UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended March 31, 2003
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
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock $.51 par value
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. [ ]
Indicate by check mark whether the registrant is an accelerated filer
(as defined by Rule 12b-2 of the Act). Yes [ ] No [X]
The aggregate market value of common stock held by non-affiliates of the
Registrant, as of September 30, 2002 was $6,505,656, based upon the $1.361
closing sale price for the Common Stock on the NASDAQ National Market System on
such date. For the purpose of this computation, all executive officers and
directors of the Registrant have been deemed to be affiliates. Such
determination should not be deemed to be an admission that each such director
and officer is, in fact, an affiliate of the Registrant.
As of May 31, 2003, the number of shares outstanding of the Registrant's common
stock, $.51 par value, was 5,448,037.
DOCUMENTS INCORPORATED BY REFERENCE
The Registrant's Definitive Proxy Statement related to its 2003 Annual Meeting
of Shareholders to be held on August 21, 2003 will be incorporated by reference
into Part III of this Form 10-K and filed with the Securities and Exchange
Commission not later than 120 days after the end of the fiscal year covered by
this Form 10-K.
TABLE OF CONTENTS
PART I Page
Item 1. Business .................................................... 3
Item 2. Properties .................................................. 15
Item 3. Legal Proceedings ........................................... 15
Item 4. Submission of Matters to a Vote of Security Holders ..........16
PART II
Item 5. Market for Registrant's Common Equity and
Related Stockholder Matters ................................. 16
Item 6. Selected Financial Data ..................................... 17
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations ......................... 18
Item 7a. Quantitative and Qualitative Disclosures About Market Risk .. 25
Item 8. Financial Statements and Supplementary Data ................. 25
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure ...................... 25
PART III
Item 10. Directors and Executive Officers of the Registrant .......... 25
Item 11. Executive Compensation ...................................... 25
Item 12. Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters .................. 25
Item 13. Certain Relationships and Related Transactions .............. 25
PART IV
Item 14. Controls and Procedures ..................................... 26
Item 15. Exhibits, Financial Statement Schedules,
and Reports on Form 8-K ..................................... 27
SIGNATURES ........................................................... 30
CERTIFICATION OF CEO - Robert S. Wiggins ............................. 31
CERTIFICATION OF CFO - Scott J. Loucks ............................... 32
As used in this Annual Report on Form 10-K, "we", "our", "us", the "Company"
and "TRC" all refer to Technology Research Corporation and its subsidiary
unless the context otherwise requires.
This Annual Report on Form 10-K contains 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 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(R), 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 goals, results, levels of
activity or performance will be achieved, and the Company disclaims any
obligation to revise any forward-looking statements subsequent to the
occurrence of events or circumstances, whether anticipated or unanticipated.
Part I
ITEM 1. BUSINESS
General
Technology Research Corporation, a Florida corporation, was established in
June of 1981 with the intended purpose of pursuing orders for products to be
designed and manufactured for sale to the military engine generator set
controls market, of which the Company's founders had acquired substantial
experience. The Company's expertise in this area is well known, and the
Company's performance in product quality and delivery to the United States
Military and its prime contractors have resulted in the Company being
recognized as a leader in this industry.
After establishing a military product base, the Company turned its efforts
early on to developing commercial markets for its ground fault sensing
technology of which the Company's founders also had acquired substantial
knowledge. This "core" technology led to the development of products that
sense dangerous power leakage from appliances, tools and other electrical
devices and cut off power immediately thereby preventing potential fires,
electrocutions or serious injuries from electrical shock. The Company has
become an internationally recognized leader in the design and supply of such
portable electrical safety products.
The Company's core commercial and military business produces the foundation
upon which the Company may develop related technologies and new products to
expand its business. The Company's new Fire Shield(R) and Surge Guard
Plus(TM) product lines are examples of such a strategy, and the Company is now
focused on developing the markets for these products into their full
potential.
3
Net sales contributed by commercial and military products are as follows:
Year Ended
March 31 Commercial % Military % Total
-------- ---------- ---- -------- ---- ----------
2003 $ 10,254,998 58.1 $ 7,386,144 41.9 $ 17,641,142
2002 10,276,165 62.2 6,241,266 37.8 16,517,431
2001 12,117,588 68.1 5,687,823 31.9 17,805,411
2000 12,801,147 76.6 3,910,457 23.4 16,711,604
1999 13,929,177 81.4 3,190,542 18.6 17,119,719
Royalties from license agreements are as follows:
Year Ended
March 31 Royalties
-------- ---------
2003 $ 120,794
2002 166,854
2001 231,563
2000 126,121
1999 91,295
The Company's backlog of unshipped orders at March 31, 2003 ("Fiscal Year")
was approximately $6.2 million. This backlog consists of approximately 24%
commercial product orders and approximately 76% military product orders, all
of which is expected to ship within Fiscal Year 2004.
Commercial Products and Markets
Core Commercial Products. The Company's core commercial business was developed
out of the demand for the following Underwriters Laboratories ("UL")
classifications of ground fault protective devices: Ground Fault Circuit
Interrupters ("GFCI"); Appliance Leakage Circuit Interrupters ("ALCI"); Leakage
Current Detectors and Interrupters ("LCDI"); and Equipment Leakage Current
Interrupters ("ELCI"). Ground fault protective devices help protect against
the hazards of fire and electrical shock that result when water comes in
contact with electrically "live" conductors or when faulty electrical grounding
is found in old or damaged extension cords, appliance cords, house wiring and
electrical equipment. The demand for the Company's commercial products has
resulted from the National Electrical Code ("NEC"), UL product standards and
voluntary efforts by industry to improve the electrical safety of their
products.
Electrical safety is compromised when a ground fault occurs, which is a
condition where electric current finds an abnormal path to ground, such as when
a power tool comes in contact with water while plugged into a live outlet or
when it is damaged in such a way as to cause internal wiring to come in contact
with exposed metal parts allowing electricity to pass through the user of that
power tool. Upon such occurrence, the entire device can become as electrically
alive as the power line to which it is attached. If a person is touching such
a live device while grounded (by being in contact with the ground or, for
example, a metal pipe, gas pipe, drain or any attached metal device), that
person can be seriously or fatally injured by electric shock. Fuses or circuit
breakers do not provide adequate protection against such shock, because the
amount of current necessary to injure or kill a human or animal is far below
the level of current required for a fuse to blow or a circuit breaker to trip.
4
The Company's GFCI devices provide protection from dangerous electrical shock
by sensing leakage of electricity and cutting off power. GFCIs are currently
available in three types: circuit breaker, receptacle and portable. The
Company specializes in the portable types of these products. GFCIs constantly
monitor electric current, and as long as the amount of current returning from
the device is equal to the amount that is directed to the device, the GFCI
performs no activities. Conversely, if there is less current coming back than
there is flowing into the device, some portion must be taking a path through a
foreign body, thereby creating a hazard. Upon recognizing that condition, the
GFCI terminates the flow of electricity instantaneously. These devices have
various commercial and military applications.
The Company's ALCI devices, whose function is to interrupt both conductors of
the electric circuit to a load when a fault current to ground exceeds 4 - 6 mA
(milli-amperes), are intended to be used in conjunction with electrical
appliances. ALCIs are designed to be used only in a circuit that has a solidly
grounded neutral conductor, and are not intended to be used in place of a GFCI
in applications where the GFCI is required. ALCIs are considered "personnel
protection" devices. These products are intended for portable and short-time
use, and should be used only while attended; for example, with kitchen
appliances, floor care products, hair dryers, and the like, which are connected
to a power supply circuit by means of a flexible cord terminating in an
attachment plug.
The Company's LCDI devices are intended to reduce the risk of electrical fires
by disconnecting power when sensing current leakage between conductors of power
cords. The Company's Fire Shield product lines are approved in the UL
classification of LCDIs. Several years ago, both government and industry
research into the major causes of fire led to a search for new, cost-effective
methods to prevent electrical fires. In response to this need, the Company
developed and patented Fire Shield, a product designed to prevent fires caused
by damaged or aging appliance power supply cords and extension cords, which
have been identified as a leading cause of electrical fires. On June 1, 1999,
the Company announced major enhancements to its Fire Shield line of appliance
power supply cords that added a higher degree of safety against fire and
electric shock for two wire appliances. These new capabilities have
significant safety benefits to the consumer. These enhancements are based on
feedback from the industry and from the staff of the United States Consumer
Product Safety Commission ("CPSC") on the need to protect not only the power
cord, but also the internal wiring of the appliance. The latest annual
statistics from the CPSC indicate that extension cords, power strips,
toaster/toaster ovens, power cords on appliances and household wiring are
responsible for over $450 million in residential fire damage, 180 lives lost
and 950 injuries. The Company believes that its Fire Shield technology will
continue to advance as a valued technology for electrical safety and fire
protection in the OEM and consumer marketplaces. The Company believes the
addition of surge protection within these devices will even further enhance the
value of the product. The Company's Fire Shield technology currently addresses
five distinct market applications: (1) the Fire Shield Power Surge Strip - a
consumer product; (2) the Fire Shield Safety Circuit - an OEM product; (3) the
Fire Shield Power Cord - an OEM product; (4) the Fire Shield Safety Extension
Cord - a consumer product; and (5) the Fire Shield Home Wiring System - for the
luxury home builder. The Company believes that its Fire Shield technology
represents the best opportunity for major long-term growth.
The Company's ELCI devices are intended to protect equipment, such as copy
machines, printers and computers, from excessive electrical leakage of current
that could occur due to the breakdown of insulation between live and grounded
parts, which could cause fires and other damage. Xerox Corporation voluntarily
uses the Company's ELCI products to protect many of its business machines.
5
Impact of Revised Product Standards. The NEC requires ground fault protection
on many applications, which are enforced by OSHA and local government building
codes and adhered to by most manufacturers. The Company presently focuses its
marketing efforts in certain spot markets, which have developed in response to
NEC imposed requirements. The NEC requirements are often incorporated into UL
product standards.
In January 1989, high-pressure sprayer/washer manufacturers that desired UL
listing of their products were required to include a GFCI and/or double-
insulation protection on each electrically driven sprayer/washer. Sales to
this industry were severely impacted in Fiscal Year 1996 as the majority of the
sprayer/washer manufacturers opted for the more cost effective double-insulated
technology rather than GFCI technology. Effective January 1996, the double-
insulation provision was eliminated from the National Electric Code, but UL did
not update its standard enforcing this change until May 2000. Sales to this
industry were approximately $4.5 million less in each of the Fiscal Years 1996,
1997, 1998 and 1999, compared to Fiscal Year 1995, due to the choice of
sprayer/washer manufacturers not using the Company's GFCI products and due to
the delay of UL requiring the industry to use GFCI technology. The revised
standard UL 1776 requiring the use of GFCIs for UL listed sprayer/washers was
issued effective as of May 6, 2000. The result was that sales to this market
grew to approximately $2.4 million in Fiscal Year 2001 from approximately $1.5
million in Fiscal Year 2000. However, due to price erosion, losing sales to
far-east competitors and lower demand for electric high-pressure
sprayer/washers in the marketplace, sales to this market in Fiscal Year 2002
were approximately $1.3 million, down approximately $1.1 million from the prior
year. In Fiscal year 2003, the Company gained larger market share with sales
of approximately $2.16 million.
Also, Article 625 of the 1996 Edition of the NEC requires electric vehicle
("EV") charging systems to include a system that will protect people against
serious electric shock in the event of a ground fault. The Company has shipped
product to the majority of the major automobile manufacturers in support of
their small EV production builds, and the Company is active with various
standards and safety bodies, relating to the electric vehicle, on a worldwide
basis. Sales for the Company's EV safety products remain relatively low due to
the small number of electric vehicles produced. Improvements in battery
technology along with mandates from individual states for zero emission
vehicles, will determine whether this will be a viable market in the future.
On July 13, 2001, the NEC added the requirement for cord fire prevention on
room air conditioners to the 2002 National Electrical Code. UL Standard 484
for room air conditioners was revised to reflect this change in the NEC and is
scheduled to become effective in August 2004. The proposal requires that room
air conditioners be provided with either LDCI or Arc Fault Circuit Interrupter
("AFCI") protected cord sets by their manufacturers. The Company believes that
its Fire Shield cord set will provide manufacturers of room air conditioners
with the best solution for this new requirement. These events create an
approximate $60 million annual market for its participants. The Company
believes it will realize significant revenues by this opportunity starting in
Fiscal Year 2005.
The Company currently manufactures and markets various portable GFCI, ALCI,
LCDI and ELCI products, such as plug-in portable adapters, several extension
cord models in various lengths, various modules for original equipment
manufacturers ("OEM") customers, and variations of such products for voltage
differences in both the United States and foreign markets. The Company is
focusing more of its marketing efforts in placing its products with major
retailers, which include Wal-Mart, Home Depot, Sears Mall stores, Orchard
Supply Hardware, and TruServ(the buying co-op for True Value Hardware Stores),
as well as with many independent retailers through distributors. The Company's
products are also being offered through magazines, catalogs and E-commerce
retailers.
