-----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, Extfn3B4w9WlVRZPRKNlh4L0rlhEufZB07Z38BiSiY7dL3n2lMTDAxfRRqEXuWHC n+1OUv0eO9aHk12uB9mb+A== 0000741556-03-000032.txt : 20030627 0000741556-03-000032.hdr.sgml : 20030627 20030627163107 ACCESSION NUMBER: 0000741556-03-000032 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 20030331 FILED AS OF DATE: 20030627 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: 03761659 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 k10fy2003.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, 2003 Commission file number 0-13763 TECHNOLOGY RESEARCH CORPORATION (Exact name of registrant as specified in its charter) Florida 59-2095002 (State or other jurisdiction of (I.R.S. Employer incorporation or Organization) Identification No.) 5250 140th Avenue North, Clearwater, Florida 33760 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (727) 535-0572 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock $.51 par value (Title of Class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] Indicate by check mark whether the registrant is an accelerated filer (as defined by Rule 12b-2 of the Act). Yes [ ] No [X] The aggregate market value of common stock held by non-affiliates of the Registrant, as of September 30, 2002 was $6,505,656, based upon the $1.361 closing sale price for the Common Stock on the NASDAQ National Market System on such date. For the purpose of this computation, all executive officers and directors of the Registrant have been deemed to be affiliates. Such determination should not be deemed to be an admission that each such director and officer is, in fact, an affiliate of the Registrant. As of May 31, 2003, the number of shares outstanding of the Registrant's common stock, $.51 par value, was 5,448,037. DOCUMENTS INCORPORATED BY REFERENCE The Registrant's Definitive Proxy Statement related to its 2003 Annual Meeting of Shareholders to be held on August 21, 2003 will be incorporated by reference into Part III of this Form 10-K and filed with the Securities and Exchange Commission not later than 120 days after the end of the fiscal year covered by this Form 10-K. TABLE OF CONTENTS PART I Page Item 1. Business .................................................... 3 Item 2. Properties .................................................. 15 Item 3. Legal Proceedings ........................................... 15 Item 4. Submission of Matters to a Vote of Security Holders ..........16 PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters ................................. 16 Item 6. Selected Financial Data ..................................... 17 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations ......................... 18 Item 7a. Quantitative and Qualitative Disclosures About Market Risk .. 25 Item 8. Financial Statements and Supplementary Data ................. 25 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure ...................... 25 PART III Item 10. Directors and Executive Officers of the Registrant .......... 25 Item 11. Executive Compensation ...................................... 25 Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters .................. 25 Item 13. Certain Relationships and Related Transactions .............. 25 PART IV Item 14. Controls and Procedures ..................................... 26 Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K ..................................... 27 SIGNATURES ........................................................... 30 CERTIFICATION OF CEO - Robert S. Wiggins ............................. 31 CERTIFICATION OF CFO - Scott J. Loucks ............................... 32 As used in this Annual Report on Form 10-K, "we", "our", "us", the "Company" and "TRC" all refer to Technology Research Corporation and its subsidiary unless the context otherwise requires. This Annual Report on Form 10-K contains forward-looking statements, within the meaning of the Private Securities Litigation Reform Act of 1995 and the Securities Exchange Act of 1934. These statements are related to future events, other future financial performance or business strategies, and may be identified by terminology such as "may," "will," "should," "expects," "scheduled," "plans," "intends," "anticipates," "believes," "estimates," "potential," or "continue," or the negative of such terms, or other comparable terminology. These statements are only predictions, and actual events or results may differ materially. In evaluating these statements, you should specifically consider the factors described throughout this report. Such key factors include, but are not limited to, the acceptance of any new products, such as Fire Shield(R), into the marketplace, the effective utilization of the Company's Honduran manufacturing facility, changes in manufacturing efficiencies and the impact of competitive products and pricing. The Company cannot provide any assurance that predicted future goals, results, levels of activity or performance will be achieved, and the Company disclaims any obligation to revise any forward-looking statements subsequent to the occurrence of events or circumstances, whether anticipated or unanticipated. Part I ITEM 1. BUSINESS General Technology Research Corporation, a Florida corporation, was established in June of 1981 with the intended purpose of pursuing orders for products to be designed and manufactured for sale to the military engine generator set controls market, of which the Company's founders had acquired substantial experience. The Company's expertise in this area is well known, and the Company's performance in product quality and delivery to the United States Military and its prime contractors have resulted in the Company being recognized as a leader in this industry. After establishing a military product base, the Company turned its efforts early on to developing commercial markets for its ground fault sensing technology of which the Company's founders also had acquired substantial knowledge. This "core" technology led to the development of products that sense dangerous power leakage from appliances, tools and other electrical devices and cut off power immediately thereby preventing potential fires, electrocutions or serious injuries from electrical shock. The Company has become an internationally recognized leader in the design and supply of such portable electrical safety products. The Company's core commercial and military business produces the foundation upon which the Company may develop related technologies and new products to expand its business. The Company's new Fire Shield(R) and Surge Guard Plus(TM) product lines are examples of such a strategy, and the Company is now focused on developing the markets for these products into their full potential. 3 Net sales contributed by commercial and military products are as follows: Year Ended March 31 Commercial % Military % Total -------- ---------- ---- -------- ---- ---------- 2003 $ 10,254,998 58.1 $ 7,386,144 41.9 $ 17,641,142 2002 10,276,165 62.2 6,241,266 37.8 16,517,431 2001 12,117,588 68.1 5,687,823 31.9 17,805,411 2000 12,801,147 76.6 3,910,457 23.4 16,711,604 1999 13,929,177 81.4 3,190,542 18.6 17,119,719 Royalties from license agreements are as follows: Year Ended March 31 Royalties -------- --------- 2003 $ 120,794 2002 166,854 2001 231,563 2000 126,121 1999 91,295 The Company's backlog of unshipped orders at March 31, 2003 ("Fiscal Year") was approximately $6.2 million. This backlog consists of approximately 24% commercial product orders and approximately 76% military product orders, all of which is expected to ship within Fiscal Year 2004. Commercial Products and Markets Core Commercial Products. The Company's core commercial business was developed out of the demand for the following Underwriters Laboratories ("UL") classifications of ground fault protective devices: Ground Fault Circuit Interrupters ("GFCI"); Appliance Leakage Circuit Interrupters ("ALCI"); Leakage Current Detectors and Interrupters ("LCDI"); and Equipment Leakage Current Interrupters ("ELCI"). Ground fault protective devices help protect against the hazards of fire and electrical shock that result when water comes in contact with electrically "live" conductors or when faulty electrical grounding is found in old or damaged extension cords, appliance cords, house wiring and electrical equipment. The demand for the Company's commercial products has resulted from the National Electrical Code ("NEC"), UL product standards and voluntary efforts by industry to improve the electrical safety of their products. Electrical safety is compromised when a ground fault occurs, which is a condition where electric current finds an abnormal path to ground, such as when a power tool comes in contact with water while plugged into a live outlet or when it is damaged in such a way as to cause internal wiring to come in contact with exposed metal parts allowing electricity to pass through the user of that power tool. Upon such occurrence, the entire device can become as electrically alive as the power line to which it is attached. If a person is touching such a live device while grounded (by being in contact with the ground or, for example, a metal pipe, gas pipe, drain or any attached metal device), that person can be seriously or fatally injured by electric shock. Fuses or circuit breakers do not provide adequate protection against such shock, because the amount of current necessary to injure or kill a human or animal is far below the level of current required for a fuse to blow or a circuit breaker to trip. 4 The Company's GFCI devices provide protection from dangerous electrical shock by sensing leakage of electricity and cutting off power. GFCIs are currently available in three types: circuit breaker, receptacle and portable. The Company specializes in the portable types of these products. GFCIs constantly monitor electric current, and as long as the amount of current returning from the device is equal to the amount that is directed to the device, the GFCI performs no activities. Conversely, if there is less current coming back than there is flowing into the device, some portion must be taking a path through a foreign body, thereby creating a hazard. Upon recognizing that condition, the GFCI terminates the flow of electricity instantaneously. These devices have various commercial and military applications. The Company's ALCI devices, whose function is to interrupt both conductors of the electric circuit