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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or
15(d) of the Securities Exchange Act of 1934
For the period ended February 28, 2003
[ ] 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
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TSR, Inc.
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(Exact name of registrant as specified in its charter)
Delaware 13-2635899
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
400 Oser Avenue, Hauppauge, NY 11788
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(Address of principal executive offices)
631-231-0333
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(Registrant's telephone number)
None
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(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
[X] Yes [ ] No
SHARES OUTSTANDING
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4,418,012 shares of common stock, par value $.01 per share, as of March 31, 2003
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Page 1
TSR, INC. AND SUBSIDIARIES
INDEX
Page
Number
------
Part I. Financial Information:
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets -
February 28, 2003 and May 31, 2002......................... 3
Condensed Consolidated Statements of Earnings -
For the three months and nine months ended
February 28, 2003 and 2002................................. 4
Condensed Consolidated Statements of Cash Flows -
For the nine months ended February 28, 2003 and 2002....... 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
February 28, May 31,
ASSETS 2003 2002
------------ ------------
(Unaudited)
Current Assets:
Cash and cash equivalents (Note 3)............................... $ 5,821,742 $ 5,793,896
Marketable securities (Note 5)................................... 11,942,871 8,941,535
Accounts receivable (net of allowance for
doubtful accounts of $430,000)............................... 8,673,733 10,131,579
Other receivables................................................ 44,064 49,819
Prepaid expenses................................................. 51,722 50,926
Prepaid and recoverable income taxes............................. 37,545 69,357
Deferred income taxes............................................ 180,000 180,000
------------ ------------
Total current assets......................................... 26,751,677 25,217,112
Equipment and leasehold improvements, at cost (net of accumulated
depreciation and amortization of $702,216 and $703,930).......... 27,994 76,044
Other assets.......................................................... 49,653 52,182
Deferred income taxes................................................. 123,000 123,000
Acquired client relationships, (net of accumulated amorization
of $85,804 and $42,902) (Note 6)................................ 85,804 128,706
------------ ------------
$ 27,038,128 $ 25,597,044
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts and other payables...................................... $ 165,124 $ 119,176
Accrued expenses and other current liabilities................... 2,009,205 2,529,264
Advances from customers.......................................... 1,893,553 1,814,611
Income taxes payable............................................. 231,605 235,888
------------ ------------
Total current liabilities.................................... 4,299,487 4,698,939
------------ ------------
Minority Interest..................................................... 17,690 2,578
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Shareholders' Equity:
Preferred stock, $1 par value, authorized
1,000,000 shares; none issued................................ -- --
Common stock, $.01 par value, authorized
25,000,000 shares; issued 6,078,326 shares................... 60,783 60,783
Additional paid-in capital....................................... 4,134,053 4,134,053
Retained earnings................................................ 30,557,416 28,731,992
------------ ------------
34,752,252 32,926,828
Less: Treasury Stock, 1,660,314 shares, at cost ................. 12,031,301 12,031,301
------------ ------------
22,720,951 20,895,527
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$ 27,038,128 $ 25,597,044
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The accompanying notes are an integral part of these condensed
consolidated financial statements.
Page 3
TSR, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF EARNINGS
FOR THE THREE AND NINE MONTHS ENDED FEBRUARY 28, 2003 AND 2002
(UNAUDITED)
Three Months Ended Nine Months Ended
February 28, February 28,
2003 2002 2003 2002
------------ ------------ ------------ ------------
Revenues .................................................... $ 11,987,005 $ 12,886,319 $ 39,526,845 $ 45,734,497
Cost of sales ............................................... 9,423,233 10,207,195 30,904,272 35,834,436
Selling, general and administrative expenses ................ 1,805,342 2,002,451 5,544,316 6,594,204
------------ ------------ ------------ ------------
11,228,575 12,209,646 36,448,588 42,428,640
------------ ------------ ------------ ------------
Income from operations ...................................... 758,430 676,673 3,078,257 3,305,857
Other income:
Interest and dividend income .......................... 58,250 63,490 182,089 261,864
Unrealized gain (loss) from marketable securities, net . (3,764) (4,482) (9,452) (3,721)
Minority interest in subsidiary operating loss (profits) (7,728) 111 (24,470) 1,000
------------ ------------ ------------ ------------
Income before income taxes .................................. 805,188 735,792 3,226,424 3,565,000
Provision for income taxes .................................. 353,000 341,000 1,401,000 1,546,000
------------ ------------ ------------ ------------
Net income ................................................ $ 452,188 $ 394,792 $ 1,825,424 $ 2,019,000
============ ============ ============ ============
Basic and diluted net income per common share ............... $ 0.10 $ 0.09 $ 0.41 $ 0.46
============ ============ ============ ============
Weighted average number of basic common shares
outstanding ............................................... 4,418,012 4,418,012 4,418,012 4,418,012
============ ============ ============ ============
Weighted average number of diluted common
shares outstanding ........................................ 4,418,012 4,430,442 4,418,012 4,421,077
============ ============ ============ ============
The accompanying notes are an integral part of these consolidated
condensed financial statements.
