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 June 30, 2002 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 July 31, 2002 Common stock, $.51 par value 5,437,497 TABLE OF CONTENTS Part I - Financial Information Page Condensed Consolidated Balance Sheets - June 30, 2002 and March 31, 2002.................................. 1 Condensed Consolidated Statements of Income - Three months ended June 30, 2002 and June 30, 2001................ 2 Condensed Consolidated Statements of Cash Flows - Three months ended June 30, 2002 and June 30, 2001................ 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... 8 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 Security Holders............. 8 Item 5 - Other Information............................................... 8 Item 6 - Exhibits and Reports on Form 8-K................................ 8 Signatures............................................................... 9 Certification........................................................... 10 PART I - FINANCIAL INFORMATION Item 1. Financial Statements TECHNOLOGY RESEARCH CORPORATION AND SUBSIDIARY CONDENSED CONSOLIDATED BALANCE SHEETS June 30 March 31 2002 2002 ----------- --------- ASSETS (unaudited) * Current assets: Cash and cash equivalents $ 585,603 1,163,099 Accounts receivable, net 2,645,748 2,516,603 Inventories: Raw material 2,932,142 3,130,889 Work in process 470,213 190,348 Finished goods 1,369,626 1,477,494 ---------- ---------- Total inventories 4,771,981 4,798,731 Prepaid expenses 368,485 97,720 Deferred income taxes, net 210,718 271,569 ---------- ---------- Total current assets 8,582,535 8,847,722 ---------- ---------- Property, plant, and equipment 9,650,735 9,493,313 Less accumulated depreciation 5,962,260 5,795,667 ---------- ---------- Net property, plant, and equipment 3,688,475 3,697,646 ---------- ---------- Non-current deferred income taxes, net 162,861 162,861 Other assets 40,501 58,708 ---------- ---------- $ 12,474,372 12,766,937 ========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable 702,239 551,300 Accrued expenses 274,651 293,422 Dividends payable 68,991 68,804 ---------- ---------- Total current liabilities 1,045,881 913,526 Long-term debt - 500,000 Deferred income - long term 50,000 50,000 ---------- ---------- Total liabilities 1,095,881 1,463,526 ---------- ---------- Stockholders' equity: Common stock 2,784,088 2,784,088 Additional paid-in capital 7,526,472 7,526,472 Retained earnings 1,108,076 1,032,996 ---------- ---------- 11,418,636 11,343,556 Treasury stock (40,145) (40,145) ---------- ---------- Total stockholders' equity 11,378,491 11,303,411 ---------- ---------- $ 12,474,372 12,766,937 ========== ========== See accompanying notes to condensed consolidated financial statements. - 1 - TECHNOLOGY RESEARCH CORPORATION AND SUBSIDIARY CONDENSED CONSOLIDATED STATEMENTS OF INCOME (unaudited) Three Months Ended June 30 2002 2001 ---------- ---------- Operating revenues: Net sales $ 3,837,780 4,078,037 Royalties 17,538 29,316 ---------- ---------- 3,855,318 4,107,353 ---------- ---------- Operating expenses: Cost of sales 2,597,272 2,985,645 Selling, general, and administrative 785,780 824,964 Research, development and engineering 285,056 263,145 ---------- ---------- 3,668,108 4,073,754 ---------- ---------- Operating income 187,210 33,599 ---------- ---------- Other income (deductions): Interest and sundry income 4,249 879 Interest expense (1,153) (31,692) ---------- ---------- 3,096 (30,813) ---------- ---------- Income before income taxes 190,306 2,786 Income taxes 60,851 696 ---------- ---------- Net income $ 129,455 2,090 ========== ========== Basic earnings per share $ 0.02 0.00 ========== ========== Weighted average number of common shares outstanding 5,437,497 5,437,497 ========== ========== Diluted earnings per share $ 0.02 0.00 ========== ========== Weighted average number of common and equivalent shares outstanding 5,466,946 5,448,004 ========== ========== Dividends paid $ .01 .01 ========== ========== See accompanying notes to condensed consolidated financial statements. - 2 - TECHNOLOGY RESEARCH CORPORATION AND SUBSIDIARY CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited) Three Months Ended June 30 2002 2001 ---------- ---------- Cash flows from operating activities: Net income $ 129,455 2,090 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 237,708 220,372 Decrease (increase) in accounts receivable (129,145) 121,891 Decrease in inventories 26,750 81,786 Decrease in income taxes receivable - 198,282 Increase in prepaid expenses, net (270,765) (103,160) Decrease (increase) in deferred income taxes 60,851 15,250 Decrease (increase) in other assets 18,207 (11,644) Increase (decrease) in accounts payable 150,939 (497,070) Decrease in accrued expenses (18,771) (87,456) Decrease in deferred income - (5,883) ---------- ---------- Net cash provided by (used in) operating activities 205,229 (65,542) ---------- ---------- Cash flows from investing activities: Capital expenditures (228,537) (33,058) ---------- ---------- Net cash used in investing activities (228,537) (33,058) ---------- ---------- Cash flows from financing activities: Borrowings (principal payments) on long-term debt (500,000) 200,000 Dividends paid (54,188) (54,321) ---------- ---------- Net cash provided by (used in) financing