to a load when a fault current to ground exceeds 4 - 6 mA (milli-amperes), are intended to be used in conjunction with electrical appliances. ALCIs are designed to be used only in a circuit that has a solidly grounded neutral conductor, and are not intended to be used in place of a GFCI in applications where the GFCI is required. ALCIs are considered "personnel protection" devices. These products are intended for portable and short-time use, and should be used only while attended; for example, with kitchen appliances, floor care products, hair dryers, and the like, which are connected to a power supply circuit by means of a flexible cord terminating in an attachment plug. The Company's LCDI devices are intended to reduce the risk of electrical fires by disconnecting power when sensing current leakage between conductors of power cords. The Company's Fire Shield product lines are approved in the UL classification of LCDIs. Several years ago, both government and industry research into the major causes of fire led to a search for new, cost-effective methods to prevent electrical fires. In response to this need, the Company developed and patented Fire Shield, a product designed to prevent fires caused by damaged or aging appliance power supply cords and extension cords, which have been identified as a leading cause of electrical fires. On June 1, 1999, the Company announced major enhancements to its Fire Shield line of appliance power supply cords that added a higher degree of safety against fire and electric shock for two wire appliances. These new capabilities have significant safety benefits to the consumer. These enhancements are based on feedback from the industry and from the staff of the United States Consumer Product Safety Commission ("CPSC") on the need to protect not only the power cord, but also the internal wiring of the appliance. The latest annual statistics from the CPSC indicate that extension cords, power strips, toaster/toaster ovens, power cords on appliances and household wiring are responsible for over $450 million in residential fire damage, 180 lives lost and 950 injuries. The Company believes that its Fire Shield technology will continue to advance as a valued technology for electrical safety and fire protection in the OEM and consumer marketplaces. The Company believes the addition of surge protection within these devices will even further enhance the value of the product. The Company's Fire Shield technology currently addresses five distinct market applications: (1) the Fire Shield Power Surge Strip - a consumer product; (2) the Fire Shield Safety Circuit - an OEM product; (3) the Fire Shield Power Cord - an OEM product; (4) the Fire Shield Safety Extension Cord - a consumer product; and (5) the Fire Shield Home Wiring System - for the luxury home builder. The Company believes that its Fire Shield technology represents the best opportunity for major long-term growth. The Company's ELCI devices are intended to protect equipment, such as copy machines, printers and computers, from excessive electrical leakage of current that could occur due to the breakdown of insulation between live and grounded parts, which could cause fires and other damage. Xerox Corporation voluntarily uses the Company's ELCI products to protect many of its business machines. 5 Impact of Revised Product Standards. The NEC requires ground fault protection on many applications, which are enforced by OSHA and local government building codes and adhered to by most manufacturers. The Company presently focuses its marketing efforts in certain spot markets, which have developed in response to NEC imposed requirements. The NEC requirements are often incorporated into UL product standards. In January 1989, high-pressure sprayer/washer manufacturers that desired UL listing of their products were required to include a GFCI and/or double- insulation protection on each electrically driven sprayer/washer. Sales to this industry were severely impacted in Fiscal Year 1996 as the majority of the sprayer/washer manufacturers opted for the more cost effective double-insulated technology rather than GFCI technology. Effective January 1996, the double- insulation provision was eliminated from the National Electric Code, but UL did not update its standard enforcing this change until May 2000. Sales to this industry were approximately $4.5 million less in each of the Fiscal Years 1996, 1997, 1998 and 1999, compared to Fiscal Year 1995, due to the choice of sprayer/washer manufacturers not using the Company's GFCI products and due to the delay of UL requiring the industry to use GFCI technology. The revised standard UL 1776 requiring the use of GFCIs for UL listed sprayer/washers was issued effective as of May 6, 2000. The result was that sales to this market grew to approximately $2.4 million in Fiscal Year 2001 from approximately $1.5 million in Fiscal Year 2000. However, due to price erosion, losing sales to far-east competitors and lower demand for electric high-pressure sprayer/washers in the marketplace, sales to this market in Fiscal Year 2002 were approximately $1.3 million, down approximately $1.1 million from the prior year. In Fiscal year 2003, the Company gained larger market share with sales of approximately $2.16 million. Also, Article 625 of the 1996 Edition of the NEC requires electric vehicle ("EV") charging systems to include a system that will protect people against serious electric shock in the event of a ground fault. The Company has shipped product to the majority of the major automobile manufacturers in support of their small EV production builds, and the Company is active with various standards and safety bodies, relating to the electric vehicle, on a worldwide basis. Sales for the Company's EV safety products remain relatively low due to the small number of electric vehicles produced. Improvements in battery technology along with mandates from individual states for zero emission vehicles, will determine whether this will be a viable market in the future. On July 13, 2001, the NEC added the requirement for cord fire prevention on room air conditioners to the 2002 National Electrical Code. UL Standard 484 for room air conditioners was revised to reflect this change in the NEC and is scheduled to become effective in August 2004. The proposal requires that room air conditioners be provided with either LDCI or Arc Fault Circuit Interrupter ("AFCI") protected cord sets by their manufacturers. The Company believes that its Fire Shield cord set will provide manufacturers of room air conditioners with the best solution for this new requirement. These events create an approximate $60 million annual market for its participants. The Company believes it will realize significant revenues by this opportunity starting in Fiscal Year 2005. The Company currently manufactures and markets various portable GFCI, ALCI, LCDI and ELCI products, such as plug-in portable adapters, several extension cord models in various lengths, various modules for original equipment manufacturers ("OEM") customers, and variations of such products for voltage differences in both the United States and foreign markets. The Company is focusing more of its marketing efforts in placing its products with major retailers, which include Wal-Mart, Home Depot, Sears Mall stores, Orchard Supply Hardware, and TruServ(the buying co-op for True Value Hardware Stores), as well as with many independent retailers through distributors. The Company's products are also being offered through magazines, catalogs and E-commerce retailers. 6 License Agreements. The Company has been issued several domestic and foreign patents on its portable GFCI, which incorporate design features not available on any similar product known to the Company (see Patents, Licenses and Trademarks on page 11 for further information). The Company has entered into seven license agreements and three sales and marketing agreements concerning its portable GFCI, ALCI, ELCI and LCDIs. These agreements are with entities located in Australia, France, Italy, Japan, the United Kingdom and the United States and have been granted for the purpose of market penetration into those areas where it would be difficult for the Company to compete on a direct basis. On February 16, 1999, the Company entered into an agreement (the "Agreement") with Applica Inc. (previously named Windmere-Durable Holdings, Inc.), that grants Applica Inc. a non-exclusive license to manufacture, have manufactured, use and sell products that use the Company's Fire Shield appliance cord technology in return for royalties. Applica Inc. is a large Miami, Florida based manufacturer and distributor of a wide variety of, among other items, household appliances and portable personal care products utilizing electric current (e.g. portable heaters, hair dryers and curlers, irons, food mixers, toasters and toaster ovens and numerous other items), most of which are sold both domestically and internationally. Under this Agreement, the Company currently receives royalties from Applica Inc. for portable heaters that are manufactured under the Black & Decker(R) brand name. On June 4, 2002, the Company announced the signing of a cross license agreement (the "Agreement")with Tecumseh Products Company for technology that provides improved protection for "Refrigeration and Air Conditioning Systems" against electrical faults. The licensed product integrates Tecumseh's proprietary technology relating to the protection of refrigeration compressors with the Company's proprietary Fire Shield technology, which will bring an advanced level of protection to refrigeration and air conditioning systems worldwide. The Fire Shield technology is also being marketed by the Company for cord fire protection on single-phase cord and plug connected room air conditioners manufactured after August 2004, as required by the National Electrical Code. The licensed product is targeted at 15 to 20 million refrigeration and air conditioning systems sold worldwide each year. Under the term of the Agreement, either party has the right to manufacture and sell the licensed product and a royalty will be paid by the selling party to the other party for the use of its technology. Tecumseh is now in the testing phase in the development of these products. On December 1, 2002, the Company entered into a new license agreement (the "Agreement") with Applica Inc. replacing the agreement dated December 31, 1999, which authorizes Applica Inc. to use the Company's extended Fire Shield technology to detect fires and electrical shock in certain small kitchen appliances manufactured by Applica Inc. under the Black & Decker(R) brand name. In return, the Company receives royalties for each unit manufactured by Applica Inc. using the Company's Fire Shield technology. In addition, the new Agreement states that the Company will receive certain non-performance penalty payments if minimum targets are not met. The Fire Shield technology includes the ability to detect an open flame or insulation/dielectric failure due to build up of grease or other substances, and disconnect the power thus reducing the risk of injury or property damage. In addition, the Fire Shield technology protects the user from electrocution or serious injury from electrical shock due to insulation failure or damage to the electrical wiring of the appliance. The Applica Inc. appliances that use this technology will display a Fire Shield marking on the appliance or packaging. In addition, Applica Inc. recently announced its commitment to incorporate the Company's Fire Shield technology into certain Black & Decker(R) kitchen appliances, which utilize Applica's Advanced Safety Technology(TM) ("AST") system. The AST(TM) system is a combination of the most advanced and significant safety features available today that can help prevent fires and electric shock in appliances. The Company's proprietary extended Fire Shield technology enables Applica Inc. to provide its customers an unparalleled degree of safety for such appliances. 