Page 4
TSR, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED FEBRUARY 28, 2003 AND 2002
(UNAUDITED)
Nine Months Ended
February 28,
2003 2002
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Cash flows from operating activities:
Net income ......................................................... $ 1,825,424 $ 2,019,000
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization .................................... 94,075 94,986
Unrealized loss from marketable securities, net .................. 9,452 3,721
Deferred income taxes ............................................ -- 28,000
Provision for doubtful accounts .................................. -- 200,000
Minority interest in subsidiary operating profit (loss) .......... 24,470 (1,000)
Changes in assets and liabilities:
Accounts receivable .............................................. 1,457,846 1,935,909
Other receivables ................................................ 5,755 14,884
Prepaid expenses ................................................. (796) (31,071)
Prepaid and recoverable income taxes ............................. 31,812 113,640
Other assets ..................................................... 2,529 --
Accounts payable and accrued expenses ............................ (474,111) (1,298,181)
Income taxes payable ............................................ (4,283) (9,701)
Advances from customers ........................................ 78,942 90,471
------------ ------------
Net cash provided by operating activities ....................... 3,051,115 3,160,658
------------ ------------
Cash flows from investing activities:
Proceeds from maturities and sales of marketable securities ..... 11,890,400 7,348,361
Purchases of marketable securities .............................. (14,901,188) (9,876,395)
Purchases of fixed assets ........................................ (3,123) --
Purchases of net assets, net of cash acquired .................... -- (274,564)
------------ ------------
Net cash used in investing activities .............................. (3,013,911) (2,802,598)
------------ ------------
Cash flows from financing activities:
Distribution to minority interest ................................ (9,358) --
Proceeds from sale of minority interest .......................... -- 1,000
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Net cash provided by (used in) financing activities ................ (9,358) 1,000
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Net increase in cash and cash equivalents ........................... 27,846 359,060
Cash and cash equivalents at beginning of period ..................... 5,793,896 6,208,361
------------ ------------
Cash and cash equivalents at end of period ........................... $ 5,821,742 $ 6,567,421
============ ============
Supplemental Disclosures:
Income tax payments ........................................... $ 1,374,000 $ 1,414,000
============ ============
The accompanying notes are an integral part of these consolidated
condensed financial statements.
Page 5
TSR, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FEBRUARY 28, 2003
(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 nine months ended February 28, 2003,
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 nine month periods ended February 28,
2003 and February 28, 2002 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 February
28, 2003:
Cash in banks.......................... $ 1,942,395
Money Market Funds..................... 2,882,327
US Treasury Bills...................... 997,020
------------
$ 5,821,742
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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 nine months have been increased by $22,382 and $117,867,
respectively, for fiscal year 2002.
Page 6
TSR, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
FEBRUARY 28, 2003
(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
February 28, 2003 are summarized as follows:
Gross Gross
Unrealized Unrealized
Amortized Holding Holding Fair
Cost Gains Losses Value
----------- ---------- ---------- -----------
United States Treasury Securities.. $11,925,937 -- -- $11,925,937
Equity Securities.................. 28,287 -- (11,353) 16,934
----------- ---------- ---------- -----------
$11,954,224 $ -- $ (11,353) $11,942,871
=========== ========== ========== ===========
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 nine months ended February 28, 2003 was $14,300 and $42,902.
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 $46,100,000, $2,030,000, and $0.46,
respectively, for the nine months ended February 28, 2002.
Page 7
TSR, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
FEBRUARY 28, 2003
(UNAUDITED)
7. Recent Accounting Pronouncements
--------------------------------
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure." SFAS No. 148 provides
alternative methods of transition for a voluntary change to the fair value
method of accounting for stock-based employee compensation as originally
provided by SFAS No. 123 "Accounting for Stock-Based Compensation."
