10-Q 1 e87670_10-q.txt QUARTERLY REPORT ================================================================================ 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, 2001 ----------------- [ ] 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 Identification No.) incorporation or organization) 400 OSER AVENUE, HAUPPAUGE, NY 11788 --------------------------------------- (Address of principal executive offices) 631-231-0333 ------------------------------ (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 4,418,012 shares of common stock, par value $.01 per share, as of December 31, 2001 ----------------------------------------------------------- ================================================================================ Page 1 TSR, INC. AND SUBSIDIARIES INDEX Page Number ------ PART I. FINANCIAL INFORMATION: Item 1. Financial Statements: Condensed Consolidated Balance Sheets - November 30, 2001 and May 31, 2001....................... 3 Condensed Consolidated Statements of Earnings - For the three months and six months ended November 30, 2001 and 2000............................... 4 Condensed Consolidated Statements of Cash Flows - For the six months ended November 30, 2001 and 2000...... 5 Notes to Condensed Consolidated Financial Statements........ 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations................................ 8 Item 3. Quantitative and Qualitative Disclosure About Market Risk... 13 PART II. OTHER INFORMATION............................................... 13 Signatures................................................................ 13 Page 2 Part I. Financial Information Item 1. Financial Statements
TSR, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS November 30, May 31, ASSETS 2001 2001 ------------ ----------- (unaudited) Current Assets: Cash and cash equivalents (Note 6) ............................................. $ 4,797,095 $ 6,208,361 Marketable securities (Note 7) ................................................ 5,945,323 4,432,978 Accounts receivable (net of allowance for doubtful accounts of $330,000 and $273,000) .............................. 12,667,865 11,935,795 Other receivables ............................................................. 69,218 59,016 Prepaid expenses ............................................................... 34,857 33,727 Prepaid and recoverable income taxes ........................................... 18,606 144,363 Deferred income taxes .......................................................... 139,000 93,000 ----------- ----------- Total current assets ...................................................... 23,671,964 22,907,240 Equipment and leasehold improvements, at cost (net of accumulated depreciation and amortization of $662,000 and $616,000) ........................ 111,957 141,513 Other assets ........................................................................ 46,145 46,145 Deferred income taxes ............................................................... 81,000 189,000 Acquired client relationships, net of accumulated amortization of $14,301 (Note 9) ..................................................... 157,307 -- ----------- ----------- $24,068,373 $23,283,898 =========== =========== LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities: Accounts and other payables .................................................... $ 138,979 $ 123,852 Accrued and other current liabilities .......................................... 2,476,639 3,070,908 Advances from customers ........................................................ 1,535,104 1,688,150 Income taxes payable ........................................................... 106,299 213,955 ------------ ----------- Total current liabilities ................................................. 4,257,021 5,096,865 ----------- ----------- Minority Interest ................................................................... 111 -- ----------- ----------- Shareholders' Equity: Preferred stock, $1 par value, authorized 1,000,000 shares; none issued ............................................. -- -- Common stock, $.01 par value, authorized 25,000,000 shares; issue 6,078,326 shares.................................. 60,783 60,783 Additional paid-in capital ..................................................... 4,134,053 4,134,053 Retained earnings .............................................................. 27,647,706 26,023,498 ----------- ----------- 31,842,542 30,218,334 Less: Treasury Stock, 1,660,314 shares at cost (Note 8)........................ 12,031,301 12,031,301 ----------- ----------- 19,811,241 18,187,033 ----------- ----------- $24,068,373 $23,283,898 =========== ===========
The accompanying notes are an integral part of these condensed consolidated financial statements. Page 3
