-----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, Umgxah/fONPmu9twOR+e/XGEo1gvKiFeqitbKEZzTp8ZGUcYdguRz1D5aikofBBv 0n+FL4SeXcwkPo8m6mlQmw== 0000950110-03-000006.txt : 20030106 0000950110-03-000006.hdr.sgml : 20030106 20030106101836 ACCESSION NUMBER: 0000950110-03-000006 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20021130 FILED AS OF DATE: 20030106 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: 1934 Act SEC FILE NUMBER: 000-08656 FILM NUMBER: 03504084 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 e90733_10q.txt 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, 2002 [ ] 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) ---------------------------------------------------- (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, 2002 Page 1 TSR, INC. AND SUBSIDIARIES INDEX Page Number ------ Part I. Financial Information: Item 1. Financial Statements: Condensed Consolidated Balance Sheets - November 30, 2002 and May 31, 2002..................................... 3 Condensed Consolidated Statements of Earnings - For the three months and six months ended November 30, 2002 and 2001... 4 Condensed Consolidated Statements of Cash Flows - For the six months ended November 30, 2002 and 2001.................... 5 Notes to Condensed Consolidated Financial Statements..................... 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations............................................ 9 Item 3. Quantitative and Qualitative Disclosure About Market Risk ........ 15 Item 4. Procedures and Controls........................................... 16 Part II. Other Information................................................... 16 Signatures................................................................... 16 Page 2 Part I. Financial Information Item 1. Financial Statements TSR, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS
November 30, May 31, ASSETS 2002 2002 ----------- ----------- (Unaudited) Current Assets: Cash and cash equivalents (Note 3) ............................ $ 5,515,294 $ 5,793,896 Marketable securities (Note 5) ................................ 8,958,256 8,941,535 Accounts receivable (net of allowance for doubtful accounts of $430,000) .............................. 11,290,227 10,131,579 Other receivables ............................................. 49,524 49,819 Prepaid expenses .............................................. 35,065 50,926 Prepaid and recoverable income taxes .......................... 18,857 69,357 Deferred income taxes ......................................... 180,000 180,000 ----------- ----------- Total current assets ...................................... 26,047,223 25,217,112 Equipment and leasehold improvements, at cost (net of accumulated depreciation and amortization of $691,452 and $703,930) ....... 35,635 76,044 Other assets .................................................... 50,087 52,182 Deferred income taxes ........................................... 123,000 123,000 Acquired client relationships, (net of accumulated amortization of $71,503 and $42,902) (Note 6) .............................. 100,105 128,706 ----------- ----------- $26,356,050 $25,597,044 =========== =========== LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities: Accounts and other payables ................................... $ 112,083 $ 119,176 Accrued expenses and other current liabilities ................ 2,059,549 2,529,264 Advances from customers ....................................... 1,652,806 1,814,611 Income taxes payable .......................................... 243,529 235,888 ----------- ----------- Total current liabilities ................................. 4,067,967 4,698,939 ----------- ----------- Minority Interest ............................................... 19,320 2,578 ----------- ----------- Shareholders' Equity: Preferred stock, $1 par value, authorized 1,000,000 shares; none issued ............................... -- -- Common stock, $.01 par value, authorized 25,000,000 shares; issued 6,078,326 shares .................. 60,783 60,783 Additional paid-in capital .................................... 4,134,053 4,134,053 Retained earnings ............................................. 30,105,228 28,731,992 ----------- ----------- 34,300,064 32,926,828 Less: Treasury Stock, 1,660,314 shares, at cost ............... 12,031,301 12,031,301 ----------- ----------- 22,268,763 20,895,527 ----------- ----------- $26,356,050 $25,597,044 =========== ===========
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, 2002 AND 2001 (UNAUDITED)