7 Military Products and Markets The Company designs and manufactures products for sale to the military engine generator set controls market. The Company's expertise in this area is well known, and the Company's performance in product quality and delivery to the United States Military and its prime contractors have resulted in the Company being recognized as a leader in this industry. The Defense Logistics Agency established a program rating system for its suppliers in 1995 for product quality, packaging and on-time deliveries, and since its inception and for the eighth straight year, the Company has been honored as a Best Value Medalist for the highest rating Gold Category, which signifies the Company's commitment to military contract performance. The Company is currently a supplier of control equipment used in engine generator systems purchased by the United States military and its prime contractors. The term "control equipment" refers to the electrical controls used to control the electrical power output of the generating systems. In general, the controls monitor and regulate the operation of engine generator mobile electric generating system sets. Electric generating systems are basic to all branches of the military, and demand has remained relatively constant, unlike products utilized in armaments and missiles. Sales are made either directly to the government for support parts or to prime contractors for new electric generator sets, which incorporate the Company's products. The Company is a qualified supplier for 37 control equipment products as required by the Department of Defense and is a supplier of the following types of control equipment, among others: protective relays and relay assemblies, instrumentation transducer controls, fault locating panel indicators, current transformer assemblies for current sensing control and instrumentation, motor operated circuit breaker assemblies and electrical load board and voltage change board assemblies. These products are also furnished for spare parts support for existent systems in the military inventory. In 1989, the Company completed the redesign of the control equipment related to the Tactical Quiet Generator ("TQG") Systems program and provided prototype and first article test qualification units to a prime contractor for system testing, which was completed in late 1992. Subsequently, the Company received production orders of approximately $12.4 million for these products from the U.S. Government's prime contractor covering the time period from August 1992 to July 1998. The current contract for the 5/10/15KW TQG systems to the prime contractor, valued at approximately $8.2 million, is for a 10-year period with the last ordering year being 2007. To date, the Company has shipped approximately $4.5 million of product to the prime contractor of this contract. On April 15, 2003, the Company announced that it received follow-on production orders of approximately $1.26 million to be shipped over the next 14 months. In November 1998, the Company received its first orders for control equipment related to the new 3KW TQG systems program. The Company completed shipments for these initial orders in March 2002, which totaled approximately $6.0 million. In August 2001, the Company announced that it would have the opportunity to participate in the follow-on 10-year contract for the 3KW TQG systems, valued at approximately $21 million, with scheduled deliveries from 2002 to 2012. The Company began shipments under this new contract in May 2002, and to date the Company has shipped approximately $3.7 million of product to the prime contractor of this contract. On April 15, 2003, the Company announced that it received follow-on production orders in the amount of $3.46 million to be shipped over the next 14 months. 8 The Company furnishes various types of A.C. power monitors to the military for its U.S. Navy vessels. These monitors provide system protection for the electrical distribution systems that are used on all classes of U.S. Navy surface vessels, such as minesweepers, destroyers, guided missile cruisers and aircraft carriers in addition to other types of naval vessels. The monitors meet the environmental and stringent U.S. Navy high shock and vibration and endurance testing requirements, and they are furnished for new vessel production, retrofit upgrades and existent vessels requiring spare support parts. In addition, the Company provides both A.C. and D.C. power monitoring systems, which include, voltage regulators, power transformers, A.C. over current and short circuit protection monitor assemblies and current sensing transformers for the military's armored-tracked vehicles. These products must pass highly accelerated stress screening and vehicle road testing at the Aberdeen Proving Grounds of the United States Department of Defense. The Company's panel mount GFCI is the only GFCI device that is approved and qualified by the Department of Defense for use on its mobile-tactical generating systems. The Company's contracts with the U.S. Government are on a fixed-price bid basis. As with all fixed-price contracts, whether government or commercial, the Company may not be able to negotiate higher prices to cover losses should unexpected manufacturing costs occur. All government contracts contain a provision that allows for cancellation by the government "for convenience." However, the government must pay for costs incurred and a percentage of profits expected if a contract is canceled. Contract disputes may arise which could result in a suspension of such contract or a reduction in the amounts claimed. Testing and Qualification A number of the Company's commercial products must be tested and approved by UL or an approved testing laboratory. UL publishes certain "Standards of Safety" which various types of products must meet and perform specific tests to ascertain whether the products meet the prescribed standards. If a product passes these tests, it receives UL approval. Once the Company's products have been initially tested and qualified by UL, they are subject to regular field checks and quarterly reviews and evaluations. UL may withdraw its approval for such products if they fail to pass these tests and if prompt corrective action is not taken. The Company's portable electrical safety products have received UL approval. In addition, certain of the Company's portable GFCI, ALCI and ELCI products have successfully undergone similar testing procedures conducted by comparable governmental testing facilities in Europe, Canada and Japan. As a result of a National Electrical Manufacturers Association ("NEMA") sponsored investigation of the long-term performance and installations of GFCI Dual Outlet Receptacles across the United States, UL announced on November 1, 2001 that it would toughen the test standard for all such devices, which included the Company's portable GFCI devices. All of the Company's GFCI devices were required to be re-tested and re-certified by January 1, 2003, according to the published UL timetable. The re-certification tested for 1) expanded surge requirements, 2) new requirements for moisture and corrosion, and 3) new requirements for reverse line-load miswiring. Of those products that represent significant revenues to the Company, re-certification is 100% complete. 9 The Company's military products are subject to testing and qualification standards imposed by the U. S. Government. The Company has established a quality control system, which has been qualified by the United States Department of Defense to operate under the requirements of a particular specification (MIL-I-45208). To the extent the Company designs a product that it believes meets those specifications, it submits the product to the responsible government-testing laboratory. Upon issue of the qualification approval and source listing, the product is rarely subject to re-qualification; however, the U. S. Government may disqualify a product if it is subject to frequent or excessive operational failures. In addition, the Company's governmental contracts provide that the current specifications and requirements could be changed at any time, which could require the Company to redesign its existing products or develop new products which would have to be submitted for testing and qualification prior to their approval for purchase by the military or its prime contractors. Certain contracts also require witness testing and acceptance by government inspectors prior to shipment of the product. The Company's wholly owned foreign subsidiary, TRC/Honduras S.A. de C.V. is an ISO 9002 certified manufacturing facility and an approved supplier to Xerox Corporation, and holds UL, Canadian Standards Association ("CSA") and the German standards association, Verband Deutsher Elektrotechniker ("VDE"), approvals. Design and Manufacturing The Company currently designs almost all of the products that it produces and generally will