10QSB 1 q10rd2004.txt THIRD QUARTER REPORT ON FORM 10-QSB UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-QSB QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended December 31, 2003 Commission File Number: 0-13763 TECHNOLOGY RESEARCH CORPORATION (Exact name of small business issuer 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) Issuer's telephone number, including area code (727) 535-0572 Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 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 [ ] Indicate the number of shares outstanding of each of the issuer's classes of common equity, as of the latest practicable date. Class Outstanding at January 31, 2004 Common stock, $.51 par value 5,710,591 Transitional Small Business Disclose Format(Check one): Yes [ ] No [X] TECHNOLOGY RESEARCH CORPORATION INDEX Part I - Financial Information Page Item 1. Financial Statements Condensed Consolidated Balance Sheets (unaudited) - December 31, 2003 and March 31, 2003.............................. 1 Condensed Consolidated Statements of Operations (unaudited) - Three months and Nine months ended December 31, 2003 and December 31, 2002........................... 2 Condensed Consolidated Statements of Cash Flows (unaudited) - Nine months ended December 31, 2003 and December 31, 2002......... 3 Notes to Condensed Consolidated Financial Statements (unaudited)......... 4 Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations............................. 7 Item 3 - Controls and Procedures........................................ 14 Part II - Other Information Item 1 - Legal Proceedings.............................................. 14 Item 2 - Changes in Securities.......................................... 14 Item 3 - Defaults Upon Senior Securities................................ 14 Item 4 - Submission of Matters to a Vote of Security Holders............ 14 Item 5 - Other Information.............................................. 14 Item 6 - Exhibits and Reports on Form 8-K............................... 15 Signatures.............................................................. 15 Certifications.......................................................... 16 PART I - FINANCIAL INFORMATION Item 1. Financial Statements TECHNOLOGY RESEARCH CORPORATION AND SUBSIDIARY CONDENSED CONSOLIDATED BALANCE SHEETS (unaudited) December 31, March 31, 2003 2003 ----------- --------- ASSETS Current assets: Cash and cash equivalents $ 5,195,426 2,529,562 Accounts receivable, net 3,042,386 2,772,825 Inventories: Raw material 2,850,460 3,020,076 Work in process 509,405 265,645 Finished goods 1,563,909 1,378,155 ---------- ---------- Total inventories 4,923,774 4,663,876 Prepaid expenses 150,987 122,323 Deferred income taxes 251,399 288,708 Income taxes receivable - 19,766 ---------- ---------- Total current assets 13,563,972 10,397,060 ---------- ---------- Property, plant, and equipment 10,146,960 9,777,497 Less accumulated depreciation 7,014,971 6,391,480 ---------- ---------- Net property, plant, and equipment 3,131,989 3,386,017 ---------- ---------- Other assets 88,233 52,612 ---------- ---------- $ 16,784,194 13,835,689 ========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 1,070,691 1,052,817 Accrued expenses 327,977 363,857 Dividends payable 98,892 96,781 Income taxes payable 693,389 - Deferred income 10,525 10,525 ---------- ---------- Total current liabilities 2,201,474 1,523,980 Deferred income - long term 31,582 39,475 Noncurrent deferred income taxes 218,246 195,604 ---------- ---------- Total liabilities 2,451,302 1,759,059 ---------- ---------- Stockholders' equity: Common stock 2,920,563 2,785,554 Additional paid-in capital 7,842,556 7,528,194 Retained earnings 3,609,918 1,803,027 ---------- ---------- 14,373,037 12,116,775 Treasury stock (40,145) (40,145) ---------- ---------- Total stockholders' equity 14,332,892 12,076,630 ---------- ---------- $ 16,784,194 13,835,689 ========== ========== See accompanying notes to condensed consolidated financial statements. - 1 - TECHNOLOGY RESEARCH CORPORATION AND SUBSIDIARY CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited) Three Months Ended Nine Months Ended December 31, December 31, ---------------------- ---------------------- 2003 2002 2003 2002 ---------- ---------- ---------- ---------- Operating revenues: Net sales $ 5,772,339 4,557,732 17,591,635 12,300,369 Royalties 33,217 24,552 86,490 106,049 ---------- ---------- ---------- ---------- 5,805,556 4,582,284 17,678,125 12,406,418 ---------- ---------- ---------- ---------- Operating expenses: Cost of sales 3,437,637 3,066,482 10,878,635 8,256,462 Selling, general, and administrative 1,109,686 741,506 2,963,136 2,283,489 Research, development and engineering 323,173 309,182 959,605 909,453 ---------- ---------- ---------- ---------- 4,870,496 4,117,170 14,801,376 11,449,404 ---------- ---------- ---------- ---------- Operating income 935,060 465,114 2,876,749 957,014 ---------- ---------- ---------- ---------- Other income (deductions): Interest and sundry income 4,564 1,553 9,587 6,668 Interest expense - - - (1,153) Loss