Three Months Ended Six Months Ended November 30, November 30, -------------------------- -------------------------- 2002 2001 2002 2001 ----------- ----------- ----------- ----------- Revenues ....................................................... $13,859,074 $15,380,782 $27,539,840 $32,848,178 Cost of sales .................................................. 10,781,431 12,016,964 21,481,039 25,627,241 Selling, general and administrative expenses ................... 1,887,943 2,186,629 3,738,974 4,591,753 ----------- ----------- ----------- ----------- 12,669,374 14,203,593 25,220,013 30,218,994 ----------- ----------- ----------- ----------- Income from operations ......................................... 1,189,700 1,177,189 2,319,827 2,629,184 Other income: Interest and dividend income ................................ 61,848 122,686 123,839 198,374 Unrealized gain (loss) from marketable securities, net ..... 4,749 2,950 (5,688) 761 Minority interest in subsidiary operating loss. (profits) ... (14,834) 889 (16,742) 889 ----------- ----------- ----------- ----------- Income before income taxes ..................................... 1,241,463 1,303,714 2,421,236 2,829,208 Provision for income taxes ..................................... 532,000 541,000 1,048,000 1,205,000 ----------- ----------- ----------- ----------- Net income ................................................. $ 709,463 $ 762,714 $ 1,373,236 $ 1,624,208 =========== =========== =========== =========== Basic and diluted net income per Common share ................................................. $ 0.16 $ 0.17 $ 0.31 $ 0.37 =========== =========== =========== =========== Weighted average number of basic and diluted Common shares outstanding .................................... 4,418,012 4,418,012 4,418,012 4,418,012 =========== =========== =========== ===========
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, 2002 AND 2001 (UNAUDITED)
Six Months Ended November 30, -------------------------- 2002 2001 ----------- ----------- Cash flows from operating activities: Net income ................................................ $ 1,373,236 $ 1,624,208 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization ............................ 69,010 60,092 Unrealized loss (gain) from marketable securities, net ... 5,688 (761) Deferred income taxes .................................... -- 62,000 Provision for doubtful accounts .......................... -- 100,000 Minority interest in subsidiary operating profit (loss) .. 16,742 (889) Changes in assets and liabilities: Accounts receivable ....................................... (1,158,648) (535,375) Other receivables ......................................... 295 (3,377) Prepaid expenses .......................................... 15,861 (1,130) Prepaid and recoverable income taxes ...................... 50,500 125,757 Other assets .............................................. 2,095 -- Accounts payable and accrued expenses ..................... (476,808) (796,722) Income taxes payable ...................................... 7,641 (107,656) Advances from customers ................................... (161,805) (153,046) ----------- ----------- Net cash (used in) provided by operating activities ..... (256,193) 373,101 ----------- ----------- Cash flows from investing activities: Proceeds from maturities and sales of marketable securities 8,915,150 4,400,221 Purchases of marketable securities ........................ (8,937,559) (5,911,805) Purchases of fixed assets ................................. -- 781 Purchases of net assets, net of cash acquired ............. -- (274,564) ----------- ----------- Net cash used in investing activities ................... (22,409) (1,785,367) ----------- ----------- Cash flows from financing activities: Proceeds from sale of minority interest ................... -- 1,000 ----------- ----------- Net cash provided by financing activities ............... -- 1,000 ----------- ----------- Net decrease in cash and cash equivalents .................. (278,602) (1,411,266) Cash and cash equivalents at beginning of period ........... 5,793,896 6,208,361 ----------- ----------- Cash and cash equivalents at end of period ................. $ 5,515,294 $ 4,797,095 =========== =========== Supplemental Disclosures: Income tax payments ....................................... $ 990,000 $ 1,125,000 =========== ===========
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, 2002 (UNAUDITED) 1. Basis of Presentation The accompanying condensed consolidated interim financial statements include the accounts of TSR, Inc. and its subsidiaries (the "Company"). All significant inter-company balances and transactions have been eliminated in consolidation. These interim financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America applying to interim financial information and with the instructions to Form 10-Q of Regulation S-X of the Securities and Exchange Commission. Accordingly, certain information and footnote disclosures required by accounting principles generally accepted in the United States of America and normally included in the Company's annual financial statements have been condensed or omitted. These interim financial statements as of and for the three and six months ended November 30, 2002, are unaudited; however, in the opinion of management, such statements include all adjustments (consisting of normal recurring accruals) necessary to present fairly the consolidated financial position, results of operations, and cash flows of the Company for the periods presented. The results of operations for the interim periods presented are not necessarily indicative of the results that might be expected for future interim periods or for the full year ending May 31, 2003. These interim financial statements should be read in conjunction with the Company's consolidated financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the year ended May 31, 2002. 