UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended December 31, 1999 Commission File Number: 0-13763 TECHNOLOGY RESEARCH CORPORATION _______________________________ (Exact name of registrant as specified in its charter) Florida 59-2095002 _______________________________ ________________ (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No,) 5250 140th Avenue North, Clearwater, Florida 33760 ____________________________________________________________________________ (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (727) 535-0572 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 a 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 [ ] Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Class Outstanding at January 28, 2000 ____________________________ _______________________________ Common stock, $.51 par value 5,455,756 TECHNOLOGY RESEARCH CORPORATION INDEX Part I - Financial Information Page Condensed Consolidated Balance Sheets - December 31, 1999 and March 31, 1999............................... 1 Condensed Consolidated Statements of Income - Three months and nine months ended December 31, 1999 and December 31, 1998.............................................. 2 Condensed Consolidated Statements of Cash Flows - Nine months ended December 31, 1999 and December 31, 1998.......... 3 Notes to Condensed Consolidated Financial Statements...................... 4 Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations.............................. 5 Item 3 - Quantitative and Qualitative Disclosure Regarding Market Risk.... 7 Part II - Other Information Item 1 - Legal Proceedings................................................ 8 Item 2 - Changes in Securities............................................ 8 Item 3 - Defaults Upon Senior Securities.................................. 8 Item 4 - Submission of Matters to a vote of Shareholders.................. 8 Item 5 - Other Information................................................ 8 Item 6 - Exhibits and Reports on Form 8-K................................. 8 Signatures................................................................ 9 PART I - FINANCIAL INFORMATION Item 1. Financial Statements TECHNOLOGY RESEARCH CORPORATION CONDENSED CONSOLIDATED BALANCE SHEETS December 31 March 31 1999 1999 ------------ --------- ASSETS (unaudited) * Current assets: Cash and cash equivalents $ 2,312,190 1,653,952 Accounts receivable, net 2,628,574 3,120,256 Income tax receivable 40,170 332,422 Inventories: Raw material 3,854,659 3,800,340 Work in process 463,811 242,683 Finished goods 1,252,487 681,159 ---------- ---------- Total inventories 5,570,957 4,724,182 Prepaid expenses 41,302 75,804 Deferred income taxes 469,261 515,010 ---------- ---------- Total current assets 11,062,454 10,421,626 ---------- ---------- Property, plant, and equipment 9,100,182 9,806,134 Less accumulated depreciation 4,685,029 5,205,162 ---------- ---------- Net property, plant, and equipment 4,415,153 4,600,972 ---------- ---------- Other assets 83,841 123,577 ---------- ---------- $ 15,561,448 15,146,175 ========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Current installments of long-term debt $ - 2,525,100 Accounts payable 748,695 649,252 Accrued expenses 285,648 331,984 Dividends payable 70,412 15,613 ---------- ---------- Total current liabilities 1,104,755 3,521,949 Long-term debt, excluding current installments 2,500,000 56,250 ---------- ---------- Total liabilities 3,604,755 3,578,199 ---------- ---------- Stockholders' equity: Common stock 2,782,435 2,782,435 Additional paid-in capital 7,528,473 7,528,473 Retained earnings 1,645,785 1,257,068 ---------- ---------- Total stockholders' equity 11,956,693 11,567,976 ---------- ---------- $ 15,561,448 15,146,175 ========== ========== <FN> See accompanying notes to condensed financial statements. </FN> - 1 - TECHNOLOGY RESEARCH CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited) Three Months Ended Nine Months Ended December 31 December 31 1999 1998 1999 1998 ---------- ---------- ---------- ---------- Operating revenues: Net sales $ 3,981,788 3,688,881 12,155,709 12,865,743 Royalties 24,634 25,517 71,659 69,088 ---------- ---------- ---------- ---------- 4,006,422 3,714,398 12,227,368 12,934,831 ---------- ---------- ---------- ---------- Operating expenses: Cost of sales 2,755,532 2,859,268 8,228,881 9,327,193 Selling, general, and administrative 781,654 748,991 2,430,845 2,348,815 Research, development and engineering 240,926 243,071 787,615 824,550 ---------- ---------- ---------- ---------- 3,778,112 3,851,330 11,447,341 12,500,558 ---------- ---------- ---------- ---------- Operating income 228,310 (136,932) 780,027 434,273 ---------- ---------- ---------- ---------- Other income (deductions): Interest and sundry income 24,116 61,240 62,544 101,200 Interest expense (41,649) (84,284) (131,564) (183,267) Loss on disposal of asset (20,174) - (20,174) - ---------- ---------- ---------- ---------- (37,707) (23,044) (89,194) (82,067) ---------- ---------- ---------- ---------- Income (loss) before income taxes 190,603 (159,976) 690,833 352,206 Income tax expense (benefit) 77,000 (89,975) 193,000 98,336 ---------- ---------- ---------- ---------- Net income (loss) $ 113,603 (70,001) 497,833 253,870 ========== ========== ========== ========== Basic earnings (loss) per share $ 0.02 (0.01) 0.09 0.05 ========== ========== =========== ========= Weighted average number of common shares outstanding 5,455,756 5,424,946 5,455,756 5,424,263 ========== ========== ========== ========== Diluted earnings (loss) per share $ 0.02 (0.01) 0.09 0.05 ========== ========== =========== ========= Weighted average number of common and equivalent shares outstanding 5,457,382 5,426,463 5,463,215 5,429,381 ========== ========== ========== ========== Dividends paid $ 0.01 - 0.02 - ========== ========== ========== ========== <FN> See accompanying notes to condensed financial statements. - 2 - TECHNOLOGY RESEARCH CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited) Nine Months Ended December 31 1999 1998 ---------- ---------- Cash flows from operating activities: Net income $ 497,833 253,870 Adjustments to reconcile net income to net cash provided by operating activities: Accretion of interest - (21,098) Depreciation 589,687 537,848 Decrease in accounts receivable 491,682 14,110 Increase in inventories (846,775) (389,417) Decrease in prepaid expenses 34,502 213,859 Decrease in income taxes receivable 292,252 91,922 Decrease in deferred income taxes 45,749 50,302 Decrease (increase) in other assets 39,736 (64,666) Increase (decrease) in accounts payable 99,443 (292,152) Decrease in accrued expenses (46,336) (243,104) ---------- ---------- Net cash provided by operating activities 1,197,773 151,474 ---------- ---------- Cash flows from investing activities: Maturities of short-term investments - 1,055,000 Capital expenditures (403,868) (641,601) ---------- ---------- Net cash provided (used) by investing activities (403,868) 413,399 ---------- ---------- Cash flows from financing activities: Principal payments of short-term debt (2,525,100) - Net borrowings (payments) of long-term debt 2,443,750 (56,250) Proceeds from exercise of stock options - 135,348 Dividends paid (54,317) (30,000) ---------- ---------- Net cash provided (used) by financing activities (135,667) 49,098 ---------- ---------- Increase in cash and cash equivalents 658,238 613,971 Cash and cash equivalents at beginning of period 1,653,952 1,153,798 ---------- ---------- Cash and cash equivalents at end of period $ 2,312,190 1,767,769 ========== ========== <FN> See accompanying notes to condensed financial statements. - 3 - TECHNOLOGY RESEARCH CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) 1. The financial information included herein is unaudited; however, such information reflects all adjustments (consisting solely of normal recurring adjustments) which are, in the opinion of management, necessary for the fair statement of results for the interim period. The results of operations for the nine-month period ended December 31, 1999, are not necessarily indicative of the results to be expected for the full year. 2. Basic earnings per share has been computed by dividing net income by the weighted average number of common shares outstanding. Diluted earnings per share has been computed by dividing net income by the weighted average number of common and equivalent shares outstanding. Common share equivalents included in the computation represent shares issuable upon exercise of stock options which would have a dilutive effect in periods where there are earnings. - 4 - Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULT OF OPERATIONS The following is management's discussion and analysis of certain significant factors which have affected the Company's financial position and operating results during the periods included in the accompanying condensed consolidated financial statements. Current Nine Months Ended December 31, 1999 versus Nine Months Ended December 31, 1998 Company's operating revenues (net sales and royalties) for the third quarter ended December 31, 1999 were $4,006,422, compared to $3,714,398 reported in the same quarter last year, an increase of approximately 8%. Net income for the current quarter was $113,603, compared to a loss of $70,001, for the same quarter last year. Basic and diluted earnings for the current period were $.02 per share compared to a loss of $.01 per share for the same quarter last year. The increase in revenues for the Company's third quarter ended December 31, 1999 was primarily due to higher military sales, which were up $267,791, compared to the prior year's quarter. The improvement in net income was due to higher sales levels and improved gross profit margins. The Company's operating revenues (net sales and royalties) for