TSR, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS FOR THE THREE AND SIX MONTHS ENDED NOVEMBER 30, 2001 AND 2000 (UNAUDITED) Three Months Ended Six Months Ended November 30, November 30, ------------------------- ------------------------- 2001 2000 2001 2000 ----------- ----------- ----------- ----------- Revenues ......................................................... $15,334,801 $21,047,157 $32,752,693 $40,787,692 Cost of sales .................................................... 11,970,983 16,420,552 25,531,756 31,654,890 Selling, general and administrative expenses ..................... 2,186,629 2,828,035 4,591,753 5,602,798 ----------- ----------- ----------- ----------- 14,157,612 19,248,587 30,123,509 37,257,688 ----------- ----------- ----------- ----------- Income from operations ........................................... 1,177,189 1,798,570 2,629,184 3,530,004 Other income: Interest and dividend income ................................ 122,686 106,298 198,374 207,114 Unrealized gain from marketable securities, net ............ 2,950 1,118 761 43,057 Minority interest in subsidiary operating loss .............. 889 -- 889 -- ----------- ----------- ----------- ----------- Income before income taxes ....................................... 1,303,714 1,905,986 2,829,208 3,780,175 Provision for income taxes ....................................... 541,000 830,000 1,205,000 1,646,000 ----------- ----------- ----------- ----------- Net income .................................................. $ 762,714 $ 1,075,986 $ 1,624,208 $ 2,134,175 =========== =========== =========== =========== Basic and diluted net income per common share ................................................. $ 0.17 $ 0.24 $ 0.37 $ 0.47 =========== =========== =========== =========== Weighted average number of basic and diluted common shares outstanding .................................... 4,418,012 4,522,845 4,418,012 4,568,012 =========== =========== =========== ===========
The accompanying notes are an integral part of these condensed consolidated financial statements. Page 4
TSR, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE SIX MONTHS ENDED NOVEMBER 30, 2001 AND 2000 (UNAUDITED) Six Months Ended November 30, -------------------------- 2001 2000 ------------ ----------- Cash flows from operating activities: Net income ....................................................................... $ 1,624,208 $ 2,134,175 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization ................................................. 60,092 62,524 Unrealized gain from marketable securities, net ............................... (761) (43,057) Deferred income taxes ......................................................... 62,000 4,000 Provision for doubtful accounts ............................................... 100,000 -- Minority interest in subsidiary operating loss ................................ (889) -- Changes in assets and liabilities: Accounts receivable ......................................................... (535,375) (3,232,949) Other receivables ........................................................... (3,377) 94,622 Prepaid expenses ............................................................ (1,130) 5,831 Prepaid and recoverable income taxes ........................................ 125,757 18,368 Other assets ................................................................ -- (14,567) Accounts payable and accrued expenses ....................................... (796,722) (113,212) Income taxes payable ........................................................ (107,656) 15,201 Advances from customers ..................................................... (153,046) 72,057 ----------- ----------- Net cash provided by (used in) operating activities .............................. 373,101 (997,007) ----------- ----------- Cash flows from investing activities: Proceeds from maturities and sales of marketable securities ................... 4,400,221 3,140,322 Purchases of marketable securities ............................................ (5,911,805) (2,423,910) Purchases of fixed assets ..................................................... 781 (59,488) Purchases of net assets, net of cash acquired ................................. (274,564) -- ----------- ----------- Net cash (used in) provided by operating activities ............................... (1,785,367) 656,924 ----------- ----------- Cash flows from financing activities: Purchases of treasury stock ................................................... -- (1,242,668) Proceeds from sale of minority interest ....................................... 1,000 -- ----------- ----------- Net cash provided by (used in) investing activities ............................... 1,000 (1,242,668) ----------- ----------- Net decrease in cash and cash equivalents ............................................. (1,411,266) (1,582,751) Cash and cash equivalents at beginning of period ...................................... 6,208,361 4,110,283 ----------- ----------- Cash and cash equivalents at end of period ............................................ $ 4,797,095 $ 2,527,532 =========== =========== Supplemental Disclosures: Income tax payments ............................................................ $ 1,125,000 $ 1,612,000 =========== ===========
The accompanying notes are an integral part of these condensed consolidated financial statements. Page 5 TSR, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS NOVEMBER 30, 2001 (UNAUDITED) 1. The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to 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, 2001. 2. In the opinion of the Company, the accompanying unaudited condensed consolidated financial statements contain all adjustments (consisting of normal recurring accruals) necessary to present fairly the consolidated financial position, the results of operations, and 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. 4. The condensed consolidated financial statements include the accounts of TSR, Inc. and its majority-owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation. Minority interest represents a minority member's share of the net equity of a majority owned subsidiary. 