activities (554,188) 145,679 ---------- ---------- Increase (decrease) in cash and cash equivalents (577,496) 47,079 Cash and cash equivalents at beginning of period 1,163,099 184,772 ---------- ---------- Cash and cash equivalents at end of period $ 585,603 231,851 ========== ========== See accompanying notes to condensed consolidated financial statements. - 3 - TECHNOLOGY RESEARCH CORPORATION AND SUBSIDIARY 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 three-month period ended June 30, 2002, 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. For the quarter ended June 30, 2002, 372,250 shares were considered anti-dilutive for purposes of calculating earnings per share. - 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 Three Months Ended June 30, 2002 versus Three Months Ended June 30, 2001 The Company's operating revenues (net sales and royalties) for the first quarter ended June 30, 2002 were $3,855,318, compared to $4,107,353 reported in the same quarter last year, a decrease of approximately 6%. Net income for the current quarter was $129,455, compared to $2,090, for the same quarter last year. Basic and diluted earnings for the current period were $.02 per share compared to basic and diluted earnings of $.00 per share for the same quarter last year. The improvement in net income for the Company's first quarter ended June 30, 2002, compared to the prior year's quarter, was primarily due to increased gross profit margins and lower interest expense. The Company became debt-free in the first quarter by paying down the remaining $500,000 on its line of credit, reducing debt in total by $1,950,000 over the past twelve months. The Company was able to reduce its debt through earnings and inventory reduction. All of the Company's $3,000,000 line of credit is now available for use. For the period ended June 30, 2002, commercial sales decreased by $515,498, military sales improved by $275,241 and royalty income was down by $11,778 compared to the prior year's quarter. The decrease in commercial sales was primarily due to competitive pressures and the current weakness in the global economy, which the Company believes will continue to affect commercial sales in the foreseeable future. Military sales remained strong throughout the first quarter due to direct military shipments of spare parts for existent systems and due to sub-contractor shipments of control devices related to the Tactical Quiet Generator (TQG) programs. The market for the Company's Fire Shield(R) products continues to develop. As previously reported, the 2002 National Electrical Code now requires that room air conditioners be manufactured with cord fire prevention, which the Company's Fire Shield cord set provides. Underwriters Laboratories recently implemented this requirement into its product standard for room air conditioners to become effective in August 2004. The Company expects to play a major role in this newly developed marketplace. Also, the Company recently introduced its Fire Shield Power Surge Strip to several major retailers, and the Company expects shipments of initial stocking quantities to begin in early Fall. In addition, the Company expects royalties of approximately $50,000 to be generated from Fire Shield licensed technology during its current fiscal year. Although Fire Shield product sales were not material as a percentage of the Company's total revenues during the quarter, the Company continues to believe that its Fire Shield technology represents its most significant opportunity for growth. - 5 - The Company's gross profit margin on net sales was 32% for the current quarter and 27% for the same quarter last year reflecting improved manufacturing productivity and higher military sales as a percentage of total sales. Selling, general and administrative expenses for the current quarter were $785,780, compared to $824,964 in the same quarter last year, a decrease of approximately 5%, reflecting lower salary related expenses of $40,719 and an increase of other expenses of $1,535. Selling expenses were $459,927 for the current quarter, compared to $477,252 the same quarter last year, a decrease of approximately 4%. General and administrative expenses were $325,853, compared to $347,712 in the same quarter last year, a decrease of approximately 6%. Research, development and engineering expenses for the current quarter were $285,056, compared to $263,145 for the same quarter last year, an increase of approximately 8%, The increase was related to the Company re-qualifying its portable GFCI products with Underwriters Laboratories ("UL"). As previously reported in the Company's Fiscal Year 2002 Form 10-K, on November 1, 2001, UL announced that it would toughen the test standard for portable GFCI devices as a result of a National Electrical Manufacturers Association ("NEMA") sponsored investigation of the long term performance and installations of GFCI Dual Outlet Receptacles across the United States. All of the Company's GFCI devices will need to be re-tested and re-certified by January 1, 2003, according to the present UL timetable. The re-certification will test for 1) expanded surge requirements, 2) new requirements for moisture and corrosion, and 3) new requirements for reverse line-load miss wiring. The risk to the Company is that certain products may not be certified by the January 1, 2003 deadline thereby impacting sales of those products until re-certification is completed. Interest and sundry income, net of interest expense, was $3,096 for the current quarter, compared to interest expense, net of interest and sundry income of ($30,813) for the same quarter last year, reflecting lower interest expense due to the Company reducing borrowings on its line of credit. 