xQUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2005
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______ to ______
0-13763
(Commission file No.)
TECHNOLOGY RESEARCH CORPORATION
(Exact name of registrant as specified in its charter)
FLORIDA | 59-2095002 |
(State or other jurisdiction of incorporation or organization) | (I.R.S. employer identification no.) |
5250-140th Avenue North
Clearwater, Florida 33760
(Address of principal executive offices)
(727) 535-0572
(Registrant’s telephone number, including area code)
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. Yes x No o.
Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes o No x
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x
TABLE OF CONTENTS
September 30, 2005
September 30, 2005 | March 31, 2005 | ||||||||
ASSETS | |||||||||
Current assets: | |||||||||
Cash and cash equivalents | $ | 2,273,926 | 815,411 | ||||||
Short-term investments | 1,169 | 487,072 | |||||||
Trade and other accounts receivable, net of allowance for | |||||||||
doubtful accounts of $75,607 and $171,725 | 6,725,798 | 13,114,548 | |||||||
Income taxes receivable | 44,241 | - | |||||||
Inventories | 12,005,117 | 11,460,302 | |||||||
Deferred income taxes | 513,119 | 488,413 | |||||||
Prepaid expenses and other current assets | 302,391 | 514,922 | |||||||
Total current assets | 21,865,761 | 26,880,668 | |||||||
Property and equipment, net of accumulated depreciation of | |||||||||
$8,712,501 and $8,089,950 | 5,354,483 | 5,470,156 | |||||||
Other assets | 64,088 | 96,004 | |||||||
Total assets | $ | 27,284,332 | 32,446,828 | ||||||
LIABILITIES AND SHAREHOLDERS' EQUITY | |||||||||
Current liabilities: | |||||||||
Short-term debt | $ | 2,210,200 | 3,000,000 | ||||||
Trade accounts payable | 4,086,405 | 7,970,920 | |||||||
Accrued expenses | 1,061,932 | 1,327,944 | |||||||
Accrued dividends | 100,273 | 100,175 | |||||||
Income taxes payable | - | 112,239 | |||||||
Total current liabilities | 7,458,810 | 12,511,278 | |||||||
Long-term debt | 2,350,000 | 2,350,000 | |||||||
Deferred income taxes | 351,352 | 378,143 | |||||||
Total liabilities | 10,160,162 | 15,239,421 | |||||||
Shareholders' equity: | |||||||||
Common stock $0.51 par value; 10,000,000 shares authorized, 5,797,375 shares and | |||||||||
5,795,375 shares issued and 5,775,875 shares and 5,773,875 shares outstanding | 2,956,661 | 2,955,641 | |||||||
Additional paid-in capital | 8,524,149 | 8,483,237 | |||||||
Common stock held in treasury, 21,500 shares, at cost | (40,145 | ) | (40,145 | ) | |||||
Retained earnings | 5,683,505 | 5,808,674 | |||||||
Total shareholders' equity | 17,124,170 | 17,207,407 | |||||||
Total liabilities and shareholders' equity | $ | 27,284,332 | 32,446,828 | ||||||
The accompanying notes are an integral part of the consolidated financial statements.
Three Months Ended September 30, | Six Months Ended September 30, | ||||||||||||
2005 | 2004 | 2005 | 2004 | ||||||||||
Revenues: | |||||||||||||
Commercial | $ | 5,538,446 | 4,232,477 | 13,465,867 | 8,008,530 | ||||||||
Military | 3,123,239 | 2,832,299 | 5,772,568 | 6,134,559 | |||||||||
Royalties | - | 4,751 | - | 57,382 | |||||||||
Total revenues | 8,661,685 | 7,069,527 | 19,238,435 | ||||||||||
Cost of sales | 6,882,845 | 4,925,848 | 15,166,395 | 9,435,264 | |||||||||
Gross profit | 1,778,840 | 2,143,679 | 4,072,040 | ||||||||||
Operating expenses: | |||||||||||||
Selling and marketing | 566,991 | 592,370 | 1,206,877 | 1,181,015 | |||||||||
General and administrative | 950,008 | 581,844 | 1,685,197 | 1,149,997 | |||||||||
Research and development | 538,018 | 501,423 | 1,025,424 | 967,894 | |||||||||
Total operating expenses | 2,055,017 | 1,675,637 | 3,917,498 | ||||||||||
Income (loss) from operations | (276,177 | ) | 468,042 | 154,542 | |||||||||
Other income (expense): | |||||||||||||
Other income, net | 10,303 | 7,145 | 20,042 | 14,613 | |||||||||
Interest expense | (64,458 | ) | (495 | ) | (114,469 | ) | (743 | ) | |||||
Other income (expense), net | (54,155 | ) | 6,650 | (94,427 | ) | ||||||||
Income (loss) before income taxes | (330,332 | ) | 474,692 | 60,115 | |||||||||
Income tax expense (benefit) | (85,589 | ) | 156,647 | 12,023 | 488,456 | ||||||||
Net income (loss) | $ | (244,743 | ) | 318,045 | 48,092 | ||||||||
Earnings (loss) per share - basic | $ | (0.04 | ) | 0.06 | 0.01 | 0.17 | |||||||
Earnings (loss) per share - diluted | $ | (0.04 | ) | 0.05 | 0.01 | 0.17 | |||||||
Shares outstanding - basic | 5,775,625 | 5,755,584 | 5,775,018 | 5,750,111 | |||||||||
Shares outstanding - diluted | 5,775,625 | 5,947,031 | 5,836,472 | 5,966,279 |
The accompanying notes are an integral part of the consolidated financial statements.