2. Net Income Per Common Share Basic net income per common share is computed by dividing income available to common shareholders (which for the Company equals its net income) by the weighted average number of common shares outstanding, and diluted net income per common share adds the dilutive effect of stock options and other common stock equivalents. Options covering 160,000 and 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, 2002 and November 30, 2001 respectively, as their effect would have been antidilutive. 3 Cash and Cash Equivalents The Company considers short-term highly liquid investments with maturities of three months or less at the time of purchase to be cash equivalents. Cash and cash equivalents were comprised of the following as of November 30, 2002: Cash in banks .......................................... $ -- Money Market Funds ..................................... 2,527,264 US Treasury Bills ...................................... 2,988,030 ---------- $5,515,294 4. Revenue Recognition The Company's contract computer programming services are generally provided under time and materials agreements with customers. Accordingly, the Company recognizes such revenues as services are provided. Advances from customers represent amounts received from customers prior to the Company's provision of the related services. The services, with respect to such advances, are expected to be provided within the next fiscal year. Effective March 1, 2002, the Company adopted Emerging Issues Task Force Issue No. 01-14, "Income Statement Characterization of Reimbursements Received for `Out-of-Pocket' Expenses Incurred." Accordingly, reimbursements received by the Company for out-of-pocket expenses are characterized as revenue. Prior to adoption of EITF 01-14, the Company characterized such amounts as a reduction of cost of sales. Accordingly, amounts previously reported for revenues and cost of sales for the three months and six months have been increased by $45,981 and $95,485, for fiscal year 2001. Page 6 TSR, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED NOVEMBER 30, 2002 (UNAUDITED) 5. Marketable Securities The Company accounts for its marketable securities in Accordance with Statement of Financial Accounting Standards No. 115 "Accounting for Certain Investments in Debt and Equity Securities." Accordingly, the Company classifies its marketable securities at acquisition as either (i) held-to-maturity (ii) trading or (iii) available-for-sale. Based upon the Company's intent and ability to hold its US Treasury securities to maturity (which maturities range between three months and two years), such securities have been classified as held-to-maturity and are carried at amortized cost. The Company's equity securities are classified as trading securities, which are carried at fair value with unrealized gains and losses included in earnings. The Company's marketable securities as of November 30, 2002 are summarized as follows:
Gross Gross Unrealized Unrealized Amortized Holding Holding Fair Cost Gains Losses Value ----------- ----------- ----------- ----------- United States Treasury Securities $ 8,937,558 -- -- $ 8,937,558 Equity Securities ............... 28,287 -- (7,589) 20,698 ----------- ----------- ----------- ----------- $ 8,965,845 $ -- $ (7,589) $ 8,958,256 =========== =========== =========== ===========
6. Acquisition 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 Statement of Financial Accounting Standards No. 141, "Accounting for Business Combinations" (SFAS No. 141), this transaction was 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 values, summarized as follows: Cash ................................ $ 11,936 Other current assets ................ 303,520 Equipment ........................... 16,235 Acquired client relationships ...... 171,608 Current liabilities ................ (216,799) ---------- $ 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. Amortization expense for the three and six months ended November 30, 2002 was $14,300 and $28,601. 