5 The Company's contract computer programming services are generally provided under time and materials agreements with customers. Accordingly, the Company recognizes such revenues as services are provided. Advances from customers represent amounts received from customers prior to the Company's provision of the related services. Such amounts are expected to be settled within the next year. Effective March 1, 2001, the Company adopted Emerging Issues Task Force Issue No. 99-19, "Reporting Revenue Gross as a Principal Versus Net as an Agent." Accordingly, prior year's revenues and cost of sales have been revised to conform to the fiscal 2002 presentation. 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, 2001: Cash in banks ............................. $ 501,587 Money Market Funds......................... 2,309,048 United States Treasury Bills............... 1,986,460 ---------- $4,797,095 ========== 7. Marketable securities consists of United States Treasury Bills and equity securities. Treasury bills with maturities at acquisition in excess of 90 days are classified as held to maturity investments and are carried at amortized cost. The Company's equity securities are classified as trading securities, which are carried at fair value with unrealized gains and losses included in earnings. The amortized cost, gross unrealized holding gains, gross unrealized holding losses and fair value for marketable securities by major security type at November 30, 2001 are as follows:
Gross Gross Unrealized Unrealized Amortized Holding Holding Fair Cost Gains Losses Value ----------- ----------- ----------- ----------- United States Treasury Bills ................. $ 5,911,805 -- -- 5,911,805 Equity Securities ............................ 28,287 9,261 (4,030) 33,518 ----------- ----------- ----------- ----------- $ 5,940,092 $ 9,261 $ (4,030) $ 5,945,323 =========== =========== =========== ===========
8. Options covering 190,000 shares of common stock have been omitted from the calculations of diluted net income per common share for the three and six month periods ended November 30, 2000 and 2001 respectively, as their effect would have been antidilutive. Page 6 TSR, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED NOVEMBER 30, 2001 (UNAUDITED) 9. During the six months ended November 30, 2000, the Company repurchased 226,800 shares of its common stock at a cost of $1,242,668. There were no repurchases transacted in the six months ended November 30, 2001. To date, the Company has repurchased a total of 1,660,314 shares at a cost of $12,031,301. 10. In August 2001, the Company capitalized a newly formed subsidiary with $4,000 and simultaneously sold a 20% interest to a third party for $1,000. On August 14, 2001, this subsidiary acquired substantially all of the assets and assumed certain liabilities of a computer consulting firm for cash of $286,500 (including cash acquired of $11,936). In accordance with SFAS No. 141, this transaction is being accounted for as a purchase business combination. Accordingly, the purchase price has been allocated to the assets acquired and liabilities assumed based on their estimated fair value, summarized as follows: Cash ..................................... $ 11,936 Other current assets ..................... 303,520 Equipment ................................ 17,016 Acquired client relationships ........... 171,608 Current liabilities ..................... (217,580) --------- $ 286,500 ========= In connection with the acquisition, the Company acquired certain contractual client relationships. The related intangible asset is being amortized over a three-year period, reflecting the estimated average life of the underlying client relationships. The results of operations of the acquired business have been included in the Company's consolidated financial statements from the date of acquisition. Had the acquisition been completed as of June 1, 2001, pro forma consolidated revenues, net income and net income per common share would have been $33,236,000, $1,635,000, and $0.37, respectively, for the six months ended November 30, 2001. 11. In June 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 142 "Goodwill and Other Intangible Assets" (SFAS No. 142)", which is effective for fiscal years beginning after June 15, 2001. SFAS No. 142 establishes accounting and reporting standards for goodwill and intangible assets. Under SFAS No. 142, amortization of goodwill will be terminated. However, goodwill will be subject to periodic assessments for impairment by applying a fair-value-based test. Intangible assets must be separately recognized and amortized over their useful lives. The Company does not expect the adoption of SFAS No. 142 (effective, June 1, 2002) to have any impact on its consolidated financial statements. In August 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) No. 144, Accounting for the Impairment of Disposal of Long-Lived Assets (SFAS No. 144), which will become effective for the Company on June 1, 2002. As applicable to the Company, SFAS No. 144 replaces SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of, and provides guidelines on how long-lived assets should be evaluated for impairment and establishes criteria for when long-lived assets are held for sale, and prescribes the accounting for long-lived assets that will be disposed of other than by sale. Unlike SFAS No. 121, an impairment assessment under SFAS No. 144 will never result in a write-down of goodwill. Rather goodwill will be evaluated for impairment under SFAS No. 142, Goodwill and Other Intangible Assets. The Company does not expect the adoption of SFAS No. 144 to have a material impact on its consolidated financial statements, because the impairment assessment under SFAS No. 144 is largely unchanged from SFAS No. 121. Page 7 PART I. FINANCIAL INFORMATION Item 2. TSR, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis should be read in conjunction with the condensed consolidated financial statements and the notes to such financial statements. RESULTS OF OPERATIONS The following table sets forth for the periods indicated certain financial information derived from the Company's condensed consolidated statements of earnings. There can be no assurance that trends in operating results will continue in the future: Three months ended November 30, 2001 compared with three months ended November 30, 2000