6
License Agreements. The Company has been issued several domestic and foreign
patents on its portable GFCI, which incorporate design features not available
on any similar product known to the Company (see Patents, Licenses and
Trademarks on page 11 for further information). The Company has entered into
seven license agreements and three sales and marketing agreements concerning
its portable GFCI, ALCI, ELCI and LCDIs. These agreements are with entities
located in Australia, France, Italy, Japan, the United Kingdom and the United
States and have been granted for the purpose of market penetration into those
areas where it would be difficult for the Company to compete on a direct basis.
On February 16, 1999, the Company entered into an agreement (the "Agreement")
with Applica Inc. (previously named Windmere-Durable Holdings, Inc.), that
grants Applica Inc. a non-exclusive license to manufacture, have manufactured,
use and sell products that use the Company's Fire Shield appliance cord
technology in return for royalties. Applica Inc. is a large Miami, Florida
based manufacturer and distributor of a wide variety of, among other items,
household appliances and portable personal care products utilizing electric
current (e.g. portable heaters, hair dryers and curlers, irons, food mixers,
toasters and toaster ovens and numerous other items), most of which are sold
both domestically and internationally. Under this Agreement, the Company
currently receives royalties from Applica Inc. for portable heaters that are
manufactured under the Black & Decker(R) brand name.
On June 4, 2002, the Company announced the signing of a cross license agreement
(the "Agreement")with Tecumseh Products Company for technology that provides
improved protection for "Refrigeration and Air Conditioning Systems" against
electrical faults. The licensed product integrates Tecumseh's proprietary
technology relating to the protection of refrigeration compressors with the
Company's proprietary Fire Shield technology, which will bring an advanced
level of protection to refrigeration and air conditioning systems worldwide.
The Fire Shield technology is also being marketed by the Company for cord fire
protection on single-phase cord and plug connected room air conditioners
manufactured after August 2004, as required by the National Electrical Code.
The licensed product is targeted at 15 to 20 million refrigeration and air
conditioning systems sold worldwide each year. Under the term of the
Agreement, either party has the right to manufacture and sell the licensed
product and a royalty will be paid by the selling party to the other party for
the use of its technology. Tecumseh is now in the testing phase in the
development of these products.
On December 1, 2002, the Company entered into a new license agreement (the
"Agreement") with Applica Inc. replacing the agreement dated December 31, 1999,
which authorizes Applica Inc. to use the Company's extended Fire Shield
technology to detect fires and electrical shock in certain small kitchen
appliances manufactured by Applica Inc. under the Black & Decker(R) brand name.
In return, the Company receives royalties for each unit manufactured by Applica
Inc. using the Company's Fire Shield technology. In addition, the new
Agreement states that the Company will receive certain non-performance penalty
payments if minimum targets are not met. The Fire Shield technology includes
the ability to detect an open flame or insulation/dielectric failure due to
build up of grease or other substances, and disconnect the power thus reducing
the risk of injury or property damage. In addition, the Fire Shield technology
protects the user from electrocution or serious injury from electrical shock
due to insulation failure or damage to the electrical wiring of the appliance.
The Applica Inc. appliances that use this technology will display a Fire Shield
marking on the appliance or packaging. In addition, Applica Inc. recently
announced its commitment to incorporate the Company's Fire Shield technology
into certain Black & Decker(R) kitchen appliances, which utilize Applica's
Advanced Safety Technology(TM) ("AST") system. The AST(TM) system is a
combination of the most advanced and significant safety features available
today that can help prevent fires and electric shock in appliances. The
Company's proprietary extended Fire Shield technology enables Applica Inc. to
provide its customers an unparalleled degree of safety for such appliances.
7
Military Products and Markets
The Company designs and manufactures products for sale to the military engine
generator set controls market. The Company's expertise in this area is well
known, and the Company's performance in product quality and delivery to the
United States Military and its prime contractors have resulted in the Company
being recognized as a leader in this industry. The Defense Logistics Agency
established a program rating system for its suppliers in 1995 for product
quality, packaging and on-time deliveries, and since its inception and for the
eighth straight year, the Company has been honored as a Best Value Medalist for
the highest rating Gold Category, which signifies the Company's commitment to
military contract performance.
The Company is currently a supplier of control equipment used in engine
generator systems purchased by the United States military and its prime
contractors. The term "control equipment" refers to the electrical controls
used to control the electrical power output of the generating systems. In
general, the controls monitor and regulate the operation of engine generator
mobile electric generating system sets. Electric generating systems are basic
to all branches of the military, and demand has remained relatively constant,
unlike products utilized in armaments and missiles. Sales are made either
directly to the government for support parts or to prime contractors for new
electric generator sets, which incorporate the Company's products. The Company
is a qualified supplier for 37 control equipment products as required by the
Department of Defense and is a supplier of the following types of control
equipment, among others: protective relays and relay assemblies,
instrumentation transducer controls, fault locating panel indicators, current
transformer assemblies for current sensing control and instrumentation, motor
operated circuit breaker assemblies and electrical load board and voltage
change board assemblies. These products are also furnished for spare parts
support for existent systems in the military inventory.
In 1989, the Company completed the redesign of the control equipment related to
the Tactical Quiet Generator ("TQG") Systems program and provided prototype and
first article test qualification units to a prime contractor for system
testing, which was completed in late 1992. Subsequently, the Company received
production orders of approximately $12.4 million for these products from the
U.S. Government's prime contractor covering the time period from August 1992 to
July 1998. The current contract for the 5/10/15KW TQG systems to the prime
contractor, valued at approximately $8.2 million, is for a 10-year period with
the last ordering year being 2007. To date, the Company has shipped
approximately $4.5 million of product to the prime contractor of this contract.
On April 15, 2003, the Company announced that it received follow-on production
orders of approximately $1.26 million to be shipped over the next 14 months.
In November 1998, the Company received its first orders for control equipment
related to the new 3KW TQG systems program. The Company completed shipments for
these initial orders in March 2002, which totaled approximately $6.0 million.
In August 2001, the Company announced that it would have the opportunity to
participate in the follow-on 10-year contract for the 3KW TQG systems, valued
at approximately $21 million, with scheduled deliveries from 2002 to 2012. The
Company began shipments under this new contract in May 2002, and to date the
Company has shipped approximately $3.7 million of product to the prime
contractor of this contract. On April 15, 2003, the Company announced that it
received follow-on production orders in the amount of $3.46 million to be
shipped over the next 14 months.
8
The Company furnishes various types of A.C. power monitors to the military for
its U.S. Navy vessels. These monitors provide system protection for the
electrical distribution systems that are used on all classes of U.S. Navy
surface vessels, such as minesweepers, destroyers, guided missile cruisers and
aircraft carriers in addition to other types of naval vessels. The monitors
meet the environmental and stringent U.S. Navy high shock and vibration and
endurance testing requirements, and they are furnished for new vessel
production, retrofit upgrades and existent vessels requiring spare support
parts.
In addition, the Company provides both A.C. and D.C. power monitoring systems,
which include, voltage regulators, power transformers, A.C. over current and
short circuit protection monitor assemblies and current sensing transformers
for the military's armored-tracked vehicles. These products must pass highly
accelerated stress screening and vehicle road testing at the Aberdeen Proving
Grounds of the United States Department of Defense.
The Company's panel mount GFCI is the only GFCI device that is approved and
qualified by the Department of Defense for use on its mobile-tactical
generating systems.
The Company's contracts with the U.S. Government are on a fixed-price bid
basis. As with all fixed-price contracts, whether government or commercial,
the Company may not be able to negotiate higher prices to cover losses should
unexpected manufacturing costs occur.
All government contracts contain a provision that allows for cancellation by
the government "for convenience." However, the government must pay for costs
incurred and a percentage of profits expected if a contract is canceled.
Contract disputes may arise which could result in a suspension of such contract
or a reduction in the amounts claimed.
Testing and Qualification
A number of the Company's commercial products must be tested and approved by UL
or an approved testing laboratory. UL publishes certain "Standards of Safety"
which various types of products must meet and perform specific tests to
ascertain whether the products meet the prescribed standards. If a product
passes these tests, it receives UL approval. Once the Company's products have
been initially tested and qualified by UL, they are subject to regular field
checks and quarterly reviews and evaluations. UL may withdraw its approval for
such products if they fail to pass these tests and if prompt corrective action
is not taken. The Company's portable electrical safety products have received
UL approval. In addition, certain of the Company's portable GFCI, ALCI and
ELCI products have successfully undergone similar testing procedures conducted
by comparable governmental testing facilities in Europe, Canada and Japan.
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, UL announced on November 1,
2001 that it would toughen the test standard for all such devices, which
included the Company's portable GFCI devices. All of the Company's GFCI
devices were required to be re-tested and re-certified by January 1, 2003,
according to the published UL timetable. The re-certification tested for 1)
expanded surge requirements, 2) new requirements for moisture and corrosion,
and 3) new requirements for reverse line-load miswiring. Of those products
that represent significant revenues to the Company, re-certification is 100%
complete.
9
The Company's military products are subject to testing and qualification
standards imposed by the U. S. Government. The Company has established a
quality control system, which has been qualified by the United States
Department of Defense to operate under the requirements of a particular
specification (MIL-I-45208). To the extent the Company designs a product that
it believes meets those specifications, it submits the product to the
responsible government-testing laboratory. Upon issue of the qualification
approval and source listing, the product is rarely subject to re-qualification;
however, the U. S. Government may disqualify a product if it is subject to
frequent or excessive operational failures. In addition, the Company's
governmental contracts provide that the current specifications and requirements
could be changed at any time, which could require the Company to redesign its
existing products or develop new products which would have to be submitted for
testing and qualification prior to their approval for purchase by the military
or its prime contractors. Certain contracts also require witness testing and
acceptance by government inspectors prior to shipment of the product.
The Company's wholly owned foreign subsidiary, TRC/Honduras S.A. de C.V. is an
ISO 9002 certified manufacturing facility and an approved supplier to Xerox
Corporation, and holds UL, Canadian Standards Association ("CSA") and the
German standards association, Verband Deutsher Elektrotechniker ("VDE"),
approvals.
Design and Manufacturing
The Company currently designs almost all of the products that it produces and
generally will not undertake special design work for customers unless it
receives a contract or purchase order to produce the resulting products. The
Company continues to work with foreign licensees to design products for foreign
markets. A significant number of the Company's commercial and military
electronic products are specialized in that they combine both electronic and
magnetic features in design and production.
The business of an electronics manufacturer such as the Company primarily
involves assembly of component parts. The only products that the Company
manufactures from raw materials consist of its transformers and magnetic
products. The manufacture of such products primarily involves the winding of
wire around magnetic ferrite cores. Recently, in an effort to lower costs by
vertical integration, the Company commenced molding its own plastic parts for
its commercial product lines at its manufacturing facility in Honduras. The
remainder of the products that the Company manufactures is assembled from
component parts that are produced or distributed by other companies.
On February 3, 1997, the Company's Board of Directors approved the
incorporation of TRC/Honduras, S.A. de C.V., a wholly owned Company, for the
purpose of manufacturing the Company's high-volume products. TRC/Honduras,
S.A. de C.V. conducts its operations in a leased 42,000 square foot building
located in ZIP San Jose, a free trade zone and industrial park, located in San
Pedro Sula, Honduras. The benefits of being located in a free trade zone
include no Honduran duties on imported raw materials or equipment, no sales or
export tax on exported finished product, a 20 year Honduran federal income tax
holiday and a ten year Honduran municipal income tax holiday for any profits
generated by the subsidiary, and various other benefits.
10
As a result of increasing manufacturing costs in Honduras, the Company
implemented a plan in Fiscal Year 2003 to move approximately 30-40% of its
Honduran production to a wholly-owned subsidiary of Applica Inc., Applica-
Durable Manufacturing ("ADM"), a contract manufacturer in China with which the
Company had acquired substantial experience prior to its setting up operations
in Honduras. The Company's plan is for ADM to manufacture certain subassembly
boards, which will then be shipped to Honduras for final assembly. ADM will
also build finished product for certain retail customers, international
customers and those customers that have operations in China. The Company
received first shipments of finished product and subassembly boards from ADM in
Fiscal Year 2003.
The Company continues to manufacture its specialized military products and low-
volume commercial products in its 43,000 square foot facility in Clearwater,
Florida.