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, unaudited 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. Page 7 TSR, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED NOVEMBER 30, 2002 (UNAUDITED) 7. Recent Accounting Pronouncements In July 2002, the FASB issued Statement No. 146, "Accounting for Costs Associated with Exit or Disposal Activities" (SFAS 146). SFAS 146 requires companies to recognize costs associated with exit or disposal activities when they are incurred rather than at the date of commitment to an exit or disposal plan. SFAS 146 will be applied to exit or disposal activities after December 31, 2002 and is not expected to have a material effect on the Company. In November 2002, the Emerging Issues Task Force (EITF) issued EITF Issue No. 00-21, "Revenue Arrangements with Multiple Deliverables", which provides guidance on the timing and method of revenue recognition for sales arrangements that include the delivery of more than one product or service. EITF 00-21 is effective prospectively for arrangements entered into in fiscal periods beginning after June 15, 2003. The Company does not expect that the adoption of EITF 00-21 will have a significant impact on its consolidated financial statements. Page 8 PART I. FINANCIAL INFORMATION ITEM 2. TSR, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis should be read in conjunction with the condensed consolidated financial statements and the notes to such financial statements. Forward-Looking Statements Certain statements contained in Management's Discussion and Analysis of Financial Condition and Results of Operations, including statements concerning the Company's future prospects and the Company's future cash flow requirements are forward looking statements, as defined in the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those projections in the forward looking statements which statements involve risks and uncertainties, including but not limited to the following: risks relating to the competitive nature of the markets for contract computer programming services; the extent to which market conditions for the Company's contract computer consulting services will continue to adversely affect the Company's business; the concentration of the Company's business with certain customers; uncertainty as to the Company's ability to maintain its relations with existing customers and expand its contract computer consulting services business; the impact of changes in the industry, such as the use of vendor management companies in connection with the consulting procurement process, on the Company's business, and other risks and uncertainties set forth in the Company's filings with the Securities and Exchange Commission. Results of Operations The following table sets forth for the periods indicated certain financial information derived from the Company's condensed consolidated statements of earnings. There can be no assurance that trends in operating results will continue in the future: Three months ended November 30, 2002 compared with three months ended November 30, 2001
Three Months Ended November 30, (Dollar amounts in Thousands) --------------------------------------- 2002 2001 ------------------ ------------------ % of % of Amount Revenues Amount Revenues ------- -------- ------- -------- Revenues* ....................................... $13,859 100.0 $15,381 100.0 Cost of sales* .................................. 10,781 77.8 12,017 78.1 ------- ----- ------- ----- Gross profit .................................... 3,078 22.2 3,364 21.9 Selling, general, and administrative expenses ... 1,888 13.6 2,187 14.2 ------- ----- ------- ----- Income from operations .......................... 1,190 8.6 1,177 7.7 Other income .................................... 51 0.3 127 0.8 ------- ----- ------- ----- Income before income taxes ...................... 1,241 8.9 1,304 8.5 Provision for income taxes ...................... 532 3.8 541 3.5 ------- ----- ------- ----- Net income ...................................... $ 709 5.1 $ 763 5.0 ======= ===== ======= =====
* For fiscal 2001, amounts revised to reflect the Company's adoption of EITF 01-14, "Income Statement Characterization of Reimbursements Received for `Out-of-Pocket' Expenses Incurred", effective March 1, 2002. Page 9 TSR, INC. AND SUBSIDIARIES Revenues Revenues consist primarily of revenues from computer programming consulting services. Revenues for the quarter ended November 30, 2002 decreased $1,522,000 or 9.9% from the comparable period in fiscal 2002. This decrease resulted from an overall decrease in the average number of programmers on billing with clients from approximately 380 during the quarter ended November 30, 2001 to approximately 365 during the quarter ended November 30, 2002. This decrease also resulted from reductions in the average daily billing rates due to customers requiring price reductions. 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. The calendar 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. At the end of calendar 2001, however, new starts were down significantly as a result of the economic condition referred to above, resulting in the number of consultants on billing being reduced. While we had been experiencing a stabilization of the number of consultants on billing over the past six months, we expect to experience a similar reduction in the number of consultants at the end of calendar 2002 due to continuing budget restrictions at many of our clients. Cost of Sales Cost of sales for the quarter ended November 30, 2002, decreased $1,236,000 or 10.3% to $10,781,000 from $12,017,000 in the prior year period. The decrease in costs resulted primarily from the decrease in the number of programmers on billing with clients. Cost of sales as a percentage of revenues decreased from 78.1% in the quarter ended November 30, 2001 to 77.8% in the quarter ended November 30, 2002. This decrease is primarily attributable to rate reductions in the amounts paid to consultants. 