on disposal of asset (148) (24,032) (148) (34,737) ---------- ---------- ---------- ---------- 4,416 (22,479) 9,439 (29,222) ---------- ---------- ---------- ---------- Income before income taxes 939,476 442,635 2,886,188 927,792 Income tax expense 259,088 130,672 827,840 280,243 ---------- ---------- ---------- ---------- Net income $ 680,388 311,963 2,058,348 647,549 ========== ========== ========== ========== Basic earnings per share $ 0.12 0.06 0.37 0.12 ========== ========== =========== ========= Weighted average number of Common shares outstanding 5,664,032 5,438,215 5,549,324 5,437,784 ========== ========== ========== ========== Diluted earnings per share $ 0.11 0.06 0.36 0.12 ========== ========== =========== ========= Weighted average number of common and equivalent shares outstanding 5,974,485 5,449,051 5,763,281 5,453,231 ========== ========== ========== ========== Dividends paid $ 0.015 0.01 0.045 0.03 ========== ========== ========== ========== See accompanying notes to condensed consolidated financial statements. - 2 - TECHNOLOGY RESEARCH CORPORATION AND SUBSIDIARY CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited) Nine Months Ended December 31, ---------------------- 2003 2002 ---------- ---------- Cash flows from operating activities: Net income $ 2,058,348 647,549 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 623,930 657,412 Loss on disposal of assets 148 34,737 Decrease (increase) in accounts receivable (269,561) (91,984) Decrease in inventories (259,898) 208,857 Decrease (increase) in prepaid expenses (28,664) (86,751) Decrease in income taxes receivable 19,766 - Change in deferred income taxes 59,951 192,266 Decrease (increase) in other assets (35,621) 18,320 Increase (decrease) in accounts payable 17,874 144,271 Increase (decrease) in accrued expenses (35,880) 11,599 Increase in income taxes payable 693,389 41,619 Decrease in deferred income (7,893) - ---------- ---------- Net cash provided by operating activities 2,835,889 1,777,895 ---------- ---------- Cash flows from investing activities: Capital expenditures (370,050) (518,252) ---------- ---------- Net cash used in investing activities (370,050) (518,252) ---------- ---------- Cash flows from financing activities: Net payments of long-term debt - (500,000) Proceeds from exercise of stock options 449,371 3,188 Dividends paid (249,346) (162,566) ---------- ---------- Net cash provided by (used in) financing activities 200,025 (659,378) ---------- ---------- Increase in cash and cash equivalents 2,665,864 600,265 Cash and cash equivalents at beginning of period 2,529,562 1,163,099 ---------- ---------- Cash and cash equivalents at end of period $ 5,195,426 1,763,364 ========== ========== Supplemental cash flow information: Cash paid for interest $ - 1,153 ========= ========= Cash paid (received) for income taxes $ 54,734 46,358 ========= ========= See accompanying notes to condensed consolidated financial statements. - 3 - TECHNOLOGY RESEARCH CORPORATION AND SUBSIDIARY NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) December 31, 2003 and March 31, 2003 1. The financial information included herein is unaudited; however, such information reflects all adjustments (consisting of normal recurring adjustments) which are, in the opinion of management, necessary for the fair presentation of the condensed consolidated financial statements for the interim period. These statements should be read in conjunction with the consolidated financial statements included in the Company's annual report on Form 10-K for the year ended March 31, 2003. The results of operations for the nine-month period ended December 31, 2003 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 earnings by the weighted average number of common shares outstanding. Diluted earnings per share have been computed by dividing net earnings by the weighted average number of common and common equivalent shares outstanding. The weighted average common and common equivalent shares outstanding has been adjusted to include the number of shares that would have been outstanding if the stock options had been exercised, at the average market price of the period, with the proceeds being used to buy shares from the market (i.e. the treasury stock method). The table below reconciles the calculation of the diluted and basic earnings per share: Three months ended Nine months ended December 31, December 31, -------------------- -------------------- 2003 2002 2003 2002 -------------------- -------------------- Net earnings $ 680,388 311,963 $2,058,348 647,549 ========= ========= ========= ========= Weighted average shares outstanding - basic 5,664,032 5,438,215 5,549,324 5,437,784 Dilutive common shares issuable upon exercise of stock options 310,453 10,836 213,957 15,447 --------- --------- --------- --------- Weighted average shares outstanding - diluted 5,974,485 5,449,051 5,763,281 5,453,231 ========= ========= ========= ========= Earnings per common share: Basic $ 0.12 0.06 $ 0.37 0.12 Diluted $ 0.11 0.06 $ 0.36 0.12 ========= ========= ========= ========= For the three-month and nine-month