Patents, Licenses, and Trademarks
Raymond H. Legatti, one of the Company's original founders, has designed seven
Company patents in the U.S., six in Great Britain, three in Italy, two in
Australia, Germany and France and one in Canada, Sweden and Japan with respect
to the Company's products giving rise to portable GFCI and Fire Shield
technologies. Several other patent applications have been filed by the Company
and are awaiting action, and the issuance of patents with respect thereto will
complement the Company's core technology and products. The Company's U.S.
patents will be valid for either 20 years from filing or 17 years from date of
issue in the United States. The term of the Company's patents in all other
countries vary from 15 to 20 years.
On October 12, 1999, Xerox Corporation was issued a patent, which listed
Mr. Legatti as a co-inventor for the Modular, Distributed Equipment Leakage
Circuit Interrupter. This product is used on some of Xerox's business machines
and shuts off power when sensing a certain leakage of electricity which could
produce dangerous results.
On February 25, 2003, the Company was issued a patent which listed Mr. Legatti
as the inventor of a Protection System for Devices Connected to an Alternating
Current Electrical Power Supply. The patent relates to technology that
provides additional user safety intended for application on electrical
appliances and equipment such as small hand tools and kitchen appliances (e.g.
toasters, toaster ovens, steam irons, coffee makers, etc.) In addition to
electric shock protection, the technology also provides the ability to detect
and prevent a variety of potentially hazardous electrical conditions such as
excessive heat, flame, electrical insulation breakdowns and pressure buildups.
When such hazardous conditions occur, the power supply is shut off, and an
audible and/or visual alarm is activated. Applica Inc. has licensed this
patent for use on its line of Black & Decker(R) small kitchen appliances as
described above under License Agreements.
The life of certain patents, related to the Company's GFCI devices, have
recently expired, and others will expire within the next few years. The
Company is unable to predict how that might affect its business. The Company
believes, however, that the success of its business depends more on the
technical and engineering expertise, marketing and service abilities of its
employees than on patents, trademarks and copyrights. Nevertheless, the
Company owns several patents and has a policy of seeking patents when
appropriate on inventions concerning new products and improvements as part of
its ongoing research, development and manufacturing activities. Furthermore,
although the Company vigorously protects its patents, there can be no assurance
that others will not independently develop similar products, duplicate the
Company's products or design around the patents issued to the Company or that
foreign intellectual property laws will protect the Company's intellectual
property rights in any foreign country.
11
The Company licenses its technology for use by others in exchange for royalties
or product purchases. Licensees are located in Australia, France, Italy,
Japan, the United Kingdom and the United States. Each licensee agrees to pay
the Company a royalty or purchase product based on schedules set forth in the
applicable agreement. The Company agrees to provide certain technical support
and assistance to its licensees. The licensees have agreed to indemnify and
hold the Company harmless against any liability associated with the manufacture
and sale of products subject to the license agreement, including but not
limited to defects in materials or workmanship.
The Company has no other patents on or licensee agreements with respect to its
products or technology, but has registered its TRC trademark with the U.S.
Patent and Trademark Office. The Company's Shock Shield(R), Electra Shield(R)
and Fire Shield(r) brand names are also registered trademarks of the Company.
Marketing
The Company's products are sold throughout the world, primarily through an in-
house sales force, licenses and sales and marketing agreements. Although the
Company will continue to market existing and new products through these
channels, the Company is looking for other viable channels through which to
market its products. The Company relies significantly upon the marketing
skills and experience, as well as the business experience, of the management of
the Company in marketing its products.
The Company complements its sales and marketing activity through the use of
additional distributors and sales representative organizations. The Company's
internal distribution division, TRC Distribution, is supported by 31
independent sales representatives who sell to over 1,500 electrical, industrial
and safety distributors.
The Company exhibits its products at numerous trade shows, which have resulted
in new commercial markets including the recreational vehicle industry and the
appliance industry.
The Company also markets through OEMs, both domestically and internationally,
that sell the Company's products under their own brand labels. The Company has
recently implemented a "value add" upgrade strategy, which provides finished
product to those OEMs who are currently only receiving subassembly modules.
The Company's plastic and receptacle molding capabilities are a key factor in
providing "value add" upgrades to its customers.
The Company primarily utilizes foreign licenses and sales and marketing
agreements to market its products internationally (see Patents, Licenses and
Trademarks for further information). The Company's products have worldwide
application, and the Company believes that international demand for these
products will continue to contribute to the Company's growth.
The Company offers its customers no specific product liability protection
except with regards to those customers that are specifically named as "Broad
Form Vendors" under its product liability coverage. The Company does extend
protection to purchasers in the event there is a claimed patent infringement
that pertains to the Company's portion of the final product. The Company also
carries product and general liability insurance for protection in such cases.
12
Major Customers and Exports
Significant customers who accounted for 10% or more of sales, and aggregate
exports were:
Year ended March 31
Customer 2003 2002 2001
-------- ---- ---- ----
Fermont (a division of ESSI, a U.S.
Government Prime Contractor) $ 3,937,999 3,855,593 4,305,101
========= ========= =========
Exports:
Canada $ 417,094 293,650 579,511
Far East 1,020,078 1,288,102 805,762
Europe 2,632,357 1,899,842 2,328,325
Mexico - 169,833 383,046
Australia 36,020 3,167 83,232
South America 6,484 6,458 13,784
Middle East 14,257 15,000 22,299
--------- --------- ---------
Total exports $ 4,126,290 3,676,052 4,215,959
========= ========= =========
Overall, the Company's exports were up approximately 12% in Fiscal Year 2003,
compared to the Company's prior fiscal year, primarily due to increased
shipments of product to a major sprayer/washer manufacturer in the amount of
$881,500. All other exports to the Company's international OEM customers were
relatively flat for Fiscal Year 2003, compared to the Company's prior fiscal
year, due to the weakness in the overall global economy.
The Company's military product sales are primarily to OEM prime contractors and
secondarily to military procurement logistic agencies for field service support
on previously shipped systems. In Fiscal Year 2003, military sales were
approximately 42% of total sales, compared to 38% in the prior year. Sales to
Fermont were up approximately 2%, compared to prior year, and overall, military
sales increased approximately 18% as the result of spare part orders for the
Company's control devices related to generator systems already in the field.
Fermont accounted for approximately 22% of the Company's sales for Fiscal Year
2003, compared to approximately 23% for the prior fiscal year.
The Company has no relationship with any of its customers except as a supplier
of product.
13
Competition
The commercial and military business of the Company is highly competitive.
In the commercial market, the Company has significant competition, except with
respect to its Fire Shield products. As a result, the Company may not be able
to maintain current profit margins due to price erosion. The Company believes,
however, that product knowledge, patented technology, ability to respond
quickly to customer requirements, positive customer relations, price, technical
background and industry experience are major competitive factors, and that it
competes favorably with respect to these factors. In addition, the Company's
patented GFCI technology utilizes, in certain adaptations, waterproofing and
"trip mechanism" techniques, each of which provides the Company, in the
judgment of its management, with a current competitive advantage.
In the military market, the Company's products must initially pass government
specified tests. The Company must compete with other companies, some being
larger and some smaller than the Company and acting as suppliers of similar
products to prime government contractors. The Company believes that knowledge
of the procurement process, engineering and technical support, price and
delivery are major competitive factors in the military market. The Company
believes that it has competitive strengths in all of these areas due to senior
management's involvement in the government procurement process and experience
in the design engineering requirements for military equipment. A substantial
portion of spare part procurement is set aside for small business concerns,
which are defined in general as entities with fewer than 1,000 employees.
Because the Company is classified as a small business concern, it qualifies for
such set aside procurements for which larger competitors are not qualified. The
entry barriers to the military market are significant because of the need, in
most cases, for products to pass government tests and qualifications.
Research, Development and Engineering
The Company employs 12 persons in the Engineering Department, all of whom are
engaged either full or part-time in research and development activities. This
department is engaged in designing and developing new commercial and military
products and improving existing products to meet the needs of the Company's
customers.
In connection with its efforts in developing the GFCI product, the Company
believes that the increasing use of portable GFCI protection will provide new
markets for the commercial marketplace, and accordingly, the Company has
modified its GFCI designs to fit these markets and new applications. There can
be no assurance, however, that the Company can maintain its sales levels in the
commercial market in view of the possibility that an increased level of
competition may develop.
The Company spent $1,225,651 in Fiscal Year 2003, $1,049,649 in Fiscal Year
2002 and $1,197,874 in Fiscal Year 2001 on research, development and
engineering activities. None of these activities were sponsored or financed by
customers, and all have been expensed as incurred. The Company anticipates
spending levels to remain comparable in the new fiscal year.
14
Employees
As of March 31, 2003, the Company employed 81 persons on a full time basis, and
of that total 47 employees were engaged in manufacturing operations, 12 in
engineering, 12 in marketing and 10 in administration. The Company's Honduran
subsidiary employed 225 persons on a full time basis as of March 31, 2003, and
of that total, 222 employees were engaged in manufacturing operations and three
in administration. Competition for such management, technical, manufacturing,
sales and support personnel is intense, and there can be no assurance that the
Company will be successful in attracting or retaining such personnel.
None of the Company's employees are represented by a collective bargaining
unit, and the Company considers its relations with employees to be stable.
While the Company believes it has established good relations with its local
labor force in both the United States and Honduras, its reliance upon a foreign
manufacturing facility subjects the Company to risks inherent in international
operations. Those risks include inflationary pressures, unexpected changes in
regulatory requirements, changes in political climate, difficulties in
coordinating and managing foreign operations and foreign labor issues. Any of
the foregoing could have a material adverse effect on the Company's operations,
prospects and financial results.
ITEM 2. PROPERTIES
The Company's executive offices and U.S. manufacturing facility are located on
4.7 acres of leased land in the St. Petersburg-Clearwater Airport Industrial
Park. The lease, with options, extends for 40 years until 2021 and is subject
to certain price escalation provisions every five years. This leased land is
adequate to enable the Company to expand this facility to 60,000 square feet.
The present facility provides a total of 43,000 square feet, including 10,000
square feet of offices and engineering areas, as well as 23,000 square feet of
production areas and 10,000 square feet of warehouse space.
In March 1997, the Company entered into a five year lease agreement with ZIP
San Jose, an industrial park located in San Pedro Sula, Honduras, for a 42,000
square foot building in which the Company manufactures its high-volume
products. The Company then entered into a one-year lease agreement with ZIP
San Jose, which ended in March 2003. The Company currently has entered into a
second one-year lease agreement, which ends in March 2004.
ITEM 3. 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.
In November 2002, a civil complaint was filed against the Company and nine
other defendants in the United States District Court in and for the District of
Nevada. The complaint alleges infringement by each of the defendants of two
patents registered in the name of the plaintiff, in the case of the Company
arising out of its manufacture and sale of recreational vehicle voltage
monitors and controllers, and seeks injunctive relief, an accounting of past
profits generated from such sales, monetary damages and cost recoveries. The
Company has filed a general denial of plaintiff's claims and management
believes that the alleged infringement has not occurred. The Company is in the
final stages of settling this claim, and the settlement amount will have no
material adverse effect upon the Company's consolidated financial position,
liquidity or results of operations.
15
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of the fiscal year ended March 31, 2003.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SECURITY HOLDER
MATTERS
The Company's shares of Common Stock are registered under Section 12(g) of the
Securities Exchange Act of 1934 and are traded in the over-the-counter market
utilizing the NASDAQ trading system, to which the Company gained admittance in
December 1984, under the symbol "TRCI". In November 1995, NASDAQ approved the
Company's application for listing on the National Market System. The following
tables set forth a range of high and low market prices for the Company's Common
Stock for the fiscal years ended March 31, 2003 and 2002 as reported by NASDAQ,
and the dividends paid with respect to each quarter ended within such years.
Market Price Cash
Fiscal Year Ended High Low Dividends
March 31, 2003:
First Quarter $ 2.00 $ 1.43 $ 0.01
Second Quarter 1.84 1.21 0.01
Third Quarter 2.00 1.25 0.01
Fourth Quarter 2.75 1.76 0.015
-----
$ 0.045
March 31, 2002:
First Quarter $ 2.00 $ 1.30 $ 0.01
Second Quarter 1.90 1.30 0.01
Third Quarter 2.42 1.40 0.01
Fourth Quarter 1.89 1.28 0.01
----
$ 0.04
As of May 31, 2003, the approximate number of the Company's record shareholders
was 461. This number does not include any adjustment for shareholders
beneficially owning common stock held of record by the Depository Trust or
fiduciary, which the Company believes to represent an additional 1,700
shareholders.
The Company's authorized capital stock, as of May 31, 2003, consisted of
10,000,000 shares of common stock, par value $.51, of which 5,448,037 shares
were outstanding.
Effective as of the record date of March 31, 2003, the Company increased its
quarterly cash dividend from $.01 per share to $.015 per share, which equates
to an annual cash dividend of $.06 per share. The Company paid dividends of
$.045 per share in Fiscal Year 2003 and $.04 per share in Fiscal Year 2002.
