceeds from sales of assets ................................. -- 8,600 ----------- ----------- Net cash used in investing activities ............................. (1,014,509) (835,003) ----------- ----------- Net increase (decrease) in cash and cash equivalents ................... 2,299,650 (1,779,102) Cash and cash equivalents at beginning of period ....................... 2,425,122 2,931,180 ----------- ----------- Cash and cash equivalents at end of period ............................. $ 4,724,772 $ 1,152,078 =========== =========== Supplemental Disclosures: Income tax payments ............................................... $ 2,002,000 $ 1,319,000 =========== =========== Interest paid ..................................................... $ -- $ -- =========== =========== The accompanying notes are an integral part of these consolidated condensed financial statements.
Page 5 TSR, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS NOVEMBER 30, 1998 1. The accompanying unaudited consolidated condensed financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions of Form 10-Q of Regulation S-X. Accordingly, they do not include all the information and notes required by generally accepted accounting principles for complete financial statements. For further information refer to the Company's consolidated financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the year ended May 31, 1998. 2. In the opinion of the Company, the accompanying unaudited consolidated condensed financial statements contain all adjustments (consisting of only normal recurring accruals) necessary to present fairly the consolidated financial position, the consolidated results of operations, and consolidated cash flows for the periods presented. 3. The Company is primarily engaged in the business of providing computer programming consulting services. The Company provides technical computer personnel to companies to supplement their in-house information technology capabilities. In addition, during fiscal 1997, the Company developed Catch/21, a Year 2000 compliance software solution which enables the Company to correct, on a substantially automated basis, problems which may occur in computer software as a result of the century change in the year 2000. Toward the end of fiscal 1997 the Company commenced providing services to customers to make applications Year 2000 compliant. 4. The consolidated condensed financial statements include the accounts of TSR, Inc. and its wholly-owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation. 5. The Company recognizes computer programming consulting services revenues as services are provided. Revenues from the maintenance and support of the Company's proprietary software are recognized monthly as services are rendered. Provided that acceptance is probable, revenue from Catch/21 code conversion is recognized when the converted code is delivered. 6. The Company considers short-term highly liquid investments with maturities of three months or less at the time of purchase to be cash equivalents. Cash and cash equivalents were comprised of the following as of November 30, 1998: Cash in banks ............................. $1,091,914 Money Market Funds......................... 2,643,668 United States Treasury Bills............... 989,190 ---------- $4,724,772 ========== 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 November 30, 1998 are as follows: Gross Gross Unrealized Unrealized Amortized Holding Holding Cost Gains Losses Fair Value ---------- ---------- ---------- ---------- United States Treasury Bills.. $2,403,775 -- -- $2,403,775 Equity Securities............. 133,289 12,632 (22,002) 123,919 ---------- ------- -------- ---------- $2,537,064 $12,632 $(22,002) $2,527,694 ========== ======= ======== ========== 8. On January 30, 1998, the Company sold 160,000 shares of common stock at $16 per share in a private placement. The net proceeds to the Company after expenses were $2,306,400. Page 6 PART I. FINANCIAL INFORMATION Item 2. TSR, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION The following discussion and analysis should be read in conjunction with the consolidated condensed financial statements and the notes to the consolidated condensed financial statements. RESULTS OF OPERATIONS The following table sets forth for the periods indicated certain financial information derived from the Company's consolidated statements of earnings. There can be no assurance that trends in sales growth or operating results will continue in the future: Three months ended November 30, 1998 compared with three months ended November 30, 1997
