-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, J7WNxwb9y+tWlG1NzVHrpTR1IJhIyYC8tMDrbj5W9WGJuL73eDrQqDHs406PePAh ca8CdDrk4ghx1hVYKEarbg== 0000741556-02-000007.txt : 20020627 0000741556-02-000007.hdr.sgml : 20020627 20020627093834 ACCESSION NUMBER: 0000741556-02-000007 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20020331 FILED AS OF DATE: 20020627 FILER: COMPANY DATA: COMPANY CONFORMED NAME: TECHNOLOGY RESEARCH CORP CENTRAL INDEX KEY: 0000741556 STANDARD INDUSTRIAL CLASSIFICATION: SWITCHGEAR & SWITCHBOARD APPARATUS [3613] IRS NUMBER: 592095002 STATE OF INCORPORATION: FL FISCAL YEAR END: 0331 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-13763 FILM NUMBER: 02688346 BUSINESS ADDRESS: STREET 1: 5250 140TH AVE NORTH CITY: CLEARWATER STATE: FL ZIP: 34620 BUSINESS PHONE: 8135350572 MAIL ADDRESS: STREET 1: 5250 140TH AVENUE NORTH CITY: CLEARWATER STATE: FL ZIP: 34620 10-K 1 k10fy2002.txt ANNUAL REPORT ON FORM 10-K 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, 2002 Commission file number 0-13763 TECHNOLOGY RESEARCH CORPORATION (Exact name of registrant as specified in its charter) Florida 59-2095002 (State or other jurisdiction of (I.R.S. Employer incorporation or Organization) Identification No.) 5250 140th Avenue North, Clearwater, Florida 33760 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (727) 535-0572 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. [ ] The aggregate market value of common stock held by non-affiliates of the Registrant, as of May 31, 2002 was $9,225,508, based upon the $1.93 closing sale price for the Common Stock on the NASDAQ National Market System on such date. For the purposes 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 such directors and officers are, in fact, affiliates of the Registrant. As of May 31, 2002, the number of shares outstanding of the Registrant's common stock, $.51 par value, was 5,437,497. DOCUMENTS INCORPORATED BY REFERENCE The Registrant's Proxy Statement related to its 2002 Annual Meeting of Shareholders to be held on August 22, 2002 will be incorporated by reference into Part III of this Form 10-K and be filed with the Securities and Exchange Commission no later than July 12, 2002. TABLE OF CONTENTS PART I Page Item 1. Business .................................................... 3 Item 2. Properties .................................................. 15 Item 3. Legal Proceedings ........................................... 16 Item 4. Submission of Matters to a Vote of Security Holders ..........16 Item 4a. Executive Officers of the Registrant ........................ 16 PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters ................................. 17 Item 6. Selected Financial Data ..................................... 18 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations ......................... 19 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 .......... 26 Item 11. Executive Compensation ...................................... 26 Item 12. Security Ownership of Certain Beneficial Owners and Management ....................................... 26 Item 13. Certain Relationships and Related Transactions .............. 26 PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K ..................................... 26 SIGNATURES ........................................................... 29 As used in this Annual Report on Form 10-K, "we", "our", "us", the "Company" and "TRC" refer to Technology Research Corporation and it 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 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 be assured that future results, levels of activity, performance or goals will be achieved, and the Company disclaims any obligation to revise any forward-looking statements subsequent to events or circumstances or the occurrence of unanticipated events. Part I ITEM 1. BUSINESS General Technology Research Corporation was incorporated in Florida in June 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, a segment with which the Company's founders had acquired substantial experience. As a result, the Company continues to use its expertise in designing and supplying power monitors and control equipment to the United States Military and its prime contractors. After establishing a military product base, the Company turned its efforts to the commercial markets based on the founder's expertise in ground fault sensing technology. This "core" technology led to the development of products that sense dangerous power leakage from appliances, tools and other electric devices and then immediately cut off the power before this leakage can cause a fire, electrocution or serious injury from electrical shock. The Company has become a worldwide-recognized leader in the design and supply of portable electrical safety products for the commercial marketplace. Until the year ended March 31, 1989, a majority of the Company's revenues were derived from sales of military products. The Company believes that its success in the design of ground fault sensing products forms the basis for the Company's greatest potential for future growth. -3- Net sales contributed by commercial and military products are as follows: Year Ended March 31 Commercial % Military % Total -------- ---------- ---- -------- ---- ---------- 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 1998 13,434,352 74.2 4,667,433 25.8 18,101,785 Royalties from license agreements are as follows: Year Ended March 31 Royalties -------- --------- 2002 $ 166,854 2001 231,563 2000 126,121 1999 91,295 1998 329,166 The Company's backlog of unshipped orders at March 31, 2002 was approximately $3.9 million. This backlog consists of approximately 65% commercial product orders and approximately 35% military product orders, all of which is expected to ship within Fiscal Year 2003. 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") classifica- tions 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. The Company's ALCI devices are intended to be used in conjunction with an electrical appliance 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) and is less than that required to operate the over-current protection device of the circuit. ALCIs are intended 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 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. In addition, on January 13, 2000, the Company announced its Fire Shield Home Wiring System at the International Home Builders' Show in Dallas, Texas. The purpose of this system is to continuously monitor the integrity of the installed household wiring and alert the home owner, in advance, of potentially dangerous electrical wiring conditions that could lead to fires. The latest annual statistics from the CPSC indicate that extension cords, 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'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 until recently, UL had not updated its standard enforcing this change. 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 enforcing on the industry the requirement for GFCI technology. The revised standard UL 1776 requiring the use of GFCIs for UL listed sprayer/washers has been issued, and the effective date for compliance was 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. On January 1, 1991, a NEC requirement became effective that requires a protective device to be incorporated into hair dryers to protect users from possible electrocution. In response to this NEC change, the Company developed a smaller GFCI plug that incorporates its patented GFCI/ALCI technology. 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, are projected to make this a viable market in the year 2003. And recently, on July 13, 2001, the NEC added the requirement for cord fire prevention on room air conditioners into the 2002 National Electric Code, which became effective on August 2, 2001. 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 would provide manufacturers of room air conditioners with the best solution for this new requirement. The next step in the implementation process will be for UL to finalize the product standard for this requirement. These events create an approximate $60 million a year market for its participants. The Company believes it could realize significant revenues from this opportunity starting in Fiscal Year 2004. -6- The Company currently manufactures and markets various portable GFCI, ALCI 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 many independent retailers through distributors. The Company's products are also being offered through magazines, catalogs and E-commerce retailers. 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 are for the purpose of market penetration into those areas where it would be difficult for the Company to compete on a direct basis. On December 31, 1999, the Company entered into a new license agreement(the "Agreement") with Applica Inc. (previously named Windmere-Durable Holdings, Inc. ), which replaces its initial license agreement. 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. hair dryers and curlers, irons, food mixers, toasters and toaster ovens and numerous other items), most of which are sold both domestically and internationally. The Agreement authorizes Applica Inc. to use the Company's extended Fire Shield technology to detect fires and electrical shock in toasters and toaster ovens manufactured by Applica Inc. under the Black & Decker(R) brand name. The Agreement called for an up front payment plus a royalty payment for each unit manufactured using the Company's Fire Shield technology. The Company's proprietary extended Fire Shield technology enables Applica Inc. to provide its customers an unparalleled degree of safety for toasters and toaster ovens. The Fire Shield technology includes the ability to detect an open flame in toasters or toaster ovens, or insulation/dielectric failure due to build up of grease or other substances, and disconnect the power 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 that the Company's Fire Shield technology will be incorporated as part of the Advanced Safety Technology(TM) ("AST") system that is designed into their new line of Black & Decker(R) heaters and toasters. 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. This Agreement converted automatically from an exclusive to non-exclusive agreement on March 1, 2002 thus allowing the Company to market this technology to other potential customers. On June 4, 2002, the Company announced it signed a cross license 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 -7- 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 January 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. The Tecumseh Products Company is a full line global manufacturer of hermetic compressors for air conditioning and refrigeration products. 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 Safety Circuit - an OEM product; (2) the Fire Shield Power Cord - an OEM product; (3) the Fire Shield Safety Extension Cord - a consumer product; (4) the Fire Shield Power Surge Strip - 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. Military Products and Markets 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 seventh 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 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. Spare parts orders from the military were stronger in Fiscal Year 2002 at $1.6 million compared to $.9 million in Fiscal Year 2001 primarily as a result of increased fielding of existent generator systems. In late 1989, the Company completed the redesign of the control equipment related to the Tactical Quiet Generator ("TQG") Systems program and provided prototype units to a prime contractor for testing, which was completed in the -8- third fiscal quarter of Fiscal Year 1992. Subsequently, the Company received production orders for these products from the U.S. Government's prime contractor in the approximate amount of $12.4 million covering the time period from August 1992 to July 1998. All deliveries have been completed under these contracts. The new contract that has been awarded by the U.S. Government for 5/10/15KW TQG Systems to the prime contractor is for a 10-year period with the last ordering period year being 2007. The Company completed shipments under the first production release, valued at $1.9 million, in the fourth quarter of Fiscal Year 1999, under the second production release, valued at $1.2 million, in the fourth quarter of Fiscal Year 2001 and under the third release, valued at $1.0 million in the fourth quarter of Fiscal Year 2002. Shipments under the fourth release, valued at approximately $.4 Million, commenced in May 2002. The estimated value of this 10-year contract for the Company for its 5/10/15KW control equipment is approximately $8.2 million. In November 1998, the Company received orders in the amount of approximately $6.0 million for its control equipment for the new 3KW TQG systems. After first article testing was completed by the U.S. Government's prime contractor, the Company's first production release valued at $2.8 million was shipped in Fiscal Year 2001. Shipments under the second and final production releases valued at $1.5 and 1.7 million, respectively, were shipped in Fiscal Year 2002. 