16
ITEM 6. SELECTED FINANCIAL DATA
2003 2002 2001 2000 1999
---- ---- ---- ---- ----
Year ended March 31:
Operating revenues $ 17,641,142 16,684,285 18,036,974 16,837,725 17,211,014
Gross profit $ 5,744,912 4,420,631 3,901,155 5,124,543 4,078,461
Net income (loss) $ 1,014,791 200,360 (411,547) 585,755 15,892
Basic earnings
per share $ .19 .04 (.08) .11 -
Weighted average number
of common shares
outstanding 5,438,381 5,437,497 5,439,811 5,455,756 5,455,756
Diluted earnings
per share $ .19 .04 (.08) .11 -
Weighted average number
of common and
equivalent shares
outstanding 5,482,450 5,457,896 5,439,811 5,473,220 5,476,134
Cash dividends
Paid $ .045 .04 .04 .03 -
March 31:
Working capital $ 8,873,080 7,934,196 8,898,697 10,267,576 6,899,677
Total assets $ 13,835,689 12,766,937 15,156,548 15,990,625 15,146,175
Current
liabilities $ 1,523,980 913,526 2,012,335 1,366,382 3,521,949
Long-term debt $ - 500,000 1,750,000 2,500,000 56,250
Total liabilities $ 1,759,059 1,463,526 3,835,998 4,000,567 3,578,199
Retained earnings $ 1,803,027 1,032,996 1,050,135 1,679,150 1,257,068
Total stockholders'
equity $ 12,076,630 11,303,411 11,320,550 11,990,058 11,567,976
17
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS 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.
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 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 reserves 100%,
or $218,336, of that inventory considered to be obsolete and 50%, or $355,880,
of that inventory considered to be slow moving. The Company evaluates all
inventory which has not had activity for twelve months. As of March 31, 2003,
the Company's inventory reserve was $574,216 or approximately 11% of total
inventory.
The Company's accounting policies are more fully described in the Summary of
Significant Accounting Policies in the Notes to Consolidated Financial
Statements. As described therein, the preparation of 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 amounts reported in the financial
statements and accompanying notes. Future events and their effects cannot be
determined with absolute certainty. Therefore, the determination of estimates
requires the exercise of judgment. Actual results inevitably will differ from
those estimates, and such differences may be material to the consolidated
financial statements.
18
Operating Results
Fiscal Years 2003 and 2002 Comparison
The Company's operating revenues for the year ended March 31, 2003 were
$17,761,936, compared to $16,684,285 reported in the prior year, an increase of
approximately 6%. Net income was $1,014,791 for the year, compared to $200,360
reported in the prior year. Basic and diluted earnings were $.19 per share for
the year, compared to $.04 per share for the prior year.
The improvement in performance over the prior year was the result of increased
revenues, higher gross profit margins and lower interest expense. Gross profit
margins improved as the result of product mix plus productivity and quality
improvements in manufacturing. Interest expense was reduced as a result of the
Company remaining debt-free during the last three quarters of its fiscal year.
Currently, all of the Company's $3,000,000 line of credit is available for use,
and the Company's cash balance as of March 31, 2003 increased to $2,529,562.
While uncertainties still exist in the economy, the Company expects its
business to remain stable throughout Fiscal Year 2004.
For the fiscal year ended March 31, 2003, commercial revenues decreased
slightly by $21,167, military revenues improved by $1,144,878 and royalty
income was down by $46,060 compared to the prior year. Commercial revenues
continued to be affected in Fiscal Year 2003 by competitive pressures and the
current weakness in the global economy; however, commercial revenues for the
fourth quarter strengthened as the result of shipments of $650,000 to a major
sprayer/washer manufacturer. Increased direct military shipments of field
support parts for existing systems and strong shipments of control devices
related to the Tactical Quiet Generator (TQG) programs resulted in record
military revenues of $7,386,144 for Fiscal Year 2003. In support of recent
military deployment, the Company responded to the increased demand with on-time
shipments while achieving its highest level of production ever for its military
products.
The market for the Company's Fire Shield products continued to develop during
Fiscal Year 2003. The Company shipped Fire Shield Power Surge Strips, a new
product, to approximately 620 Wal-Mart Stores, Inc. In addition, Fire Shield
licensed technology generated royalties of approximately $50,000 during the
fiscal year. Fire Shield product sales and royalties currently represent
approximately 2% of the Company's total revenues. The Company believes that
its patented Fire Shield technology represents its most significant opportunity
for growth.
The Company's gross profit margin was approximately 33% of net sales for Fiscal
Year 2003 compared to 27% in the prior year. The improvement was primarily the
result of product mix plus productivity and quality improvements in
manufacturing.
Selling, general and administrative expenses for Fiscal Year 2003 were
$3,190,338, compared to $3,175,724 for the prior year, reflecting comparable
expenses year to year. Selling expenses were $1,854,671 for Fiscal Year 2003,
compared to $1,816,133 for the prior year, an increase of approximately 2%.
General and administrative expenses were $1,335,667 for Fiscal Year 2003,
compared to $1,359,591 for the prior year, a decrease of approximately 2%.
19
Research, development and engineering expenses for Fiscal Year 2003 were
$1,225,651, compared to $1,049,649 for the prior year, an increase of
approximately 17%. 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, UL announced on November
1, 2001 that it would change 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
were required to be re-tested and re-certified by January 1, 2003, according to
the UL timetable. The re-certification tested for 1) expanded surge
requirements, 2) new requirements for moisture and corrosion, and 3) new
requirements for reverse line-load miswiring. Of those products that represent
significant revenues to the Company, re-certification is 100% complete.
Interest and sundry income, net of interest expense for Fiscal Year 2003 was
$6,330, compared to interest expense, net of interest and sundry income of
$66,708 for the prior year, reflecting lower interest rates and the Company
using less of its Line of Credit.
Income tax expense for the years ended March 31, 2003 and 2002 differs from the
amounts computed by applying the Federal income tax rate of 34 percent to
pretax income as the operating results of the foreign manufacturing subsidiary
are not subject to foreign tax since it is operating under a tax holiday for at
least 20 years. The foreign operations resulted in income of approximately
$301,000 in 2003 and $44,000 in 2002, and no income taxes have been provided on
these results of operations. The total amount of undistributed earnings of the
foreign subsidiary for income tax purposes was approximately $570,000 at March
31, 2003 and $269,000 at March 31, 2002. It is the Company's intention to
reinvest undistributed earnings of its foreign subsidiary and thereby
indefinitely postpone its repatriation. Accordingly, no provision has been
made for foreign withholding taxes or United States income taxes which may
become payable if undistributed earnings of the foreign subsidiary are paid as
dividends to the Company. It is not practicable to calculate the unrecognized
deferred tax liability on those earnings.
Fiscal Years 2002 and 2001 Comparison
The Company's operating revenues for the year ended March 31, 2002 were
$16,684,285, compared to $18,036,974 reported in the prior year, a decrease of
approximately 7%. Net income was $200,360 for Fiscal Year 2002, compared to a
net loss of $(411,547) reported in Fiscal Year 2001. Basic and diluted
earnings (loss) were $.04 per share for Fiscal Year 2002, compared to $(.08)
per share for Fiscal Year 2001.
Although the Company did not meet its revenue objectives for Fiscal Year 2002,
the business was managed well, producing a profit instead of a loss in a tough
economy. The improvement in performance was due to lower operating expenses
and increased manufacturing productivity. In addition, supply chain
initiatives produced a reduction in inventory of $1,553,543 allowing the
Company to strengthen its balance sheet significantly, increasing cash by
$978,327 while reducing its bank debt by $1,250,000. The decrease in revenues
for Fiscal Year 2002 was due to commercial sales decreasing by $1,841,423, of
which $735,250 was attributed to Xerox and its suppliers. Royalty income
decreased by $64,709, and military sales increased by $553,443. The increase
in military sales was mainly due to stronger spare parts orders and the Company
being in full production of the control devices related to the 5/10/15/30/60KW
TQG and the variable speed 3KW TQG programs.
20
On December 13, 2000, the Company announced that its Board of Directors had
approved a plan to find a strategic buyer who could expand the Company's
business, primarily to that of the Company's Fire shield product lines. On
August 13, 2001, the Company announced that it was no longer seeking to sell
the Company due to unfavorable market conditions and the unlikelihood of the
Company meeting its objectives of being acquired by a strategic buyer who could
also increase shareholder value.
The Company's gross profit margin was approximately 27% of net sales for Fiscal
Year 2002 compared to 22% in the prior year. Although the Company's
manufacturing performance improved from year to year, higher than expected
rework expense was recorded in the year due to warranty repairs of inverters
associated with the 3KW TQG program. Latent defects of certain vendor supplied
parts were responsible for the problems. The Company repaired the majority of
the product in question.
Selling, general and administrative expenses for Fiscal Year 2002 were
$3,175,724, compared to $3,490,326 for the prior year, a decrease of
approximately 9%. Selling expenses were $1,816,133 for Fiscal Year 2002,
compared to $2,008,092 for the prior year, a decrease of approximately 10%,
reflecting a decrease in salary related expenses of $49,621, travel expenses of
$44,303, advertising costs of $58,122, professional fees of $21,841 and a
reduction of $18,072 in other expenses. General and administrative expenses
were $1,359,591 for Fiscal Year 2002, compared to $1,482,234 for the prior
year, a decrease of approximately 8%, reflecting lower professional fees of
$32,878, shareholder expenses of $36,485, travel expenses of $23,151,
telecommunications expenses of $22,850 and a reduction of other expenses of
$7,279.
Research, development and engineering expenses for Fiscal Year 2002 were
$1,049,649, compared to $1,197,874 for the prior year, a decrease of
approximately 12%, reflecting a decrease in salary related expenses of
$102,243, health insurance costs of $48,681 and an increase of $2,699 in other
expenses.
Interest expense, net of interest and sundry income, for Fiscal Year 2002 was
$66,708, compared to $76,572 for the prior year, reflecting lower interest
rates and the Company using less of its institutional Line of Credit.
Income tax expense (benefit) for the years ended March 31, 2002 and 2001
differs from the amounts computed by applying the Federal income tax rate of 34
percent to pretax income (loss) as the operating results of the foreign
manufacturing subsidiary are not subject to foreign tax since it is operating
under a tax holiday for at least 20 years. The foreign operations resulted in
income of approximately $44,000 in 2002 and $51,000 in 2001, and no income
taxes have been provided on these results of operations. The total amount of
undistributed earnings of the foreign subsidiary for income tax purposes was
approximately $269,000 at March 31, 2002 and $225,000 at March 31, 2001. It is
the Company's intention to reinvest undistributed earnings of its foreign
subsidiary and thereby indefinitely postpone its repatriation. Accordingly, no
provision has been made for foreign withholding taxes or United States income
taxes which may become payable if undistributed earnings of the foreign
subsidiary are paid as dividends to the Company. It is not practicable to
calculate the unrecognized deferred tax liability on those earnings.
21
Liquidity and Capital Resources
As of March 31, 2003, the Company's cash and cash equivalents increased to
$2,529,562 from the March 31, 2002 total of $1,163,099. The increase was due
to cash provided by operating activities of $2,657,521, offset to some extent
by cash used for investing activities of $577,463 and cash used in financing
activities of $713,595, a total of $1,366,463.
Cash provided by operating activities was primarily due to net income of
$1,014,791, depreciation of $857,374 and an increase in deferred income taxes
and accounts payable of $341,326 and $501,517, respectively, offset to some
extent by an increase in accounts receivable of $289,216. The increases in
accounts payable and receivable were primarily the result of the Company's
increase in business.
Cash used in investing activities was related to purchases of capital
equipment. The Company's capital expenditures were $577,463 for Fiscal Year
2003 compared to $397,604 in the prior year. The increase was primarily due
to: 1) the acquisition of a 375 ton molding press to further vertically
integrate its plastic parts requirements; 2) tooling for parts required on new
programs; 3) the Company's tooling for several new and existing products to be
manufactured at the Company's contract manufacturer in China; and 4) tooling
for the re-certification of the Company's GFCI products as required by UL, as
noted above.
Cash used in financing activities was due to the Company's repaying its line of
credit by $500,000 and the payment of its cash dividend in the amount of
$216,783, offset slightly by proceeds from the exercise of stock options in the
amount of $3,188.