periods ended December 31, 2003, no shares of common stock were considered anti-dilutive for the purposes of calculating earnings per share. For the three-month and nine-month periods ended December 31, 2002, options to purchase 544,750 shares and 397,250 shares, respectively, of common stock were considered anti-dilutive for purposes of calculating earnings per share. - 4 - 3. In June 2001, the Financial Accounting Standards Board ("FASB") issued the Statement of Financial Accounting Standards ("SFAS") No. 143, Accounting for Asset Retirement Obligations, effective for fiscal years beginning after June 15, 2002. SFAS No. 143 requires the Company to record the fair value of an asset retirement obligation as a liability in the period in which it incurs a legal obligation associated with the retirement of tangible long- lived assets that result from the acquisition, construction, development and/or normal use of the assets. The Company would also record a corresponding asset, which is depreciated over the life of the asset. Subsequent to the initial measurement of the asset retirement obligation, the obligation will be adjusted at the end of each period to reflect the passage of time and changes in the estimated future cash flows underlying the obligation. The adoption of SFAS No. 143 did not have a material effect on the Company's financial condition, results of operations or cash flows. 4. In November 2002, the FASB issued interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others". Interpretation 45 changes the accounting for and the disclosure of guarantees. Interpretation 45 requires that guarantees meeting certain characteristics be initially recorded as a liability at fair value, in contrast to FASB No. 5 which requires recording a liability only when a loss is probable and reasonably estimable. The disclosure requirements of Interpretation 45 are effective for financial statements and annual periods ending after December 15, 2002. The initial recognition and initial measurement provisions of Interpretation 45 are effective on a prospective basis to guarantees issued or modified after December 31, 2002. The adoption of Interpretation 45 did not have a material effect on the Company's financial condition, results of operations or cash flows. 5. In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based Compensation - Transition and Disclosure, an amendment of SFAS No. 123. SFAS 148 amends SFAS 123, Accounting for Stock-Based Compensation to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, SFAS 148 amends the disclosure requirements of SFAS No. 123 to require more prominent and more frequent disclosures in the financial statements regarding the effects of stock-based compensation. SFAS 148 is effective for financial statements for fiscal years ending after December 15, 2002, including certain amendments to require disclosures related to stock-based compensation included in condensed financial statements for interim periods after December 15, 2002. The Company does not plan to change to the fair value based method of accounting for stock-based compensation in the foreseeable future under the existing accounting literature and therefore this standard will not have a material impact on the Company's financial condition, results of operations or cash flows. Certain of the disclosure requirements are included in the notes to these condensed consolidated financial statements. - 5 - 6. In January 2003, the FASB issued Interpretation 46 - Consolidation of Variable Interest Entities. This Interpretation clarifies the application of Accounting Research Bulletin No. 51, Consolidated Financial Statements, to certain entities in which the equity investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. A variable interest entity is required to be consolidated by the company that has a majority of the exposure to expected losses of the variable interest entity. The Interpretation is effective immediately for variable interest entities created after January 31, 2003. For variable interest entities in which an enterprise holds a variable interest that is acquired before February 1, 2003, the Interpretation applies in the first fiscal year or interim period ending after December 15, 2003. The application of this Interpretation did not have a material effect on the Company's financial position, results of operations or cash flows. 7. In April 2003, the FASB issued SFAS No. 149, Amendment of Statement 133 on Derivative Instruments and Hedging Activities. This statement amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts and for hedging activities under SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities. This statement is effective for contracts entered into or modified after June 30, 2003, except for hedging relationships designated after June 30, 2003. The adoption of SFAS No. 149 did not have a material effect on the Company's financial condition, results of operations or cash flows. 