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 the first production release of this new contract in May 2002, valued at $1.0 million. The Company expects to begin shipments under the second production release, valued at $2.7 million, in October 2002. The Company continues to furnish various types of electrical power monitors for military Naval shipboard requirements. The monitors are used on all classes of Naval surface vessels, such as minesweepers, destroyers, guided missile cruisers and aircraft carriers in addition to other types of Naval vessels. The monitors are furnished for new vessel production, retrofit upgrades and existent vessels requiring spare support parts. These devices include A.C. power monitor assemblies (which provide system protection and status display on on-board computers), generator voltage regulators, power transformers, A.C. over current and short circuit protection monitor assemblies and current sensing transformers. All of these products have met the high shock and vibration and endurance testing requirements during both highly accelerated stress screening tests and vehicle road testing at the Aberdeen Proving Grounds of the United States Department of Defense. 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. -9- 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 portable GFCI devices. All of the Company's GFCI devices will need to be re-tested and re-certified by January 1, 2003, according to the present UL timetable. The re-certification will test for 1) expanded surge requirements, 2) new requirements for moisture and corrosion, and 3) new requirements for reverse line-load miss wiring. The risk to the Company is that certain products may not be certified by the January 1, 2003 deadline thereby impacting sales of those products until re-certification is completed. 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 would 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; is an approved supplier to Xerox Corporation; and has 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 which 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. -10- The business of an electronics manufacturer, such as the Company, primarily involves assembly of component parts. The only products which the Company manufactures from raw materials consists of its transformers and magnetic products. The manufacture of such products primarily involves the winding of wire around magnetic steel cores. Recently, in an effort to lower cost by vertical integration, the Company also molds its own plastic parts for its commercial product lines at its manufacturing facility in Honduras. The remainder of the products which the Company manufactures are 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 subsidiary of Technology Research Corporation, 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 lease is for a term of five years with an option to extend the lease for another five years. 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 twenty-year Honduran federal income tax holiday and a ten- year Honduran municipal income tax holiday for any profits generated by the Company's Honduran subsidiary, and various other benefits. As a result of increasing labor costs in Honduras, the Company is implementing a plan to move approximately 30-40% of its Honduran production to an wholly- owned subsidiary of Applica Inc., Durable Electrical Metal Factory ("Durable"), 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 Durable to manufacture the majority of subassembly boards which will then be shipped to Honduras for final assembly. Durable will also build finished product for those customers that have operations already in China. The Company recently received its first shipment of subassembly boards from Durable, which are currently being evaluated for workmanship and quality. The Company expects to receive production quantities sometime during the second quarter ending September 2002. 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 The Company's President, Mr. Legatti, has designed and the Company has been issued six patents in the U.S. and Great Britain, three patents in Italy, two patents in Australia, Germany and France and one patent in Canada, Sweden and Japan with respect to its portable GFCI and Fire Shield technologies. Several other patent applications have been filed by the Company and are awaiting action, which 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 running from January 1986. 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. -11- The life of certain patents will be expiring within the next few years, and 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. The Company 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. 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. 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 label. 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. -12- 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 world-wide 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. Major Customers and Exports Individual customers and aggregate exports which accounted for 10% or more of sales were: Year ended March 31 Customer 2002 2001 2000 -------- ---- ---- ---- Xerox Corporation $ 275,448 723,982 1,266,613 Noma Appliance & Electric, Inc. Noma Appliance, Inc. f/k/a Fleck Manufacturing, Inc. (a Xerox Corporation supplier) 281,011 531,835 954,288 Other Xerox suppliers 263,704 299,596 987,424 Fermont (a division of ESSI, a U.S. Government Prime Contractor) 3,855,593 4,305,101 2,115,722 --------- --------- --------- $ 4,675,756 5,860,514 5,324,047 ========= ========= ========= Exports: Canada $ 293,650 579,511 1,342,365 Far East 1,288,102 805,762 198,026 Europe 1,899,842 2,328,325 3,243,918 Mexico 169,833 383,046 563,550 Australia 3,167 83,232 218,746 South America 6,458 13,784 12 430 Middle East 15,000 22,299 5,281 --------- --------- --------- Total exports $ 3,676,052 4,215,959 5,584,316 ========= ========= ========= Overall, the Company's exports were down approximately 13% in Fiscal Year 2002, compared to the Company's prior fiscal year, due to Xerox Corporation and its suppliers whose sales were down from the previous fiscal year by approximately $735,250. Xerox and its suppliers accounted for approximately 5% of the Company's sales for Fiscal Year 2002, compared to approximately 9% for the prior fiscal year. Excluding Xerox, exports to the Company's international OEM customers were also down for Fiscal Year 2002, compared to the Company's prior fiscal year, due to the weakness in the overall global economy. -13- 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 2002, military sales were approximately 38% of total sales, compared to 32% in the prior year. Although sales to Fermont were down approximately 10%, compared to prior year, overall military increased approximately 9% 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 23% of the Company's sales for Fiscal Year 2002, compared to approximately 24% for the prior fiscal year. Orders from Fermont related to the 5/10/15 KW TQG systems were significantly weaker in Fiscal Year 2002, compared to the prior year, due to the buy cycle and demand for such systems by the military. The Company has no relationship with any of its customers except as a supplier of product. 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, a retractable ground pin 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, 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. -14- 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 $1,049,649 in Fiscal Year 2002, $1,197,874 in Fiscal Year 2001 and $1,035,994 in Fiscal Year 2000 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 constant in the new fiscal year. Employees As of March 31, 2002, the Company employed 80 persons on a full time basis, and of that total, 46 employees were engaged in manufacturing operations, 12 in engineering, 11 in marketing and 11 in administration. The Company's Honduran subsidiary employed 210 persons on a full time basis as of March 31, 2002, and of that total, 207 employees were engaged in manufacturing operations and 3 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. 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. This lease terminated in March 2002, and the Company has renewed its lease with ZIP San Jose for another year. -15- 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. 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, 2002. ITEM 4a. EXECUTIVE OFFICERS OF THE REGISTRANT Name Age Position Robert S. Wiggins 72 Chief Executive Officer, Chairman of the Board Raymond H. Legatti 70 President Raymond B. Wood 67 Senior Vice President of Government Operations and Marketing Scott J. Loucks 40 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. RAYMOND H. LEGATTI, served as the Company's President since the Company's inception in 1981. Additional biographical data on Mr. Legatti may be found in Section III of the Company's proxy statement. RAYMOND B. WOOD, 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 4 years, of Controller for 8 years and of 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. -16- 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 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, 2002, 2001 and 2000 as reported by NASDAQ. Market Price Cash Fiscal Year Ended High Low Dividends March 31, 2002: First Quarter $ 2.000 $ 1.313 $ 0.01 Second Quarter 1.900 1.302 0.01 Third Quarter 2.420 1.400 0.01 Fourth Quarter 1.890 1.280 0.01 $ 0.04 March 31, 2001: First Quarter $ 2.563 $ 1.500 $ 0.01 Second Quarter 3.938 1.813 0.01 Third Quarter 3.063 1.375 0.01 Fourth Quarter 2.094 1.188 0.01 $ 0.04 March 31, 2000: First Quarter $ 2.000 $ 0.938 $ - Second Quarter 1.875 1.156 .01 Third Quarter 1.500 0.625 .01 Fourth Quarter 4.500 1.250 .01 ----- $ .03 As of May 31, 2002, the approximate number of the Company's shareholders was 466. This number does not include any adjustment for shareholders owning common stock in the Depository Trust name or otherwise in "Street" name, which the Company believes represent an additional 1,700 shareholders. The Company's authorized capital stock, as of May 31, 2002, consisted of 10,000,000 shares of authorized common stock, par value $.51, of which 5,437,497 shares were issued and outstanding. On August 30, 1999, the Company re-instituted its quarterly dividend policy at $.01 per share with a annual cash dividend rate of $.04 per share. The Company paid dividends of $.04 per share in Fiscal Year 2002, $.04 per share in Fiscal Year 2001 and $.03 per share in Fiscal Year 2000. -17- ITEM 6. SELECTED FINANCIAL DATA 2002 2001 2000 1999 1998 ---- ---- ---- ---- ---- Year ended March 31: Operating revenues $ 16,684,285 18,036,974 16,837,725 17,211,014 18,430,951 Gross profit $ 4,420,631 3,901,155 5,124,543 4,078,461 4,836,280 Net income (loss) $ 200,360 (411,547) 585,755 15,892 (196,314) Basic earnings per share $ .04 (.08) .11 - (.04) Weighted average number of common shares outstanding 5,437,497 5,439,811 5,455,756 5,455,756 5,332,571 Diluted earnings per share $ .04 (.08) .11 - (.04) Weighted average number of common and equivalent shares outstanding 5,457,896 5,439,811 5,473,220 5,476,134 5,332,571 Cash dividends Paid $ .04 .04 .03 - .18 March 31: Working capital $ 7,934,196 8,898,697 10,267,576 6,899,677 6,875,679 Total assets $ 12,766,937 15,156,548 15,990,625 15,146,175 15,746,818 Current liabilities $ 913,526 2,012,335 1,366,382 3,521,949 4,243,200 Long-term debt $ 500,000 1,750,000 2,500,000 56,250 131,250 Total liabilities $ 1,463,526 3,835,998 4,000,567 3,578,199 4,374,450 Retained earnings $ 1,032,996 1,050,135 1,679,150 1,257,068 1,241,176 Total stockholders' equity $ 11,303,411 11,320,550 11,990,058 11,567,976 11,372,368 -18- ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Critical Accounting Policies The Company's critical accounting policies are as follows: (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. 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 $218,504, of that inventory considered to be obsolete and 50%, or $406,097, 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, 2002, the Company inventory reserve was $624,601 or approximately 13% 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 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 financial statements. -19- Operating Results Fiscal Years 2002 and 2001 Comparison The Company's operating revenues (net sales and royalties) 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 were $.04 per share for Fiscal Year 2002, compared to a loss of $(.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 $1,823,903, of which $735,250 was attributed to Xerox and its suppliers. Royalty income decreased by $64,709, and military sales increased by $535,923. 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. On December 13, 2000, the Company announced that its Board of Directors 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 is now moving forward with a plan to expand its commercial business through product development. Recent events related to this plan are as follows: (1) on February 7, 2002, the Company announced its Surge Guard Plus (TM) Recreational Vehicle Power Monitor, a microprocessor based power monitor for the recreational vehicle market; (2) on March 26, 2002, the Company announced its line of Fire Shield surge protected power strips targeted for retail sales; (3) on June 3, 2002, the Company announced its cross license agreement with Tecumseh Products Company, who has developed a protection system using the Company's Fire Shield technology for Refrigeration and Air Conditioning Systems. On April 16, 2002, the Company announced the promotion of Rick O'Neal to Vice President of Fire Shield Sales and Marketing to focus specifically on those markets related to the Company's Fire Shield technology and product lines since it represents such a major growth opportunity for the Company. One such market revolves around the mandate requiring cord fire protection on room air conditioners, beginning in 2004, which creates a potential $60 million a year market opportunity for the participants. 