On November 12, 2002, the Company renewed its $3,000,000 revolving credit loan
with its institutional lender, extending the maturity date to December 14,
2004. Although the Company did not utilize its line of credit in the second,
third or fourth quarters, the Company has the option of borrowing at lesser of
(a) the lender's prime rate of interest minus 25 basis points, or (b) the 30-
day London Interbank Offering Rate (LIBOR) 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 $938,884 to $8,873,080 at March 31,
2003, compared to $7,934,196 at March 31, 2002. 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 $2,727,877 for Fiscal Year 2003, compared to
$1,651,781 for Fiscal Year 2002. The Company wishes to present its EBITDA
results as an indication of its liquidity and should not be interpreted as
earnings. The table below sets forth the reconciliation between net income and
EBITDA:
Fiscal Year 2003 Fiscal Year 2002
---------------- ----------------
Net income $ 1,014,791 $ 200,360
Interest expense 1,153 79,337
Income taxes 409,538 94,111
Depreciation 857,374 897,236
Amortization 445,021 380,737
--------- ---------
EBITDA $ 2,727,877 $ 1,651,781
22
The fourth quarter dividend of $.015 per share was paid on April 25, 2003 to
shareholders of record on March 31, 2003. The Company paid $.045 per share for
Fiscal Year 2003.
Contractual Obligations
The Company is obligated under future commitments as part of its normal
business operations. The future commitments may be for long-term debt, capital
lease, operating lease or purchase obligations. These obligations are set
forth in the table below:
Obligations due by period
Less Than More than
Contractual Obligations Total 1 Year 1-3 Years 3-5 Years 5 Years
----- ------ --------- --------- -------
Operating Lease Obligations $ 443,848 173,112 73,836 73,836 123,064
Purchase Obligations $ 2,589,506 2,589,506
New Accounting Standards
In June 2001, the FASB issued SFAS No. 143, Accounting for Asset Retirement
Obligations (SFAS No. 143). 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 Company was
required to adopt SFAS No. 143 on April 1, 2003. Adoption of SFAS No. 143 did
not have a material effect on the consolidated financial statements.
In April 2002, the FASB issued SFAS No. 145, Rescission of FASB Statements No.
4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections.
SFAS No. 145 amends existing guidance on reporting gains and losses on the
extinguishment of debt to prohibit the classification of the gain or loss as
extraordinary, as the use of such extinguishments have become part of the risk
management strategy of many companies. SFAS No. 145 also amends SFAS No. 13 to
require sale-leaseback accounting for certain lease modifications that have
economic effects similar to sale-leaseback transactions. The provisions of the
Statement related to the rescission of Statement No. 4 is applied in fiscal
years beginning after May 15, 2002. Earlier application of these provisions is
encouraged. The provisions of the Statement related to Statement No. 13 were
effective for transactions occurring after May 15, 2002, with early application
encouraged. The adoption of SFAS No. 145 did not have a material effect on the
Company's consolidated financial statements.
In June 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated
with Exit or Disposal Activities. SFAS No. 146 addresses financial accounting
and reporting for costs associated with exit or disposal activities and
nullifies Emerging Issues Task Force (EITF) Issue 94-3, Liability Recognition
for Certain Employee Termination Benefits and Other Costs to Exit an Activity.
The provisions of this Statement are effective for exit or disposal activities
that are initiated after December 31, 2002, with early application encouraged.
The adoption of SFAS No. 146 did not have a material effect on the Company's
consolidated financial statements.
23
In November 2002, the FASB issued Interpretation No. 45, Guarantor's Accounting
and Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness to Others, an interpretation of FASB Statements No. 5, 57 and 107
and a Rescission of FASB Interpretation No. 34. This Interpretation elaborates
on the disclosures to be made by a guarantor in its interim and annual
financial statements about its obligations under guarantees issued. The
Interpretation also clarifies that a guarantor is required to recognize, at
inception of a guarantee, a liability for the fair value of the obligation
undertaken. The initial recognition and measurement provisions of the
Interpretation are applicable to guarantees issued or modified after December
31, 2002 and did not have a material effect on the Company's consolidated
financial statements.
In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based
Compensation - Transition and Disclosure, an amendment of FASB Statement No.
123. This Statement amends SFAS No. 123, Accounting for Stock-Based
Compensation, to provide alternative methods of transition for a voluntary
change to the fair value method of accounting for stock-based employee
compensation. In addition, this Statement amends the disclosure requirements
of SFAS No. 123 to require prominent disclosures in both annual and interim
financial statements. Certain of the disclosure modifications are required for
fiscal years ending after December 15, 2002 and are included in the notes to
these consolidated financial statements.
In January 2003, the FASB issued Interpretation No. 46, Consolidation of
Variable Interest Entities, an Interpretation of ARB No. 51. This
Interpretation addresses the consolidation by business enterprises of variable
interest entities as defined in the Interpretation. The Interpretation applies
immediately to variable interests in variable interest entities created after
January 31, 2003, and to variable interests in variable interest entities
obtained after January 31, 2003. The application of this Interpretation is not
expected to have a material effect on the Company's consolidated financial
statements. The Interpretation requires certain disclosures in consolidated
financial statements issued after January 31, 2003 if it is reasonably possible
that the Company will consolidate or disclose information about variable
interest entities when the Interpretation becomes effective.
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 is not expected to have a
material effect on the Company's consolidated financial statements.
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 is not expected to have a material effect
on the Company's consolidated financial statements.
24
ITEM 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company owned no derivative securities as of March 31, 2003. 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 March 31, 2003.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Response to this item is submitted in a separate section of this report
starting at Page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
None.
PART III
Part III of this Form 10-K is incorporated by reference from the registrant's
Proxy Statement for the Annual Meeting of Shareholders to be held on August 21,
2003.
ITEM 10. DIRECTOR AND EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers of the Company are as follows:
Name Age Position
Robert S. Wiggins 73 Chief Executive Officer,
Chairman of the Board
Jerry T. Kendall 52 President and Chief Operating Officer
as of April 17, 2003
Raymond H. Legatti 71 President through April 17, 2003 and
currently Senior Vice President
Raymond B. Wood 68 Senior Vice President of Government
Operations and Marketing
Scott J. Loucks 41 Vice President of Finance,
Chief Financial Officer
ROBERT S. WIGGINS has served as Chairman of the Board, Chief Executive Officer
and Director since March 1988. Additional biographical data on Mr. Wiggins may
be found in Section III of the Company's proxy statement.
JERRY T. KENDALL joined the Company on April 17, 2003 as its President and
Chief Operating Officer. Additional biographical data on Mr. Kendall may be
found in Section III of the Company's proxy statement.
25
RAYMOND H. LEGATTI, a founder of the Company, served as the Company's President
since the Company's inception in 1981 through April 2003. Mr. Legatti is
currently Senior Vice President and plans to retire on December 31, 2003.
Additional biographical data on Mr. Legatti may be found in Section III of the
Company's proxy statement.
RAYMOND B. WOOD, a founder of the Company, has served as the Senior Vice
President of Government Operations and Marketing since the Company's inception
in 1981. Additional biographical data on Mr. Wood may be found in Section III
of the Company's proxy statement.
SCOTT J. LOUCKS has served the Company in various capacities since March 1985.
Mr. Loucks performed the duties of Information Technology Manager for four
years, Controller for eight years and Vice President of Finance and Chief
Financial Officer since August 1996. Mr. Loucks has a Bachelor of Science
Degree in computer science and a minor degree in mathematics from Florida State
University. Mr. Loucks has also been a Director and the Secretary of the
Company's Honduran subsidiary, TRC/Honduras S.A. de C.V., since February 1997.
PART IV
ITEM 14. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures. The Company's chief
executive officer and chief financial officer, after evaluating the
effectiveness of the Company's "disclosure controls and procedures" (as defined
in Sections 13a-14(c) of the Securities Exchange Act of 1934) as of a date (the
"Evaluation Date") not more than 90 days before the filing date of this annual
report, have concluded that as of the Evaluation Date, the Company's disclosure
controls and procedures were effective and designed to ensure that material
information relating to the Company and its consolidated subsidiaries was
accumulated and would be made known to them by others within those entities as
appropriate to allow timely decisions regarding required disclosures.
Changes in Internal Controls. The Company does not believe that there are
significant deficiencies in the design or operation of its internal controls
that could adversely affect its ability to record, process, summarize and
report financial data. Although there were no significant changes in the
Company's internal controls or in other factors that could significantly affect
those controls subsequent to the Evaluation Date, the Company's senior
management, in conjunction with its Board of Directors, continuously reviews
overall policies and improves documentation of important financial reporting
and internal control matters. The Company is committed to continuously
monitoring, and as appropriate, improving the state of its internal controls,
corporate governance and financial reporting.
Limitations on the Effectiveness of Controls. The Company's management,
including its chief executive officer and chief financial officer, does not
expect that its internal controls will prevent all errors. A control system,
no matter how well conceived and operated, can provide only reasonable, not
absolute, assurance that the objectives of the control system are met.
Further, the design of a control system must reflect the fact that there are
resource constraints, and the benefits of controls must be considered relative
to their costs. Due to the inherent limitations of a cost-effective control
system, misstatements due to error or other factors may occur and not be
detected.
26
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)(1) Financial Statements
The following consolidated financial statements of Technology Research
Corporation and its subsidiary are included in Schedule I (i.e. indexes F-1
through F-18) attached herewith:
- Independent Auditors' Report
- Consolidated Balance Sheets as of March 31, 2003 and 2002
- Consolidated Statements of Operations for the years
ended March 31, 2003, 2002 and 2001
- Consolidated Statement of Stockholders' Equity for the years
ended March 31, 2003, 2002 and 2001
- Consolidated Statements of Cash Flows for the years
ended March 31, 2003, 2002 and 2001
- Notes to Consolidated Financial Statements
(a)(2) Financial Statement Schedules
The Valuation and Qualifying Accounts - Years ended March 31, 2003, 2002, and
2001 is included in Schedule II (i.e. index F-19) attached herewith:
All other schedules are omitted because they are not applicable or the required
information is shown in the financial statements or notes thereto.
(a)(3) Exhibits:
3.1 Articles of Incorporation and By-Laws*
3.2 Certificate of Amendment to the Articles of Incorporation, dated
September 24, 1990.***
3.3 Certificate of Amendment to the Articles of Incorporation, dated
September 24, 1996.***
(10) Material contracts:
10.1 License Agreement, dated as of January 1, 1985, between the
Company and Societe BACO, a French corporation, granting BACO a
non-exclusive right to manufacture the Company's GFCI products in
France, and the non-exclusive right to sell GFCI products other
than in North America.*
10.2 License Agreement between the Company and B & R Electrical
Products, Ltd., an English corporation ("B & R") dated January 1,
1985, granting B & R a limited exclusive license to manufacture
GFCI products within the United Kingdom and a non-exclusive
license to market other such products other than in North
America.*
27
10.3 License Agreement, dated as of January 8, 1987, between the
Company and HPM INDUSTRIES PTY LTD, an Australian corporation
("HPM"), granting to HPM an exclusive license to manufacture
and sell GFCI products in Australia, New Zealand, New Guinea,
Papua and Fiji.*
10.4 License Agreement, dated May 17, 1997, between the Company and
Yaskawa Controls Company, Ltd., a Japanese company, granting
Yaskawa an exclusive right to market and manufacture the Company's
products developed for use in electrical vehicle charging
systems.***
10.5 Sales and Marketing Agreement, dated May 17, 1997, between the
Company and Yaskawa Controls Company, Ltd., a Japanese company,
granting Yaskawa exclusive sales and marketing rights to the
Company's full line of commercial electrical protection devices,
including Fire Shield, Shock Shield and Electra Shield.***
10.6 License Agreement, dated February 16, 1999, between the Company and
Windmere-Durable Holdings, Inc. granting Windmere-Durable a non-
exclusive license to manufacture, have manufactured, use and
sell products that use the Company's Fire Shield cord set
technology.***
10.7 $3,000,000 Revolving Credit Agreement, dated December 14, 1999,
between the Company and SouthTrust Bank***
10.8 The 2000 Long Term Incentive Plan.***
10.9 License Agreement, dated March 24, 2002, between the Company and
Tecumseh Products Company granting use of the Company's Fire Shield
technology to be integrated into a protective product for
Refrigeration and Air Conditioning Systems against electric
faults.***
10.10 Amended Revolving Credit Agreement, dated November 12, 2002,
between the Company and its subsidiary and SouthTrust Bank,
extending the maturity date to December 14, 2004.*****
10.11 License Agreement with Applica Inc. (previously named Windmere-
Durable Holdings, Inc.), dated December 1, 2002, replacing the
Agreement dated December 31, 1999, between the Company and
Applica Inc. granting Applica Inc. an exclusive license to
manufacture, have manufactured, use and sell kitchen appliances
using the Company's Fire Shield safety circuit technology.*****
10.12 Employment Agreement, dated April 16, 2003, between the Company
and Jerry T. Kendall.*****
10.13 Technical Consulting Agreement, effective January 1, 2004, between
the Company and Raymond H. Legatti.*****
(23) Independent Auditors' Consent. *****
(99) Additional Exhibits:
99.1 Certification of Chairman and Chief Executive Officer pursuant to
18 U.S.C. Section 1350. *****
99.2 Certification of Vice President and Chief Financial Officer
pursuant to 18 U.S.C. Section 1350. *****
28
* Previously filed with and as part of the Registrant's Registration
Statement on Form S-1 (No. 33-24647).