8. In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity. This statement establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. It requires that an issuer classify a financial instrument that is within its scope as a liability. This statement is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. The adoption of SFAS No. 150 did not have a material effect on the Company's financial condition, results of operations or cash flows. 9. At December 31, 2003, the Company had four stock-based employee compensation plans that are accounted for under the intrinsic value recognition and measurement principles of the Accounting Principles Board ("APB") Opinion No. 25, Accounting for Stock Issued to Employees. No stock-based employee compensation expense is reflected in the net earnings, as all options granted under the plans had an exercise price at least equal to the market value of the underlying stock on the date of the grant. The following table illustrates the effect on net earnings and earnings per share if the Company had applied the fair value recognition and measurement provisions of FASB Statement No. 123, Accounting for Stock-Based Compensation, to stock-based employee compensation: - 6 - Three months ended Nine months ended December 31, December 31, -------------------- ------------------- 2003 2002 2003 2002 -------------------- ------------------- Net earnings $ 680,388 311,963 $2,058,348 647,549 Total stock-based employee compensation expense determined under fair value based method for all rewards, net of related tax effect (22,336) (19,509) (67,007) (58,527) --------- --------- --------- --------- Pro forma net earnings $ 658,052 292,454 $1,991,341 589,022 ========= ========= ========= ========= Earnings per common share: Reported earnings per share-basic $ 0.12 0.06 0.37 0.12 Pro forma earnings per share-basic $ 0.12 0.05 0.36 0.11 Reported earnings per share-diluted $ 0.11 0.06 0.36 0.12 Pro forma earnings per share-diluted $ 0.11 0.05 0.35 0.11 The Company uses the Black-Scholes option-pricing model to estimate the fair value of each option on the date of grant. The following weighted-average assumptions were used in the model for the three and nine months ended December 31, 2003 and 2002, respectively: 1.6% to 1.7% dividend yield; risk- free interest rate of 1.0%; expected volatility of 91.9% to 92.6%; and expected holding period of eight to nine years. Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULT OF OPERATIONS Critical Accounting Policies The Company's critical accounting policies are: (1) revenue recognition; and (2) excess and obsolete inventory reserves. Revenue Recognition. The Company recognizes revenue when an order has been received, pricing is fixed, product has been shipped and collectibility is reasonably assured. Title to goods passes to customers upon shipment, there are no customer acceptance provisions included in sales contracts and the Company has no installation obligation subsequent to product shipment. Similarly, revenue is recognized upon shipment to distributors as title passes to them without additional involvement or obligation. Collection of receivables related to distributor sales is not contingent upon subsequent sales to third parties. Cost of sales includes the cost of the product and the Company's estimate of any additional warranty, rework or other concessions the Company expects to incur in connection with a sale. Government sales are fixed price contracts. The Company has not experienced losses in the past on such contracts. Should the Company identify a loss on a future contract, the Company would account for the loss under Statement of Position 81-1, Accounting for Performance of Construction-Type and Certain Production Type Contracts, and record a charge against earnings in the period the estimated loss was identified. - 7 - The Company accrues minimum royalties due from customers over the related royalty period. Royalties earned in excess of minimum royalties due are recognized as reported by the licensees. The Company enters into license agreements and receives nonrefundable license fees in exchange for the use of technology previously developed by the Company. The licensee receives the right to manufacture and sell certain products exclusively within specified geographic areas. The nonrefundable license fees are recorded as deferred revenue and recognized as income on a straight-line basis over the exclusivity period of the agreement. A termination or change to the initial license agreement could result in an accelerated recognition of the deferred revenue. License fees are included in royalty revenue. Excess and Obsolete Inventory Reserves. The Company's condensed consolidated financial statements include an estimate associated with reserves with respect to inventory. Various assumptions and other factors underlie the determination of this estimate. The process of determining this estimate is fact specific and takes into account primarily historical experience and expected economic conditions. The Company evaluates this estimate on a monthly basis and makes adjustments each quarter where facts and circumstances dictate. The Company evaluates all inventory which has not had activity for twelve