the nine-month period ended December 31, 1999 were $12,227,368, compared to $12,934,831 reported in the same period of the prior year, a decrease of approximately 5%. Net income for the nine-month period was $497,833, compared to $253,871, for the same period in the prior year, an increase of approximately 96%. Basic and diluted earnings for the nine-month period were $.09 per share compared to basic and diluted earnings of $.05 per share for the same period last year. The Company's performance through the nine-month period ended December 31, 1999 was mixed. The Company continues to improve gross profit margins and control operating expenses, so although revenues were down for the nine-month period, a substantial improvement has been made to the bottom line. Compared to the nine-month period last year, commercial sales were down by $1,100,045, while military sales and royalties increased by $390,010 and $2,572, respectively. The decrease in commercial sales was primarily due to the level of business with Xerox Corporation and its suppliers, which was down by $669,578, while commercial sales, other than Xerox, showed a decrease of $430,467. For the upcoming quarter, the Company expects total commercial sales to remain at current levels. The increase in military sales was mainly due to the Company being in full production of the control devices related to the 5/10/15/30/60KW Tactical Quiet Generator (TQG) Systems program. In addition, direct military shipments of spare parts and of control devices for the C2V Armored Bradley Chassis Tactical Vehicle were strong in the Company's third quarter. The Company expects military sales to remain strong for its fourth quarter and to strengthen in its first quarter of Fiscal Year 2001 as shipments are made under the new 3KW TQG Program. The Company's believes that the recently announced agreement with Windmere- Durable Holdings, Inc. demonstrates the start of the Company's Fire Shield(TM) safety technology being accepted into the marketplace. The Extended Fire Shield technology will be used in toasters and toaster ovens manufactured by Windmere-Durable under the Black & Decker(r) brand name. The Company also received a favorable response to its Fire Shield Home Wiring System, which was introduced at the International Home Builders' Show in Dallas, Texas last week. - 5 - The Company's gross profit margin on net sales was approximately 31% for the current quarter and approximately 32% for the nine-month period ended December 31, 1999, compared to 22% and 28% for the same periods last year, respectively, reflecting lower manufacturing costs primarily due to the Company transferring additional manufacturing processes from its Clearwater, Florida plant to its plant in San Pedro Sula, Honduras. Selling, general and administrative expenses were $781,654 for the current quarter and $2,430,845 for the nine-month period ended December 31, 1999, compared to $748,991 and $2,348,815 for the same periods last year, an increase of approximately 4% and 3%, respectively, reflecting comparable expenses year to year. Selling expenses were $450,826 for the current quarter and $1,386,297 for the nine-month period ended December 31, 1999, compared to $414,400 and $1,312,794 for the same periods last year. General and administrative expenses were $330,828 for the current quarter and $1,044,548 for the nine-month period ended December 31, 1999, compared to $334,591 and $1,036,021 for the same periods last year. Research, development and engineering expenses were $240,926 for the current quarter and $787,615 for the nine-month period ended December 31, 1999, compared to $243,071 and $824,550 for the same periods last year, reflecting comparable expenses year to year. Interest expense, net of interest and sundry income, for the current quarter was $17,533 and $69,020 for the nine-month period ended December 31, 1999, compared to $23,044 and $82,067, respectively, for same periods last year, reflecting lower interest rates and the Company refinancing its debt in the third quarter. In accordance with FSAS 109, "Accounting for Income Taxes", the Company does not record deferred income taxes on the foreign undistributed earnings of an investment in a foreign subsidiary that is essentially permanent in duration. Accordingly, the Company's Honduras subsidiary was profitable which caused a decrease in the effective tax rate of the Company. If circumstances change, and it becomes apparent that some or all of the undistributed earnings of the subsidiary will be remitted in the foreseeable future, but U.S. income taxes have not been recognized by the Company, the Company will record as an expense of the current period the U.S. income taxes attributed to that remittance. Liquidity and Capital Resources As of December 31, 1999, the Company's cash and cash equivalents were $2,312,190, compared to $1,653,952 at March 31, 1999. The Company's cash is currently held