Additionally, SFAS No. 148 amends the disclosure requirements of SFAS No.
123 in both annual and interim financial statements. The Company intends on
continuing to apply the intrinsic value method of accounting for
stock-based employee compensation, and will provide the required
disclosures of SFAS No. 148 in all future filings. The adoption of this
pronouncement will not have any impact on the Company's consolidated
financial position or results of operations.
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 February 28, 2003 compared with three months ended February
28, 2002
Three Months Ended
February 28,
(Dollar amounts in Thousands)
2003 2002
---- ----
%of %of
Amount Revenues Amount Revenues
------ -------- ------ --------
Revenues* ................................... $11,987 100.0 $12,886 100.0
Cost of sales* .............................. 9,423 78.6 10,207 79.2
------- ----- ------- -----
Gross profit ................................ 2,564 21.4 2,679 20.8
Selling, general, and administrative expenses 1,806 15.1 2,002 15.5
------- ----- ------- -----
Income from operations ...................... 758 6.3 677 5.3
Other income ................................ 47 0.4 59 0.4
------- ----- ------- -----
Income before income taxes .................. 805 6.7 736 5.7
Provision for income taxes .................. 353 2.9 341 2.6
------- ----- ------- -----
Net income .................................. $ 452 3.8 $ 395 3.1
======= ===== ======= =====
* For fiscal 2002, 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 February 28, 2003 decreased $899,000 or
7.0% from the comparable period in fiscal 2002. The continuing weak economic
environment has caused almost all of our customers to severely cut back on their
IT spending. This has caused a decrease in the placement of new consultants with
clients, resulting in a decrease in the average number of consultants on billing
from approximately 339 for the quarter ended February 28, 2002 to 335 for the
quarter ended February 28, 2003. After reaching a low point in the beginning of
calendar year 2002, we had made some progress during the year, only to again
reach the previous year's low point at year end due to headcount reductions
resulting from budget restrictions at many of our clients. Additionally, due to
the current economic environment, customers have required the Company to
decrease the rates charged for its services. As a result, the Company has also
decreased the rates paid to its consultants for their services. Also, during the
current quarter, several work days were lost for many consultants due to the
severe winter weather in the New York Metropolitan area.
Cost of Sales
- -------------
Cost of sales for the quarter ended February 28, 2003, decreased $784,000 or
7.7% to $9,423,000 from $10,207,000 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
79.2% in the quarter ended February 28, 2002 to 78.6% in the quarter ended
February 28, 2003. 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 $196,000 or 9.8%
from $2,002,000 in the quarter February 28, 2002 to $1,806,000 in the quarter
ended February 28, 2003. 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 $5,000 to $58,000 due to lower interest rates in the quarter ended
February 28, 2003. Additionally, the Company also had a net unrealized losses of
$4,000 in the quarters ended February 28, 2003 and 2002 from marketable
securities due to mark to market adjustments of its trading securities equity
portfolio.
Income Taxes
- ------------
The effective income tax rate of 43.8% for the quarter ended February 28, 2003
decreased from a rate of 46.3% in the quarter ended February 28, 2002.
Net Income
- ----------
Net income for the quarter ended February 28, 2003 increased by $57,000 or 14.4%
from the prior year period. Although gross profit decreased by $115,000 or 4.3%,
income from operations increased $81,000 or 12.0% due to lower selling, general
and administrative expenses.