3 Months Ended November 30, ---------------------------------------- 1998 1997 ------------------ ------------------ % of % of Amount Revenues Amount Revenues ------- -------- ------- -------- (Dollar amounts in Thousands) Revenues ........................................ $21,682 100.0 $17,516 100.0 Cost of Sales ................................... 15,887 73.3 12,671 72.3 ------- ----- ------- ----- Gross Profit .................................... 5,795 26.7 4,845 27.7 Selling, General, and Administrative Expenses ... 3,526 16.2 3,089 17.7 Research and Development ........................ 80 0.4 212 1.2 ------- ----- ------- ----- Income from Operations .......................... 2,189 10.1 1,544 8.8 Other Income .................................... 102 0.5 44 0.2 ------- ----- ------- ----- Income Before Income Taxes ...................... 2,291 10.6 1,588 9.0 Provision for Income Taxes ...................... 1,000 4.6 707 4.0 ------- ----- ------- ----- Net Income ...................................... $ 1,291 6.0 $ 881 5.0 ======= ===== ======= =====
REVENUES Revenues consist primarily of revenues from computer programming consulting services. In addition, the Company's revenues for the quarter ended November 30, 1998 included revenues from its Year 2000 business which was commenced in fiscal 1997. Revenues for the quarter ended November 30, 1998 increased $4,166,000 or 23.8% over the comparable period in fiscal 1998. Computer programming consulting services revenues increased $3,539,000 from $15,921,000 in the quarter ended November 30, 1997 to $19,460,000 in the quarter ended November 30, 1998. This increase resulted from an overall increase in the number of programmers on billing with clients from an average of approximately 467 in the quarter ended November 30, 1997 to approximately 514 in the quarter ended November 30, 1998. Revenues from the Company's Year 2000 business, were $2,222,000 for the quarter ended November 30, 1998 as compared to $1,580,000 for the quarter ended November 30, 1998. During the current quarter the Company used its proprietary Catch/21 Software Solution on conversion projects to remediate approximately 7,500,000 lines of code for client software applications for a total of sixteen customers. The Company's Year 2000 revenues during the second quarter of fiscal 1999 were slightly less than the first quarter revenues and the Company expects these revenues may decline more rapidly during the remainder of fiscal 1999. The Company has received less code from customers than it had expected based on customers' original estimates. In addition, the Company is experiencing more intense competition which has impacted obtaining new customers. 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. Page 7 COST OF SALES Cost of sales as a percentage of revenues increased from 72.3% in the quarter ended November 30, 1997 to 73.3% in the quarter ended November 30, 1998. This increase is attributable to increases in cost of sales as a percentage of revenues in both the computer programming consulting services business and the Year 2000 business. In the computer programming consulting services business, cost of sales as a percentage of sales increased from 76.3% in the quarter ended November 30, 1997 to 77.0% in the quarter ended November 30, 1998. This increase is attributable to increases in amounts being paid to qualified programming professionals outpacing the Company's ability to pass these increases on to customers due to competitive market pressures in the industry. The Year 2000 business incurred cost of sales of $1,908,000 in the quarter ended November 30, 1998 versus $522,000 in the prior year quarter. These costs consisted primarily of salaries of software analysts and quality assurance personnel. The Company expects cost of sales from the Year 2000 business to decrease in the coming quarters due to a significant decrease in the number of analysts working in this area. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES Selling, general and administrative expenses consist primarily of expenses relating to account executives, technical recruiters, facilities costs, management and corporate overhead. These expenses increased $437,000 or 14.1% from $3,089,000 in the quarter ended November 30, 1997 to $3,526,000 in the quarter ended November 30, 1998. Selling, general and administrative expenses related to computer programming consulting services increased $305,000 over the prior year period to $2,801,000. 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 November 30, 1998, approximately $725,000 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 November 30, 1997 were $593,000. RESEARCH AND DEVELOPMENT Research and development costs of $80,000 in the quarter ended November 30, 1998 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 November 30, 1997 were $212,000. The Company expects to continue to reduce research and development expenditures. INCOME FROM OPERATIONS In the quarter ended November 30, 1998, the computer programming consulting service business contributed $1,680,000 or 76.7% of the income from operations, while the Year 2000 business contributed the remaining $509,000 or 23.3%. In the prior year quarter, the computer programming consulting service business contributed $1,276,000 or 82.6% of income from operations, the Year 2000 business contributed $253,000 or 16.4%, and there was $15,000 or 1.0% from other sources. OTHER INCOME Other income resulted primarily from interest and dividend income which increased by $58,000 to $102,000 due to higher average available investable funds in the quarter ended November 30, 1998. There was also an unrealized gain of $24,000 on the Company's equity securities. INCOME TAXES The effective income tax rate decreased to 43.7% in the quarter ended November 30, 1998 from 44.5% in the quarter ended November 30, 1997 because of a lower percentage of non-deductible expenses. Page 8