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 $299,000 or 13.7% from $2,187,000 in the quarter ended November 30, 2001 to $1,888,000 in the quarter ended November 30, 2002. This decrease was primarily attributable to a reduction of account executives, technical recruiting professionals and administrative assistants, as well as a reduction of commissions paid to the remaining account executives and recruiters. Other Income Other income resulted primarily from interest and dividend income, which decreased by $61,000 to $62,000 due to lower interest rates in the quarter ended November 30, 2002. Additionally, the Company also had a net unrealized gain of $5,000 in the quarter ended November 30, 2002 versus a net unrealized gain of $3,000 in the quarter ended November 30, 2001 from marketable securities due to mark to market adjustments of its trading securities equity portfolio. Income Taxes The effective income tax rate of 42.9% for the quarter ended November 30, 2002 increased from a rate of 41.5% in the quarter ended November 30, 2001. Net Income Net income for the quarter ended, November 30, 2002 decreased by $54,000 or 7.1% from the prior year period. Income from operations increased by $13,000 or 1.1% for the same periods. The decrease in revenues was offset by decreases in both cost of sales and selling, general and administration expenses. Net income decreased primarily due to a significant decrease in other income described above. Page 10 TSR, INC. AND SUBSIDIARIES Six months ended November 30, 2002 compared with six months ended November 30, 2001
Six Months Ended November 30, (Dollar amounts in Thousands) --------------------------------------- 2002 2001 ------------------ ------------------ % of % of Amount Revenues Amount Revenues ------- -------- ------- -------- Revenues* ....................................... $27,540 100.0 $32,848 100.0 Cost of sales* .................................. 21,481 78.0 25,627 78.0 ------- ----- ------- ----- Gross profit .................................... 6,059 22.0 7,221 22.0 Selling, general, and administrative expenses ... 3,739 13.6 4,592 14.0 ------- ----- ------- ----- Income from operations .......................... 2,320 8.4 2,629 8.0 Other income .................................... 101 0.4 200 0.6 ------- ----- ------- ----- Income before income taxes ...................... 2,421 8.8 2,829 8.6 Provision for income taxes ...................... 1,048 3.8 1,205 3.7 ------- ----- ------- ----- Net income ...................................... $ 1,373 5.0 $ 1,624 4.9 ======= ===== ======= =====
* For fiscal 2001, amounts revised to reflect the Company's adoption of EITF 01-14, "Income Statement Characterization of Reimbursements Received for `Out-of-Pocket' Expenses Incurred", effective March 1, 2002. Revenues Revenues consist primarily of revenues from computer programming consulting services. Revenues for the six months ended November 30, 2002 decreased $5,308,000 or 16.2% from the comparable period in fiscal 2002. This decrease resulted from an overall decrease in the average number of programmers on billing with clients from approximately 396 during the six months ended November 30, 2001 to approximately 360 during the six months ended November 30, 2002. 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. 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 maintain its relationships with its customers and preserve and expand its business. These effects had a greater impact in the first quarter than the second quarter of fiscal 2003. The Company is unable to predict the long-term effects of these changes. The calendar 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. At the end of calendar 2001, however, new starts were down significantly as a result of the economic condition referred to above, resulting in the number of consultants on billing being reduced. While we had been experiencing a stabilization of the number of consultants on billing over the past six months, we expect to experience a similar reduction in the number of consultants at the end of calendar 2002 due to continuing budget restrictions at many of our clients. Page 11 TSR, INC. AND SUBSIDIARIES Cost of Sales Cost of sales for the six months ended November 30, 2002, decreased $4,146,000 or 16.2% to $21,481,000 from $25,627,000 in the prior year period. The decrease in costs resulted primarily from the decrease in amounts paid to programmers resulting from the decrease in contract computer programming services revenues. Cost of sales as a percentage of revenues remained at 78.0% in the six months ended November 30, 2001 and 2002. 