not undertake special design work for customers unless it receives a contract or purchase order to produce the resulting products. The Company continues to work with foreign licensees to design products for foreign markets. A significant number of the Company's commercial and military electronic products are specialized in that they combine both electronic and magnetic features in design and production. The business of an electronics manufacturer such as the Company primarily involves assembly of component parts. The only products that the Company manufactures from raw materials consist of its transformers and magnetic products. The manufacture of such products primarily involves the winding of wire around magnetic ferrite cores. Recently, in an effort to lower costs by vertical integration, the Company commenced molding its own plastic parts for its commercial product lines at its manufacturing facility in Honduras. The remainder of the products that the Company manufactures is assembled from component parts that are produced or distributed by other companies. On February 3, 1997, the Company's Board of Directors approved the incorporation of TRC/Honduras, S.A. de C.V., a wholly owned Company, for the purpose of manufacturing the Company's high-volume products. TRC/Honduras, S.A. de C.V. conducts its operations in a leased 42,000 square foot building located in ZIP San Jose, a free trade zone and industrial park, located in San Pedro Sula, Honduras. The benefits of being located in a free trade zone include no Honduran duties on imported raw materials or equipment, no sales or export tax on exported finished product, a 20 year Honduran federal income tax holiday and a ten year Honduran municipal income tax holiday for any profits generated by the subsidiary, and various other benefits. 10 As a result of increasing manufacturing costs in Honduras, the Company implemented a plan in Fiscal Year 2003 to move approximately 30-40% of its Honduran production to a wholly-owned subsidiary of Applica Inc., Applica- Durable Manufacturing ("ADM"), a contract manufacturer in China with which the Company had acquired substantial experience prior to its setting up operations in Honduras. The Company's plan is for ADM to manufacture certain subassembly boards, which will then be shipped to Honduras for final assembly. ADM will also build finished product for certain retail customers, international customers and those customers that have operations in China. The Company received first shipments of finished product and subassembly boards from ADM in Fiscal Year 2003. The Company continues to manufacture its specialized military products and low- volume commercial products in its 43,000 square foot facility in Clearwater, Florida. Patents, Licenses, and Trademarks Raymond H. Legatti, one of the Company's original founders, has designed seven Company patents in the U.S., six in Great Britain, three in Italy, two in Australia, Germany and France and one in Canada, Sweden and Japan with respect to the Company's products giving rise to portable GFCI and Fire Shield technologies. Several other patent applications have been filed by the Company and are awaiting action, and the issuance of patents with respect thereto will complement the Company's core technology and products. The Company's U.S. patents will be valid for either 20 years from filing or 17 years from date of issue in the United States. The term of the Company's patents in all other countries vary from 15 to 20 years. On October 12, 1999, Xerox Corporation was issued a patent, which listed Mr. Legatti as a co-inventor for the Modular, Distributed Equipment Leakage Circuit Interrupter. This product is used on some of Xerox's business machines and shuts off power when sensing a certain leakage of electricity which could produce dangerous results. On February 25, 2003, the Company was issued a patent which listed Mr. Legatti as the inventor of a Protection System for Devices Connected to an Alternating Current Electrical Power Supply. The patent relates to technology that provides additional user safety intended for application on electrical appliances and equipment such as small hand tools and kitchen appliances (e.g. toasters, toaster ovens, steam irons, coffee makers, etc.) In addition to electric shock protection, the technology also provides the ability to detect and prevent a variety of potentially hazardous electrical conditions such as excessive heat, flame, electrical insulation breakdowns and pressure buildups. When such hazardous conditions occur, the power supply is shut off, and an audible and/or visual alarm is activated. Applica Inc. has licensed this patent for use on its line of Black & Decker(R) small kitchen appliances as described above under License Agreements. The life of certain patents, related to the Company's GFCI devices, have recently expired, and others will expire within the next few years. The Company is unable to predict how that might affect its business. The Company believes, however, that the success of its business depends more on the technical and engineering expertise, marketing and service abilities of its employees than on patents, trademarks and copyrights. Nevertheless, the Company owns several patents and has a policy of seeking patents when appropriate on inventions concerning new products and improvements as part of its ongoing research, development and manufacturing activities. Furthermore, although the Company vigorously protects its patents, there can be no assurance that others will not independently develop similar products, duplicate the Company's products or design around the patents issued to the Company or that foreign intellectual property laws will protect the Company's intellectual property rights in any foreign country. 11 The Company licenses its technology for use by others in exchange for royalties or product purchases. Licensees are located in Australia, France, Italy, Japan, the United Kingdom and the United States. Each licensee agrees to pay the Company a royalty or purchase product based on schedules set forth in the applicable agreement. The Company agrees to provide certain technical support and assistance to its licensees. The licensees have agreed to indemnify and hold the Company harmless against any liability associated with the manufacture and sale of products subject to the license agreement, including but not limited to defects in materials or workmanship. The Company has no other patents on or licensee agreements with respect to its products or technology, but has registered its TRC trademark with the U.S. Patent and Trademark Office. The Company's Shock Shield(R), Electra Shield(R) and Fire Shield(r) brand names are also registered trademarks of the Company. Marketing The Company's products are sold throughout the world, primarily through an in- house sales force, licenses and sales and marketing agreements. Although the Company will continue to market existing and new products through these channels, the Company is looking for other viable channels through which to market its products. The Company relies significantly upon the marketing skills and experience, as well as the business experience, of the management of the Company in marketing its products. The Company complements its sales and marketing activity through the use of additional distributors and sales representative organizations. The Company's internal distribution division, TRC Distribution, is supported by 31 independent sales representatives who sell to over 1,500 electrical, industrial and safety distributors. The Company exhibits its products at numerous trade shows, which have resulted in new commercial markets including the recreational vehicle industry and the appliance industry. The Company also markets through OEMs, both domestically and internationally, that sell the Company's products under their own brand labels. The Company has recently implemented a "value add" upgrade strategy, which provides finished product to those OEMs who are currently only receiving subassembly modules. The Company's plastic and receptacle molding capabilities are a key factor in providing "value add" upgrades to its customers. The Company primarily utilizes foreign licenses and sales and marketing agreements to market its products internationally (see Patents, Licenses and Trademarks for further information). The Company's products have worldwide application, and the Company believes that international demand for these products will continue to contribute to the Company's growth. The Company offers its customers no specific product liability protection except with regards to those customers that are specifically named as "Broad Form Vendors" under its product liability coverage. The Company does extend protection to purchasers in the event there is a claimed patent infringement that pertains to the Company's portion of the final product. The Company also carries product and general liability insurance for protection in such cases. 12 Major Customers and Exports Significant customers who accounted for 10% or more of sales, and aggregate exports were: Year ended March 31 Customer 2003 2002 2001 -------- ---- ---- ---- Fermont (a division of ESSI, a U.S. Government Prime Contractor) $ 3,937,999 3,855,593 4,305,101 ========= ========= ========= Exports: Canada $ 417,094 293,650 579,511 Far East 1,020,078 1,288,102 805,762 Europe 2,632,357 1,899,842 2,328,325 Mexico - 169,833 383,046 Australia 36,020 3,167 83,232 South America 6,484 6,458 13,784 Middle East 14,257 15,000 22,299 --------- --------- --------- Total exports $ 4,126,290 3,676,052 4,215,959 ========= ========= ========= Overall, the Company's exports were up approximately 12% in Fiscal Year 2003, compared to the Company's prior fiscal year, primarily due to increased shipments of product to a major sprayer/washer manufacturer in the amount of $881,500. All other exports to the Company's international OEM customers were relatively flat for Fiscal Year 2003, compared to the Company's prior fiscal year, due to the weakness in the overall global economy. The Company's military product sales are primarily to OEM prime contractors and secondarily to military procurement logistic agencies for field service support on previously shipped systems. In Fiscal Year 2003, military sales were approximately 42% of total sales, compared to 38% in the prior year. Sales to Fermont were up approximately 2%, compared to prior year, and overall, military sales increased approximately 18% as the result of spare part orders for the Company's control devices related to generator systems already in the field. Fermont accounted for approximately 22% of the Company's sales for Fiscal Year 2003, compared to approximately 23% for the prior fiscal year. The Company has no relationship with any of its customers except as a supplier of product. 