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. Although the Company has repaired the majority of the product in question, additional warranty repair expense is expected to continue, although to a lesser degree, throughout the first half of Fiscal Year 2003. -20- 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 Line of Credit. Income tax (benefit) expense 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 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. Fiscal Years 2001 and 2000 Comparison The Company's operating revenues (net sales and royalties) for the year ended March 31, 2001 totaled $18,036,974, compared to $16,837,725 reported in the previous year ended March 31, 2000, an increase of approximately 7%. The Company had a net loss of $411,547 for Fiscal Year 2001, compared to net income of $585,755 for Fiscal Year 2000. Basic and diluted losses were $(.08) per share for Fiscal Year 2001, compared to basic and diluted earnings of $.11 per share for Fiscal Year 2000. The increase in revenues for the Company's Fiscal Year 2001, compared to Fiscal year 2000, was due to higher military sales of $1,777,366 resulting from Inverters being shipped under the new 3KW Tactical Quiet Generator (TQG) program in addition to its core spare parts and 5/10/15/30/60KW TQG business. Total commercial sales were down $683,559, primarily as a result of lower sales to Xerox and its suppliers. Commercial sales, other than Xerox, were up $987,009 for the fiscal year. Royalty income was up $105,442 in Fiscal Year 2001 as a result of the licensing agreement with Applica Inc., formerly Windmere-Durable Holdings Inc. -21- Significant factors for the Company's loss in Fiscal Year 2001 include the following: first, the Company experienced manufacturing inefficiencies throughout its second and third quarters during the startup of two new product lines; second, the Company recorded severance expenses of approximately $125,000 related to reductions in its workforce at both the Company's Clearwater and Honduras facilities in its fourth quarter; third, the Company recorded an inventory write-off of approximately $150,000 in its fourth quarter to reserve for material associated with a discontinued commercial product line; fourth, the Company's labor cost increased approximately 35% in Honduras during its third quarter as a result of a government mandated increase in minimum wage; fourth, the Company incurred rework costs associated with engineering design changes implemented to bring certain international products up to specification with a new standard; and fifth, higher than expected initial costs of manufacturing the Inverter for the new military 3KW TQG program. The Company made progress in lowering the labor cost of the Inverter in Fiscal Year 2001, and by negotiating better purchase prices for supplied materials, the Company realized the benefit of reduced material cost in the next production phase as well, which started in June 2001. The Company's gross profit margin was approximately 22% of net sales for Fiscal Year 2001 compared to 31% in the prior year, primarily due to those reasons stated above as significant factors in the Company's loss for Fiscal Year 2001. Selling, general and administrative expenses for Fiscal Year 2001 were $3,490,326, compared to $3,301,640 for the prior year, an increase of approximately 6%. Selling expenses were $2,008,092 for Fiscal Year 2001, compared to $1,863,656 for the prior year, an increase of approximately 8%, reflecting an increase in health insurance costs of $68,744, advertising costs of $77,223, commissions to outside sales reps of $43,995 and a reduction of $45,526 in other expenses. General and administrative expenses were $1,482,234 for Fiscal Year 2001, compared to $1,437,984 for the prior year, an increase of approximately 3%, primarily due to a $43,342 write-off of an accounts receivable. Research, development and engineering expenses for Fiscal Year 2001 were $1,197,874, compared to $1,035,994 for the prior year, an increase of approximately 16%, reflecting an increase in salary related expenses of $94,840, UL expenses of $59,755, health insurance costs of $24,288 and a reduction of $17,003 in other expenses. Interest expense, net of interest and sundry income, for Fiscal Year 2001 was $76,572, compared to $92,041 for the prior year, reflecting lower interest rates and the Company using less of its Line of Credit. Income tax (benefit) expense for the years ended March 31, 2001 and 2000 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 $51,000 in 2001 and $221,000 in 2000, 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 $225,000 at March 31, 2001 and $174,000 at March 31, 2000. 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 -22- subsidiary was paid as dividends to the Company. It is not practicable to calculate the unrecognized deferred tax liability on those earnings. Liquidity and Capital Resources As of March 31, 2002, the Company's cash and cash equivalents increased to $1,163,099 from the March 31, 2001 total of $184,772. The increase in cash was due to cash provided by operating activities of $2,842,684, offset to some extent, by cash used for investing activities of $397,604 and cash used in financing activities of $1,466,753, totaling $978,327. Cash provided by operating activities was primarily due to net income of $200,360, depreciation in the amount of $897,236 and a decrease in accounts receivable, inventory and income taxes receivable of $848,214, 1,553,543 and $278,500, respectively, offset to some extent by accounts payable decreasing by $1,028,651. The decrease in accounts payable was the result of the Company improving the timeliness of payments to suppliers. Accounts receivable decreased primarily as a result of lower shipments in the quarter compared to the fourth quarter ended March 31, 2001. The decrease in inventory was the result of the Company moving all material planning to its Clearwater facility thus eliminating that function at its Honduran subsidiary. In addition, an Inventory Action Committee was created within the Company in March 2001 to closely monitor inventory purchases and implement an aggressive material planning strategy to ensure inventory levels reflect changes in demand. Cash used in financing activities was primarily due to the Company paying down its line of credit by $1,250,000 plus dividends paid in the amount of $216,753, totaling $1,466,753. Cash used in investing activities of $397,604 was related to purchases of capital equipment only. Purchases of capital equipment in Fiscal Year 2001 and Fiscal Year 2000 were $725,680 and $548,122, respectively. On December 24, 2001, the Company renewed its $3,000,000 revolving credit loan with its institutional lender, extending the maturity date to December 14, 2003. The Company has the option of borrowing at the lender's prime rate of interest minus 25 basis points or the 30-day London Interbank Offering Rate (L.I.B.O.R.) plus 175 basis points. The Company is currently using the L.I.B.O.R. option. The loan is collateralized with a perfected first security interest on all of its accounts receivable and inventories, and a blanket security interest on all of its assets. The Company continues to operate well within all the covenants of the loan agreement. The Company's debt from advances on its new line of credit was $500,000 as of March 31, 2002, compared to $1,750,000 as of March 31, 2001. The Company has no off-balance sheet arrangements and no debt relationships other than what is noted above. The Company's working capital decreased by $964,501 to $7,934,196 at March 31, 2002, compared to $8,898,697 at March 31, 2001. The decrease was primarily due to the Company's reduction of inventory and its line of credit, as noted above. 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. -23- The Company's earnings before interest, income taxes, depreciation and amortization ("EBITDA") was $1,651,781, or $.30 per share, for Fiscal Year 2002, compared to $610,279, or $.11 per share, for the Fiscal Year 2001. The Company wishes to present its EBITDA results as an indication of its liquidity and should not be interpreted as earnings. The fourth quarter dividend of $.01 per share was paid on April 26, 2002 to shareholders of record on March 31, 2002. The Company paid $.04 per share for Fiscal Year 2002. New Accounting Standards In July 2001, the FASB issued SFAS No. 141, "Business Combinations," and SFAS No. 142, "Goodwill and Other Intangible Assets". SFAS 141 requires that all business combination initiated after June 30, 2001, be accounted for using the purchase method. SFAS 142 will require that goodwill and intangible assets with indefinite useful lives no longer be amortized, but instead tested for impairment at least annually in accordance with the provisions of SFAS 142. SFAS 142 will also require that intangible assets with definite useful lives be amortized over their respective estimated useful lives to their estimated residual values, and reviewed for impairment in accordance with SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets To Be Disposed Of." The Company is required to adopt the provisions of SFAS 141 immediately, and SFAS 142 effective April 1, 2002. The adoption of SFAS 141 had no effect on the consolidated financial statements. In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations", which addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. The standard applies to legal obligations associated with the retirement of long-lived assets that result from the acquisition, construction, development and(or) normal use of the asset. Statement No. 143 requires that the fair value of a liability for an asset retirement obligation be recognized in the period in which it is incurred if a reasonable estimate of fair value can be made. The fair value of the liability is added to the carrying amount of the associated asset and this additional carrying amount is depreciated over the life of the asset. The liability is accreted at the end of each period through charges to operating expense. If the obligation is settled for other than the carrying amount of the liability, the Company will recognize a gain or loss on settlement. The Company is required and plans to adopt the provisions of Statement No. 143 for fiscal years beginning after June 2002. To accomplish this, the Company must identify all legal obligations for asset retirement obligations, if any, and determine the fair value of these obligations on the date of adoption. The determination of fair value is complex and will require the Company to gather market information and develop cash flow models. Additionally, the Company will be required to develop processes to track and monitor these obligations. The Company does not expect the adoption of SFAS 143 to have a material impact on the consolidated financial statements. On October 3, 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets", which addresses financial accounting and reporting for the impairment or disposal of long-lived assets. SFAS 144 supersedes SFAS 121; however, it retains many of the fundamental provisions of that Statement. SFAS 144 also supersedes the accounting and reporting provisions of APB Opinion No. 30, "Reporting the Results of Operations-Reporting the Effects of Disposal of a Segment of a Business, and -24- Extraordinary, Unusual and Infrequently Occurring Events and Transactions", for the disposal of a segment of a business. However, it retains the requirement in Opinion No. 30 to report separately discontinued operations and extends that reporting to a component of an entity that either has been disposed of (by sale, abandonment, or in a distribution to owners) or is classified as held for sale. By broadening the presentation of discontinued operations to include more disposal transactions, the FASB has enhanced managements' ability to provide information that helps financial statement users to assess the effects of a disposal transaction on the ongoing operations of an entity. The Company is required to adopt the provisions of SFAS 144 on April 1, 2002, and the adoption of SFAS 144 is not expected to have any effect on the consolidated financial statements. ITEM 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company's exposure to market risk for changes in interest rates relates primarily to the Company's debt obligations due to its variable LIBOR pricing. Accordingly, a 1% change in LIBOR will result in an interest expense change of approximately $5000. 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. -25- 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 22, 2002. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (A) 1. Consolidated Financial Statements of Technology Research Corporation: See index on next page. 2. The following Consolidated Financial Schedules for the years ended March 31, 2002, 2001, and 2000 are submitted herewith: See index on next page. All other schedules are omitted because they are not applicable or the required information is shown in the financial statements or notes thereto. 3. Exhibits included herein: Inserted after Financial Statements. (B) Reports on Form 8K No reports on Form 8K have been filed by the registrant during the last quarter of the fiscal year. -26- TECHNOLOGY RESEARCH CORPORATION AND SUBSIDIARY Index 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, 2002, 2001 and 2000 F-18 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, 2002 and 2001, and the results of their operations and their cash flows for each of the years in the three-year period ended March 31, 2002, 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. KPMG LLP St. Petersburg, Florida April 23, 2002 F-1 TECHNOLOGY RESEARCH CORPORATION AND SUBSIDIARY Consolidated Balance Sheets March 31, 2002 and 2001 Assets 2002 2001 Current assets: ---- ---- Cash and cash equivalents $ 1,163,099 184,772 Accounts receivable, less allowance for doubtful accounts of $11,908 in 2002 and $60,760 in 2001 (note 4) 2,516,603 3,364,817 Income tax receivable (note 5) - 278,500 Inventories (notes 2 and 4) 4,798,731 6,352,274 Prepaid expenses and other current assets 97,720 145,134 Deferred income taxes (note 5) 271,569 585,535 ---------- ---------- Total current assets 8,847,722 10,911,032 ---------- ---------- Property, plant and equipment (notes 3, 4 and 7) 9,493,313 9,304,618 Less accumulated depreciation 5,795,667 5,106,407 ---------- ---------- Net property, plant and equipment 3,697,646 4,198,211 ---------- ---------- Noncurrent deferred income taxes (note 5) 162,861 - Other assets 58,708 47,305 ---------- ---------- $ 12,766,937 15,156,548 ========== ========== Liabilities and Stockholders' Equity Current liabilities: Trade accounts payable $ 551,300 1,579,951 Accrued expenses: Compensation 228,210 231,806 Other 65,212 108,990 Dividends payable 68,804 68,058 Deferred income - 23,430 ---------- ---------- Total current liabilities 913,526 2,012,335 Debt (note 4) 500,000 1,750,000 Deferred income, excluding current portion 50,000 50,000 Deferred income taxes (note 5) - 23,663 ---------- ---------- Total liabilities 1,463,526 3,835,998 ---------- ---------- Stockholders' equity (note 6): Common stock, $.51 par value. Authorized 10,000,000 shares; issued and outstanding 5,437,497 shares in 2002 and 2001 2,784,088 2,784,088 Additional paid-in capital 7,526,472 7,526,472 Retained earnings 1,032,996 1,050,135 ---------- ---------- 11,343,556 11,360,695 Treasury stock, at cost - 21,500 shares (40,145) (40,145) ---------- ---------- Total stockholders' equity 11,303,411 11,320,550 Commitments and contingencies (notes 7 and 10) $ 12,766,937 15,156,548 ========== ========== See accompanying notes to consolidated financial statements. F-2 TECHNOLOGY RESEARCH CORPORATION AND SUBSIDIARY Consolidated Statements of Operations Years ended March 31, 2002, 2001 and 2000 2002 2001 2000 Operating revenues: ---- ---- ---- Net sales (note 8) $ 16,517,431 17,805,411 16,711,604 Royalties 166,854 231,563 126,121 ---------- ---------- ---------- 16,684,285 18,036,974 16,837,725 ---------- ---------- ---------- Operating expenses: Cost of sales 12,096,800 13,904,256 11,587,061 Selling, general, and administrative 3,175,724 3,490,326 3,301,640 Research, development, and engineering 1,049,649 1,197,874 1,035,994 ---------- ---------- ---------- 16,322,173 18,592,456 15,924,695 ---------- ---------- ---------- Operating income (loss) 362,112 (555,482) 913,030 ---------- ---------- ---------- Other income (deductions): Interest and sundry income 12,629 58,947 92,791 Interest expense (79,337) (135,519) (184,832) Loss on disposal of property, plant and equipment (933) (5,320) (20,174) ---------- ---------- ---------- (67,641) (81,892) (112,215) ---------- ---------- ---------- Income (loss) before income taxes 294,471 (637,374) 800,815 Income taxes expense (benefit) (note 5) 94,111 (225,827) 215,060 ---------- ---------- ---------- Net income (loss) $ 200,360 (411,547) 585,755 ========== ========== ========== Basic earnings (loss) per share $ 0.04 (0.08) .11 ========== ========== ========== Diluted earnings (loss) per share $ 0.04 (0.08) .11 ========== ========== ========== Weighted average number of common and equivalent shares outstanding: Basic 5,437,497 5,439,811 5,455,756 ========== ========== ========== Diluted 5,457,896 5,439,811 5,473,220 ========== ========== ========== See accompanying notes to consolidated financial statements. F-3 TECHNOLOGY RESEARCH CORPORATION AND SUBSIDIARY Consolidated Statements of Stockholders' Equity Years ended March 31, 2002, 2001 and 2000 Retained Additional earnings Total Common stock paid-in (accumulated Treasury stockholders' Shares Amount capital deficit) stock equity Balances at ------ ------ ------- --------- -------- ---------- March 31, 1999: 5,455,756 $ 2,782,435 7,528,473 1,257,068 - 11,567,976 Dividends - $.03 per share - - - (163,673) - (163,673) Net income - - - 585,755 - 585,755 --------- --------- --------- --------- ---------- -------- 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 ========= ========= ========= ========= ======== ========== See accompanying notes to consolidated financial statements.
F-4 TECHNOLOGY RESEARCH CORPORATION AND SUBSIDIARY Consolidated Statements of Cash Flows Years ended March 31, 2002, 2001 and 2000 2002 2001 2000 Cash flows from operating activities: ---- ---- ---- Net income (loss) $ 200,360 (411,547) 585,755 Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Loss on disposal of equipment 933 5,320 20,174 Change in allowance for doubtful accounts (48,852) 12,561 (15,501) Depreciation and amortization 897,236 800,977 850,092 Decrease (increase) in accounts receivable 897,066 (271,837) 30,216 Decrease (increase) in income taxes receivable 278,500 (201,900) 255,822 Decrease (increase) in inventories 1,553,543 (1,143,685) (484,407) Decrease (increase) in prepaid expenses and other current assets 36,011 (75,016) 5,686 Decrease (increase) in deferred income taxes 127,442 (145,427) 98,565 Decrease (increase) in other assets - 30,534 45,738 Increase (decrease) in deferred income (23,530) (141,176) 214,706 Increase (decrease) in accounts payable (1,028,651) 774,609 156,090 Increase (decrease) in accrued expenses (47,374) (9,166) 17,978 --------- --------- --------- Net cash provided by (used in) operating activities 2,842,684 (775,753) 1,780,914 --------- --------- --------- Cash flows from investing activities: Capital expenditures for property, plant and equipment (397,604) (725,680) (548,122) --------- --------- --------- Net cash used in investing activities (397,604) (725,680) (548,122) --------- --------- --------- Cash flows from financing activities: Net (repayments) borrowings under line-of-credit agreement (1,250,000) (750,000) 49,900 Principal payments on mortgage note payable - - (131,250) Acquisition of treasury stock - (40,145) - Proceeds from exercise of stock options and warrants - (348) - Dividends paid (216,753) (219,312) (109,384) --------- --------- --------- Net cash used in financing activities (1,466,753) (1,009,805) (190,734) --------- --------- --------- Net increase (decrease) in cash and cash equivalents 978,327 (2,511,238) 1,042,058 Cash and cash equivalents at beginning of year 184,772 2,696,010 1,653,952 --------- --------- --------- Cash and cash equivalents at end of year$ 1,163,099 184,772 2,696,010 ========= ========= ========= Supplemental cash flow information: Cash paid for interest $ 79,337 139,761 180,590 ========= ========= ========= Cash paid (received) for income taxes $ (278,500) 121,500 (139,327) ========= ========= ========= See accompanying notes to consolidated financial statements. F-5 TECHNOLOGY RESEARCH CORPORATION AND SUBSIDIARY Notes to Consolidated Financial Statements March 31, 2002, 2001 and 2000 (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 book value of its debt approximates fair value due to its short-term nature and the variable interest rate. (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 statements of cash flows, the Company considers all short- term investments with a maturity of three months or less to be cash equivalents. Short-term investments at March 31, 2001 and 2000 consisted of interest bearing demand deposit accounts. F-6 TECHNOLOGY RESEARCH CORPORATION AND SUBSIDIARY Notes to Consolidated Financial Statements March 31, 2002, 2001 and 2000 (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 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. (g) Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of The Company reviews long-lived assets 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 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. (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. F-7 TECHNOLOGY RESEARCH CORPORATION AND SUBSIDIARY Notes to Consolidated Financial Statements March 31, 2002, 2001 and 2000 (j) Income Taxes 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 accounts for stock-based compensation in accordance with Statement of Financial Accounting Standards No. 123 (SFAS 123), Accounting for Stock- Based Compensation, which permits entities to recognize as expense over the vesting period the fair value of all stock-based awards on the date of grant. Alternatively, SFAS 123 also allows entities to continue to apply the provisions of APB 25 and provide pro forma net income and pro forma earnings per share disclosures for employee stock option grants made in 1995 and future years as if the fair-value-based method defined in SFAS 123 had been applied. The Company has elected to continue to apply the provisions of APB 25 and provide the pro forma disclosures of SFAS 123. (l) Earnings per Share Basic earnings per share have been computed by dividing net income 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 are earnings. (m) 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 is required to adopt SFAS No. 143 on April 1, 2003. The Company does not expect the adoption of SFAS No. 143 to have a material effect on the consolidated financial statements. In August 2001, the FASB issued SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets (SFAS No. 144). SFAS No. 144 addresses financial accounting and reporting for the impairment or disposal of long-lived assets. F-8 TECHNOLOGY RESEARCH CORPORATION AND SUBSIDIARY Notes to Consolidated Financial Statements March 31, 2002, 2001 and 2000 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. SFAS No. 144 requires companies to separately report discontinued operations and extends that reporting to a component of an entity that either has been disposed of (by sale, abandonment, or in a distribution to owners) 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. The Company adopted SFAS No. 144 on April 1, 2002. Adoption of SFAS No. 144 did not have a material affect on the Company. (n) Reclassifications Certain amounts in the 2001 and 2000 consolidated financial statements have been reclassified to conform to the 2002 presentation. (2) Inventories Inventories at March 31, 2002 and 2001 consist of: 2002 2001 ---- ---- Raw materials $ 3,130,889 4,443,662 Work in process 190,348 224,449 Finished goods 1,477,494 1,684,163 --------- --------- $ 4,798,731 6,352,274 ========= ========= Approximately 47 percent of inventories were located in Honduras at March 31, 2002 and 2001. (3) Property, Plant and Equipment Property, plant and equipment at March 31, 2002 and 2001 consists of: Estimated 2002 2001 useful lives ---- ---- ------------ Building and improvements $ 1,608,756 1,609,961 20 years Machinery and equipment 7,884,557 7,694,657 5 - 15 years --------- --------- ------------ $ 9,493,313 9,304,618 ========= ========= Approximately 28 percent and 27 percent of property, plant and equipment is located in Honduras at March 31, 2002 and 2001, respectively. F-9 TECHNOLOGY RESEARCH CORPORATION AND SUBSIDIARY Notes to Consolidated Financial Statements March 31, 2002, 2001 and 2000 (4) Debt Debt at March 31, 2002 and 2001 consists of a $3,000,000 line of credit with an outstanding balance of $500,000 and $1,750,000 at March 31, 2002 and 2001, respectively. Interest is based on LIBOR plus 175 basis points 3.78% and 6.63% at March 31, 2002 and 2001, 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, 2002 and 2001. The line was renewed in August 2000 and the full balance outstanding is due December 14, 2003, unless renewed. (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, 2002 and 2001 are presented below: 2002 2001 ---- ---- Deferred tax assets: Accounts receivable, principally due to allowance for doubtful accounts $ 4,287 22,000 Deferred income for financial reporting - 26,000 Inventories, principally due to valuation allowance for financial reporting purposes and additional costs inventoried for tax purposes 283,059 361,000 Accrued expenses, principally due to accrual for financial reporting purposes 33,076 32,000 Net operating loss carryforwards 270,048 184,000 Tax credit carryforwards 93,063 122,000 -------- -------- Total gross deferred tax assets 