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, 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 July 30, 1999 Common stock, $.51 par value 5,455,756 TABLE OF CONTENTS Part I - Financial Information Page Condensed Consolidated Balance Sheets - June 30, 1999 and March 31, 1999.................................. 1 Condensed Consolidated Statements of Operations - Three months ended June 30, 1999 and June 30, 1998................ 2 Condensed Consolidated Statements of Cash Flows - Three months ended June 30, 1999 and June 30, 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... 6 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 AND SUBSIDIARY CONDENSED CONSOLIDATED BALANCE SHEETS June 30 March 31 1999 1999 ----------- --------- ASSETS (unaudited) * Current assets: Cash and cash equivalents $ 1,737,469 1,653,952 Accounts receivable, net 3,131,328 3,120,256 Income tax receivable 280,770 332,422 Inventories: Raw material 3,795,205 3,800,340 Work in process 452,662 242,683 Finished goods 697,725 681,159 ---------- ---------- Total inventories 4,945,592 4,724,182 Prepaid expenses 52,582 75,804 Deferred income taxes 515,010 515,010 ---------- ---------- Total current assets 10,662,751 10,421,626 ---------- ---------- Property, plant, and equipment 9,984,720 9,806,134 Less accumulated depreciation 5,393,139 5,205,162 ---------- ---------- Net property, plant, and equipment 4,591,581 4,600,972 ---------- ---------- Other assets 113,624 123,577 ---------- ---------- $ 15,367,956 15,146,175 ========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Current installments of debt $ 2,525,100 2,525,100 Accounts payable 656,728 649,252 Accrued expenses 361,214 331,984 Dividends payable 15,613 15,613 ---------- ---------- Total current liabilities 3,558,655 3,521,949 Long-term debt, excluding current installments 37,500 56,250 ---------- ---------- Total liabilities 3,596,155 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 1,460,893 1,257,068 ---------- ---------- Total stockholders' equity 11,771,801 11,567,976 ---------- ---------- $ 15,367,956 15,146,175 ========== ========== <FN> <F1> * The balance sheet as of March 31, 1999 has been summarized from the Company's audited balance sheet as of that date. <F2> See accompanying notes to condensed consolidated financial statements. </FN> - 1 - TECHNOLOGY RESEARCH CORPORATION AND SUBSIDIARY CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited) Three Months Ended June 30 1999 1998 ---------- ---------- Operating revenues: Net sales $ 3,914,286 4,737,522 Royalties 20,232 15,879 ---------- ---------- 3,934,518 4,753,401 ---------- ---------- Operating expenses: Cost of sales 2,583,025 3,310,807 Selling, general, and administrative 804,597 752,484 Research, development and engineering 259,606 279,685 ---------- ---------- 3,647,228 4,342,976 ---------- ---------- Operating income 287,290 410,425 ---------- ---------- Other income (deductions): Interest and sundry income 18,221 17,013 Interest expense (43,897) (51,888) Gain on foreign exchange 1,211 1,072 ---------- ---------- (24,465) (33,803) ---------- ---------- Income before income taxes 262,825 376,622 Income taxes 59,000 136,760 ---------- ---------- Net income $ 203,825 239,862 ========== ========== Basic earnings per share $ 0.04 0.04 ========== ========== Weighted average number of common shares outstanding 5,455,756 5,377,051 ========== ========== Diluted earnings per share $ 0.04 0.04 ========== ========== Weighted average number of common and equivalent shares outstanding 5,461,762 5,393,711 ========== ========== Dividends paid $ - - ========== ========== <FN> 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 1999 1998 ---------- ---------- Cash flows from operating activities: Net income $ 203,825 239,862 Adjustments to reconcile net income to net cash provided by operating activities: Accretion of interest - (13,745) Depreciation 187,977 183,649 Increase in accounts receivable (11,072) (328,946) Increase in inventories (221,410) (320,799) Decrease (increase) in prepaid expenses 23,222 (64,012) Decrease in income taxes receivable 51,652 116,958 Decrease in deferred income taxes - 19,802 Decrease (increase) in other assets 9,953 (39,175) Increase (decrease) in accounts payable 7,476 (4,600) Increase (decrease) in accrued expenses 29,230 (143,588) ---------- ---------- Net cash provided (used) by operating activities 280,853 (354,594) ---------- ---------- Cash flows from investing activities: Capital expenditures (178,586) (72,072) ---------- ---------- Net cash used by investing activities (178,586) (72,072) ---------- ---------- Cash flows from financing activities: Principal payments on long-term debt (18,750) (18,750) Proceeds from exercise of stock options - 86,332 Dividends paid - (10,000) ---------- ---------- Net cash provided (used) by financing activities (18,750) 57,582 ---------- ---------- Increase (decrease) in cash and cash equivalents 83,517 (369,084) Cash and cash equivalents at beginning of period 1,653,952 1,153,798 ---------- ---------- Cash and cash equivalents at end of period $ 1,737,469 784,714 ========== ========== <FN> 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, 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 Three Months Ended June 30, 1999 versus Three Months Ended June 30, 1998 The Company's operating revenues (net sales and royalties) for the quarter ended June 30, 1999 were $3,934,518, compared to $4,753,401 reported in the same quarter last year, a decrease of approximately 17%. Net income for the current quarter was $203,825, compared to $239,862, for the same quarter last year, a decrease of approximately 15%. Basic and diluted earnings for the current period were $.04 per share compared to basic and diluted earnings of $.04 per share for the same quarter last year. Although net sales were down, the Company generated a profit for the quarter ended June 30, 1999. This improvement is due to lower product costs, which were realized by moving more of the Company's U.S. manufacturing processes to its Honduran manufacturing facility in the first quarter. The Company also experienced a favorable income tax effect on the profit realized by its Honduran subsidiary due to the Honduran tax holiday. The decline in revenues, compared to the same quarter last year, was due to military and commercial sales being down by $101,996 and $721,240, respectively, while royalty income was up slightly by $4,353. The decrease in military sales was mainly due to the Company completing the previous contract related to the 5/10/15/30/60KW Tactical Quiet Generator (TQG) Systems program. As previously reported, the Company has received initial releases in the amount of $1.9 million under a new contract for