13 Competition The commercial and military business of the Company is highly competitive. In the commercial market, the Company has significant competition, except with respect to its Fire Shield products. As a result, the Company may not be able to maintain current profit margins due to price erosion. The Company believes, however, that product knowledge, patented technology, ability to respond quickly to customer requirements, positive customer relations, price, technical background and industry experience are major competitive factors, and that it competes favorably with respect to these factors. In addition, the Company's patented GFCI technology utilizes, in certain adaptations, waterproofing and "trip mechanism" techniques, each of which provides the Company, in the judgment of its management, with a current competitive advantage. In the military market, the Company's products must initially pass government specified tests. The Company must compete with other companies, some being larger and some smaller than the Company and acting as suppliers of similar products to prime government contractors. The Company believes that knowledge of the procurement process, engineering and technical support, price and delivery are major competitive factors in the military market. The Company believes that it has competitive strengths in all of these areas due to senior management's involvement in the government procurement process and experience in the design engineering requirements for military equipment. A substantial portion of spare part procurement is set aside for small business concerns, which are defined in general as entities with fewer than 1,000 employees. Because the Company is classified as a small business concern, it qualifies for such set aside procurements for which larger competitors are not qualified. The entry barriers to the military market are significant because of the need, in most cases, for products to pass government tests and qualifications. Research, Development and Engineering The Company employs 12 persons in the Engineering Department, all of whom are engaged either full or part-time in research and development activities. This department is engaged in designing and developing new commercial and military products and improving existing products to meet the needs of the Company's customers. In connection with its efforts in developing the GFCI product, the Company believes that the increasing use of portable GFCI protection will provide new markets for the commercial marketplace, and accordingly, the Company has modified its GFCI designs to fit these markets and new applications. There can be no assurance, however, that the Company can maintain its sales levels in the commercial market in view of the possibility that an increased level of competition may develop. The Company spent $1,225,651 in Fiscal Year 2003, $1,049,649 in Fiscal Year 2002 and $1,197,874 in Fiscal Year 2001 on research, development and engineering activities. None of these activities were sponsored or financed by customers, and all have been expensed as incurred. The Company anticipates spending levels to remain comparable in the new fiscal year. 14 Employees As of March 31, 2003, the Company employed 81 persons on a full time basis, and of that total 47 employees were engaged in manufacturing operations, 12 in engineering, 12 in marketing and 10 in administration. The Company's Honduran subsidiary employed 225 persons on a full time basis as of March 31, 2003, and of that total, 222 employees were engaged in manufacturing operations and three in administration. Competition for such management, technical, manufacturing, sales and support personnel is intense, and there can be no assurance that the Company will be successful in attracting or retaining such personnel. None of the Company's employees are represented by a collective bargaining unit, and the Company considers its relations with employees to be stable. While the Company believes it has established good relations with its local labor force in both the United States and Honduras, its reliance upon a foreign manufacturing facility subjects the Company to risks inherent in international operations. Those risks include inflationary pressures, unexpected changes in regulatory requirements, changes in political climate, difficulties in coordinating and managing foreign operations and foreign labor issues. Any of the foregoing could have a material adverse effect on the Company's operations, prospects and financial results. ITEM 2. PROPERTIES The Company's executive offices and U.S. manufacturing facility are located on 4.7 acres of leased land in the St. Petersburg-Clearwater Airport Industrial Park. The lease, with options, extends for 40 years until 2021 and is subject to certain price escalation provisions every five years. This leased land is adequate to enable the Company to expand this facility to 60,000 square feet. The present facility provides a total of 43,000 square feet, including 10,000 square feet of offices and engineering areas, as well as 23,000 square feet of production areas and 10,000 square feet of warehouse space. In March 1997, the Company entered into a five year lease agreement with ZIP San Jose, an industrial park located in San Pedro Sula, Honduras, for a 42,000 square foot building in which the Company manufactures its high-volume products. The Company then entered into a one-year lease agreement with ZIP San Jose, which ended in March 2003. The Company currently has entered into a second one-year lease agreement, which ends in March 2004. ITEM 3. LEGAL PROCEEDINGS The Company is involved in various claims and legal actions arising in the ordinary course of business. In the opinion of the Company, the ultimate disposition of these matters will not have a material adverse effect on the Company. In November 2002, a civil complaint was filed against the Company and nine other defendants in the United States District Court in and for the District of Nevada. The complaint alleges infringement by each of the defendants of two patents registered in the name of the plaintiff, in the case of the Company arising out of its manufacture and sale of recreational vehicle voltage monitors and controllers, and seeks injunctive relief, an accounting of past profits generated from such sales, monetary damages and cost recoveries. The Company has filed a general denial of plaintiff's claims and management believes that the alleged infringement has not occurred. The Company is in the final stages of settling this claim, and the settlement amount will have no material adverse effect upon the Company's consolidated financial position, liquidity or results of operations. 15 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of security holders during the fourth quarter of the fiscal year ended March 31, 2003. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SECURITY HOLDER MATTERS The Company's shares of Common Stock are registered under Section 12(g) of the Securities Exchange Act of 1934 and are traded in the over-the-counter market utilizing the NASDAQ trading system, to which the Company gained admittance in December 1984, under the symbol "TRCI". In November 1995, NASDAQ approved the Company's application for listing on the National Market System. The following tables set forth a range of high and low market prices for the Company's Common Stock for the fiscal years ended March 31, 2003 and 2002 as reported by NASDAQ, and the dividends paid with respect to each quarter ended within such years. Market Price Cash Fiscal Year Ended High Low Dividends March 31, 2003: First Quarter $ 2.00 $ 1.43 $ 0.01 Second Quarter 1.84 1.21 0.01 Third Quarter 2.00 1.25 0.01 Fourth Quarter 2.75 1.76 0.015 ----- $ 0.045 March 31, 2002: First Quarter $ 2.00 $ 1.30 $ 0.01 Second Quarter 1.90 1.30 0.01 Third Quarter 2.42 1.40 0.01 Fourth Quarter 1.89 1.28 0.01 ---- $ 0.04 As of May 31, 2003, the approximate number of the Company's record shareholders was 461. This number does not include any adjustment for shareholders beneficially owning common stock held of record by the Depository Trust or fiduciary, which the Company believes to represent an additional 1,700 shareholders. The Company's authorized capital stock, as of May 31, 2003, consisted of 10,000,000 shares of common stock, par value $.51, of which 5,448,037 shares were outstanding. Effective as of the record date of March 31, 2003, the Company increased its quarterly cash dividend from $.01 per share to $.015 per share, which equates to an annual cash dividend of $.06 per share. The Company paid dividends of $.045 per share in Fiscal Year 2003 and $.04 per share in Fiscal Year 2002. 