683,533 747,000 Less valuation allowance 78,152 60,000 -------- -------- 605,381 687,000 -------- -------- Deferred tax liabilities: Property, plant and equipment, principally due to differences in depreciation (170,951) (125,128) -------- -------- Net deferred tax assets $ 434,430 561,872 ======== ======== F-10 TECHNOLOGY RESEARCH CORPORATION AND SUBSIDIARY Notes to Consolidated Financial Statements March 31, 2002, 2001 and 2000 Net deferred tax assets are included in the accompanying balance sheets at March 31, 2002 and 2001 as: 2002 2001 ---- ---- Deferred income taxes, current asset $ 271,569 585,535 Deferred income taxes, noncurrent asset 162,861 - Deferred income taxes, noncurrent liability (23,663) -------- -------- $ 434,430 561,872 ======== ======== 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, net of the existing valuation allowance at March 31, 2002. The valuation allowance at March 31, 2002 and 2001 relates to tax credit carryforwards which management expects will expire unused. At March 31, 2002, the Company has net operating loss carryforwards for Federal income tax purposes of approximately $671,000, which are available to offset future taxable income through 2022. The Company also has available tax credit carryforwards for Federal income tax purposes of approximately $74,000, which are available to offset future Federal income taxes through 2003. The Company has approximately $19,000 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, 2002, 2001, and 2000 consists of: 2002 2001 2000 ---- ---- ---- Current: Federal $ (33,331) (80,400) 116,495 State - - - -------- -------- --------- (33,331) (80,400) 116,495 -------- -------- --------- Deferred: Federal 117,247 (133,874) 90,731 State 10,195 (11,553) 7,834 -------- -------- --------- 127,442 (145,427) 98,565 -------- -------- --------- $ 94,111 (225,827) 215,060 ======== ======== ========= F-11 TECHNOLOGY RESEARCH CORPORATION AND SUBSIDIARY Notes to Consolidated Financial Statements March 31, 2002, 2001 and 2000 Income tax expense (benefit) for the years ended March 31, 2002, 2001 and 2000 differs from the amounts computed by applying the Federal income tax rate of 34% percent to pretax income (loss) as a result of the following: 2002 2001 2000 ---- ---- ---- Computed expected tax expense (benefit) $ 100,120 (216,707) 272,000 (Reduction) increase in income taxes resulting from: Foreign activity for which no income tax has been provided (17,691) (17,000) (75,000) State income taxes, net of Federal income tax effect 6,525 (7,400) 5,000 Other 5,157 15,280 13,060 -------- -------- --------- $ 94,111 (225,827) 215,060 ======== ======== ========= 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, $51,000 in 2001, and $221,000 in 2000. 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 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 Plan, options granted under the Plans generally vest over three years. Options granted under the Performance 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. Option transactions and other information relating to the Plans for the three years ended March 31, 2002 are as follows: F-12 TECHNOLOGY RESEARCH CORPORATION AND SUBSIDIARY Notes to Consolidated Financial Statements March 31, 2002, 2001 and 2000 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 ------- ------- ------- --------- -------- Total number of options available under the plans 166,667 400,000 333,333 300,000 1,200,000 ======= ======= ======= ========= ======== Exercisable at March 31, 2002 120,651 - 46,666 51,003 218,320 1.63 ======= ======= ======= ========= ======== Available for issue at March 31, 2002 - 150,000 - 121,750 271,750 ======= ======= ======= ========= ======== The per share weighted average fair value of stock options granted during 2002, 2001 and 2000 was $1.64, $1.82, and $1.13, respectively, on the date of grant using the Black Scholes option pricing model, with the following assumptions: (1) risk free interest rate - 5.00 percent to 6.26 percent, (2) expected life - 6.5 to 10.0 years, (3) expected volatility - 73% to 83%, and (4) expected dividends - 2.0% to 5.8%. At March 31, 2002, 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, 2002 life price March 31, 2002 price - -------- -------------- -------------- --------- -------------- -------- $1.05-1.19 28,250 7.2 1.10 26,333 1.10 $1.20-1.64 208,500 7.5 1.59 139,651 1.62 $1.65-2.00 115,250 8.6 1.81 48,336 1.85 $2.06-2.74 7,000 8.1 2.55 4,000 2.64 $2.75-5.25 250,000 4.2 5.13 - - -------------- -------------- --------- -------------- -------- 609,000 6.4 ============== ============== F-13 TECHNOLOGY RESEARCH CORPORATION AND SUBSIDIARY Notes to Consolidated Financial Statements March 31, 2002, 2001 and 2000 The Company grants options at fair value and applies APB 25 in accounting for its Plans. Accordingly, no compensation cost has been recognized for stock options in the consolidated financial statements. Had the Company determined compensation cost based on the fair value at the grant date for its stock options under SFAS 123, the Company's net income at March 31, 2002, 2001 and 2000 would have been reduced to the pro forma amounts indicated below: 2002 2001 2000 ---- ---- ---- Net income (loss): As reported $ 200,360 (411,547) 585,755 ========= ========= ======== Pro forma $ 100,782 (515,843) 539,899 ========= ========= ======== Income (loss) per common share: As reported $ .04 (.08) .11 ========= ========= ======== Pro forma $ .02 (.09) .10 ========= ========= ======== Pro forma net income reflects only options granted after March 31, 1995. Therefore, the full impact of calculating compensation costs for stock options under SFAS 123 is not reflected in the pro forma net income 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. 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, 2002, 2001 or 2000. (7) Leases The Company leases the land on which its operating facility is located. This operating lease is for a period of twenty years through August 2001 with options to renew for two additional ten-year periods. 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 is for five years through the year 2002 and was extended in 2002 for one additional year. Future minimum lease payments under noncancelable operating leases as of March 31, 2002 are: Year ending March 31, --------------------- 2003 173,113 2004 24,613 2005 24,613 -------- Total minimum lease payments $ 222,339 ======== F-14 TECHNOLOGY RESEARCH CORPORATION AND SUBSIDIARY Notes to Consolidated Financial Statements March 31, 2002, 2001 and 2000 Rental expense for all operating leases was approximately $233,000 in 2002, $241,000 in 2001 and $245,000 in 2000. (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: 2002 2001 2000 ---------- ---------- ---------- Commercial $ 10,276,165 12,117,588 12,801,147 Military 6,241,266 5,687,823 3,910,457 ---------- ---------- ---------- $ 16,517,431 17,805,411 16,711,604 ========== ========== ========== Significant customers who accounted for 10 percent or more of sales and aggregate exports were: Year ended March 31 Customer 2002 2001 2000 -------- ---- ---- ---- Xerox Corporation $ 275,448 723,982 1,266,613 Noma Appliance & Electric, Inc. Noma Appliance, Inc. f/k/a Fleck Manufacturing, Inc. (a Xerox Corporation supplier) 281,011 531,835 954,288 Other Xerox suppliers 263,704 299,596 987,424 Fermont (a division of ESSI, a U.S. Government Prime Contractor) 3,855,593 4,305,101 2,115,722 --------- --------- --------- $ 4,675,756 5,860,514 5,324,047 ========= ========= ========= Exports: Canada $ 293,650 579,511 1,342,365 Far East 1,288,102 805,762 198,026 Europe 1,899,842 2,328,325 3,243,918 Mexico 169,833 383,046 563,550 Australia 3,167 83,232 218,746 South America 6,458 13,784 12 430 Middle East 15,000 22,299 5,281 --------- --------- --------- Total exports $ 3,676,052 4,215,959 5,584,316 ========= ========= ========= F-15 TECHNOLOGY RESEARCH CORPORATION AND SUBSIDIARY Notes to Consolidated Financial Statements March 31, 2002, 2001 and 2000 (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 $26,700 in 2002, $29,000 in 2001, and $24,000 in 2000. (10) Litigation The Company is involved in various claims and legal actions arising in the ordinary course of business. In the opinion of management, the ultimate disposition of these matters will not have a material adverse effect on the Company's consolidated financial position, results of operations or liquidity. (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 end, 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, 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-16 TECHNOLOGY RESEARCH CORPORATION AND SUBSIDIARY Notes to Consolidated Financial Statements March 31, 2002, 2001 and 2000 Year ended March 31, 2001: Operating revenues $ 4,796,520 4,385,131 3,981,283 4,874,040 ========= ========= ========= ========= Gross profit $ 1,426,040 1,015,853 770,750 688,512 ========= ========= ========= ========= Operating income (loss) $ 297,314 (204,006) (249,745) (399,045) ========= ========= ========= ========= Net income (loss) $ 202,166 (152,047) (123,255) (338,411) ========= ========= ========= ========= Basic earnings per share $ .04 (.03) (.02) (.07) ========= ========= ========= ========= Diluted earnings per share $ .04 (.03) (.02) (.07) ========= ========= ========= ========= F-17 TECHNOLOGY RESEARCH CORPORATION AND SUBSIDIARY Schedule II Valuation and Qualifying Accounts Years ended March 31, 2002, 2001 and 2000 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, 2002 $ 60,760 19,761 - 68,613 11,908 ======= ======= ======= ======= ======= Year ended March 31, 2001 $ 48,199 126,105 - 113,544 60,760 ======= ======= ======= ======= ======= Year ended March 31, 2000 $ 63,700 45,105 - 60,606 48,199 ======= ======= ======= ======= ======= F-18 INDEX TO EXHIBITS (Item 14(A)3) Exhibit (3) (a) Articles of Incorporation and By-Laws* (b) Certificate of Amendment to the Articles of Incorporation, dated September 24, 1990*** (c) Certificate of Amendment to the Articles of Incorporation, dated September 24, 1996*** (10) Material contracts: (a) 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.* (b) 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.* (c) 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.* (d) 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.*** (e) 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".*** (f) 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.*** (g) $3,000,000 Revolving Credit Agreement, dated December 14, 1999, between the Company and SouthTrust Bank*** (h) License Agreement, dated December 31, 1999, between the Company and Windmere-Durable Holdings, Inc. granting Windmere-Durable a non-exclusive license to manufacture, have manufactured, use and sell cooking appliances using the Company's Fire Shield safety circuit technology.*** -27- (i) The 2000 Long Term Incentive Plan.*** (j) Amended Revolving Credit Agreement, dated December 24, 2001, between the Company and its subsidiary and SouthTrust Bank, extending the maturity date to December 13, 2003.***** (k) 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.***** (23) Consents of Experts and Counsel: (a) Consent of Independent Certified Public Accountants. ***** * 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. -28- 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: 6/20/2001 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 Chairman, Chief Executive Officer, and Director (Principal Executive /s/ Robert S. Wiggins Officer) 6/20/2001 Robert S. Wiggins Vice President of Finance and Chief Financial Officer (Principal Financial /s/ Scott J. Loucks Officer) 6/20/2001 Scott J. Loucks /s/ Raymond H. Legatti President and Director 6/21/2001 Raymond H. Legatti Senior Vice President Government Operations and Marketing and /s/ Raymond B. Wood Director 6/21/2001 Raymond B. Wood /s/ Gerry Chastelet Director 6/24/2001 Gerry Chastelet /s/ Edmund F. Murphy, Jr. Director 6/24/2001 Edmund F. Murphy, Jr. /s/ Martin L. Poad Director 6/25/2001 Martin L. Poad -29- EX-23 3 k10acex-23.txt AUDITOR'S CONSENT The Board of Directors Technology Research Corporation: We consent to incorporation by reference in the registration statements (No. 33-62379 and No. 33-62397) on Form S-8 of Technology Research Corporation of our report dated April 23, 2002, relating to the consolidated balance sheets of Technology Research Corporation and subsidiary as of March 31, 2002 and 2001, and the related consolidated statements of operations, stockholders' equity and cash flows for each of the years in the three-year period ended March 31, 2002, and related schedule, which report appears in the March 31, 2002, annual report on Form 10-K of Technology Research Corporation. KPMG LLP St. Petersburg, Florida June 26, 2002 EX-10 4 k10laex-10.txt AMENDED CREDIT AGREEMENT CHANGE IN TERMS AGREEMENT Principal Amount: $3,000,000.00 Initial Rate: 3.681% Date of Agreement: December 24, 2001 DESCRIPTION OF EXISTING INDEBTEDNESS. This is a modification of 0955169868- 0000061660. DESCRIPTION OF COLLATERAL. Accounts Receivable, Inventory and all Domestic Assets as further described in Loan and Security Agreement dated December 14, 1999. DESCRIPTION OF CHANGE IN TERMS. Extend the maturity date to December 14, 2003. PROMISE TO PAY. Technology Research Corporation; and Technology Research Corporation/Honduras, SA. do