Six Months Ended September 30, | |||||||||
2005 | 2004 | ||||||||
Cash flows from operating activities: | |||||||||
Net income | $ | 48,092 | 991,715 | ||||||
Adjustments to reconcile net income to net cash provided (used) by operating activities: | |||||||||
Tax benefit of stock options exercised | - | 8,612 | |||||||
Gain on disposal of assets | - | 1,390 | |||||||
Stock compensation expense | 38,400 | - | |||||||
Depreciation | 625,348 | 447,985 | |||||||
Accretion of interest on short-term investments | (97 | ) | - | ||||||
Changes in operating assets and liabilities: | |||||||||
Trade and other accounts receivable, net | 6,388,750 | (815,932 | ) | ||||||
Income taxes receivable | (44,241 | ) | - | ||||||
Inventories | (544,815 | ) | (2,232,657 | ) | |||||
Deferred income taxes | (51,497 | ) | (15,628 | ) | |||||
Prepaid expenses and other current assets | 212,531 | (205,722 | ) | ||||||
Other assets | 31,916 | (1,255 | ) | ||||||
Trade accounts payable | (3,884,515 | ) | 2,169,610 | ||||||
Accrued expenses | (266,012 | ) | (171,480 | ) | |||||
Income taxes payable | (112,239 | ) | (327,249 | ) | |||||
Deferred revenue | - | (5,262 | ) | ||||||
Net cash provided (used) by operating activities | 2,441,621 | (155,873 | ) | ||||||
Cash flows from investing activities: | |||||||||
Sale (purchase) of short-term investments | 486,000 | (482,802 | ) | ||||||
Capital expenditures | (509,675 | ) | (2,269,051 | ) | |||||
Net cash used by investing activities | (23,675 | ) | (2,751,853 | ) | |||||
Cash flows from financing activities: | |||||||||
Borrowings of short-term debt | 10,200 | - | |||||||
Repayments of short-term debt | (800,000 | ) | - | ||||||
Proceeds from the exercise of stock options | 3,532 | 45,682 | |||||||
Cash dividends paid | (173,163 | ) | (172,120 | ) | |||||
Net cash used by financing activities | (959,431 | ) | (126,438 | ) | |||||
Net increase (decrease) in cash and cash equivalents | 1,458,515 | (3,034,164 | ) | ||||||
Cash and cash equivalents at beginning of period | 815,411 | 5,968,122 | |||||||
Cash and cash equivalents at end of period | $ | 2,273,926 | 2,933,958 | ||||||
The accompanying notes are an integral part of the consolidated financial statements.
1. Basis of Presentation:
The unaudited interim consolidated financial statements and related notes have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. Accordingly, certain information and footnote disclosures normally included in complete financial statements prepared in accordance with United States generally accepted accounting principles have been omitted pursuant to such rules and regulations. The accompanying unaudited interim consolidated financial statements and related notes should be read in conjunction with the consolidated financial statements and notes thereto included in the Technology Research Corporation (the "Company") Annual Report on Form 10-KSB for the year ended March 31, 2005.
The information furnished reflects, in the opinion of the management of the Company, all adjustments necessary for a fair presentation of the financial results for the interim period presented.
2. Earnings (loss) per share:
Basic earnings (loss) per share have been computed by dividing net income (loss) by the weighted average number of common shares outstanding.