** Previously filed with and as a part of the Registrant's Registration
Statement on Form S-1 (No. 33-31967).
*** Previously filed with and as part of the Registrant's Annual Report on
Form 10-K.
**** Previously filed with and as part of the Registrant's Post-Effective
Amendment No. 1 to Form S-1 (No. 33-31967)
***** Filed herewith.
(b) Reports on Form 8-K
No reports on Form 8-K have been filed by the registrant during the last
quarter of the fiscal year.
29
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
TECHNOLOGY RESEARCH CORPORATION
Dated: 6/17/2003 By: /s/ Robert S. Wiggins
--------- ----------------------
Robert S. Wiggins
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons in the capacities and on
the dates indicated:
Signature Title Date
/s/ Robert S. Wiggins Chairman, Chief Executive 6/17/2003
Robert S. Wiggins Officer, and Director
(Principal Executive Officer)
/s/ Scott J. Loucks Vice President of Finance and 6/17/2003
Scott J. Loucks Chief Financial Officer
(Principal Financial Officer)
/s/ Raymond B. Wood Senior Vice President 6/17/2003
Raymond B. Wood Government Operations
and Marketing and Director
/s/ Raymond H. Legatti Director and 6/20/2003
Raymond H. Legatti Senior Vice President
/s/ Gerry Chastelet Director 6/17/2003
Gerry Chastelet
/s/ Edmund F. Murphy, Jr. Director 6/17/2003
Edmund F. Murphy, Jr.
/s/ Martin L. Poad Director 6/17/2003
Martin L. Poad
30
CERTIFICATION
I, Robert S. Wiggins, certify that:
1. I have reviewed this annual report on Form 10-K of Technology Research
Corporation:
2. Based on my knowledge, this quarterly 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 annual
report;
3. Based on my knowledge, the financial statements and other financial
information included in this annual 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 annual 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-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures 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 annual report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, 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 in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: June 17, 2003
/s/ Robert S. Wiggins
Robert S. Wiggins
Chairman of the Board and
Chief Executive Officer
31
CERTIFICATION
I, Scott J. Loucks, certify that:
1. I have reviewed this annual report on Form 10-K of Technology Research
Corporation:
2. Based on my knowledge, this quarterly 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 annual
report;
3. Based on my knowledge, the financial statements and other financial
information included in this annual 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 annual 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-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures 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 annual report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, 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 in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: June 17, 2003
/s/ Scott J. Loucks
Scott J. Loucks
Vice President of Finance and
Chief Financial Officer,
32
TECHNOLOGY RESEARCH CORPORATION
AND SUBSIDIARY
Index
Schedule I
Page
Independent Auditors' Report F-1
Financial Statements:
Consolidated Balance Sheets F-2
Consolidated Statements of Operations F-3
Consolidated Statements of Stockholders' Equity F-4
Consolidated Statements of Cash Flows F-5
Notes to Consolidated Financial Statements F-6
Schedule
II Valuation and Qualifying Accounts for the Years Ended March 31,
2003, 2002 and 2001 F-19
Independent Auditors' Report
The Board of Directors and Stockholders
Technology Research Corporation:
We have audited the consolidated financial statements of Technology Research
Corporation and subsidiary as listed in the accompanying index. In connection
with our audits of the consolidated financial statements, we have audited the
financial statement schedule as listed in the accompanying index. These
consolidated financial statements and financial statement schedule are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these consolidated financial statements and financial statement
schedule based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Technology Research
Corporation and subsidiary as of March 31, 2003 and 2002, and the results of
their operations and their cash flows for each of the years in the three-year
period ended March 31, 2003, in conformity with accounting principles generally
accepted in the United States of America. Also in our opinion, the related
financial statement schedule, when considered in relation to the basic
consolidated financial statements taken as a whole, presents fairly, in all
material respects, the information set forth therein.
/s/ KPMG LLP
Tampa, Florida
May 2, 2003
F-1
TECHNOLOGY RESEARCH CORPORATION
AND SUBSIDIARY
Consolidated Balance Sheets
March 31, 2003 and 2002
Assets 2003 2002
Current assets: ---- ----
Cash and cash equivalents $ 2,529,562 1,163,099
Accounts receivable,
less allowance for doubtful accounts of
$44,902 in 2003 and $11,908 in 2002 (note 4) 2,772,825 2,516,603
Inventories (notes 2 and 4) 4,663,876 4,798,731
Prepaid expenses and other current assets 122,323 97,720
Deferred income taxes (note 5) 288,708 271,569
Income taxes receivable 19,766 -
---------- ----------
Total current assets 10,397,060 8,847,722
---------- ----------
Property, plant and equipment (notes 3 and 4) 9,777,497 9,493,313
Less accumulated depreciation 6,391,480 5,795,667
---------- ----------
Net property, plant and equipment 3,386,017 3,697,646
---------- ----------
Noncurrent deferred income taxes,net (note 5) - 162,861
Other assets 52,612 58,708
---------- ----------
$ 13,835,689 12,766,937
========== ==========
Liabilities and Stockholders' Equity
Current liabilities:
Trade accounts payable $ 1,052,817 551,300
Accrued expenses:
Compensation 313,749 228,210
Other 50,108 65,212
Dividends payable 96,781 68,804
Deferred income 10,525 -
---------- ----------
Total current liabilities 1,523,980 913,526
Debt (note 4) - 500,000
Deferred income 39,475 50,000
Noncurrent deferred income taxes, net (note 5) 195,604 -
---------- ----------
Total liabilities 1,759,059 1,463,526
---------- ----------
Stockholders' equity (note 6):
Common stock, $.51 par value. Authorized
10,000,000 shares; issued and outstanding
5,440,370 shares in 2003 and
5,437,497 share in 2002 2,785,554 2,784,088
Additional paid-in capital 7,528,194 7,526,472
Retained earnings 1,803,027 1,032,996
---------- ----------
12,116,775 11,343,556
Treasury stock, at cost - 21,500 shares (40,145) (40,145)
---------- ----------
Total stockholders' equity 12,076,630 11,303,411
Commitments and contingencies (notes 7 and 10)
$ 13,835,689 12,766,937
========== ==========
See accompanying notes to consolidated financial statements.
F-2
TECHNOLOGY RESEARCH CORPORATION
AND SUBSIDIARY
Consolidated Statements of Operations
Years ended March 31, 2003, 2002 and 2001
2003 2002 2001
Operating revenues: ---- ---- ----
Net sales (note 8) $ 17,641,142 16,517,431 17,805,411
Royalties 120,794 166,854 231,563
---------- ---------- ----------
17,761,936 16,684,285 18,036,974
---------- ---------- ----------
Operating expenses:
Cost of sales 11,896,230 12,096,800 13,904,256
Selling, general, and administrative 3,190,338 3,175,724 3,490,326
Research, development, and engineering 1,225,651 1,049,649 1,197,874
---------- ---------- ----------
16,312,219 16,322,173 18,592,456
---------- ---------- ----------
Operating income (loss) 1,449,717 362,112 (555,482)
---------- ---------- ----------
Other income (expense):
Interest and sundry income 7,483 12,629 58,947
Interest expense (1,153) (79,337) (135,519)
Loss on disposal of property,
plant and equipment (31,718) (933) (5,320)
---------- ---------- ----------
(25,388) (67,641) (81,892)
---------- ---------- ----------
Income (loss) before income taxes 1,424,329 294,471 (637,374)
Income taxes expense (benefit) (note 5) 409,538 94,111 (225,827)
---------- ---------- ----------
Net income (loss) $ 1,014,791 200,360 (411,547)
========== ========== ==========
Basic earnings (loss) per share $ 0.19 0.04 (0.08)
Diluted earnings (loss) per share $ 0.19 0.04 (0.08)
Weighted average number of common and
equivalent shares outstanding:
Basic 5,438,381 5,437,497 5,439,811
Diluted 5,482,450 5,457,896 5,439,811
See accompanying notes to consolidated financial statements.
F-3
TECHNOLOGY RESEARCH CORPORATION
AND SUBSIDIARY
Consolidated Statements of Stockholders' Equity
Years ended March 31, 2003, 2002 and 2001
Additional Total
Common stock paid-in Retained Treasury stockholders'
Shares Amount capital earnings stock equity
Balances at ------ ------ ------- --------- -------- ----------
March 31, 2000: 5,455,756 $ 2,782,435 7,528,473 1,679,150 - 11,990,058
Dividends - $.04 per share - - - (217,468) - (217,468)
Net loss - - - (411,547) - (411,547)
Exercise of stock
options via exchange
of 2,534 common shares
and cash of $(348) for
5,775 new common
shares 3,241 1,653 (2,001) - - (348)
Treasury stock,
at cost (21,500) - - - (40,145) (40,145)
--------- --------- --------- --------- -------- ----------
Balances at
March 31, 2001: 5,437,497 2,784,088 7,526,472 1,050,135 (40,145) 11,320,550
Dividends - $.04 per share - - - (217,499) - (217,499)
Net income - - - 200,360 - 200,360
--------- --------- --------- --------- -------- ----------
Balances at
March 31, 2002: 5,437,497 2,784,088 7,526,472 1,032,996 (40,145) 11,303,411
Dividends - $.045 per share - - - (244,760) - (244,760)
Net income - - - 1,014,791 - 1,014,791
Exercise of
stock options 2,873 1,466 1,722 - - 3,188
--------- --------- --------- --------- -------- ----------
Balances at
March 31, 2003: 5,440,370 $ 2,785,554 7,528,194 1,803,027 (40,145) 12,076,630
========= ========= ========= ========= ======== ==========
See accompanying notes to consolidated financial statements.
F-4
TECHNOLOGY RESEARCH CORPORATION
AND SUBSIDIARY
Consolidated Statements of Cash Flows
Years ended March 31, 2003, 2002 and 2001
2003 2002 2001
Cash flows from operating activities: ---- ---- ----
Net income (loss) $ 1,014,791 200,360 (411,547)
Adjustments to reconcile net income
(loss) to net cash provided by
(used in) operating activities:
Loss on disposal of equipment 31,718 933 5,320
Change in allowance for
doubtful accounts 32,994 (48,852) 12,561
Depreciation 857,374 897,236 800,977
Decrease (increase) in
accounts receivable (289,216) 897,066 (271,837)
Decrease (increase) in income
taxes receivable (19,766) 278,500 (201,900)
Decrease (increase) in inventories 134,855 1,553,543 (1,143,685)
Decrease (increase) in prepaid expenses
and other current assets (24,603) 36,011 (75,016)
Decrease (increase) in deferred
income taxes 341,326 127,442 (145,427)
Decrease (increase) in other assets 6,096 - 30,534
Increase (decrease) in deferred income - (23,530) (141,176)
Increase (decrease) in
trade accounts payable 501,517 (1,028,651) 774,609
Increase (decrease) in
accrued expenses 70,435 (47,374) (9,166)
--------- --------- ---------
Net cash provided by (used in)
operating activities 2,657,521 2,842,684 (775,753)
--------- --------- ---------
Cash flows from investing activities:
Capital expenditures for property,
plant and equipment (577,463) (397,604) (725,680)
--------- --------- ---------
Net cash used in
investing activities (577,463) (397,604) (725,680)
--------- --------- ---------
Cash flows from financing activities:
Net (repayments) borrowings under
line-of-credit agreement (500,000) (1,250,000) (750,000)
Acquisition of treasury stock - - (40,145)
Proceeds from exercise of
stock options and warrants 3,188 - (348)
Dividends paid (216,783) (216,753) (219,312)
--------- --------- ---------
Net cash used in
financing activities (713,595) (1,466,753) (1,009,805)
--------- --------- ---------
Net increase (decrease) in cash and
cash equivalents 1,366,463 978,327 (2,511,238)
Cash and cash equivalents at
beginning of year 1,163,099 184,772 2,696,010
--------- --------- ---------
Cash and cash equivalents at end of year$ 2,529,562 1,163,099 184,772
========= ========= =========
Supplemental cash flow information:
Cash paid for interest $ 1,153 79,337 139,761
Cash paid (received) for income taxes $ (226,393) (278,500) 121,500
See accompanying notes to consolidated financial statements.
F-5
TECHNOLOGY RESEARCH CORPORATION
AND SUBSIDIARY
Notes to Consolidated Financial Statements
March 31, 2003, 2002 and 2001
(1) Summary of Significant Accounting Policies
(a) Description of Business
Technology Research Corporation and subsidiary (the Company) is engaged in the
design, development, manufacturing, and marketing of electronic control and
measurement devices related to the distribution of electrical power and
specializes in electrical safety products that prevent electrocution,
electrical fires and protect against serious injury from electrical shock. The
Company's corporate headquarters are located in Clearwater, Florida. The
Company incorporated TRC Honduras, S.A. de C.V., a wholly owned subsidiary, for
the purpose of manufacturing the Company's high volume products in Honduras.