Six months ended November 30, 1998 compared with six months ended November 30, 1997. (Dollar amounts in Thousands) 6 Months Ended November 30, 1998 1997 ---- ---- % of % of Amount Revenues Amount Revenues ------ -------- ------ -------- Revenues ................................................................... $42,148 100.0 $33,294 100.0 Cost of Sales .............................................................. 30,948 73.4 24,618 74.0 ------- ------- ------- ------- Gross Profit ............................................................... 11,200 26.6 8,676 26.0 Selling, General, and Administrative Expenses .............................. 6,885 16.3 5,903 17.7 Research and Development ................................................... 228 0.6 377 1.1 ------- ------- ------- ------- Income from Operations ..................................................... 4,087 9.7 2,396 7.2 Other Income ............................................................... 142 0.3 88 0.3 ------- ------- ------- ------- Income Before Income Taxes ................................................. 4,229 10.0 2,484 7.5 Provision for Income Taxes ................................................. 1,850 4.4 1,134 3.4 ------- ------- ------- ------- Net Income ................................................................. $ 2,379 5.6 $ 1,350 4.1 ======= ======= ======= =======
Revenues Revenues consist primarily of revenues from computer programming consulting services. In addition, the Company's revenues for the six months ended November 30, 1998 included revenues from its Year 2000 business which was commenced in fiscal 1997. Revenues for the six months ended November 30, 1998 increased $8,854,000 or 26.6% over the comparable period in fiscal 1998. Computer programming consulting services revenues increased $6,499,000 from $31,096,000 in the six months ended November 30, 1997 to $37,595,000 in the six months ended November 30, 1998. This increase resulted from an overall increase in the number of programmers on billing with clients from an average of approximately 458 in the six months ended November 30, 1997 to approximately 496 in the six months ended November 30, 1998. Revenues from the Company's Year 2000 business, were $4,553,000 for the six months ended November 30, 1998 as compared to $2,165,000 in the six months ended November 30, 1998. During the current six month period the Company used its proprietary Catch/21 Software Solution on conversion projects to remediate approximately 16,500,000 lines of code for client software applications for a total of sixteen customers. While the Company's revenues for Year 2000 services increased over the comparable six month period in fiscal 1998, the Company expects its Year 2000 revenues to decline during the remainder of fiscal 1999. Page 9 Cost of Sales Cost of sales as a percentage of revenues decreased from 74.0% in the six months ended November 30, 1997 to 73.4% in the six months ended November 30, 1998. This decrease is primarily attributable to the increase in Year 2000 revenues for which cost of sales as a percentage of revenues is less than the computer programming consulting services business. In the computer programming consulting services business, cost of sales as a percentage of sales increased from 76.2% in the six months ended November 30, 1997 to 77.1% in the six months ended November 30, 1998. This increase is attributable to increases in amounts being paid to qualified programming professionals outpacing the Company's ability to pass these increases on to customers due to competitive market pressures in the industry. The Year 2000 business incurred cost of sales of $1,988,000 in the six months ended November 30, 1998 versus $908,000 in the prior year period. These costs consisted primarily of salaries of software analysts and quality assurance personnel. The Company expects cost of sales from the Year 2000 business to decrease in the coming quarters due to a significant decrease in the number of analysts working in this area. Selling, General and Administrative Expenses Selling, general and administrative expenses consist primarily of expenses relating to account executives, technical recruiters, facilities costs, management and corporate overhead. These expenses increased $982,000 or 16.6% from $5,903,000 in the six months ended November 30, 1997 to $6,885,000 in the six months ended November 30, 1998. Selling, general and administrative expenses related to computer programming consulting services increased $766,000 over the prior year period to $5,522,000. 