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 $853,000 or 18.6% from $4,592,000 in the six months ended November 30, 2001 to $3,739,000 in the six months ended November 30, 2002. This decrease was primarily attributable a reduction of account executives, technical recruiting professionals and administrative assistants, as well as a reduction of commissions paid to the remaining account executives and recruiters. Other Income Other income resulted primarily from interest and dividend income, which decreased by $75,000 to $124,000 due to lower interest rates in the six months ended November 30, 2002. Additionally, the Company also had a net unrealized loss of $6,000 in the six months ended November 30, 2002 versus a net unrealized 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. Income Taxes The effective income tax rate of 43.3% for the six months ended November 30, 2002 increased from a rate of 42.6% in the six months ended November 30, 2001. Page 12 TSR, INC. AND SUBSIDIARIES Liquidity and Capital Resources The Company expects that cash flow generated from operations together with its cash and marketable securities will be sufficient to provide the Company with adequate resources to meet its liquidity requirements for the foreseeable future. At November 30, 2002, the Company had working capital of $21,979,000 and cash and cash equivalents of $5,515,000 as compared to working capital of $20,518,000 and cash and cash equivalents of $5,794,000 at May 31, 2002. Working capital increased primarily due to the Company's net income of $1,373,000 in the six months ended November 30, 2002. Net cash used by operating activities amounted to $256,000 for the six months ended November 30, 2002, compared to cash provided of $373,000 for the six months ended November 30, 2001. The cash used by operating activities and the increase in accounts receivable primarily resulted from reduced collections of receivables as compared to the prior year period. The comparative reduction in collections occurred primarily because of delays associated with collections from a major customer due to the implementation of a vendor management system, and associated reconciliation difficulties. There were also delayed payments from another major account due to the changing of the head of the IT department of a local government. However, we do not believe that the ultimate collectibility of the amounts due from this customer are subject to greater than normal collection risks. Net cash used in investing activities amounted to $22,000 for the six months ended November 30, 2002, compared to $1,785,000 for the six months ended November 30, 2001. The decrease in net cash flows used in investing activities primarily resulted from the reduction in net purchases of marketable securities as well as the purchase of the net assets of an acquired business in August 2001. The Company's capital resource commitments at November 30, 2002 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. A summary of non-cancelable long-term operating lease commitments as of November 30, 2002 follows: FY 03 FY 04 FY 05 FY 06 Thereafter Total Operating Leases $169,000 $343,000 $349,000 $170,000 $118,000 $1,149,000 The Company's cash and marketable securities were sufficient to enable it to meet its cash requirements during the six months ended November 30, 2002. The Company has available a revolving line of credit of $5,000,000 with a major money center bank through October 6, 2003. As of November 30, 2002, no amounts were outstanding under this line of credit. Page 13 TSR, INC. AND SUBSIDIARIES Recent Accounting Pronouncements In July 2002, the FASB issued Statement No. 146, "Accounting for Costs Associated with Exit or Disposal Activities" (SFAS 146). SFAS 146 requires companies to recognize costs associated with exit or disposal activities when they are incurred rather than at the date of commitment to an exit or disposal plan. SFAS 146 will be applied to exit or disposal activities after December 31, 2002 and is not expected to have a material effect on the Company. In November 2002, the Emerging Issues Task Force (EITF) issued EITF Issue No. 00-21, "Revenue Arrangements with Multiple Deliverables", which provides guidance on the timing and method of revenue recognition for sales arrangements that include the delivery of more than one product or service. EITF 00-21 is effective prospectively for arrangements entered into in fiscal periods beginning after June 15, 2003. The Company does not expect that the adoption of EITF 00-21 will have a significant impact on its consolidated financial statements. Page 14 TSR, INC. AND SUBSIDIARIES Critical Accounting Policies The Securities and Exchange Commission ("SEC") issued disclosure guidance for "critical accounting policies." The SEC defines "critical accounting policies" as those that require the application of management's most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain and may change in subsequent periods. The Company's significant accounting policies are described in Note 1 to the Company's consolidated financial statements, contained in its May 31, 2002 Annual Report on Form 10-K, as filed with the SEC. 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 upon our historical experience 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 could have a material adverse effect on the collectibility of our accounts receivable and our future operating results. 