3 Months Ended November 30, (Dollar amounts in Thousands) --------------------------------- 2001 2000 --------------- ---------------- % of % of Amount Revenues Amount Revenues ------- -------- ------ -------- Revenues ........................................... $15,335 100.0 $21,047 100.0 Cost of Sales ...................................... 11,971 78.1 16,420 78.0 ------- ----- ------- ----- Gross Profit ....................................... 3,364 21.9 4,627 22.0 Selling, General, and Administrative Expenses ...... 2,187 14.2 2,828 13.4 ------- ----- ------- ----- Income from Operations ............................. 1,177 7.7 1,799 8.6 Other Income ....................................... 127 0.8 107 0.5 ------- ----- ------- ----- Income Before Income Taxes ......................... 1,304 8.5 1,906 9.1 Provision for Income Taxes ......................... 541 3.5 830 4.0 ------- ----- ------- ----- Net Income ......................................... $ 763 5.0 $ 1,076 5.1 ======= ===== ======= =====
REVENUES Revenues consist primarily of revenues from computer programming consulting services. Revenues for the quarter ended November 30, 2001 decreased $5,712,000 or 27.1% from the comparable period in fiscal 2001. This decrease resulted from an overall decrease in the number of programmers on billing with clients from approximately 520 at November 30, 2000 to approximately 370 at November 30, 2001. The continuing weak economic environment has significantly reduced the IT spending levels of many of our major customers, limiting opportunities to place new consultants on billing. Additionally, while thankfully none of our consultants were physically harmed in the World Trade Center tragedy, many of our consultants working in the financial district were displaced for several weeks, which has negatively impacted revenues and net income this quarter. The trend of reduced IT spending has continued into the new calendar year. The year end budget and planning process at many of our clients normally results in projects ending at year end, resulting in a reduction in programmers on billing. In prior years, much of this effect was offset by consultants starting new projects. This year, however, new starts were down significantly as a result of the economic condition referred to above, resulting in the number of consultants on billing as of January 1, 2002 being reduced to approximately 330. Page 8 The Company's revenues from programmers on billing have also been affected by discounts required by major customers as a condition to remaining on their approved vendor lists, such as discounts for prompt payment and volume discounts. In addition, some major customers have retained a third party 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 and the Company bills the third party and the third party bills the ultimate customer. This process weakens the relationship 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 do business. These changes have reduced the Company's profit margins. COST OF SALES Cost of sales for the quarter ended November 30, 2001, decreased $4,449,000 or 27.1% to $11,971,000 from $16,420,000 in the prior year period, primarily due to the reduced revenues discussed above. Cost of sales as a percentage of revenues increased from 78.0% in the quarter ended November 30, 2000 to 78.1% in the quarter ended November 30, 2001. This increase is primarily attributable to customers requiring rate reductions and discounts. 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 $641,000 or 22.7% from $2,828,000 in the quarter ended November 30, 2000 to $2,187,000 in the quarter ended November 30, 2001. This decrease was primarily attributable to lower headcount in our recruiting and administrative staff. OTHER INCOME Other income resulted primarily from interest and dividend income, which increased by $16,000 to $123,000 due to a higher average on investable funds in the quarter, ended November 30, 2001. Additionally, the Company also had a net unrealized gain of $3,000 in the quarter ended November 30, 2001 versus a gain of $1,000 in the quarter ended November 30, 2000 from marketable securities due to mark to market adjustments of its trading securities equity portfolio. The balance of $1,000 of other income in the current quarter resulted from the recognition of the minority interest in the operating losses of a subsidiary. INCOME TAXES The effective income tax rate of 41.5% for the quarter ended November 30, 2001 decreased from a rate of 43.5% in the quarter ended November 30, 2000 due to a benefit of $22,000 recorded in the current quarter for state and local deferred income tax assets. Page 9 Six months ended November 30, 2001 compared with six months ended November 30, 2000.