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 six months ended November 30, 1998, approximately $1,363,000 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 six months ended November 30, 1997 were $1,147,000. Research and Development Research and development costs of $228,000 in the six months ended November 30, 1998 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 six months ended November 30, 1997 were $377,000. Income from Operations In the six months ended November 30, 1998, the computer programming consulting service business contributed $3,113,000 or 76.2% of the income from operations, while the Year 2000 business contributed the remaining $974,000 or 23.8%. In the prior year period, the computer programming consulting service business contributed $2,629,000 of income from operations, the Year 2000 business incurred a loss of $267,000, and there was $34,000 from other sources. Other Income Other income resulted primarily from interest and dividend income which increased by $54,000 to $142,000 due to higher average available investable funds in the six months ended November 30, 1998. This interest and dividend increase was offset, to some extent, by an unrealized loss of $4,000 on the Company's equity securities. Income Taxes The effective income tax rate decreased to 43.7% in the six months ended November 30, 1998 from 45.6% in the period ended November 30, 1997 because the losses incurred in the prior year period by the Year 2000 business, operated out of the Company's Hauppauge, New York location, were not available to offset state and local income taxes other than for New York State. Page 10 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 November 30, 1998, the Company had working capital of $17,693,000 and cash and cash equivalents of $4,725,000 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 six months ended November 30, 1998. The Company had positive net cash flow of $3,314,000 from operations during the six months ended November 30, 1998 as compared to negative net cash flow from operations of $944,000 in the six months ended November 30, 1997. The Company had net income of $2,379,000, in the six month ended November 30, 1998 as compared to $1,350,000 in the six months ended November 30, 1997. Cash flow also benefited from a small increase 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 six months ended November 30, 1998. The Company also had additional cash flow as a result of the increase in the accounts payable and accrued expenses of $1,015,000. 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 $59,000. The fixed asset additions were $739,000 in the prior year period. The significant decrease occurred due to equipment purchased in the prior year period to emulate client computer environments to enable sufficient testing and quality assurance of the Catch/21 Software Solution. The Company's capital resource commitments at November 30, 1998 consisted of lease obligations on its branch and corporate facilities. The Company intends to finance these lease commitments from cash flow provided by operations, available cash and short-term marketable securities. The Company's cash and marketable securities were sufficient to enable it to meet its cash requirements during the six months ended November 30, 1998. The Company believes that it would require financing for its accounts receivable if its accounts receivable grow significantly as a result of a significant increase in the rate of revenue growth. 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 November 30, 1998 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 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 engage 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 and the risk that the Catch/21 software solution will not achieve increased commercial acceptance. 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 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: January 8, 1999 /s/ J.F. Hughes ---------------------------------------------- J.F. Hughes, Chairman, President and Treasurer Date: January 8, 1999 /s/ John G. Sharkey ---------------------------------------------- John G. Sharkey, Vice President, Finance Page 13 EX-27 2 FDS
5 TSR, INC. AND SUBSIDIARIES EXHIBIT 27 FINANCIAL DATA SCHEDULE TO REPORT ON FORM 10-Q SIX MONTHS ENDED NOVEMBER 30, 1998 6-MOS MAY-31-1999 NOV-30-1998 4,724,772 2,527,694 15,501,196 173,264 0 22,882,523 1,979,133 1,326,311 23,734,773 5,189,288 0 0 0 59,883 18,485,602 23,734,773 0 42,147,906 0 30,948,128 7,113,832 0 0 4,228,638 1,850,000 2,378,638 0 0 0 2,372,638 0.40 0.40
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