CV. ("Borrower") jointly and severally promise to pay to SouthTrust Bank ("Lender"), or order, in lawful money of the United States of America, the principal amount of Three Million & 00/100 Dollars ($3,000,000.00) or so much as may be outstanding, together with Interest on the unpaid outstanding principal balance of each advance. Interest shall be calculated from the date of each advance until repayment of each advance. PAYMENT. Borrower will pay this loan in one payment of all outstanding principal plus all accrued unpaid interest on December 14, 2003. In addition, Borrower will pay regular monthly payments of all accrued unpaid interest due as of each payment date, beginning January 24, 2002, with all subsequent interest payments to be due on the same day of each month after that, Interest on this Agreement is computed on a 365/360 simple interest basis: that is, by applying the ratio of the annual interest rate over a year of 360 days, multiplied by the outstanding principal balance, multiplied by the actual number of days the principal balance is outstanding. Borrower will pay Lender at Lenders address shown above or at such other place as Lender may designate in writing. VARIABLE INTEREST RATE. The interest rate on this Agreement is subject to change from time to time based on changes in an independent index which is the published thirty (30) day London Interbank Offered Rates ("LIBOR") (the ("Index"). The Index is not necessarily the lowest rate charged by Lender on its loans. If the Index becomes unavailable during the term of this loan, Lender may designate a substitute index after notice to Borrower. Lender will tell Borrower the current Index rate upon Borrower's request. The interest rate change will not occur more often than each clay. The frequency of the rate change is further defined below in paragraph titled "VARIABLE RATE CHANGE FREQUENCY". Borrower understands that Lender may make loans based on other rates as well. The Index currently is 1.931% per annum. The interest rate to be applied to the unpaid principal balance of the Note will be at a rate of 1.750 percentage points over the Index, resulting in an initial rate of 3.681% per annum. NOTICE: Under no circumstances will the effective rate of interest on the Note be more than the maximum rate allowed by applicable law. See "Optional Interest Rate" Provision on page 2 of "Change in Terms Agreement". PREPAYMENT. Borrower may pay without penalty all or a portion of the amount owed earlier than it is due. Early payments will not, unless agreed to by Lender in writing, relieve Borrower of Borrower's obligation to continue to make payments of accrued unpaid interest. Rather, early payments will reduce the principal balance due. Borrower agrees not to send Lender payments marked "paid in full", "without recourse", or similar language. If Borrower sends such a payment, Lender may accept it without losing any of Lender's rights under this Agreement, and Borrower will remain obligated to pay any further amount owed to Lender. All written communications concerning disputed amounts, including any check or other payment instrument that indicates that the payment constitutes "payment in full" of the amount owed or that is tendered with other conditions or limitations or as full satisfaction of a disputed amount must be mailed or delivered to: SouthTrust Bank, Tampa Middle Market - H'Boro, Tampa, FL. LATE CHARGE. If a payment is 10 days or more late, Borrower will be charged 5.000% of the unpaid portion of the regularly scheduled payment or $10.00, whichever is greeter. INTEREST AFTER DEFAULT. Upon default, including failure to pay upon final maturity, at Lender's option, and if permitted by applicable law, Lender may add any unpaid accrued interest to principal and such sum will bear interest therefrom until paid at the rate provided in this Agreement. Upon default, the total sum due under this Agreement will beer Interest from the date of acceleration or maturity at the variable interest rate on this Agreement. DEFAULT. Each of the following shall constitute an Event of Default under this Agreement: Payment Default. Borrower fails to make any payment when due under the Indebtedness. Other Defaults. Borrower fails to comply with or to perform any other term, obligation, covenant or condition contained in this Agreement or in any of the Related Documents or to comply with or to perform any term, obligation, covenant or condition contained in any other agreement between Lender and Borrower. Default in Favor of Third Parties. Borrower defaults under any loan, extension of credit, security agreement, purchase or sales agreement, or any other agreement, in favor of any other creditor or person that may materially affect any of Borrower's property or Borrower's ability to perform Borrower's obligations under this Agreement or any of the Related Documents. False Statements. Any warranty, representation or statement made or furnished to Lender by Borrower or on Borrower's behalf under this Agreement or the Related Documents is false or misleading in any material respect, either now or at the time made or furnished or becomes false or misleading at any time thereafter. insolvency. The dissolution or termination of Burrower's existence as a going business, the insolvency of Borrower, the appointment of a receiver for any part of Borrower's property, any assignment for the benefit of creditors, any type of creditor workout, or the commencement of any proceeding under any bankruptcy or insolvency laws by or against Borrower. Creditor or Forfeiture Proceedings. Commencement of foreclosure or forfeiture proceedings, whether by judicial proceeding, self-help, repossession or any other method, by any creditor of Borrower or by any governmental agency against any collateral securing the Indebtedness. This includes a garnishment of any of Borrower's accounts, including deposit accounts, with Lender. However, this Event of Default shall not apply if there is a good faith dispute by Borrower as to the validity or reasonableness of the claim which is the basis of the creditor or forfeiture proceeding and if Borrower gives Lender written notice of the creditor or forfeiture proceeding and deposits with Lender monies or a surety bond for the creditor or forfeiture proceeding, in an amount determined by Lender, in its sole discretion, as being an adequate reserve or bond for the dispute. Events Affecting Guarantor. Change In Ownership. Any change in ownership of twenty-five percent 125%l or more of the common stock of Borrower. Adverse Change. A material adverse change occurs in Borrower's financial condition, or Lender believes the prospect of payment or performance of the Indebtedness is impaired. Insecurity. Lender in good faith believes itself insecure. Cure Provisions. If any default, other than a default in payment is curable and if Borrower has not been given a notice of a breach of the same provision of this Agreement within the preceding twelve (12) months, it may be cured (and no event of default will have occurred) if Borrower, after receiving written notice from Lender demanding cure of such default: (1) cures the default within fifteen (15) days; or (2) if the cure requires more than fifteen (15) days, immediately initiates steps which Lender deems in Lender's sole discretion to be sufficient to cure the default and thereafter continues and completes all reasonable and necessary stops sufficient to produce compliance as soon as reasonably practical. LENDER'S RIGHTS. Upon default, Lender may declare the entire unpaid principal balance on this Agreement and all accrued unpaid interest immediately due, and then Borrower will pay that amount. CHANGE IN TERMS AGREEMENT Loan No: 0000061660 (Continued) Page 2 ATTORNEYS' FEES; EXPENSES. Lender may lire or pay someone else to help collect this Agreement if Borrower does not pay. Borrower will pay Lender the amount of these costs and expenses, which includes, subject to any limits under applicable law, Lenders reasonable attorneys' fees and Lender's legal expenses whether or not there is a lawsuit, including reasonable attorneys' fees and legal expenses for bankruptcy proceedings including efforts to modify or vacate any automatic stay or injunction), and appeals. If not prohibited by applicable law, Borrower also will pay any court costs, in addition to all other sums provided by law. JURY WAIVER. Lender and Borrower hereby. waive the right to any jury trial in any action, proceeding, or counterclaim brought by either Lender or Borrower against the other. (Initial Here GOVERNING LAW. This Agreement will be governed by, construed and enforced in accordance with federal law and the laws of the State of Florida. This Agreement has been accepted by Lender in the State of Florida. RIGHT OF SETOFF. To the extent permitted by applicable law, Lender reserves a right of setoff in all Borrower's accounts with Lender (whether checking, savings, or some other account). This includes all accounts Borrower holds jointly with someone else and all accounts Borrower may open in the future. However, this does not include any IRA or Keogh accounts, or any trust accounts for which setoff would be prohibited by law. Borrower authorizes Lender, to the extent permitted by applicable law, to charge or setoff all sums owing on the indebtedness against any and all such accounts, and, at Lender's option, to administratively freeze all such accounts to allow Lender to protect Lenders charge and setoff rights provided in this paragraph. COLLATERAL. Borrower acknowledges this Agreement is secured by Accounts Receivable, Inventory and all Domestic Assets. LINE OF CREDIT. This Agreement evidences a revolving line of credit. Advances under this Agreement may be requested orally by Borrower or as provided in this paragraph. All oral requests shall be confirmed in writing on the day of the request. All communications, instructions, or directions by telephone or otherwise to Lender are to be directed to Lender's office shown above. The following persons currently are authorized to request advances and authorize payments under the line of credit until Lender receives from Borrower, at Lender's address shown above, written notice of revocation of their authority: Scott J Loucks, OFO of Technology Research Corporation; and Scott J Loucks, Secretary of Technology Research Corporation/Honduras, S.A. de C.V. Borrower agrees to be liable for all sums either: IA) advanced in accordance with the instructions of an authorized person or (B) credited to any of Borrower's accounts with Lender. The unpaid principal balance owing on this Agreement at any time may be evidenced by endorsements on this Agreement or by Lender's internal records, including daily computer print-outs. Lender will have no obligation to advance funds under this Agreement if: (A) Borrower or any guarantor is in default under the terms of this Agreement or any agreement that Borrower or any guarantor has with Lender, including any agreement made in connection with the signing of this Agreement; (B) Borrower or any guarantor ceases doing business or is insolvent; ICI any guarantor seeks, claims or otherwise attempts to limit, modify or revoke such guarantor's guarantee of this Agreement or any other loan with Lender; )D) Borrower has applied funds provided pursuant to this Agreement for purposes other than those authorized by Lender; or (El Lender in good faith believes itself insecure. CONTINUING VALIDITY. Except as expressly changed by this Agreement, the terms of the original obligation or obligations, including all agreements evidenced or securing the obligation(s), remain unchanged and in full force and effect. Consent by Lender to this Agreement does not waive Lender's right to strict performance of the obligation(s) as changed, nor obligate Lender to make any future change in terms. Nothing in this Agreement will constitute a satisfaction of the obligation(s). It is the intention of Lender to retain as liable parties all makers and endorsers of the original obligation(s), including accommodation parties, unless a party is expressly released by Lender in writing. Any maker or endorser, including accommodation makers, will not be released by virtue of this Agreement, If any person who signed the original Obligation does not sign this Agreement below, then all persons signing below acknowledge that this Agreement is given conditionally, based on the representation to Lender that the non-signing party consents to the changes and provisions of this Agreement or otherwise will not be released by it. This waiver applies not only to any initial extension, modification or release, but also to all such subsequent actions. VARIABLE RATE FREDUENCY. The interest rate change will occur each month on the anniversary date based on the Index Rate for that day. FINANCIAL STATEMENTS. Until this loan is paid in full, Borrower will furnish to Lender, as soon as available but in any event within 120 days after the end of each fiscal year, Borrowers balance sheet and statements of income, cash flows and changes in capital for the fiscal year just ended, setting forth in comparative form the corresponding figures for the prior year, together with accompanying schedules and footnotes, If the financial statements were compiled or certified by a public accountant, Borrower will also furnish Lender the