Three months ended September 30, | Six months ended September 30, | |||||||||||||
2005 | 2004 | 2005 | 2004 | |||||||||||
Net income (loss) | $ | (244,743 | ) | 318,045 | 48,092 | 991,715 | ||||||||
Weighted average shares outstanding - basic | 5,775,625 | 5,755,584 | 5,775,018 | 5,750,111 | ||||||||||
Dilutive common shares issuable upon exercise of stock options | - | 191,447 | 61,454 | 216,168 | ||||||||||
Weighted average shares outstanding - diluted | 5,775,625 | 5,947,031 | 5,836,472 | 5,966,279 | ||||||||||
Earnings (loss) per share: | ||||||||||||||
Basic | $ | (0.04 | ) | 0.06 | 0.01 | 0.17 | ||||||||
Diluted | $ | (0.04 | ) | 0.05 | 0.01 | 0.17 |
Short-term investments totaled $1,169 as of September 30, 2005 and consisted of corporate securities. As of March 31, 2005, short-term investments totaled $487,072 and consisted of corporate securities of $2,079 and original cost plus accrued interest on U.S. Treasury Bills in the amount of $484,993. The Company considers all of its short-term investments to be held-to-maturity, and therefore, are recorded at amortized cost.
4. Inventories:
September 30, 2005 | March 31, 2005 | ||||||||
Raw materials | $ | 9,252,751 | 8,669,678 | ||||||
Work-in-process | 435,592 | 628,622 | |||||||
Finished goods | 2,316,774 | 2,162,002 | |||||||
Total | $ | 12,005,117 | 11,460,302 | ||||||
The Company generally provides a one year warranty period for all of its products. The Company also provides coverage on certain of its surge products for "downstream" damage of products not manufactured by the Company. The Company's warranty provision represents management's best estimate of probable liabilities, calculated as a function of sales volume and historical repair experience for each product under warranty. A roll-forward of the activity in the Company's warranty liability for the three and six months ended September 30, 2005 and 2004 is as follows:
Three months ended September 30, 2005 | Three months ended September 30, 2004 | Six months ended September 30, 2005 | Six months ended September 30, 2004 | ||||||
Beginning balance | $ | 342,626 | 20,000 | 310,447 | 20,000 | ||||
Warranty expense | 235,761 | 23,167 | 322,539 | 23,167 | |||||
Warranty claims | (307,925 | ) | (2,948 | ) | (362,524 | ) | (2,948 | ) | |
Ending balance | $ | 270,462 | 40,219 | 270,462 | 40,219 | ||||
Three months ended September 30, | Six months ended September 30, | |||||||||||||
2005 | 2004 | 2005 | 2004 | |||||||||||
Net income (loss) - as reported | $ | (244,743 | ) | 318,045 | 48,092 | 991,715 | ||||||||
Deduct: Total stock-based compensation | ||||||||||||||
expense determined under fair | ||||||||||||||
value based method | (35,319 | ) | (192,839 | ) | (1,344,241 | ) | (385,679 | ) | ||||||
Add: Stock compensation expense | 30,720 | - | 30,720 | - | ||||||||||
Net income (loss) - pro forma | $ | (249,342 | ) | 125,206 | (1,265,429 | ) | 606,036 | |||||||
Basic earnings (loss) per share: | ||||||||||||||
as reported | $ | (0.04 | ) | 0.06 | 0.01 | 0.17 | ||||||||
pro forma | $ | (0.04 | ) | 0.02 | (0.22 | ) | 0.11 | |||||||
Diluted earnings (loss) per share | ||||||||||||||
as reported | $ | (0.04 | ) | 0.05 | 0.01 | 0.17 | ||||||||
pro forma | $ | (0.04 | ) | 0.02 | (0.22 | ) | 0.11 | |||||||
As used in this Quarterly Report on Form 10-Q, unless the context otherwise requires, "we," "our," "us," the "Company" and "TRC" refer to Technology Research Corporation and its Honduran subsidiary.
FORWARD-LOOKING STATEMENTS
Some of the statements in this report constitute forward-looking statements, within the meaning of the Private Securities Litigation Reform Act of 1995 and the Securities Exchange Act of 1934, and any forward looking statements made herein are based on current expectations of the Company, involve a number of risks and uncertainties and should not be considered as guarantees of future performance. Such statements may be identified by terminology such as "may," "will," "should," "expects," "scheduled," "plans," "intends," "anticipates," "believes," "estimates," "potential," or "continue," or the negative of such terms, or other comparable terminology. These statements are only predictions, and actual events as well as results may differ materially. In evaluating these statements, you should specifically consider the information described in the Risk Factors section. Other key factors include, but are not limited to, the acceptance of any new products, such as Fire Shield®, into the marketplace, the effective utilization of our Honduran manufacturing facility and Far East contract manufacturers, changes in manufacturing efficiencies and the impact of competitive products and pricing. We cannot provide any assurance that predicted future results, levels of activity, performance or goals will be achieved, and we disclaim any obligation to revise any forward-looking statements subsequent to events or circumstances or the occurrence of unanticipated events. The factors that could cause actual results to differ materially include: interruptions or cancellation of existing contracts, impact of competitive products and pricing, product demand and market acceptance, risks, the presence of competitors with greater financial resources, product development and commercialization risks, changing economic conditions in developing countries, and an inability to arrange additional debt or equity financing. More information about factors that potentially could affect our financial results or otherwise described from time to time in our filings with the Securities and Exchange Commission, including our Annual Report on Form 10-KSB for the year ended March 31, 2005.