months. As of December 31, 2003, the Company's inventory reserve was $452,610 or approximately 8% of total inventory. The preparation of the condensed consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions about future events that affect the reported amount of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. Operating Results The following is management's discussion and analysis of certain significant factors that have affected the Company's financial position and operating results during the periods included in the accompanying condensed consolidated financial statements. Current Three Months and Nine Months Ended December 31, 2003 versus December 31, 2002 The Company's operating revenues for the third quarter ended December 31, 2003 were $5,805,556, compared to $4,582,284 reported in the same quarter last year, an increase of 27% with military revenues increasing by $958,773, commercial revenues by $255,834 and royalty income by $8,665. Net income for the current quarter was $680,388, compared to $311,963, for the same quarter last year, an increase of 118%. Basic earnings were $.12 per share and diluted earnings were $.11 per share for the current quarter compared to basic and diluted earnings of $.06 per share for the same quarter last year. The Company recorded expenses of $137,923 in the quarter for new account setup and the promotion of its Fire Shield(R) products in retail stores. In addition, the Company recorded a non-recurring expense of approximately $75,000 due to a change in its severance policy at its Honduran subsidiary during the quarter. - 8 - The Company's operating revenues for the nine-month period ended December 31, 2003 were $17,678,125, compared to $12,406,418 reported in the same period of the prior year, an increase of 42%. Net income for the nine-month period was $2,058,348, compared to $647,549, for the same period in the prior year, an increase of 218%. Basic earnings were $.37 per share and diluted earnings were $.36 per share for the nine-month period compared to basic and diluted earnings of $.12 per share for the same period of the prior year. For the nine-month period ended December 31, 2003, commercial revenues increased by $1,933,095, military revenues improved by $3,358,171 and royalty income was down by $19,559 compared to the same period of the prior year. The increase in commercial revenues was primarily attributed to product sales of $1,008,831 into retail stores and $450,000 to a major sprayer/washer manufacturer. New accounts in the Recreational Vehicle, Brand Label and Commercial Distribution markets contributed to the remainder of the growth. Military revenues continue to be strong due to direct military shipments of support parts for existing systems and control devices related to the Tactical Quiet Generator (TQG) programs. The increase in direct military shipments is primarily the result of current U.S. military activity. The Company continues to make progress in establishing its Fire Shield(R) brand name. Fire Shield(R) product sales were $750,957, or 8.3% of commercial sales, for the nine-month period. In addition, the Company recorded royalty income of $67,536 for the nine-month period from Applica Inc., a licensee that incorporates a Fire Shield(R) cord set on its line of Black & Decker(R) portable heaters. The Company's patented Fire Shield(R) technology has numerous applications and represents a significant opportunity for growth. One example is that the Company is well-positioned to participate in the estimated $60 million annual market created by the 2002 National Electrical Code (NEC) and the Underwriters Laboratories (UL) currently scheduled requirement for cord fire protection on portable room air conditioners which are manufactured after August 1, 2004. The Company's products are currently under evaluation by a number of room air conditioner manufacturers. The Company's gross profit margin on net sales was approximately 40% for the current quarter and approximately 38% for the nine-month period ended September 30, 2003, compared to 33% for the same periods last year. The improvement in gross profit margins was the result of product mix plus productivity improvements in manufacturing. Selling, general and administrative expenses were $1,109,686 for the current quarter and $2,963,136 for the nine-month period ended December 31, 2003, compared to $741,506 and $2,283,489 for the same periods in the prior year, an increase of 50% and 30%, respectively. The increase in expenses for the nine- month period was generally due to increased personnel and business related activities to support the Company's expanding business. Specifically, salary related expenses increased by $176,919, advertising costs by $40,777, professional fees by $32,681, general insurance expense by $26,976, outside sales commissions by $26,623 and other expenses by $7,489. Selling expenses were $662,933 for the current quarter and $1,716,263 for the nine-month period ended December 31, 2003, compared to $435,307 and $1,327,972 for the same periods in the prior year, an increase of approximately 52% and 