The Company primarily sells its products to original equipment manufacturers
involved in a variety of industries including business machinery and personal
care appliances and to governmental entities. The Company performs credit
evaluations of all new customers and generally does not require collateral.
Historically, the Company has experienced minimal losses related to receivables
from individual customers or groups of customers in any particular industry or
geographic area. The Company's customers are located throughout the world.
See note 8 for further information on major customers. The Company also
licenses its technology for use by others in exchange for a royalty or product
purchases. Licensees are located in Australia, France, Italy, Japan, the
United Kingdom and the United States.
(b) Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts 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.
(c) Financial Instruments
The Company believes the carrying value of its debt approximates fair value due
to its short-term nature and the variable interest rate at March 31, 2002.
(d) Principles of Consolidation
The consolidated financial statements include the financial statements of
Technology Research Corporation and its wholly owned subsidiary, TRC Honduras,
S.A. de C.V. All significant intercompany balances and transactions have been
eliminated in consolidation.
(e) Cash Equivalents
For purposes of the consolidated statements of cash flows, the Company
considers all short-term investments with a maturity of three months or less to
be cash equivalents.
F-6
TECHNOLOGY RESEARCH CORPORATION
AND SUBSIDIARY
Notes to Consolidated Financial Statements
March 31, 2003, 2002 and 2001
(f) 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 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.
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 upfront fees are recorded as deferred revenue and
recognized as income on a straight-line basis when earned, in accordance with
Staff Accounting Bulletin 101, Revenue Recognition in Financial Statements.
(g) Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of
In 2003, the Company accounts for long-lived assets in accordance with
Statement of Financial Accounting Standards (SFAS) No. 144, Accounting for
Impairment or Disposal of Long-Lived Assets. This statement requires that
long-lived assets be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to future net cash flows expected
to be generated by the asset. If the carrying amount of an asset exceeds its
estimated future cash flows, an impairment charge is recognized by the amount
by which the carrying amount of the asset exceeds the fair value of the asset.
This statement requires companies to separately report discontinued operations
and extends that reporting to a component of an entity that either has been
disposed of or is classified as held for sale. Assets to be disposed of are
reported at the lower of the carrying amount or fair value less costs to sell.
In 2002 and 2001, the Company accounts for long-lived assets in accordance with
SFAS No. 121, Accounting for Long-Lived Assets and for Long-Lived Assets to be
Disposed of. This statement requires that long-lived assets be reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. Recoverability of assets
to be held and used is measured by a comparison of the carrying amount of asset
to future net cash flows expected to be generated by the asset. If such assets
are considered to be impaired, the impairment to be recognized is measured by
the amount by which the carrying amount of the assets exceeds the fair value of
the assets. Assets to be disposed of are reported at the lower of the carrying
amount or fair value, less costs to sell.
F-7
TECHNOLOGY RESEARCH CORPORATION
AND SUBSIDIARY
Notes to Consolidated Financial Statements
March 31, 2003, 2002 and 2001
(h) Inventories
Inventories are stated at the lower of cost or market. Cost is determined
using the first-in, first-out method.
(i) Property, Plant, and Equipment
Property, plant, and equipment are stated at cost. Depreciation is calculated
on the straight-line method over the estimated useful lives of the assets.
(j) Income Taxes
Income taxes are accounted for under the asset and liability method. Deferred
tax assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases and operating
loss and tax credit carryforwards. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a change in tax
rates is recognized in income in the period that includes the enactment date.
(k) Stock-Based Compensation
The Company applies the intrinsic-value-based method of accounting prescribed
by Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock
Issued to Employees, and related interpretations including Financial Accounting
Standards Board (FASB) Interpretation No. 44, Accounting for Certain
Transactions Involving Stock Compensation, an Interpretation of APB Opinion No.
25, issued in March 2000, to account for its two incentive stock option plans.
Under this method, compensation expense is recorded on the date of grant only
if the current market price of the underlying stock exceeded the exercise
price. SFAS No. 123, Accounting for Stock-Based Compensation, established
accounting and disclosure requirements using a fair-value-based method of
accounting for stock-based employee compensation plans. As allowed by SFAS No.
123, the Company has elected to continue to apply the intrinsic-value-based
method of accounting described above, and has adopted only the disclosure
requirements of SFAS No. 123. The following table illustrates the effect on
net income if the fair-value-based method had been applied to all outstanding
and unvested awards in each period.
F-8
TECHNOLOGY RESEARCH CORPORATION
AND SUBSIDIARY
Notes to Consolidated Financial Statements
March 31, 2003, 2002 and 2001
2003 2002 2001
---- ---- ----
Net income (loss), as reported $ 1,014,791 200,360 (411,547)
Deduct total stock-based employee
compensation expense determined
under fair-value-based method
for all rewards, net of tax (104,598) (99,578) (104,296)
========= ========= ========
Pro forma net income $ 910,193 100,782 (515,843)
========= ========= ========
Income (loss) per common share:
As reported $ 0.19 0.04 (0.08)
Pro forma $ 0.17 0.02 (0.09)
Pro forma net income (loss) reflects only options granted after March 31, 1995.
Therefore, the full impact of calculating compensation costs for stock options
under SFAS No. 123 is not reflected in the pro forma net income (loss) amounts
presented above because compensation cost is reflected over the options'
vesting period of three to ten years, and compensation costs for options
granted prior to April 1, 1995 are not considered.
(l) Earnings (Loss) per Share
Basic earnings (loss) per share have been computed by dividing net income
(loss) by the weighted average number of common shares outstanding. Common
share equivalents included in the dilutive weighted average shares outstanding
computation represent shares issuable upon assumed exercise of stock options
which would have a dilutive effect in years where there is net income.
(m) Recently Issued Accounting Standards
In June 2001, FASB issued SFAS No. 143, Accounting for Asset Retirement
Obligations. 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 Company is required to adopt
SFAS No. 143 on April 1, 2003. Adoption of SFAS No. 143 did not have a
material effect on the consolidated financial statements.
In April 2002, the FASB issued SFAS No. 145, Rescission of FASB Statements
No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical
Corrections. SFAS No. 145 amends existing guidance on reporting gains and
losses on the extinguishment of debt to prohibit the classification of the gain
or loss as extraordinary, as the use of such extinguishments have become part
of the risk management strategy of many companies. SFAS No. 145 also amends
SFAS No. 13 to require sale-leaseback accounting for certain lease
modifications that have economic effects similar to sale-leaseback
transactions. The provisions of the Statement related to the rescission of
F-9
Statement No. 4 is applied in fiscal years beginning after May 15, 2002.
Earlier application of these provisions is encouraged. The provisions of the
Statement related to Statement No. 13 were effective for transactions occurring
after May 15, 2002, with early application encouraged. The adoption of SFAS
No. 145 did not have a material effect on the Company's consolidated financial
statements.
In June 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated
with Exit or Disposal Activities. SFAS No. 146 addresses financial accounting
and reporting for costs associated with exit or disposal activities and
nullifies Emerging Issues Task Force (EITF) Issue 94-3, Liability Recognition
for Certain Employee Termination Benefits and Other Costs to Exit an Activity.
The provisions of this Statement are effective for exit or disposal activities
that are initiated after December 31, 2002, with early application encouraged.
The adoption of SFAS No. 146 did not have a material effect on the Company's
consolidated financial statements.
In November 2002, the FASB issued Interpretation No. 45, Guarantor's Accounting
and Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness to Others, an interpretation of FASB Statements No. 5, 57 and 107
and a Rescission of FASB Interpretation No. 34. This Interpretation elaborates
on the disclosures to be made by a guarantor in its interim and annual
financial statements about its obligations under guarantees issued. The
Interpretation also clarifies that a guarantor is required to recognize, at
inception of a guarantee, a liability for the fair value of the obligation
undertaken. The initial recognition and measurement provisions of the
Interpretation are applicable to guarantees issued or modified after December
31, 2002 and did not have a material effect on the Company's consolidated
financial statements.
In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based
Compensation - Transition and Disclosure, an amendment of FASB Statement
No. 123. This Statement amends SFAS No. 123, Accounting for Stock-Based
Compensation, to provide alternative methods of transition for a voluntary
change to the fair value method of accounting for stock-based employee
compensation. In addition, this Statement amends the disclosure requirements
of SFAS No. 123 to require prominent disclosures in both annual and interim
financial statements. Certain of the disclosure modifications are required for
fiscal years ending after December 15, 2002 and are included in the notes to
these consolidated financial statements.
In January 2003, the FASB issued Interpretation No. 46, Consolidation of
Variable Interest Entities, an Interpretation of ARB No. 51. This
Interpretation addresses the consolidation by business enterprises of variable
interest entities as defined in the Interpretation. The Interpretation applies
immediately to variable interests in variable interest entities created after
January 31, 2003, and to variable interests in variable interest entities
obtained after January 31, 2003. The application of this Interpretation is not
expected to have a material effect on the Company's consolidated financial
statements. The Interpretation requires certain disclosures in consolidated
financial statements issued after January 31, 2003 if it is reasonably possible
that the Company will consolidate or disclose information about variable
interest entities when the Interpretation becomes effective.
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
F-10
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 is not expected to have a
material effect on the Company's consolidated financial statements.
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 is not expected to have a material effect
on the Company's consolidated financial statements.
(2) Inventories
Inventories at March 31, 2003 and 2002 consist of:
2003 2002
---- ----
Raw materials $ 3,020,076 3,130,889
Work in process 265,645 190,348
Finished goods 1,378,155 1,477,494
--------- ---------
$ 4,663,876 4,798,731
========= =========
Approximately 44% and 47% of inventories were located in Honduras at
March 31, 2003 and 2002, respectively.
(3) Property, Plant and Equipment
Property, plant and equipment at March 31, 2003 and 2002 consists of:
Estimated
2003 2002 useful lives
---- ---- ------------
Building and improvements $ 1,608,138 1,608,756 20 years
Machinery and equipment 8,169,359 7,884,557 5 - 15 years
--------- --------- ------------
$ 9,777,497 9,493,313
========= =========
Approximately 25% and 28% of property, plant and equipment is located in
Honduras at March 31, 2003 and 2002, respectively.
F-11
TECHNOLOGY RESEARCH CORPORATION
AND SUBSIDIARY
Notes to Consolidated Financial Statements
March 31, 2003, 2002 and 2001
(4) Debt
Debt at March 31, 2003 and 2002 consists of a $3,000,000 line of credit due in
December 2004 with an outstanding balance of zero and $500,000 at March 31,
2003 and 2002, respectively. Interest is based on LIBOR plus 175 basis points
3.03% and 3.78% at March 31, 2003 and 2002, respectively.
Borrowings under the line of credit are secured by all accounts receivable,
inventories, and property, plant, and equipment, and require the Company to
maintain certain financial ratios, minimum working capital and minimum tangible
net worth amounts. The Company was in compliance with these covenants at March
31, 2003.
(5) Income Taxes
The tax effects of temporary differences that give rise to significant portions
of the deferred tax assets and deferred tax liabilities at March 31, 2003 and
2002 are presented below:
2003 2002
---- ----
Deferred tax assets:
Accounts receivable, principally due to
allowance for doubtful accounts $ 16,165 4,287
Inventories, principally due to valuation
allowance for financial reporting purposes
and additional costs inventoried for
tax purposes 253,882 283,059
Accrued expenses, principally due to accrual
for financial reporting purposes 18,661 33,076
Charitable contribution carryover 12,790 -
Net operating loss carryforwards 20,341 270,048
Tax credit carryforwards 39,705 93,063
-------- --------
Total gross deferred tax assets 361,544 683,533
Less valuation allowance - 78,152
-------- --------
361,544 605,381
-------- --------
Deferred tax liabilities:
Property, plant and equipment, principally
due to differences in depreciation (268,440) (170,951)
-------- --------
Net deferred tax assets $ 93,104 434,430
======== ========
F-12
TECHNOLOGY RESEARCH CORPORATION
AND SUBSIDIARY
Notes to Consolidated Financial Statements
March 31, 2003, 2002 and 2001
Net deferred tax assets are included in the accompanying consolidated balance
sheets at March 31, 2003 and 2002 as:
2003 2002
---- ----
Deferred income taxes, current asset $ 288,708 271,569
Deferred income taxes, noncurrent asset - 162,861
Deferred income taxes, noncurrent liability (195,604) -
-------- --------
$ 93,104 434,430
======== ========
Management assesses the likelihood deferred tax assets will be realized which
is dependent upon the generation of taxable income during the periods in which
those temporary differences are deductible. Management considers historical
taxable income, the scheduled reversal of deferred tax liabilities, projected
future taxable income, and tax planning strategies in making this assessment.