OVERVIEW
- to increase profitability by improving operating efficiencies;
- to strengthen and expand its markets and distribution channels;
- to broaden the applications within target markets for its existing products;
- to expand the scope of its product content;
- to expand its manufacturing capabilities;
- to maintain a conservative capital structure; and
- to pursue strategic acquisitions to the extent favorable opportunities are presented.
For the six-month period ended September 30, 2005, selling and marketing expense was $1,206,877, or 6.3%, compared to $1,181,015, or 8.3%, for the same period last year, an increase of $25,862, or 2.2%; however, as a percent of revenues, expenses decreased 2.0%, reflecting improved efficiency of selling and marketing resources.
The increase in expense for the three and six-month periods ended September 30, 2005 over the comparable periods was due to higher salary expense for additional personnel which was related to the support of the new RAC market.
The preparation of financial statements and related disclosures, in conformity with United States generally accepted accounting principles, requires management to make judgments, assumptions and estimates that affect the amounts reported. Certain of these significant accounting policies are considered to be critical accounting policies, as defined below.
A critical accounting policy is defined as one that is both material to the presentation of the Company’s financial statements and requires management to make difficult, subjective or complex judgments that could have a material effect on the Company’s financial condition and results of operations. Specifically, critical accounting estimates have the following attributes: (i) the Company is required to make assumptions about matters that are highly uncertain at the time of the estimate; and (ii) different estimates the Company could reasonably have used, or changes in the estimates actually used resulting from events that could be reasonably foreseen as likely to have a material effect on the Company’s financial condition or results of operations.
Management believes that the following are critical accounting policies:
- Failure to achieve our operating strategy
- Access to capital to fund growth
- Availability and cost increases in raw materials and components
- The loss of or significant decrease in sales to large customers
- Adverse changes in the operations of global manufacturing facilities
- Interruptions in manufacturing operations
- Infringement or loss of proprietary rights
- Seasonality
- Competition from larger companies that produce similar products
- Newly acquired businesses or product lines
- Government regulations could adversely impact our operations
As of the end of the period covered by this interim report on Form 10-Q, the Company carried out, under the supervision and with the participation of the Company’s Chief Executive Officer ("CEO") and Chief Financial Officer (“CFO”) (the “Certifying Officers”), an evaluation of the effectiveness of its “disclosure controls and procedures” (as the term is defined under Rules 13a–15(e) and 15d–15(e) promulgated under the Securities Exchange Act of 1934 as amended). Based on this evaluation, the Certifying Officers have concluded that the Company’s disclosure controls and procedures were effective.
Further, there were no significant changes in the Company’s internal control over financial reporting during the Company’s second fiscal quarter that materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
Not applicable.
Item 3. Defaults Upon Senior Securities.
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders.
On August 25, 2005, the Company held its 2005 Annual Meeting of Shareholders. The following is a tabulation of the voting on the proposals presented as the Annual Meeting:
Proposal 1; | The following nominees were elected as directors to serve a one-year term of office: |
Shares Voted FOR | Shares WITHHELD | |
Robert S. Wiggins | 5,389,088 | 88,384 |
Raymond B. Wood | 5,405,623 | 71,849 |
Gerry Chastelet | 5,369,473 | 107,999 |
Edmund F. Murphy, Jr. | 5,406,060 | 71,412 |
Martin L. Poad | 5,346,500 | 130,972 |
David F. Walker | 5,345,793 | 131,679 |
Proposal 2; | The appointment of KPMG LLP as the Company's independent registered public accounting firm for the year ending March 31, 2006 was ratified as such: |
Shares Voted FOR | Shares WITHHELD | Shares ABSTAINED |
5,441,336 | 17,539 | 18,597 |
Not applicable.
Exhibits: | |||
Exhibit 31.1 — Certification of the CEO pursuant to Rule 13a-14(a) or Rule 15(d)-14(a). | |||
Exhibit 31.2 — Certification of the CFO pursuant to Rule 13a-14(a) or Rule 15(d)-14(a). | |||
Exhibit 32.1 — Certification pursuant to 18 U.S.C. §1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |||
Exhibit 32.2 — Certification pursuant to 18 U.S.C. §1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |||
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.
TECHNOLOGY RESEARCH CORPORATION | |
November 14, 2005 | By: /s/ Robert S. Wiggins |
Robert S. Wiggins | |
Chairman, President and Chief Executive Officer | |
(Principal Executive Officer) | |
November 14, 2005 | By: /s/ Scott J. Loucks �� |
Scott J. Loucks | |
Chief Financial Officer | |
(Principal Financial and Accounting Officer) |