accountant's letter accompanying the financial statements, Borrower will furnish to Lender, as soon as available but in any event within 30 days after the end of the first three quarters of Borrower's fiscal year, Borrower's balance sheet and profit and loss statement for the quarter just ended, All financial reports provided to Lender will be certified in writing by the chief executive officer, chief financial officer, managing partner or comparable financial officer of Borrower to be true and complete to the best of his or her knowledge and belief and to have been prepared in accordance with generally accepted accounting principles applied on a basis consistent with the financial statements previously furnished to Lender or, if not so prepared, setting forth the manner in which the financial statements depart therefrom. Borrower will furnish Lender, within 30 days after Lender's request therefore, a copy of the federal income tax return most recently filed by Borrower. Borrower will cause each guarantor or endorser of this loan to furnish to Lender, within 30 days after Lender's request therefore, a current financial statement of such guarantor or endorser in form acceptable to Lender and a copy of the federal income tax return most recently filed by such guarantor or endorser. CHANGE IN OWNERSHIP. Any aggregate change of twenty-five (25%) or more in the ownership of the common stock or other ownership interest in Borrower in any period of 12 consecutive months shall constitute a default under this loan. OBLIGATION TO DEVELOP BUSINESS PLAN. Before approving this loan, Lender required Borrower to furnish Lender with financial statements and other information concerning the financial history and future prospects of Borrowers business. Lender requested and reviewed that information solely to enable it to make a decision whether to extend credit. Borrower understands that Lender has not necessarily approved Borrower's business plan and has not undertaken any duty or obligation to advise Borrower on business matters now or in the future, Lender is not a financial or business advisor, and Borrower will not look to Lender for business advice. Lender's role is solely that of a Lender, and Borrower's relationship with Lender is that of debtor and creditor. Lender expressly disclaims any fiduciary or other duties or obligations to Borrower except those expressly provided in the written loan documents signed by Lender. NO ORAL AGREEMENTS. Lender's agreement to lend, Borrower's obligation to repay the loan, and all other agreements between Lender and Borrower have been reduced to writing. This instrument and the other documents signed concurrently with it contain the entire agreement between Lender and Borrower, Any prior conversations and discussions that Lender or Borrower may have had concerning the transaction are not binding unless reflected in the written loan documents. Borrower acknowledges that the loan documents reflect everything the Lender has agreed to do or not to do in connection with this transaction. COMMERCIAL PURPOSES. Borrower intends to use the loan proceeds solely for business or commercial related purposes and under no circumstances will such proceeds be used for persona), family or household purposes. FURTHER ASSURANCE AND COMPLIANCE AGREEMENT. Borrower(s) and Guarantor(s) agree to cooperate, adjust, initial, re-execute and re-deliver any and all closing documents, including but not limited to any notes, security documents and closing statements if deemed necessary of desirable in the sole discretion of the Bank in order to consummate or complete the Loan from the Bank to Borrower or to perfect the Bank's lien. It is the intention of the Borrower that all documentation for the Loan shall be an accurate reflection of the Bank's requirements. The Borrower(s) agree and covenant to assure that the Loan and documentation will conform to the Bank's requirements. The Bank is relying upon this agreement and the covenants contained herein in closing this transaction and funding the Loan to Borrower. ;;Bank shall have the right to bring suit to enforce the obligations incurred in connection with this Agreement, and in the event any suit is brought to enforce this Agreement, the Bank shall be entitled to recover from the Borrower(s) or Guarantor(s) all costs and expenses incurred, including a reasonable attorney fee. OPTIONAL INTEREST RATE. The optional interest rate as described in the original Note dated December 14, 1999 and original Loan and Security Agreement dated December 14, 1999. PRIOR NOTE. This is a modification of 0955169B68-0000061660. SUCCESSORS AND ASSIGNS. Subject to any limitations stated in this Agreement on transfer of Borrower's interest, this Agreement shall be binding upon anti inure to the benefit of the parties, their successors and assigns. if ownership of the Collateral becomes vested in a person other than Borrower, Lender, without notice to Borrower, may deal with Borrower's successors with reference to this Agreement and the Indebtedness by way of forbearance or extension without releasing Borrower from the obligations of this Agreement or liability under the Indebtedness. Notify Us of Inaccurate Information We Report To Consumer Reporting Agencies. Please notify us if we report any inaccurate information about your account(s) to a consumer reporting agency. Your written notice describing the specific inaccuracy(ies) should be sent to us at the following address: SouthTrust Bank, Tampa Middle Market - H'Boro, Tampa, FL MISCELLANEOUS PROVISIONS. If any part of this Agreement cannot be enforced, this fact will not affect the rest of the Agreement. Borrower CHANGE IN TERMS AGREEMENT Loan No: 0000061660 (Continued) Page 3 does not agree or intend to pay, and Lender does not agree or intend to contract for, charge, collect, take, reserve or receive (collectively referred to herein as charge or collect"), any amount in the nature of interest or in the nature of a fee for this loan, which would in any way or event (including demand, prepayment, or acceleration) cause Lender to charge or collect more for this loan than the maximum Lender would be permitted to charge or collect by federal law or the law of the State of Florida (as applicable). Any such excess interest or unauthorized fee shall, instead of anything stated to the contrary, be applied first to reduce the principal balance of this loan, and when the principal has been paid in full, be refunded to Borrower. Lender may delay or forgo enforcing any of its rights or remedies under this Agreement without losing them. Each Borrower understands and agrees that, with or without notice to Borrower, Lender may with respect to any other Borrower (a) make one or more additional secured or unsecured loans or otherwise extend additional credit; (b) alter, compromise, renew, extend, accelerate, or otherwise change one or more times the time for payment or other terms any indebtedness, including increases and decreases of the rate of interest on the indebtedness; (c) exchange, enforce, waive, subordinate, fail or decide not to perfect, and release any security, with or without the substitution of new collateral; (d) apply such security and direct the order or manner of sale thereof, including without limitation, any non-judicial sale permitted by the terms of the controlling security agreements, as Lender in its discretion may determine; (a) release, substitute, agree not to sue, or deal with any one or more of Borrowers sureties, endorsers, or other guarantors on any terms or in any manner Lender may choose; and If) determine how, when and what application of payments and credits shall be made on any other indebtedness owing by such other Borrower. Borrower and any other person who signs, guarantees or endorses this Agreement, to the extent allowed by law, waive presentment, demand for payment, and notice of dishonor. Upon any change in the terms of this Agreement, and unless otherwise expressly stated in writing, no party who signs this Agreement, whether as maker, guarantor, accommodation maker or endorser, shall be released from liability. All such parties agree that Lender may renew or extend (repeatedly and for any length of time) this loan or release any party or guarantor or collateral; or impair, fail to realize upon or perfect Lender's security interest in the collateral; and take any other action deemed necessary by Lender without the consent of or notice to anyone. All such parties also agree that Lender may modify this loan without the consent of or notice to anyone other than the party with whom the modification is made. The obligations under this Agreement are joint arid several. PRIOR TO SIGNING THIS AGREEMENT, EACH BORROWER READ AND UNDERSTOOD ALL THE PROVISIONS OF THIS AGREEMENT, INCLUDING THE VARIABLE INTEREST RATE PROVISIONS. EACH BORROWER AGREES TO THE TERMS OF THE AGREEMENT. CIT SIGNERS: TECHNOLOGY RESEARCH CORPORATION By: /S/ Scott J. Loucks Scott J Loucks, CFO of Technology Research Corporation TECHNOLOGY RESEARCH CORPORATION, HONDURAS, SA. DE C.V. By: /S/ Scott J. Loucks Scott J Loucks, Secretary of Technology Research Corporation/ Honduras, S.A. de C.V. EX-10 5 k10tecex-10.txt TECUMSEH AGREEMENT LICENSE AGREEMENT This is an AGREEMENT between Tecumseh Products Company, a Michigan corporation having a place of business at 100 East Patterson Street, Tecumseh, Michigan 49286 ("TECUMSEH") and Technology Research Corporation, a Florida corporation, having a place of business at 5250 140th Avenue North, Clearwater, Florida, 33760 ("TRC"). 1. RECITALS 1.01 TECUMSEH has developed a compressor fault interrupter device; owns certain intellectual property rights pertaining to such devices; and has expertise in the design, manufacture and marketing of such devices. 1.02 TRC has developed, manufactures and markets a variety of ground fault protection devices including over current sensors; owns certain intellectual property rights pertaining to such devices; and has expertise in the design, manufacture and marketing of such devices. 1.03 Both parties are interested in the manufacture and sale of new products which are based on the combination of the designs of TRC's fault to ground protection devices with the design of TECUMSEH's compressor fault interrupter device, and, in particular, the design, manufacture and sale of such a product which may be used with air conditioning and refrigeration units. 1.04 TECUMSEH is further interested in manufacturing additional products, for sale exclusively to TRC, which are similar to TRC's existing fault to ground protection devices and which do not include TECUMSEH's compressor fault interrupter. NOW THEREFORE, the parties agree as follows: 2. DEFINITIONS 2.01 As used in this AGREEMENT, the term "TECUMSEH CFI TECHNOLOGY" shall refer to the design and the manufacturing details of an instantaneous current trip that is tuned to protect the integrity of a hermetically sealed compressor system in the event of a high current failure. 2.02 As used in this AGREEMENT, the term "TRC TECHNOLOGY" shall refer to the design and the manufacturing details of TRC's over current detection, ground- fault circuit-interrupter ("GFCI"), appliance leakage current interrupter ("ALCI"), immersion-detection circuit-interrupter ("IDCJ") and equipment leakage current interrupter ("ELCI") products as exemplified, in part, by TRC's "FireShield" products. 2.03 As used in this AGREEMENT, the term "TECUMSEH IP" shall mean those patents and patent applications including patents which issue therefrom identified in Appendix A, as well as all of the patents, patent applications, copyrights, know-how and trade secrets owned by TECUMSEH necessary for the manufacture, use and sale of LICENSED CFI PRODUCTS. 1 2.04 As used in this AGREEMENT, the term "TRC IP" shall mean those patents and patent applications including patents which issue therefrom identified in Appendix B, as well as all of the patents, patent applications, copyrights, know-how and trade secrets owned by TRC necessary for the manufacture, use and sale of LICENSED AC/REFRIGERATION PRODUCTS and/or LICENSED TRC PRODUCTS. 2.05 As used in this AGREEMENT, the term "LICENSED CFI PRODUCTS" shall mean products having a design which combines the TECUMSEH CFI TECHNOLOGY with the TRC TECHNOLOGY 2.06 As used in this AGREEMENT, the term "LICENSED AC/REFRIGERATION PRODUCTS" shall mean products employing the TRC TECHNOLOGY for use in refrigeration or air conditioning systems or products having a design which combines the TECUMSEH CFI TECHNOLOGY with the TRC TECHNOLOGY. 2.07 As used in this AGREEMENT, the term "LICENSED TRC PRODUCTS" shall mean products having a design embodying TRC TECHNOLOGY but not the TECUMSEH CFI TECHNOLOGY. 2.08 As used in this AGREEMENT, the term "Sold" shall be applicable to a product at that point in time at which the selling party invoices their dealers or customers for shipment of the product. 3. CONFIDENTIAL INFORMATION 3.01 Any information disclosed by one party ("DISCLOSING PARTY") to the other party ("RECEIVING PARTY"), which the DISCLOSING PARTY deems to be confidential and proprietary shall be disclosed in writing and marked with an appropriate legend designating such information as confidential at the time of disclosure. Any such information disclosed verbally, visually or in other tangible form shall be identified as confidential at the time of its disclosure and reduced to writing and appropriately marked as confidential within thirty (30) days of its disclosure. 