Page 10
TSR, INC. AND SUBSIDIARIES
Nine months ended February 28, 2003 compared with nine months ended February 28,
2002
Nine Months Ended
February 28,
(Dollar amounts in Thousands)
2003 2002
---- ----
%of %of
Amount Revenues Amount Revenues
------ -------- ------ --------
Revenues* ................................... $39,527 100.0 $45,734 100.0
Cost of sales* .............................. 30,904 78.2 35,834 78.4
------- ----- ------- -----
Gross profit ................................ 8,623 21.8 9,900 21.6
Selling, general, and administrative
expenses 5,545 14.0 6,594 14.4
------- ----- ------- -----
Income from operations ...................... 3,078 7.8 3,306 7.2
Other income ................................ 148 0.4 259 0.6
------- ----- ------- -----
Income before income taxes .................. 3,226 8.2 3,565 7.8
Provision for income taxes .................. 1,401 3.6 1,546 3.4
------- ----- ------- -----
Net income .................................. $ 1,825 4.6 $ 2,019 4.4
======= ===== ======= =====
* For fiscal 2002, 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 nine months ended February 28, 2003 decreased
$6,207,000 or 13.6% from the comparable period in fiscal 2002. The continuing
weak economic environment has caused almost all of our customers to severely cut
back on their IT spending. This has caused a decrease in the placement of new
consultants with clients, resulting in a decrease in the average number of
consultants on billing from approximately 377 for the nine months ended February
28, 2002 to 352 for the nine months ended February 28, 2003. After reaching a
low point in the beginning of calendar year 2002, we had made some progress
during the year, only to again reach the previous year's low point at year end
due to headcount reductions resulting from budget restrictions at many of our
clients. Additionally, due to the current economic environment, customers have
required the Company to decrease the rates charged for its services. As a
result, the Company has also decreased the rates paid to its consultants for
their services.
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. The Company is unable to predict the long-term effects of
these changes.
Page 11
TSR, INC. AND SUBSIDIARIES
Cost of Sales
- -------------
Cost of sales for the nine months ended February 28, 2003, decreased $4,930,000
or 13.8% to $30,904,000 from $35,834,000 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 decreased from 78.4% in the nine
months ended February 28, 2002 to 78.2% in the nine months ended February 28,
2003.
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 $1,049,000 or 15.9%
from $6,594,000 in the nine months ended February 28, 2002 to $5,545,000 in the
nine months ended February 28, 2003. 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 $80,000 to $182,000 due to lower interest rates in the nine months
ended February 28, 2003. Additionally, the Company also had a net unrealized
loss of $9,000 in the nine months ended February 28, 2003 versus a net
unrealized loss of $4,000 in the nine months ended February 28, 2002 from
marketable securities due to mark to market adjustments of its trading
securities equity portfolio.
Income Taxes
- ------------
The effective income tax rate remained at 43.4% for the nine months ended
February 28, 2002 and 2003.
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 February 28, 2003, the Company had working capital of $22,452,000 and cash
and cash equivalents of $5,822,000 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 $1,825,000 in the nine
months ended February 28, 2003.
Net cash provided by operating activities amounted to $3,051,000 for the nine
months ended February 28, 2003, compared to cash provided of $3,161,000 for the
nine months ended February 28, 2002. The cash provided by operating activities
in both periods resulted primarily from the Company's net income and decreases
in accounts receivable. The decreases in accounts receivable resulted primarily
from the reduced revenues.
Net cash used in investing activities amounted to $3,014,000 for the nine months
ended February 28, 2003, compared to $2,803,000 for the nine months ended
February 28, 2002. The increase in net cash flows used in investing activities
primarily resulted from an increase in the purchase of U.S. Treasury Bills.
The Company's capital resource commitments at February 28, 2003 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 February 28, 2003 follows:
FY 03 FY 04 FY 05 FY 06 Thereafter Total
Operating Leases $85,000 $343,000 $349,000 $170,000 $118,000 $1,065,000
The Company's cash and marketable securities were sufficient to enable it to
meet its cash requirements during the nine months ended February 28, 2003. 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 February 28, 2003, no amounts
were outstanding under this line of credit.
Page 13
TSR, INC. AND SUBSIDIARIES
Recent Accounting Pronouncements
- --------------------------------
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure." SFAS No. 148 provides alternative
methods of transition for a voluntary change to the fair value method of
accounting for stock-based employee compensation as originally provided by SFAS
No. 123 "Accounting for Stock-Based Compensation." Additionally, SFAS No. 148
amends the disclosure requirements of SFAS No. 123 in both annual and interim
financial statements. The Company intends on continuing to apply the intrinsic
value method of accounting for stock-based employee compensation, and will
provide the required disclosures of SFAS No. 148 in all future filings. The
adoption of this pronouncement will not have any impact on the Company's
consolidated financial position or results of operations.
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 February 28,
2003, 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: April 3, 2003 /s/ J.F. Hughes
----------------------------------------------
J.F. Hughes, Chairman, President and Treasurer
Date: April 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: April 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: April 3, 2003
/s/ John G. Sharkey
----------------------------------------
John G. Sharkey
Vice President, Finance
Page 18