Based upon the level of historical taxable income and projections for future
taxable income, management believes the Company will realize the benefits of
these deductible differences at March 31, 2003. The valuation allowance at
March 31, 2002 related to tax credit carryforwards which management expected to
expire unused.
At March 31, 2003, the Company has net operating loss carryforwards for state
income tax purposes of approximately $493,000, which are available to offset
future taxable income through 2022.
The Company has approximately $39,700 of alternate minimum tax credit
carryforward. This credit is not subject to an expiration date.
Income tax expense (benefit) for the years ended March 31, 2003, 2002,
and 2001 consists of:
2003 2002 2001
---- ---- ----
Current:
Federal $ 68,212 (33,331) (80,400)
State - - -
-------- -------- ---------
68,212 (33,331) (80,400)
-------- -------- ---------
Deferred:
Federal 312,071 117,247 (133,874)
State 29,255 10,195 (11,553)
-------- -------- ---------
341,326 127,442 (145,427)
-------- -------- ---------
$ 409,538 94,111 (225,827)
======== ======== =========
F-13
TECHNOLOGY RESEARCH CORPORATION
AND SUBSIDIARY
Notes to Consolidated Financial Statements
March 31, 2003, 2002 and 2001
Income tax expense (benefit) for the years ended March 31, 2003, 2002 and 2001
differs from the amounts computed by applying the Federal income tax rate of
34% to pretax income (loss) as a result of the following:
2003 2002 2001
---- ---- ----
Computed expected tax expense (benefit) $ 484,272 100,120 (216,707)
(Reduction) increase in income taxes
resulting from:
Foreign activity for which no
income tax has been provided (102,435) (17,691) (17,000)
State income taxes, net of
Federal income tax effect 19,309 6,525 (7,400)
Other 14,842 5,157 15,280
Change in valuation allowance (78,152) - -
Tax credits expired 71,702 - -
-------- -------- ---------
$ 409,538 94,111 (225,827)
======== ======== =========
The operating results of the foreign manufacturing subsidiary are not subject
to foreign tax since it is operating under a tax holiday for at least 20 years.
The foreign operations resulted in income of approximately $301,000 in 2003,
$44,000 in 2002, and $51,000 in 2001. No income taxes have been provided on
these results of operations.
The total amount of undistributed earnings of the foreign subsidiary for income
tax purposes was approximately $570,000 at March 31, 2003 and $269,000 at March
31, 2002. It is the Company's intention to reinvest undistributed earnings of
its foreign subsidiary and thereby indefinitely postpone its remittance.
Accordingly, no provision has been made for foreign withholding taxes or United
States income taxes which may become payable if undistributed earnings of the
foreign subsidiary was paid as dividends to the Company. It is not practicable
to calculate the unrecognized deferred tax liability on those earnings.
(6) Stock Options and Grants
The Company has two qualified incentive stock option plans, one performance-
incentive stock option plan, and one nonqualified stock option plan (the
Plans). Options granted under the Plans are granted to directors, officers and
employees at fair value and expire ten years after the date of grant. Except
for the performance incentive stock option plan, options granted under the
Plans generally vest over three years. Options granted under the performance
incentive stock option plan vest at the end of year ten but are subject to
accelerated vesting if certain targets are met. Options may be exercised by
payment of cash or with stock of the Company owned by the officer or employee.
During 2000, stockholders approved a Long Term Incentive Plan with an aggregate
of 300,000 shares reserved for this plan.
F-14
TECHNOLOGY RESEARCH CORPORATION
AND SUBSIDIARY
Notes to Consolidated Financial Statements
March 31, 2003, 2002 and 2001
Option transactions and other information relating to the Plans for the three
years ended March 31, 2003 are as follows:
Qualified Performance Non- Long-term
incentive incentive qualified incentive Weighted
stock stock stock stock average
option option option option exercise
plans plan plan Total price
------- ------- ------- --------- -------- --------
Outstanding at
March 31, 2000 152,260 300,000 54,434 - 506,694 3.67
Granted - - - 93,000 93,000 1.82
Exercised (5,207) - (568) - (5,775) 1.48
Canceled (4,001) - (5,700) - (9,701) 1.63
------- ------- ------- --------- --------
Outstanding at
March 31, 2001 143,052 300,000 48,166 93,000 584,218 3.41
Granted - - - 100,250 100,250 1.64
Canceled (8,968) (50,000) (1,500) (15,000) (75,468) 3.97
------- ------- ------- --------- --------
Outstanding at
March 31, 2002 134,084 250,000 46,666 178,250 609,000 3.07
Granted - - - 40,000 40,000 1.92
Canceled (3,000) - - - (3,000) 1.06
------- ------- ------- --------- --------
Outstanding at
March 31, 2003 131,084 250,000 46,666 218,250 646,000 3.01
------- ------- ------- --------- --------
Total number of options
available under
the plans 166,667 400,000 333,333 300,000 1,200,000
Exercisable at
March 31, 2003 124,567 - 46,666 130,422 301,655 1.68
Available for issue
at March 31, 2003 - 150,000 - 81,750 317,000
The per share weighted average fair value of stock options granted during 2003,
2002 and 2001 was $1.92, $1.64 and $1.82, respectively, on the date of grant
using the Black Scholes option pricing model, with the following assumptions:
(1) risk free interest rate - 1.00% to 6.26%, (2) expected life - 6.5 to 10.0
years, (3) expected volatility - 73% to 93%, and (4) expected dividends - 1.7%
to 5.8%.
The Company has also reserved 32,667 shares of its common stock for issuance to
employees or prospective employees at the discretion of the Board of Directors
of which 16,033 shares are available for future issue. There were no reserved
shares issued during the years ended March 31, 2003, 2002 or 2001.
F-15
TECHNOLOGY RESEARCH CORPORATION
AND SUBSIDIARY
Notes to Consolidated Financial Statements
March 31, 2003, 2002 and 2001
At March 31, 2003, the range of exercise prices and weighted average remaining
contractual life of options outstanding and exercisable was as follows:
Options Outstanding Options Exercisable
- ------------------------------------------------- ----------------------------
Number Weighted average Weighted Number Weighted
Range of outstanding remaining average exercisable average
exercise as of contractual exercise as of exercise
prices March 31, 2003 life(years) price March 31, 2003 price
- -------- -------------- -------------- --------- -------------- --------
$1.06-1.19 25,250 6.2 $ 1.10 25,250 $ 1.10
$1.20-1.64 208,500 6.5 1.59 163,317 1.61
$1.65-2.05 140,250 7.9 1.79 91,755 1.80
$2.06-2.74 17,000 9.2 2.30 16,333 2.31
$2.75-5.13 255,000 3.3 5.08 5,000 $ 2.75
-------------- -------------- --------- -------------- --------
646,000 5.6 $ 3.01 301,655 1.68
======= === ======== ======= =======
(7) Leases
The Company leases the land on which its operating facility is located. This
operating lease is for a period of 20 years through August 2001 with options to
renew for two additional ten-year periods. The Company utilized the first ten-
year option and extended the lease through August 2011. The lease provides for
rent adjustments every five years. The Company is responsible for payment of
taxes, insurance, and maintenance. In the event the Company elects to
terminate the lease, title to all structures on the land reverts to the lessor.
The Company's subsidiary leases its operating facility in Honduras. This
operating lease was for five years through the year 2002 and was extended in
2002 and 2003 for one additional year, respectively.
Future minimum lease payments under noncancelable operating leases as of
March 31, 2003 are:
Year ending March 31,
---------------------
2004 173,112
2005 24,612
2006 24,612
2007 24,612
2008 24,612
Thereafter 73,840
--------
Total minimum lease payments $ 345,400
========
Rental expense for all operating leases was approximately $182,000 in 2003,
$233,000 in 2002 and $241,000 in 2001.
F-16
TECHNOLOGY RESEARCH CORPORATION
AND SUBSIDIARY
Notes to Consolidated Financial Statements
March 31, 2003, 2002 and 2001
(8) Major Customers
The Company operates in one business segment - the design, development,
manufacture and marketing of electronic control and measurement devices for the
distribution of electric power. The Company only reports sales and standard
gross profit by market (commercial and military), no allocations of
manufacturing variances and other costs of operations or assets are made to the
markets. Sales by market are:
2003 2002 2001
---------- ---------- ----------
Commercial $ 10,254,998 10,276,165 12,117,588
Military 7,386,144 6,241,266 5,687,823
---------- ---------- ----------
$ 17,641,142 16,517,431 17,805,411
========== ========== ==========
Significant customers who accounted for 10 percent or more of sales and
aggregate exports were:
Year ended March 31
Customer 2003 2002 2001
-------- ---- ---- ----
Fermont (a division of ESSI, a U.S.
Government Prime Contractor) $ 3,937,999 3,855,593 4,305,101
========= ========= =========
Exports:
Canada $ 417,094 293,650 579,511
Far East 1,020,078 1,288,102 805,762
Europe 2,632,357 1,899,842 2,328,325
Mexico - 169,833 383,046
Australia 36,020 3,167 83,232
South America 6,484 6,458 13,784
Middle East 14,257 15,000 22,299
--------- --------- ---------
Total exports $ 4,126,290 3,676,052 4,215,959
========= ========= =========
(9) Benefit Plan
The Company's 401(k) plan covers all employees with one year of service who are
at least 21 years old. Through plan year 1999, the Company matched employee
contributions dollar-for-dollar up to $300. Effective for the 2000 plan year,
the board of directors approved an increase in the Company match up to $400.
Total Company contributions were approximately $21,700 in 2003, $26,700 in
2002, and $29,000 in 2001.
(10) Litigation
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.
F-17
TECHNOLOGY RESEARCH CORPORATION
AND SUBSIDIARY
Notes to Consolidated Financial Statements
March 31, 2003, 2002 and 2001
In November 2002, a civil complaint was filed against the Company and nine
other defendants in the United States District Court in and for the District of
Nevada. The compliant alleges infringement by each of the defendants of two
patents registered in the name of the plaintiff, in the case of the Company
arising out of its manufacture and sale of recreational vehicle voltage
monitors and controllers, and seeks injunctive relief, an accounting of past
profits generated from such sales, monetary damages and cost recoveries. The
Company has filed a general denial of plaintiff's claims and management
believes that the alleged infringement has not occurred. The Company is in the
final stages of settling this claim and the expected settlement amount is not
material to the Company's consolidated financial statements.
(11) Stock Repurchase Plan
On December 9, 1999, the Company's board of directors approved a plan for the
Company to buy back up to 500,000 shares of the Company stock on the open
market. Through fiscal year ended March 31, 2003, the Company has repurchased
21,500 shares at a cost of $40,145.
(12) Selected Quarterly Data (Unaudited)
Information (unaudited) related to operating revenue, operating income (loss),
net income (loss) and earnings per share, by quarter, for the years ended
March 31, 2002 and 2001 are:
First Second Third Fourth
quarter quarter quarter quarter
------- ------- ------- -------
Year ended March 31, 2003:
Operating revenues $ 3,855,318 3,968,816 4,582,284 5,355,518
========= ========= ========= =========
Gross profit $ 1,240,508 1,312,149 1,491,250 1,701,005
========= ========= ========= =========
Operating income $ 187,210 304,690 465,114 492,703
========= ========= ========= =========
Net income $ 129,455 206,131 311,963 367,242
========= ========= ========= =========
Basic earnings per share $ .02 0.04 0.06 0.07
========= ========= ========= =========
Diluted earnings per share $ .02 0.04 0.06 0.07
========= ========= ========= =========
First Second Third Fourth
quarter quarter quarter quarter
------- ------- ------- -------
Year ended March 31, 2002:
Operating revenues $ 4,107,353 4,870,671 3,724,728 3,981,533
========= ========= ========= =========
Gross profit $ 1,092,392 1,094,904 1,079,672 1,153,663
========= ========= ========= =========
Operating income $ 33,599 99,475 68,080 160,958
========= ========= ========= =========
Net income $ 2,090 56,158 43,269 98,843
========= ========= ========= =========
Basic earnings per share $ - .01 .01 .02
========= ========= ========= =========
Diluted earnings per share $ - .01 .01 .02
========= ========= ========= =========
F-18
TECHNOLOGY RESEARCH CORPORATION
AND SUBSIDIARY
Schedule II
Valuation and Qualifying Accounts
Years ended March 31, 2003, 2002 and 2001
Additions
----------------------
Balances at Charged to Charged to Balances
beginning costs and other at end of
Description of period expenses accounts Deductions period
- ----------- ---------- ---------- ---------- ---------- ---------
Allowance for
doubtful accounts:
Year ended
March 31, 2003 $ 11,908 33,001 - 7 44,902
Year ended
March 31, 2002 $ 60,760 19,761 - 68,613 11,908
Year ended
March 31, 2001 $ 48,199 126,105 - 113,544 60,760
F-19