29%, respectively. General and administrative expenses were $446,753 for the current quarter and $1,246,873 for the nine-month period ended December 31, 2003, compared to $306,199 and $955,517 for the same periods in the prior year, an increase of approximately 46% and 30%, respectively. - 9 - Research, development and engineering expenses were $323,173 for the current quarter and $959,605 for the nine-month period ended December 31, 2003, compared to $309,182 and $909,453 for the same periods in the prior year, an increase of approximately 5% and 6%, respectively. The increase was primarily related to an increased number of engineering personnel. Interest and sundry income, net of interest expense, for the current quarter was $4,564 and $9,587 for the nine-month period ended December 31, 2003, compared to $1,553 and $5,515 for the same periods in the prior year, reflecting no debt and interest income on increased cash balances. In accordance with SFAS 109, "Accounting for Income Taxes", the Company does not record deferred income taxes on the undistributed earnings of its foreign subsidiary, as it is management's intention to permanently reinvest these earnings outside of the U.S. Accordingly, as the Company's Honduras subsidiary was profitable, this has a favorable impact on the Company's overall effective income tax rate. Should circumstances change, and it becomes necessary to repatriate these undistributed earnings, the Company will record U.S. income taxes associated with these amounts in the period in which any such change in facts and circumstances occurs. Conversely, as the Company's mix of profits between domestic and international change, this will affect the Company's overall effective tax rate. Liquidity and Capital Resources As of December 31, 2003, the Company's cash and cash equivalents increased to $5,195,426 from the March 31, 2003 total of $2,529,562. Cash provided by operating activities was $2,835,889, cash used in investing activities was $370,050 and cash provided by financing activities was $200,025, giving a total increase of $2,665,864 for the nine-month period ended December 31, 2003. Cash provided by operating activities was primarily due to earnings of $2,058,348, depreciation in the amount of $623,930, an increase in income taxes payable of $693,389, offset to some extent by an increase in accounts receivable and inventories of $269,561 and $259,898, respectively. The increase in accounts receivable and accounts payable was primarily the result of the Company's increased business. Income taxes payable increased as a result of the Company's increased earnings for the current year while remittance of estimated payments are based upon the Company's prior year's tax obligation. Cash used in investing activities was related to purchases of capital equipment only. The Company's capital expenditures were $370,050 for the nine-month period ended December 31, 2003, compared to $518,252 in the prior year. The decrease was due to the following capital expenditures which occurred in the prior year's nine-month period ended December 31, 2002: 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 provided by financing activities was due to proceeds from exercises of stock options in the amount of $449,371, offset to some extent by the Company's payment of cash dividends in the amount of $249,346. - 10 - On November 12, 2003, the Company renewed its $3,000,000 revolving credit loan with its institutional lender, extending the maturity date to December 14, 2005. Although the Company did not utilize its line of credit in the third quarter, 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 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 comply with its loan covenants. The Company has no off-balance sheet arrangements and no debt relationships other than noted above. The Company's working capital increased by $2,489,418 to $11,362,498 at December 31, 2003, compared to $8,873,080 at March 31, 2003. The Company believes cash flow from operations, the available bank line and current cash and cash equivalents position will be sufficient to meet its working capital requirements for the next twelve months. The Company's earnings before interest, income taxes, depreciation and amortization ("EBITDA") was $1,134,448 for the three-month period and $3,510,118 for the nine-month period ended December 31, 2003, compared to $635,317 for the three-month period and $1,586,357 for the nine-month period ended December 31, 2002. The chart below shows the reconciliation of EBITDA to net earnings: Three Months Ended Nine Months Ended December 31 December 31 2003 2002 2003 2002 ---------- ---------- ---------- ---------- Net income $ 680,388 311,963 $ 2,058,348 647,549 Interest expense - - - 1,153 Income taxes 259,088 130,672 827,840 280,243 Depreciation 194,972 192,682 623,930 657,412 Amortization - - - - --------- ------- --------- --------- EBITDA $ 1,134,448 635,317 $ 3,510,118 1,586,357 ========= ======= ========= ========= The record date for the Company's third fiscal quarter dividend of $.015 per share was December 31, 2003, and