16 ITEM 6. SELECTED FINANCIAL DATA 2003 2002 2001 2000 1999 ---- ---- ---- ---- ---- Year ended March 31: Operating revenues $ 17,641,142 16,684,285 18,036,974 16,837,725 17,211,014 Gross profit $ 5,744,912 4,420,631 3,901,155 5,124,543 4,078,461 Net income (loss) $ 1,014,791 200,360 (411,547) 585,755 15,892 Basic earnings per share $ .19 .04 (.08) .11 - Weighted average number of common shares outstanding 5,438,381 5,437,497 5,439,811 5,455,756 5,455,756 Diluted earnings per share $ .19 .04 (.08) .11 - Weighted average number of common and equivalent shares outstanding 5,482,450 5,457,896 5,439,811 5,473,220 5,476,134 Cash dividends Paid $ .045 .04 .04 .03 - March 31: Working capital $ 8,873,080 7,934,196 8,898,697 10,267,576 6,899,677 Total assets $ 13,835,689 12,766,937 15,156,548 15,990,625 15,146,175 Current liabilities $ 1,523,980 913,526 2,012,335 1,366,382 3,521,949 Long-term debt $ - 500,000 1,750,000 2,500,000 56,250 Total liabilities $ 1,759,059 1,463,526 3,835,998 4,000,567 3,578,199 Retained earnings $ 1,803,027 1,032,996 1,050,135 1,679,150 1,257,068 Total stockholders' equity $ 12,076,630 11,303,411 11,320,550 11,990,058 11,567,976 17 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Critical Accounting Policies The Company's critical accounting policies are: (1) revenue recognition; and (2) excess and obsolete inventory reserves. Revenue Recognition. The Company recognizes revenue when an order has been received, pricing is fixed, product has been shipped and collectibility is reasonably assured. Title to goods passes to customers upon shipment, there are no customer acceptance provisions included in sales contracts and the Company has no installation obligation subsequent to product shipment. Similarly, revenue is recognized upon shipment to distributors as title passes to them without additional involvement or obligation. Collection of receivables related to distributor sales is not contingent upon subsequent sales to third parties. Cost of sales includes the cost of the product and the Company's estimate of any additional warranty, rework or other concessions the Company expects to incur in connection with a sale. Government sales are fixed price contracts. The Company has not experienced losses in the past on such contracts. Should the Company identify a loss on a future contract, the Company would account for the loss under Statement of Position 81-1, Accounting for Performance of Construction-Type and Certain Production Type Contracts, and record a charge against earnings in the period the estimated loss was identified. The Company accrues minimum royalties due from customers over the related royalty period. Royalties earned in excess of minimum royalties due are recognized as reported by the licensees. The Company enters into license agreements and receives nonrefundable license fees in exchange for the use of technology previously developed by the Company. The licensee receives the right to manufacture and sell certain products exclusively within specified geographic areas. The nonrefundable license fees are recorded as deferred revenue and recognized as income on a straight-line basis over the exclusivity period of the agreement. A termination or change to the initial license agreement could result in an accelerated recognition of the deferred revenue. License fees are included in royalty revenue. Excess and Obsolete Inventory Reserves. The Company's financial statements include an estimate associated with reserves with respect to inventory. Various assumptions and other factors underlie the determination of this estimate. The process of determining this estimate is fact specific and takes into account primarily historical experience and expected economic conditions. The Company evaluates this estimate on a monthly basis and makes adjustments each quarter where facts and circumstances dictate. The Company reserves 100%, or $218,336, of that inventory considered to be obsolete and 50%, or $355,880, of that inventory considered to be slow moving. The Company evaluates all inventory which has not had activity for twelve months. As of March 31, 2003, the Company's inventory reserve was $574,216 or approximately 11% of total inventory. The Company's accounting policies are more fully described in the Summary of Significant Accounting Policies in the Notes to Consolidated Financial Statements. As described therein, the preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions about future events that affect the amounts reported in the financial statements and accompanying notes. Future events and their effects cannot be determined with absolute certainty. Therefore, the determination of estimates requires the exercise of judgment. Actual results inevitably will differ from those estimates, and such differences may be material to the consolidated financial statements. 18 Operating Results Fiscal Years 2003 and 2002 Comparison The Company's operating revenues for the year ended March 31, 2003 were $17,761,936, compared to $16,684,285 reported in the prior year, an increase of approximately 6%. Net income was $1,014,791 for the year, compared to $200,360 reported in the prior year. Basic and diluted earnings were $.19 per share for the year, compared to $.04 per share for the prior year. The improvement in performance over the prior year was the result of increased revenues, higher gross profit margins and lower interest expense. Gross profit margins improved as the result of product mix plus productivity and quality improvements in manufacturing. Interest expense was reduced as a result of the Company remaining debt-free during the last three quarters of its fiscal year. Currently, all of the Company's $3,000,000 line of credit is available for use, and the Company's cash balance as of March 31, 2003 increased to $2,529,562. While uncertainties still exist in the economy, the Company expects its business to remain stable throughout Fiscal Year 2004. For the fiscal year ended March 31, 2003, commercial revenues decreased slightly by $21,167, military revenues improved by $1,144,878 and royalty income was down by $46,060 compared to the prior year. Commercial revenues continued to be affected in Fiscal Year 2003 by competitive pressures and the current weakness in the global economy; however, commercial revenues for the fourth quarter strengthened as the result of shipments of $650,000 to a major sprayer/washer manufacturer. Increased direct military shipments of field support parts for existing systems and strong shipments of control devices related to the Tactical Quiet Generator (TQG) programs resulted in record military revenues of $7,386,144 for Fiscal Year 2003. In support of recent military deployment, the Company responded to the increased demand with on-time shipments while achieving its highest level of production ever for its military products. The market for the Company's Fire Shield products continued to develop during Fiscal Year 2003. The Company shipped Fire Shield Power Surge Strips, a new product, to approximately 620 Wal-Mart Stores, Inc. In addition, Fire Shield licensed technology generated royalties of approximately $50,000 during the fiscal year. Fire Shield product sales and royalties currently represent approximately 2% of the Company's total revenues. The Company believes that its patented Fire Shield technology represents its most significant opportunity for growth. The Company's gross profit margin was approximately 33% of net sales for Fiscal Year 2003 compared to 27% in the prior year. The improvement was primarily the result of product mix plus productivity and quality improvements in manufacturing. Selling, general and administrative expenses for Fiscal Year 2003 were $3,190,338, compared to $3,175,724 for the prior year, reflecting comparable expenses year to year. Selling expenses were $1,854,671 for Fiscal Year 2003, compared to $1,816,133 for the prior year, an increase of approximately 2%. General and administrative expenses were $1,335,667 for Fiscal Year 2003, compared to $1,359,591 for the prior year, a decrease of approximately 2%. 19 Research, development and engineering expenses for Fiscal Year 2003 were $1,225,651, compared to $1,049,649 for the prior year, an increase of approximately 17%. The increase was related to the Company re-qualifying its portable GFCI products with Underwriters Laboratories ("UL"). As previously reported in the Company's Fiscal Year 2002 Form 10-K, UL announced on November 1, 2001 that it would change the test standard for portable GFCI devices as a result of a National Electrical Manufacturers Association ("NEMA") sponsored investigation of the long term performance and installations of GFCI Dual Outlet Receptacles across the United States. All of the Company's GFCI devices were required to be re-tested and re-certified by January 1, 2003, according to the UL timetable. The re-certification tested for 1) expanded surge requirements, 2) new requirements for moisture and corrosion, and 3) new requirements for reverse line-load miswiring. Of those products that represent significant revenues to the Company, re-certification is 100% complete. Interest and sundry income, net of interest expense for Fiscal Year 2003 was $6,330, compared to interest expense, net of interest and sundry income of $66,708 for the prior year, reflecting lower interest rates and the Company using less of its Line of Credit. Income tax expense for the years ended March 31, 2003 and 2002 differs from the amounts computed by applying the Federal income tax rate of 34 percent to pretax income as the operating results of the foreign manufacturing subsidiary are not subject to foreign tax since it is operating under a tax holiday for at least 20 years. The foreign operations resulted in income of approximately $301,000 in 2003 and $44,000 in 2002, and no income taxes have been provided on these results of operations. The total amount of undistributed earnings of the foreign subsidiary for income tax purposes was approximately $570,000 at March 31, 2003 and $269,000 at March 31, 2002. It is the Company's intention to reinvest undistributed earnings of its foreign subsidiary and thereby indefinitely postpone its repatriation. Accordingly, no provision has been made for foreign withholding taxes or United States income taxes which may become payable if undistributed earnings of the foreign subsidiary are paid as dividends to the Company. It is not practicable to calculate the unrecognized deferred tax liability on those earnings. Fiscal Years 2002 and 2001 Comparison The Company's operating revenues for the year ended March 31, 2002 were $16,684,285, compared to $18,036,974 reported in the prior year, a decrease of approximately 7%. Net income was $200,360 for Fiscal Year 2002, compared to a net loss of $(411,547) reported in Fiscal Year 2001. Basic and diluted earnings (loss) were $.04 per share for Fiscal Year 2002, compared to $(.08) per share for Fiscal Year 2001. Although the Company did not meet its revenue objectives for Fiscal Year 2002, the business was managed well, producing a profit instead of a loss in a tough economy. The improvement in performance was due to lower operating expenses and increased manufacturing productivity. In addition, supply chain initiatives produced a reduction in inventory of $1,553,543 allowing the Company to strengthen its balance sheet significantly, increasing cash by $978,327 while reducing its bank debt by $1,250,000. The decrease in revenues for Fiscal Year 2002 was due to commercial sales decreasing by $1,841,423, of which $735,250 was attributed to Xerox and its suppliers. Royalty income decreased by $64,709, and military sales increased by $553,443. The increase in military sales was mainly due to stronger spare parts orders and the Company being in full production of the control devices related to the 5/10/15/30/60KW TQG and the variable speed 3KW TQG programs. 