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 June 30, 2002, the Company's cash and cash equivalents decreased to $585,603 from the March 31, 2002 total of $1,163,099. Cash provided by operating activities was $205,229, cash used in investing activities was $228,537 and cash used in financing activities was $554,188, giving a total decrease of $577,496. - 6 - Cash provided by operating activities was primarily due to net income of $129,455, depreciation in the amount of $237,708, an increase in accounts payable of $150,939, and a decrease in inventory and deferred income taxes of $26,750 and $60,851, respectively, offset to some extent by an increase in accounts receivable and prepaid expenses of $129,145 and $270,765, respectively. The increase in accounts receivable was primarily the result of four slow-paying customers, which the Company believes will be collected within the next quarter. The increase in prepaid expenses was the result of up front payments by the Company for its one year Honduran facility lease and for its commercial property and casualty insurances. Cash used in investing activities was related to purchases of capital equipment only. The Company's capital expenditures were $228,537 in the first quarter ended June 30, 2002 compared to $33,058 in the prior year's quarter. Increased capital expenditures were due to the following: 1) the Company purchasing a 375 ton molding press to further vertically integrate its plastic parts requirements; and 2) the Company tooling for several new and existing products to be manufactured at the Company's contract manufacturer in China. Cash used in financing activities was primarily due to the Company's repayment of its line of credit in the amount of $500,000 and the Company's payment of its quarterly cash dividend in the amount of $54,188. On December 24, 2001, the Company renewed its $3,000,000 revolving credit loan with its institutional lender, extending the maturity date to December 14, 2003. 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 175 basis points. The Company is currently using the L.I.B.O.R. option. The loan is collateralized with a perfected first security interest on all of its accounts receivable and inventories, and a blanket security interest on all of its assets. The Company continues to operate well within all the covenants of the loan agreement. The Company was debt-free as of June 30, 2002, compared its line of credit balance of $500,000 as of March 31, 2002. The Company has no off-balance sheet arrangements and no debt relationships other than what is noted above. The Company's working capital decreased by $397,542 to $7,536,654 at June 30, 2002, compared to $7,934,196 at March 31, 2002. The decrease was primarily due to the Company's reduction of its line of credit, as noted above; however, the Company has all of its $3,000,000 line of credit now available for use. 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 Company's earnings before interest, income taxes, depreciation and amortization ("EBITDA") was $526,795, or $.10 per share, for the first quarter ended June 30, 2002, compared to $349,486, or $.06 per share, for the prior year's quarter. The Company wishes to present its EBITDA results as an indication of its liquidity and should not be interpreted as earnings. The record date for the Company's first fiscal quarter dividend of $.01 per share was June 28, 2002, and the Company paid that dividend on July 19, 2002. - 7 - Item 3. Quantitative and Qualitative Disclosure Regarding Market Risk The Company has no derivative securities as of June 30, 2002. The Company's exposure to market risk for changes in interest rates would relate primarily to the Company's debt obligations due to its variable LIBOR Rate pricing; however, the Company has no debt obligations as of June 30, 2002. 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. These statements related to future events, other future financial performance or business strategies, and 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 or results may differ materially. In evaluating these statements, you should specifically consider the factors described throughout this report. Such 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 the Company's Honduran manufacturing facility, changes in manufacturing efficiencies and the impact of competitive products and pricing. The Company cannot be assured that future results, levels of activity, performance or goals will be achieved, and the Company disclaims any obligation to revise any forward-looking statements subsequent to events or circumstances or the occurrence of unanticipated events. 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) August 14, 2002 /s/ Scott J. Loucks ___________________________ __________________________________ Date Scott J. Loucks Chief Financial Officer, (principal financial, accounting and Duly Authorized Officer) - 9 -