6 Months Ended November 30, (Dollar amounts in Thousands) --------------------------------- 2001 2000 ---------------- --------------- % of % of Amount Revenues Amount Revenues ------ -------- ------- -------- Revenues ........................................... $32,753 100.0 $40,788 100.0 Cost of Sales ...................................... 25,532 78.0 31,655 77.6 ------- ----- ------- ----- Gross Profit ....................................... 7,221 22.0 9,133 22.4 Selling, General, and Administrative Expenses ...... 4,592 14.0 5,603 13.7 ------- ----- ------- ----- Income from Operations ............................. 2,629 8.0 3,530 8.7 Other Income ....................................... 200 0.6 250 0.6 ------- ----- ------- ----- Income Before Income Taxes ......................... 2,829 8.6 3,780 9.3 Provision for Income Taxes ......................... 1,205 3.7 1,646 4.0 ------- ----- ------- ----- Net Income ......................................... $ 1,624 4.9 $ 2,134 5.3 ======= ===== ======= =====
REVENUES Revenues consist primarily of revenues from computer programming consulting services. Revenues for the six months ended November 30, 2001 decreased $8,035,000 or 19.7% from the comparable period in fiscal 2001. This decrease resulted from an overall decrease in the number of programmers on billing with clients from approximately 520 at November 30, 2000 to approximately 370 at November 30, 2001. The continuing weak economic environment has significantly reduced the IT spending levels of many of our major customers, limiting opportunities to place new consultants on billing. Additionally, while thankfully none of our consultants were physically harmed in the World Trade Center tragedy, many of our consultants working in the financial district were displaced for several weeks, which has negatively impacted revenues and net income this period. The trend of reduced IT spending has continued into the new calendar year. The year end budget and planning process at many of our clients normally results in projects ending at year end, resulting in a reduction in programmers on billing. In prior years, much of this effect was offset by consultants starting new projects. This year, however, new starts were down significantly as a result of the economic condition referred to above, resulting in the number of consultants on billing as of January 1, 2002 being reduced to approximately 330. The Company's revenues from programmers on billing have also been affected by discounts required by major customers as a condition to remaining on their approved vendor lists, such as discounts for prompt payment and volume discounts. In addition, some major customers have retained a third party 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 and the Company bills the third party and the third party bills the ultimate customer. This process weakens the relationship 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 do business. These changes have reduced the Company's profit margins. Page 10 COST OF SALES Cost of sales for the six months ended November 30, 2001, decreased $6,123,000 or 19.3% to $25,560,000 from $31,655,000 in the prior year period, primarily due to the reduced revenues discussed above. Cost of sales as a percentage of revenues increased from 77.6% in the six months ended November 30, 2000 to 78.0% in the six months ended November 30, 2001. This increase is primarily attributable to customers requiring rate reductions and discounts. 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 $1,011,000 or 18.0% from $5,603,000 in the six months ended November 30, 2000 to $4,592,000 in the six months ended November 30, 2001. This decrease was primarily attributable to lower headcount in our recruiting and administrative staff. OTHER INCOME Other income resulted primarily from interest and dividend income, which decreased by $9,000 to $198,000 due to lower interest rates on investable funds in the six months, ended November 30, 2001. Additionally, the Company also had a net unrealized gain of $43,000 in the six months ended November 30, 2000 versus a gain of $1,000 in the six months ended November 30, 2001 from marketable securities due to mark to market adjustments of its trading securities equity portfolio. The balance of $1,000 of other income in the current period resulted from the recognition of the minority interest in the operating losses of a subsidiary. INCOME TAXES The effective income tax rate of 42.6% for the six months ended November 30, 2001 decreased from a rate of 43.5% in the six months ended November 30, 2000 due to a benefit of $22,000 recorded in the current period for state and local deferred income tax assets. Page 11 LIQUIDITY AND CAPITAL RESOURCES Although the Company's operating results could be negatively impacted by a continuing decrease in demand for the Company's services, the Company expects that cash flow generated from operations together with its cash and marketable securities will be sufficient to provide the Company with adequate resources to meet its cash requirements. At November 30, 2001, the Company had working capital of $19,415,000 and cash and cash equivalents of $4,797,000 as compared to working capital of $17,810,000 and cash and cash equivalents of $6,208,000 at May 31, 2001. Working capital increased primarily due to