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. Valuation of Long-lived and Intangible Assets We assess the recoverability of long-lived assets and intangible assets whenever we determine that events or changes in circumstances indicate that their carrying amount may not be recoverable. Our assessment is primarily based upon our estimate of future cash flows associated with these assets. Although there has been a sustained weakness in our operating results, through November 30, 2002, we have continued to generate net income. Accordingly, we have not determined that there has been an indication of impairment of any of our assets. However, should our operating results deteriorate, we may determine that some portion of our long-lived assets or intangible assets are impaired. Such determination could result in non-cash charges to income that could materially affect our financial position or results of operations for that period. 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. Page 15 TSR, INC. AND SUBSIDIARIES Item 4. Procedures and Controls Within the 90 days prior to the date of this report, the Company carried out an evaluation, under the supervision and with the participation of the Company's management, including the Company's Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company's disclosure controls and procedures pursuant to Exchange Act Rule 13a-14. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures are effective. There were no significant changes in the Company's internal controls or in other factors that could significantly affect these controls subsequent to the date of their evaluation. Part II. Other Information Item 6. Exhibits and Reports on Form 8K (a). Exhibit 99.1 - Certification by J.F. Hughes pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. Exhibit 99.2 - Certification by John G. Sharkey pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (b). 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 3, 2003 /s/ J.F. Hughes ---------------------------------------------- J.F. Hughes, Chairman, President and Treasurer Date: January 3, 2003 /s/ John G. Sharkey ---------------------------------------------- John G. Sharkey, Vice President Finance Page 16 CERTIFICATION BY J.F. HUGHES PURSUANT TO SECURITIES EXCHANGE ACT RULE 13A-14 I, J.F. Hughes, certify that: 1. I have reviewed this quarterly report on Form 10-Q of TSR, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officer and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: January 3, 2003 /s/ J.F. Hughes --------------------------------- J.F. Hughes Chairman, President and Treasurer Page 17 CERTIFICATION BY JOHN G. SHARKEY PURSUANT TO SECURITIES EXCHANGE ACT RULE 13A-14 I, John G. Sharkey, certify that: 1. I have reviewed this quarterly report on Form 10-Q of TSR, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officer and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: January 3, 2003 /s/ John G. Sharkey ----------------------- John G. Sharkey Vice President, Finance Page 18 EX-99.1 3 e90733_ex99-1.txt EXHIBIT 99.1 TO TSR INC. REPORT ON FORM 10-Q NOVEMBER 30, 2002 CERTIFICATION BY J.F. HUGHES PURSUANT TO 18 U.S.C. SECTION 1350 AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 The undersigned, President of TSR, Inc. (the "Company"), hereby certify, to the best of my knowledge, that the Form 10-Q of the Company for the quarter ended November 30, 2002 (the "Periodic Report") accompanying this certification fully complies with the requirements of the Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m or 78o(d)) and that the information contained in the Periodic Report fairly presents, in all material respects, the financial condition and results of operations of the Company. The foregoing certification is incorporated solely for purposes of complying with the provisions of Section 906 of the Sarbanes-Oxley Act and is not intended to be used for any other purpose. Dated: January 3, 2003 /s/ J.F. Hughes ---------------------- J.F. Hughes, President EX-99.2 4 e90733_ex99-2.txt EXHIBIT 99.2 TO TSR INC. REPORT ON FORM 10-Q NOVEMBER 30, 2002 CERTIFICATION BY JOHN G. SHARKEY PURSUANT TO 18 U.S.C. SECTION 1350 AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 The undersigned, Vice President of Finance of TSR, Inc. (the "Company"), hereby certify, to the best of my knowledge, that the Form 10-Q of the Company for the quarter year ended November 30, 2002 (the "Periodic Report") accompanying this certification fully complies with the requirements of the Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m or 78o(d)) and that the information contained in the Periodic Report fairly presents, in all material respects, the financial condition and results of operations of the Company. The foregoing certification is incorporated solely for purposes of complying with the provisions of Section 906 of the Sarbanes-Oxley Act and is not intended to be used for any other purpose. Dated: January 3, 2003 /s/ John G. Sharkey ------------------------------------------ John G. Sharkey, Vice President of Finance -----END PRIVACY-ENHANCED MESSAGE-----