the Company paid that dividend on January 23, 2004. The Company's annual dividend is expected to be $.06 per share. New Accounting Standards In June 2001, the Financial Accounting Standards Board ("FASB") issued the Statement of Financial Accounting Standards ("SFAS") No. 143, Accounting for Asset Retirement Obligations, effective for fiscal years beginning after June 15, 2002. SFAS No. 143 requires the Company to record the fair value of an asset retirement obligation as a liability in the period in which it incurs a legal obligation associated with the retirement of tangible long- lived assets that result from the acquisition, construction, development and/or normal use of the assets. The Company would also record a corresponding asset, which is depreciated over the life of the asset. Subsequent to the initial measurement of the asset retirement obligation, the obligation will be adjusted at the end of each period to reflect the passage of time and changes in the estimated future cash flows underlying the obligation. The adoption of SFAS No. 143 did not have a material effect on the Company's financial condition, results of operations or cash flows. - 11 - In November 2002, the FASB issued interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others". Interpretation 45 changes the accounting for and the disclosure of guarantees. Interpretation 45 requires that guarantees meeting certain characteristics be initially recorded as a liability at fair value, in contrast to FASB No. 5 which requires recording a liability only when a loss is probable and reasonably estimable. The disclosure requirements of Interpretation 45 are effective for financial statements and annual periods ending after December 15, 2002. The initial recognition and initial measurement provisions of Interpretation 45 are effective on a prospective basis to guarantees issued or modified after December 31, 2002. The adoption of Interpretation 45 did not have a material effect on the Company's financial condition, results of operations or cash flows. In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based Compensation - Transition and Disclosure, an amendment of SFAS No. 123. SFAS 148 amends SFAS 123, Accounting for Stock-Based Compensation to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, SFAS 148 amends the disclosure requirements of SFAS No. 123 to require more prominent and more frequent disclosures in the financial statements regarding the effects of stock-based compensation. SFAS 148 is effective for financial statements for fiscal years ending after December 15, 2002, including certain amendments to require disclosures related to stock-based compensation included in condensed financial statements for interim periods beginning after December 15, 2002. The Company does not plan to change to the fair value based method of accounting for stock-based compensation in the foreseeable future under the existing accounting literature and therefore this standard will not have a material impact on the Company's financial condition, results of operations or cash flows. Certain of the disclosure requirements are included in the notes to these condensed consolidated financial statements. In January 2003, the FASB issued Interpretation 46 - Consolidation of Variable Interest Entities. This Interpretation clarifies the application of Accounting Research Bulletin No. 51, Consolidated Financial Statements, to certain entities in which the equity investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. A variable interest entity is required to be consolidated by the company that has a majority of the exposure to expected losses of the variable interest entity. The Interpretation is effective immediately for variable interest entities created after January 31, 2003. For variable interest entities in which an enterprise holds a variable interest that is acquired before February 1, 2003, the Interpretation applies in the first fiscal year or interim period ending after December 15, 2003. The application of this Interpretation did not have a material effect on the Company's financial position, results of operations or cash flows. - 12 - In April 2003, the FASB issued SFAS No. 149, Amendment of Statement 133 on Derivative Instruments and Hedging Activities. This statement amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts and for hedging activities under SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities. This statement is effective for contracts entered into or modified after June 30, 2003, except for hedging relationships designated after June 30, 2003. The adoption of SFAS No. 149 did not have a material effect on the Company's financial condition, results of operations or cash flows. In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity. This statement establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. It requires that an issuer classify a financial instrument that is within its scope as a liability. This statement is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. The adoption of SFAS No. 150 did not have a material effect on the Company's financial condition, results of operations or cash flows. 