20 On December 13, 2000, the Company announced that its Board of Directors had approved a plan to find a strategic buyer who could expand the Company's business, primarily to that of the Company's Fire shield product lines. On August 13, 2001, the Company announced that it was no longer seeking to sell the Company due to unfavorable market conditions and the unlikelihood of the Company meeting its objectives of being acquired by a strategic buyer who could also increase shareholder value. The Company's gross profit margin was approximately 27% of net sales for Fiscal Year 2002 compared to 22% in the prior year. Although the Company's manufacturing performance improved from year to year, higher than expected rework expense was recorded in the year due to warranty repairs of inverters associated with the 3KW TQG program. Latent defects of certain vendor supplied parts were responsible for the problems. The Company repaired the majority of the product in question. Selling, general and administrative expenses for Fiscal Year 2002 were $3,175,724, compared to $3,490,326 for the prior year, a decrease of approximately 9%. Selling expenses were $1,816,133 for Fiscal Year 2002, compared to $2,008,092 for the prior year, a decrease of approximately 10%, reflecting a decrease in salary related expenses of $49,621, travel expenses of $44,303, advertising costs of $58,122, professional fees of $21,841 and a reduction of $18,072 in other expenses. General and administrative expenses were $1,359,591 for Fiscal Year 2002, compared to $1,482,234 for the prior year, a decrease of approximately 8%, reflecting lower professional fees of $32,878, shareholder expenses of $36,485, travel expenses of $23,151, telecommunications expenses of $22,850 and a reduction of other expenses of $7,279. Research, development and engineering expenses for Fiscal Year 2002 were $1,049,649, compared to $1,197,874 for the prior year, a decrease of approximately 12%, reflecting a decrease in salary related expenses of $102,243, health insurance costs of $48,681 and an increase of $2,699 in other expenses. Interest expense, net of interest and sundry income, for Fiscal Year 2002 was $66,708, compared to $76,572 for the prior year, reflecting lower interest rates and the Company using less of its institutional Line of Credit. Income tax expense (benefit) for the years ended March 31, 2002 and 2001 differs from the amounts computed by applying the Federal income tax rate of 34 percent to pretax income (loss) as the operating results of the foreign manufacturing subsidiary are not subject to foreign tax since it is operating under a tax holiday for at least 20 years. The foreign operations resulted in income of approximately $44,000 in 2002 and $51,000 in 2001, and no income taxes have been provided on these results of operations. The total amount of undistributed earnings of the foreign subsidiary for income tax purposes was approximately $269,000 at March 31, 2002 and $225,000 at March 31, 2001. It is the Company's intention to reinvest undistributed earnings of its foreign subsidiary and thereby indefinitely postpone its repatriation. Accordingly, no provision has been made for foreign withholding taxes or United States income taxes which may become payable if undistributed earnings of the foreign subsidiary are paid as dividends to the Company. It is not practicable to calculate the unrecognized deferred tax liability on those earnings. 21 Liquidity and Capital Resources As of March 31, 2003, the Company's cash and cash equivalents increased to $2,529,562 from the March 31, 2002 total of $1,163,099. The increase was due to cash provided by operating activities of $2,657,521, offset to some extent by cash used for investing activities of $577,463 and cash used in financing activities of $713,595, a total of $1,366,463. Cash provided by operating activities was primarily due to net income of $1,014,791, depreciation of $857,374 and an increase in deferred income taxes and accounts payable of $341,326 and $501,517, respectively, offset to some extent by an increase in accounts receivable of $289,216. The increases in accounts payable and receivable were primarily the result of the Company's increase in business. Cash used in investing activities was related to purchases of capital equipment. The Company's capital expenditures were $577,463 for Fiscal Year 2003 compared to $397,604 in the prior year. The increase was primarily due to: 1) the acquisition of a 375 ton molding press to further vertically integrate its plastic parts requirements; 2) tooling for parts required on new programs; 3) the Company's tooling for several new and existing products to be manufactured at the Company's contract manufacturer in China; and 4) tooling for the re-certification of the Company's GFCI products as required by UL, as noted above. Cash used in financing activities was due to the Company's repaying its line of credit by $500,000 and the payment of its cash dividend in the amount of $216,783, offset slightly by proceeds from the exercise of stock options in the amount of $3,188. On November 12, 2002, the Company renewed its $3,000,000 revolving credit loan with its institutional lender, extending the maturity date to December 14, 2004. Although the Company did not utilize its line of credit in the second, third or fourth quarters, the Company has the option of borrowing at lesser of (a) the lender's prime rate of interest minus 25 basis points, or (b) the 30- day London Interbank Offering Rate (LIBOR) plus 175 basis points. The loan is collateralized with a perfected first security interest on all of its accounts receivable and inventories, and a blanket security interest on all of its assets. The Company continues to comply with its loan covenants. The Company has no off-balance sheet arrangements and no debt relationships other than noted above. The Company's working capital increased by $938,884 to $8,873,080 at March 31, 2003, compared to $7,934,196 at March 31, 2002. The Company believes cash flow from operations, the available bank line and current cash position will be sufficient to meet its working capital requirements for the immediate future. The Company's earnings before interest, income taxes, depreciation and amortization ("EBITDA") was $2,727,877 for Fiscal Year 2003, compared to $1,651,781 for Fiscal Year 2002. The Company wishes to present its EBITDA results as an indication of its liquidity and should not be interpreted as earnings. The table below sets forth the reconciliation between net income and EBITDA: Fiscal Year 2003 Fiscal Year 2002 ---------------- ---------------- Net income $ 1,014,791 $ 200,360 Interest expense 1,153 79,337 Income taxes 409,538 94,111 Depreciation 857,374 897,236 Amortization 445,021 380,737 --------- --------- EBITDA $ 2,727,877 $ 1,651,781 22 The fourth quarter dividend of $.015 per share was paid on April 25, 2003 to shareholders of record on March 31, 2003. The Company paid $.045 per share for Fiscal Year 2003. Contractual Obligations The Company is obligated under future commitments as part of its normal business operations. The future commitments may be for long-term debt, capital lease, operating lease or purchase obligations. These obligations are set forth in the table below: Obligations due by period Less Than More than Contractual Obligations Total 1 Year 1-3 Years 3-5 Years 5 Years ----- ------ --------- --------- ------- Operating Lease Obligations $ 443,848 173,112 73,836 73,836 123,064 Purchase Obligations $ 2,589,506 2,589,506 New Accounting Standards In June 2001, the FASB issued SFAS No. 143, Accounting for Asset Retirement Obligations (SFAS No. 143). SFAS No. 143 requires the Company to record the fair value of an asset retirement obligation as a liability in the period in which it incurs a legal obligation associated with the retirement of tangible long-lived assets that result from the acquisition, construction, development and/or normal use of the assets. The Company would also record a corresponding asset, which is depreciated over the life of the asset. Subsequent to the initial measurement of the asset retirement obligation, the obligation will be adjusted at the end of each period to reflect the passage of time and changes in the estimated future cash flows underlying the obligation. The Company was required to adopt SFAS No. 143 on April 1, 2003. Adoption of SFAS No. 143 did not have a material effect on the consolidated financial statements. In April 2002, the FASB issued SFAS No. 145, Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections. SFAS No. 145 amends existing guidance on reporting gains and losses on the extinguishment of debt to prohibit the classification of the gain or loss as extraordinary, as the use of such extinguishments have become part of the risk management strategy of many companies. SFAS No. 145 also amends SFAS No. 13 to require sale-leaseback accounting for certain lease modifications that have economic effects similar to sale-leaseback transactions. The provisions of the Statement related to the rescission of Statement No. 4 is applied in fiscal years beginning after May 15, 2002. Earlier application of these provisions is encouraged. The provisions of the Statement related to Statement No. 13 were effective for transactions occurring after May 15, 2002, with early application encouraged. The adoption of SFAS No. 145 did not have a material effect on the Company's consolidated financial statements. In June 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities. SFAS No. 146 addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies Emerging Issues Task Force (EITF) Issue 94-3, Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity. The provisions of this Statement are effective for exit or disposal activities that are initiated after December 31, 2002, with early application encouraged. The adoption of SFAS No. 146 did not have a material effect on the Company's consolidated financial statements. 