the Company's net income of $1,624,000 in the six months ended November 30, 2001. Net cash provided by operating activities amounted to $373,000 for the six months ended November 30, 2001, compared to net cash used in operating activities of $997,000 for the six months ended November 30, 2000. The improvement in cash provided by operating activities primarily resulted from improved collections of receivables as compared to the prior year period, partially offset by a decrease in net income. The comparative improvement in collections occurred because of temporary slowness in collections due to system changes at several customers in the prior year six months. Net cash used in investing activities amounted to $1,785,000 for the six months ended November 30, 2001, compared to net cash provided by investing activities of $657,000 for the six months ended November 30, 2000. The decrease in net cash flows from investing activities primarily resulted from purchases of marketable securities in excess of sales and proceeds from maturities of marketable securities compared to the prior year period and the purchase of the net assets of an acquired business in August 2001. Cash provided by financing activities resulted from the sale of a minority interest in a subsidiary for $1,000 during the six months ended November 30, 2001. Cash used in financing activities for the six months ended November 30, 2000 consisted of purchases of treasury stock amounting to $1,243,000. The Company's capital resource commitments at November 30, 2001 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, 2001. The Company has available a revolving line of credit of $5,000,000 with a major money center bank. As of November 30, 2001, no amounts were outstanding under this line of credit. RECENT ACCOUNTING PRONOUNCEMENTS In June 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 142 "Goodwill and Other Intangible Assets" (SFAS No. 142)", which is effective for fiscal years beginning after June 15, 2001. SFAS No. 142 establishes accounting and reporting standards for goodwill and intangible assets. Under SFAS No. 142, amortization of goodwill will be terminated. However, goodwill will be subject to periodic assessments for impairment by applying a fair-value-based test. Intangible assets must be separately recognized and amortized over their useful lives. The Company does not expect the adoption of SFAS No. 142 (effective, June 1, 2002) to have any impact on its consolidated financial statements. In August 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) No. 144, Accounting for the Impairment of Disposal of Long-Lived Assets (SFAS No. 144), which will become effective for the Company on June 1, 2002. As applicable to the Company, SFAS No. 144 replaces SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of, and provides guidelines on how long-lived assets should be evaluated for impairment and establishes criteria for when long-lived assets are held for sale, and prescribes the accounting for long-lived assets that will be disposed of other than by sale. Unlike SFAS No. 121, an impairment assessment under SFAS No. 144 will never result in a write-down of goodwill. Rather goodwill will be evaluated for impairment under SFAS No. 142, Goodwill and Other Intangible Assets. The Company does not expect the adoption of SFAS No. 144 to have a material impact on its consolidated financial statements, because the impairment assessment under SFAS No. 144 is largely unchanged from SFAS No. 121. Page 12 FORWARD-LOOKING STATEMENTS Certain statements contained in Management's Discussion and Analysis of Financial Condition and Results of Operations, including statements concerning the Company's future prospects and the Company's future cash flow requirements are forward looking statements, as defined in the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those projections in the forward looking statements which statements involve risks and uncertainties, including but not limited to the following: risks relating to the competitive nature of the markets for computer programming consulting services, the effect of current economic conditions on IT budgets, the concentration of the Company's business with certain customers and uncertainty as to the Company's ability to bring in new customers. TSR, INC. AND SUBSIDIARIES Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK The Company's earnings and cash flows are subject to fluctuations due to (i) changes in interest rates primarily affecting its income from the investment of available cash balances in money market funds and (ii) changes in market values of its investments in trading equity securities. Under its current policies, the Company does not use interest rate derivative instruments to manage exposure to interest rate changes. The Company's present exposure to changes in the market value of its investments in equity securities is not significant. PART II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8K (a). Reports on Form 8K: None 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, 2002 /s/ J.F. HUGHES -------------------------------------------------- J.F Hughes, Chairman, President and Treasurer Date: January 8, 2002 /s/ JOHN G. SHARKEY ------------------------------------------------------- John G. Sharkey, Vice President Finance Page 13