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 are 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 as well as 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 provide any assurance that predicted 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. - 13 - Item 3. Controls and Procedures As of the end of the period covered by this report, an evaluation was carried out under the supervision and with participation of the Company's management, including the Chief Executive Officer ("CEO") and Chief Financial Officer ("CFO"), of the effectiveness of the design and operation of the Company's disclosure controls and procedures (as defined in Rules 13a-15(e) or 15d-15(e)). Based on that evaluation, the CEO and CFO have concluded that the Company's disclosure controls and procedures are effective to ensure that information required to be disclosed by the Company in reports that it files or submits under the Securities and Exchange Act of 1934 are recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission rules and forms. There were no changes in the Company's internal control over financial reporting (as defined in Rules 13a-15(f) or 15d-15(f)) during the quarter covered by this report that have materially effected, or are reasonably likely to materially affect, the Company's internal control over financial reporting. Part II - Other Information Item 1. Legal Proceedings The Company is involved in various claims and legal actions arising in the ordinary course of business. In the opinion of the Company, the ultimate disposition of these matters will not have a material adverse effect on the Company. 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. - 14 - 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. (a) Exhibits: Exhibit 32.1 The Chief Executive Officer's certification required under Section 906 of the Sarbanes-Oxley Act of 2002. Exhibit 32.2 The Chief Financial Officer's certification required under Section 906 of the Sarbanes-Oxley Act of 2002. (b) Reports on Form 8-K: Form 8-K dated January 21, 2004 reported under "Item 12. Results of Operations and Financial Condition" that the Company issued a press release describing its results of operations for the second quarter ended December 31, 2003 and attached such press release. This information is not deemed to be "filed" for purposes of Section 18 of the Securities Exchange Act of 1934 and is not incorporated by reference into any Securities Act registration statements. ___________________________________________ SIGNATURES In accordance with the requirements of the Exchange Act, the registrant has caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. TECHNOLOGY RESEARCH CORPORATION (registrant) February 12, 2004 /s/ Scott J. Loucks ___________________________ __________________________________ Date Scott J. Loucks Chief Financial Officer, (principal financial and accounting Officer) - 15 - CERTIFICATIONS PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 CERTIFICATION ------------- I, Robert S. Wiggins, certify that: 1. I have reviewed this quarterly report on Form 10-QSB of Technology Research Corporation: 2. Based on my knowledge, this 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 report; 3. Based on my knowledge, the financial statements, and other financial information included in this 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 report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and we have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, 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 report is being prepared; (b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, 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 and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and - 16 - (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. February 12, 2004 /s/ Robert S. Wiggins ___________________________ __________________________________ Date Robert S. Wiggins Chairman of the Board and Chief Executive Officer CERTIFICATION ------------- I, Scott J. Loucks, certify that: 1. I have reviewed this quarterly report on Form 10-QSB of Technology Research Corporation: 2. Based on my knowledge, this 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 report; 3. Based on my knowledge, the financial statements, and other financial information included in this 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 report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and we have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, 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 report is being prepared; (b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and - 17 - 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, 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 and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. February 12, 2004 /s/ Scott J. Loucks ___________________________ __________________________________ Date Scott J. Loucks Chief Financial Officer, (principal financial and accounting Officer) - 18 -