in a money market fund whose yield is comparable to U.S. Treasury Bills. The Company continues to generate cash through its operating activities. On December 14, 1999, the Company closed on a $3,000,000 revolving credit loan with a new institutional lender. The term of the loan is for two years, and at the end of each year, the Company has the option to extend the maturity date another year. Similar to the previous line of credit, the Company has the option of borrowing at the lender's prime rate of interest minus 25 basis points or the 30-day London Interbank Offering Rate (L.I.B.O.R.) plus 200 basis points. The Company's debt from advances on its new line of credit was $2,500,000 as of December 31, 1999. - 6 - The Company's working capital increased by $3,058,022 to $9,957,699 at December 31, 1999, compared to $6,899,677 at March 31, 1999. The increase was primarily a result of the Company's new two-year line of credit agreement, which allowed the Company to record the advances on its line of credit as long term debt as of December 31, 1999, as compared to current liabilities as of March 31, 1999. The Company's continued profitability, although to a lesser extent, also contributed to the increase of working capital. The Company believes cash flow from operations, the available bank line and current cash position will be sufficient to meet its working capital requirements for the immediate future. The mortgage payable to the Company's previous institutional lender, which was in the amount of $93,750 as of September 30, 1999, was paid down completely as of December 31, 1999 as part of the Company's refinancing its debt with a new institutional lender. On August 30, 1999, the Company announced that its Board of Directors, at its regularly scheduled board meeting on August 26, 1999, voted to re-institute the Company's quarterly dividend policy at $0.01 cent per share. The record date for the Company's third fiscal quarter dividend was December 31, 1999, and the Company paid that dividend on January 22, 2000. Several key factors were important in the Board's decision to re-institute the payment of a cash dividend to its shareholders. These factors were the successful implementation of key strategies that have long term positive effect on future earnings and growth, the overall strength of the Company's Balance Sheet, positive cash flow and the turnaround at the Company's off-shore Honduras manufacturing operation. Item 3. Quantitative and Qualitative Disclosure Regarding Market Risk The Company has no derivative securities as of December 31, 1999. The Company is exposed to changes in interest rates as a result of its bank credit agreement, which is based on the London Interbank Offered Rate. A 10% increase in interest rates related to the Company's bank credit facility would not have a material effect on the Company's earnings over the next fiscal year or the bank credit agreement's fair value. Year 2000 issues The Year 2000 issue was a result of certain microprocessors and computer programs that were designed using two digits rather than four to define the applicable year. Computer programs that have time sensitive software may have recognized a date using "00" as the year 1900 rather that the year 2000; however, to date, the Company has not experienced any Year 2000 disruptions within or by its business partners. In addition, the Company believes that the likelihood of futures disruptions at this point are very remote; therefore, the Company will not make further comment in the future on Year 2000 issues, unless otherwise required by the SEC. Forward Looking Statement The statements in this report that relate to future plans, expectations, events, performance and the like are forward-looking statements, within the meaning of the Private Securities Litigation Reform Act of 1995 and the Securities Exchange Act of 1934. Actual results or events could differ materially from those described in the forward-looking statements due to a variety of factors, including those set forth in the Company's reports on Form 10-K and 10-Q filed with the Securities and Exchange Commission. - 7 - Part II - Other Information Item 1. Legal Proceedings Not Applicable. Item 2. Changes in Securities Not Applicable. Item 3. Defaults Upon Senior Securities Not Applicable. Item 4. Submission of Matters to a Vote of Security Holders Not Applicable. Item 5. Other Information Not Applicable. Item 6. Exhibits and Reports on Form 8-K The Company filed no reports on Form 8-K during the quarter covered by this Report. - 8 - ___________________________________________ SIGNATURES Pursuant to the requirements of the Security 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 (registrant) February 15, 1999 Scott J. Loucks ___________________________ __________________________________ Date Scott J. Loucks Chief Financial Officer, (principal financial, accounting and Duly Authorized Officer) - 9 -