its 5/10/15KW TQG control equipment and orders in the amount of approximately $6.3 million for the new 3KW military TQG Program. Shipments of the 5/10/15KW TQG control equipment began in December 1998, and assuming successful completion of First Article Testing and release of the production phase of the initial contract, shipments of approximately 4,200 3KW TQG control devices are estimated to begin in March 2000. The Company expects military sales to remain steady for Fiscal Year 2000 with potential strengthening in the fourth quarter to the extent that shipments are made under the new 3KW TQG Program. The decrease in commercial sales was primarily due to the level of business with Xerox Corporation and its suppliers, which was down by $536,803 compared to the same quarter last year. Commercial sales, other than Xerox, also showed a decrease of $184,437, compared to the prior year's quarter. However, the first quarter last year had approximately $400,000 of shipments, which had been delayed from the previous quarter due to production problems at the Company's Honduran manufacturing plant. Excluding this condition, commercial sales, other than Xerox, were stronger in the current quarter compared to the same quarter last year. For the upcoming quarter, the Company expects total commercial sales to remain at current levels unless orders from Xerox increase. The Company's gross profit margin on net sales was 34% for the current quarter and 30% for the same quarter last year. The improvement in gross profit margin were mainly due to the Company moving additional U.S. manufacturing processes to its Honduran manufacturing facility in the first quarter. - 5 - Selling, general and administrative expenses for the current quarter were $804,597, compared to $752,484 in the same quarter last year, an increase of approximately 7%, reflecting comparable expenses over the respective periods. Selling expenses were $455,374 for the current quarter, compared to $418,438 the same quarter last year, an increase of approximately 9%, and General and administrative expenses were $349,223, compared to $334,046 in the same quarter last year, an increase of approximately 5%. Research, development and engineering expenses for the current quarter were $259,606, compared to $279,685 for the same quarter last year, a decrease of approximately 7%, reflecting comparable expenses over the respective periods. Interest expense, net of interest and sundry income was $24,465 for the current quarter, compared to $33,803 for the same quarter last year. Liquidity and Capital Resources As of June 30, 1999, the Company's cash and cash equivalents increased to $1,737,469 from the March 31, 1999 total of $1,653,952. The increase in cash was mainly provided by operating activities. On August 28, 1999, the Company expects to renew its $2,500,000 commercial line of credit with its institutional lender for another year, maturing in August 2000. The Company continues to have the option of borrowing at the lender's prime rate of interest or the 30-day London Interbank Offering Rate (L.I.B.O.R.) plus 175 basis points. The Company's debt from advances on its line of credit was $2,450,100 as of June 30, 1999. The Company's working capital increased by $204,419 to $7,104,096 at June 30, 1999, compared to $6,899,677 at March 31, 1999. The increase was primarily a result of the Company's profitability in its first fiscal quarter. The Company believes cash flow from operations, the available bank line, and its short term investments and current cash position will be sufficient to meet its working capital requirements for the immediate future. The mortgage payable to the Company's institutional lender as of June 30, 1999 was $112,500, compared to $131,250 at March 31, 1999, reflecting the Company's payments on principal for the three-month period. The Company's Board of Directors did not declare a dividend for its first quarter ended June 30, 1999. The Company's Board of Directors reviews the Company's dividend policy on a quarterly basis and makes a determination at such time as to whether the Company will resume payment of a dividend based on the Company's cash and earnings position. Item 3. Quantitative and Qualitative Disclosure Regarding Market Risk The Company has no derivative securities as of March 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. - 6 - Year 2000 Issues The Year 2000 issue is 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 recognize a date using "00" as the year 1900 rather that the year 2000. This could result in a system failure or miscalculation causing disruptions to operations including, among other things, a temporary inability to process transactions, send invoices or engage in similar activities. The Company is continually working to resolve the potential risks and concerns of the Year 2000 issues. The Company has made progress in assessing and implementing systems to be Year 2000 ready, completing the conversion of its major business computer systems to be Year 2000 ready, on January 1, 1999 at its U.S. facility and on July 4, 1998 at its Honduran facility. None of the Company's products are Year 2000 sensitive, so the total cost of the Year 2000 project has been minimal so far at approximately $10,000. The Company expensed all costs associated with these system changes as the costs were incurred, and they were funded through operating cash flows. Since the Company's major computer systems are already Year 2000 compliant, the Company does not foresee the need of a contingency plan for those minor systems that are not significant enough to disrupt the Company's business. The Company is also assessing the readiness of its significant suppliers, which if not Year 2000 ready, could have a material adverse effect on the Company's operations. The Company believes that if certain suppliers were not Year 2000 ready, then alternate arrangements could be made to alleviate any material impact on operations. Achieving Year 2000 compliance is dependent on many factors, some of which are not completely within the Company's control. There can be no assurances that the Company will be able to identify all aspects of its business that are subject to Year 2000 problems, specifically those related to suppliers that could have a material effect on the Company. As a contingency plan, the Company will maintain sufficient inventory of those parts with long lead times that are critical to the manufacturing process. Safe Harbor 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) August 11, 1999 Scott J. Loucks ___________________________ __________________________________ Date Scott J. Loucks Chief Financial Officer, (principal financial, accounting and Duly Authorized Officer) - 9 -