3.02 The RECEIVING PARTY will hold in confidence and not use for any purpose other than the exercise of license rights granted under this AGREEMENT, any information disclosed by the DISCLOSING PARTY under Section 3.01, provided that the RECEIVING PARTY shall have no obligation with respect to any information which is: 3.02.1 already publicly known or in the public domain at the time of its disclosure to the RECEIVING PARTY; 2 3.02.2 becomes publicly known or in the public domain subsequent to its disclosure to the RECEIVING PARTY, through no fault of the RECEIVING PARTY; 3.02.3 is already known to the RECEIVING PARTY at the time of its disclosure to the RECEIVING PARTY or is subsequently developed by the RECEIVING PARTY by employees who had no access to the confidential information disclosed by the DISCLOSING PARTY; or 3.02.4 is subsequently disclosed to the RECEIVING PARTY by a third party having no obligation of confidence to the DISCLOSING PARTY. 3.03 The confidential disclosure obligations assumed by the RECEIVING PARTIES under this AGREEMENT shall terminate at the end of the term set forth in this AGREEMENT. 4. DOCUMENTATION AND TECHNICAL ASSISTANCE 4.01 TRC shall provide to TECUMSEH documentation and technical assistance reasonably necessary for TECUMSEH to manufacture LICENSED AC/REFRIGERATION PRODUCTS and LICENSED TRC PRODUCTS including, but not necessarily limited to: 4.01.1 Copies of bills of materials and manufacturing drawings for pertinent TRC PRODUCTS. 4.01.2 TRC shall designate a TRC Project Engineer who shall be available to assist TECUMSEH in the further development and manufacture of the LICENSED AC/REGRIGERATION PRODUCTS and LICENSED TRC PRODUCTS 4.01.3 TRC shall also make available to TECUMSEH technicians, draftsman, laboratory testing facilities, and assistance in obtaining U.L. approval and with other agency product approval processes at the following rates: 4.01.3.1 Technicians: $ $50 per hour. 4.01.3.2 Draftsman: $ $50 per hour. 4.01.3.3 Laboratory Testing Facilities: $500 per day. 4.01.3.4 Design Engineering: $150 per hour. 4.01.4 3 4.01.4.1 Within thirty (30) days of the EFFECTIVE DATE of this AGREEMENT, TECUMSEH shall pay to TRC an advance payment in the amount of $50,000 for such services. 4.01.4.2 TRC shall provide to TECUMSEH a written accounting of incurred fees on a periodic basis upon TECUMSEH's request. 4.01.4.3 TECUMSEH shall not be obligated to make any payments to TRC in excess of the advance payment set forth in section 4.01.4.1 for any services or goods provided under this AGREEMENT unless such additional payments were the subject of the prior written approval of TECUMSEH. 4.02 TRC shall provide TECUMSEH with access to its certification files, including U.L. files, and provide reasonable assistance to TECUMSEH in obtaining necessary certifications for the LICENSED PRODUCTS and TRC PRODUCTS manufactured by TECUMSEH. 4.03 Any inventions, copyrightable works, know-how, trade secrets or other intellectual properties developed under this AGREEMENT by one or more employee of one of the parties hereto, shall be owned by the party whose employees conceived or developed such invention, copyrightable work, know- how, trade secret or other intellectual property. For any inventions, copyrightable works, know-how, trade secrets or other intellectual properties developed under this AGREEMENT by employees of both of the parties hereto, such intellectual property shall be jointly owned by the parties hereto. 5. LICENSE 5.01 5.01.1 TRC hereby grants to TECUMSEH a world-wide, non-exclusive, non- transferable license, with no right to sublicense, under the TRC IP to manufacture, have manufactured, use and sell LICENSED AC/REFRIGERATION PRODUCTS for use with refrigeration or air conditioning systems or products. 5.01.2 TRC hereby grants to TECUMSEH a world-wide, non-exclusive, non- transferable, royalty-free license, with no right to sublicense, under the TRC IP to manufacture and have manufactured LICENSED TRC PRODUCTS for sale to TRC. 5.02 5.02.1 TECUMSEH hereby grants to TRC a world-wide, non-exclusive, non- transferable license, with no right to sublicense, under the TECUMSEH IP to manufacture, have manufactured, use and sell LICENSED CFI PRODUCTS. 5.02.2 Upon the prior written approval by TECUMSEH of an identified sub-licensee, TRC may extend a sublicense under the license granted under section 5.02.1 to manufacture, have manufactured, use and sell LICENSED CFI PRODUCTS but shall in all respects be responsible for such manufacture, use or sales under all the terms and conditions of this AGREEMENT, as though the manufacture, use and sales were TRC's own act. 4 6. ROYALTIES AND ACCOUNTING 6.01 In consideration of the rights licensed by TRC to TECUMSEH under section 5.01.1 of this AGREEMENT, TECUMSEH agrees to compensate TRC as set forth below: TECUMSEH shall pay TRC a royalty of $0.25 per unit for each LICENSED AC/REFRIGERATION PRODUCT sold by TECUMSEH. 6.02 In consideration of the rights licensed by TECUMSEH to TRC under section 5.02.1 and 5.02.2 of this AGREEMENT, TRC agrees to compensate TECUMSEH as set forth below: TRC shall pay TECUMSEH a royalty of $0.25 per unit for each LICENSED CFI PRODUCT sold by TRC or a sublicensee of TRC. 6.03 Royalties shall be paid on a quarterly basis for products subject to the royalty provisions of this AGREEMENT which are Sold during such quarter, and shall be paid within thirty (30) days of the end of each quarter (i.e., March 31, June 30, September 30 and December 31). 6.04 Each party hereto shall maintain such regular books of account as are necessary for the other party to evaluate the accuracy of payments rendered pursuant to section 6. A certified public accountant appointed by the party initiating such an evaluation, shall be entitled to inspect such records and books of account of the other party solely for the purpose of verifying the accuracy of any such payment and such accountant shall disclose to initiating party only such information necessary to affirm or refute the accuracy of the payments. Such inspection must be made during the evaluated party's normal business hours and shall not be made more often than once per year. All contracts or arrangements between a party hereto and any sublicensee shall require that such sublicensee make available for review by a certified public accountant appointed by the party initiating such an evaluation, all records and books of accounts necessary or appropriate solely for the purpose of verifying the accuracy of records of sales of products subject to a sublicense hereunder by such sublicensees. Such accountants shall disclose to the party initiating such an evaluation only such information necessary to affirm or refute the accuracy of the payment. Such inspection must be made during such sublicensee's business hours and shall not be made more than once per year. 5 The cost and expenses of such records' inspection shall be borne by the party initiating such evaluation unless the audit discloses that adjustments exceeding five percent (5%) need to be made in amounts paid to the party initiating such evaluation, in which case the other party shall reimburse the party initiating such evaluation its reasonable expenses incurred in verifying the accuracy of such sales records. Each party hereto and all sublicensees shall retain their records for a period of three (3) years after each financial statement to permit such verifications. 7. EFFECTIVE DATE, TERM AND TERMINATION 7.01 This AGREEMENT shall have an EFFECTIVE DATE of March 31, 2002, and unless terminated earlier as hereinafter provided, shall terminate ten (10) years thereafter on March31, 2012. 7.02 Following the termination of this AGREEMENT pursuant to section 7.01, nothing in this AGREEMENT shall be interpreted to prevent the parties from manufacturing, using and selling products previously licensed under this AGREEMENT on a royalty-free basis unless such products are covered by an enforceable patent owned by the other party. 7.03 Either party may terminate this Agreement if the other party breaches any material provision and has failed to cure such breach within sixty (60) days following written notice of the details of such breach by the complaining party. 7.04 This AGREEMENT may be extended by the mutual consent of the parties hereto under the terms and provisions of such future mutual consent. 8. INFRINGEMENT 8.01 In the event that any third party infringes any of the TECUMSEH IP rights licensed to TRC by TECU7MSEH under this Agreement, any and all legal actions against such third party shall be at the sole discretion and control of TECUMSEH and at the sole expense and for the sole benefit of TECUMSEH. In the event TECUMSEH brings a legal action against such third party, TRC agrees to cooperate with TECUMSEH at TECUMSEH's expense in such action and to make available all evidence, documents, data, material and other matters in its possession which are pertinent and valuable to the success of such legal action. 8.02 In the event that any third party infringes any of the TRC IP rights licensed to TECUMSEH by TRC under this Agreement, any and all legal actions against such third party shall be at the sole discretion and control of TRC and at the sole expense and for the sole benefit of TRC. 6 In the event TRC brings a legal action against such third party, TECUMSEH agrees to cooperate with TRC at TRC's expense in such action and to make available all evidence, documents, data, material and other matters in its possession which are pertinent and valuable to the success of such legal action. 9. MARKING 9.01 TECUMSEH agrees to label those LICENSED AC/REFRIGERATION PRODUCTS sold by TECUMSEH under this AGREEMENT, and product literature for such products, with the term "FireShield" for such products which utilize the same design as TRC's "FireShield"-labelled products. 9.02 TRC warrants and represents that it has the right to mark products identified in section 9.01 with the term "FireShield". TRC further agrees to indemnify TECUMSELI for any and all expenses and damages incurred by TECUMSEH for any and all legal claims threatened or filed against TECUMSEH for the use of the term "FireShield" in association with products identified in section 9.01. 10. WARRANTIES 10.01 TECUMSEH represents and warrants in respect to the TECUMSEH IP that it has the legal power to extend the rights granted to TRC in this AGREEMENT and that it has not made and will not make any commitments to others inconsistent with or in derogation of such rights. 10.02 TRC represents and warrants in respect to the TRC IP that it has the legal power to extend the rights granted to TECUMSEH in this AGREEMENT and that it has not made and will not make any commitments to others inconsistent with or in derogation of such rights. 11. MISCELLANEOUS 11.01 PROHIB1TION ON ASSIGNMENT: Neither this AGREEMENT nor any of the rights conferred by this AGREEMENT is assignable by either party hereto without the prior written consent of the other party hereto, which consent will not be unreasonably withheld. 11.02 INTEREST: All sums owing under this AGREEMENT that are not received within ten (10) days after the due date shall bear simple interest of 1.5% per month until paid (or the maximum rate permitted by law, if lesser). 11.03 NOTICES: All notices required under this AGREEMENT shall be given in writing and shall be deemed given if sent by certified mail, return receipt requested, to the following: 7 For TECUMSEH: Kent B. Herrick For TRC: Raymond Legatti 11.04 CHOICE OF LAW: This AGREEMENT shall be interpreted and construed in accordance with the laws of the State of Michigan without regard to any conflict of laws principles. 11.05 ENTIRE AGREEMENT: This AGREEMENT constitutes the entire agreement between the parties relating to the subject matter of this AGREEMENT and supercedes all prior discussions between the parties. No amendment or modification of this AGREEMENT shall be valid unless in writing and signed by both parties. 11.06 DUPLICATE ORIGINALS: This AGREEMENT shall be executed in two counterparts, each of which shall for all purposes be deemed an original. IN WITNESS WHEREOF the parties have caused this AGREEMENT to be executed by their duly authorized representatives: TECUMSEH TRC Tecumseh Products Company Technology Research Corporation 100 East Patterson Street 5250 140111 Avenue North Tecumseh, Michigan 49286 Clearwater, Florida 33760 By: /s/ Kent B. Herrick By: /s/ Raymond Legatti Title: President & CEO Title: President Date: 22 March 2002 Date: 22 March 2002 8 APPENDIX A TECUMSEH IP U.S. Patent Application Serial No. 10/0 14,692 entitled COMPRESSOR TERMINAL FAULT INTERRUPTION METHOD AND APPARATUS PCT Application filed on December 11, 2001 entitled COMPRESSOR TERMINAL FAULT INTERRUPTION METHOD AND APPARATUS which claims priority from U.S. Application Serial No. 60/254,945. APPENDIX B TRC IP U.S. Pat. No. 4,567,456 entitled RESETTABLE CIRCUIT CLOSING DEVICE U.S. Pat. No. 5,229,730 entitled RESETTABLE CIRCUIT INTERRUPTER U.S. Pat. No. 4,931,894 entitled GROUND FAULT CURRENT INTERRUPTER CIRCUIT WITH ARCING PROTECTION U.S. Pat. No. 6,292,337 B1 entitled ELECTRICAL SYSTEM WITH ARC PROTECTION -----END PRIVACY-ENHANCED MESSAGE-----