23 In November 2002, the FASB issued Interpretation No. 45, Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness to Others, an interpretation of FASB Statements No. 5, 57 and 107 and a Rescission of FASB Interpretation No. 34. This Interpretation elaborates on the disclosures to be made by a guarantor in its interim and annual financial statements about its obligations under guarantees issued. The Interpretation also clarifies that a guarantor is required to recognize, at inception of a guarantee, a liability for the fair value of the obligation undertaken. The initial recognition and measurement provisions of the Interpretation are applicable to guarantees issued or modified after December 31, 2002 and did not have a material effect on the Company's consolidated financial statements. In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based Compensation - Transition and Disclosure, an amendment of FASB Statement No. 123. This Statement amends SFAS No. 123, Accounting for Stock-Based Compensation, to provide alternative methods of transition for a voluntary change to the fair value method of accounting for stock-based employee compensation. In addition, this Statement amends the disclosure requirements of SFAS No. 123 to require prominent disclosures in both annual and interim financial statements. Certain of the disclosure modifications are required for fiscal years ending after December 15, 2002 and are included in the notes to these consolidated financial statements. In January 2003, the FASB issued Interpretation No. 46, Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51. This Interpretation addresses the consolidation by business enterprises of variable interest entities as defined in the Interpretation. The Interpretation applies immediately to variable interests in variable interest entities created after January 31, 2003, and to variable interests in variable interest entities obtained after January 31, 2003. The application of this Interpretation is not expected to have a material effect on the Company's consolidated financial statements. The Interpretation requires certain disclosures in consolidated financial statements issued after January 31, 2003 if it is reasonably possible that the Company will consolidate or disclose information about variable interest entities when the Interpretation becomes effective. In April 2003, the FASB issued SFAS No. 149, Amendment of Statement 133 on Derivative Instruments and Hedging Activities. This statement amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts and for hedging activities under SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities. This statement is effective for contracts entered into or modified after June 30, 2003, except for hedging relationships designated after June 30, 2003. The adoption of SFAS No. 149 is not expected to have a material effect on the Company's consolidated financial statements. In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity. This statement establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. It requires that an issuer classify a financial instrument that is within its scope as a liability. This statement is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. The adoption of SFAS No. 150 is not expected to have a material effect on the Company's consolidated financial statements. 24 ITEM 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company owned no derivative securities as of March 31, 2003. The Company's exposure to market risk for changes in interest rates would relate primarily to the Company's debt obligations due to its variable LIBOR Rate pricing; however, the Company has no debt obligations as of March 31, 2003. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Response to this item is submitted in a separate section of this report starting at Page F-1. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III Part III of this Form 10-K is incorporated by reference from the registrant's Proxy Statement for the Annual Meeting of Shareholders to be held on August 21, 2003. ITEM 10. DIRECTOR AND EXECUTIVE OFFICERS OF THE REGISTRANT The executive officers of the Company are as follows: Name Age Position Robert S. Wiggins 73 Chief Executive Officer, Chairman of the Board Jerry T. Kendall 52 President and Chief Operating Officer as of April 17, 2003 Raymond H. Legatti 71 President through April 17, 2003 and currently Senior Vice President Raymond B. Wood 68 Senior Vice President of Government Operations and Marketing Scott J. Loucks 41 Vice President of Finance, Chief Financial Officer ROBERT S. WIGGINS has served as Chairman of the Board, Chief Executive Officer and Director since March 1988. Additional biographical data on Mr. Wiggins may be found in Section III of the Company's proxy statement. JERRY T. KENDALL joined the Company on April 17, 2003 as its President and Chief Operating Officer. Additional biographical data on Mr. Kendall may be found in Section III of the Company's proxy statement. 25 RAYMOND H. LEGATTI, a founder of the Company, served as the Company's President since the Company's inception in 1981 through April 2003. Mr. Legatti is currently Senior Vice President and plans to retire on December 31, 2003. Additional biographical data on Mr. Legatti may be found in Section III of the Company's proxy statement. RAYMOND B. WOOD, a founder of the Company, has served as the Senior Vice President of Government Operations and Marketing since the Company's inception in 1981. Additional biographical data on Mr. Wood may be found in Section III of the Company's proxy statement. SCOTT J. LOUCKS has served the Company in various capacities since March 1985. Mr. Loucks performed the duties of Information Technology Manager for four years, Controller for eight years and Vice President of Finance and Chief Financial Officer since August 1996. Mr. Loucks has a Bachelor of Science Degree in computer science and a minor degree in mathematics from Florida State University. Mr. Loucks has also been a Director and the Secretary of the Company's Honduran subsidiary, TRC/Honduras S.A. de C.V., since February 1997. PART IV ITEM 14. CONTROLS AND PROCEDURES Evaluation of Disclosure Controls and Procedures. The Company's chief executive officer and chief financial officer, after evaluating the effectiveness of the Company's "disclosure controls and procedures" (as defined in Sections 13a-14(c) of the Securities Exchange Act of 1934) as of a date (the "Evaluation Date") not more than 90 days before the filing date of this annual report, have concluded that as of the Evaluation Date, the Company's disclosure controls and procedures were effective and designed to ensure that material information relating to the Company and its consolidated subsidiaries was accumulated and would be made known to them by others within those entities as appropriate to allow timely decisions regarding required disclosures. Changes in Internal Controls. The Company does not believe that there are significant deficiencies in the design or operation of its internal controls that could adversely affect its ability to record, process, summarize and report financial data. Although there were no significant changes in the Company's internal controls or in other factors that could significantly affect those controls subsequent to the Evaluation Date, the Company's senior management, in conjunction with its Board of Directors, continuously reviews overall policies and improves documentation of important financial reporting and internal control matters. The Company is committed to continuously monitoring, and as appropriate, improving the state of its internal controls, corporate governance and financial reporting. Limitations on the Effectiveness of Controls. The Company's management, including its chief executive officer and chief financial officer, does not expect that its internal controls will prevent all errors. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Due to the inherent limitations of a cost-effective control system, misstatements due to error or other factors may occur and not be detected. 26 ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a)(1) Financial Statements The following consolidated financial statements of Technology Research Corporation and its subsidiary are included in Schedule I (i.e. indexes F-1 through F-18) attached herewith: - Independent Auditors' Report - Consolidated Balance Sheets as of March 31, 2003 and 2002 - Consolidated Statements of Operations for the years ended March 31, 2003, 2002 and 2001 - Consolidated Statement of Stockholders' Equity for the years ended March 31, 2003, 2002 and 2001 - Consolidated Statements of Cash Flows for the years ended March 31, 2003, 2002 and 2001 - Notes to Consolidated Financial Statements (a)(2) Financial Statement Schedules The Valuation and Qualifying Accounts - Years ended March 31, 2003, 2002, and 2001 is included in Schedule II (i.e. index F-19) attached herewith: All other schedules are omitted because they are not applicable or the required information is shown in the financial statements or notes thereto. (a)(3) Exhibits: 3.1 Articles of Incorporation and By-Laws* 3.2 Certificate of Amendment to the Articles of Incorporation, dated September 24, 1990.*** 3.3 Certificate of Amendment to the Articles of Incorporation, dated September 24, 1996.*** (10) Material contracts: 10.1 License Agreement, dated as of January 1, 1985, between the Company and Societe BACO, a French corporation, granting BACO a non-exclusive right to manufacture the Company's GFCI products in France, and the non-exclusive right to sell GFCI products other than in North America.* 10.2 License Agreement between the Company and B & R Electrical Products, Ltd., an English corporation ("B & R") dated January 1, 1985, granting B & R a limited exclusive license to manufacture GFCI products within the United Kingdom and a non-exclusive license to market other such products other than in North America.* 27 10.3 License Agreement, dated as of January 8, 1987, between the Company and HPM INDUSTRIES PTY LTD, an Australian corporation ("HPM"), granting to HPM an exclusive license to manufacture and sell GFCI products in Australia, New Zealand, New Guinea, Papua and Fiji.* 10.4 License Agreement, dated May 17, 1997, between the Company and Yaskawa Controls Company, Ltd., a Japanese company, granting Yaskawa an exclusive right to market and manufacture the Company's products developed for use in electrical vehicle charging systems.*** 10.5 Sales and Marketing Agreement, dated May 17, 1997, between the Company and Yaskawa Controls Company, Ltd., a Japanese company, granting Yaskawa exclusive sales and marketing rights to the Company's full line of commercial electrical protection devices, including Fire Shield, Shock Shield and Electra Shield.*** 10.6 License Agreement, dated February 16, 1999, between the Company and Windmere-Durable Holdings, Inc. granting Windmere-Durable a non- exclusive license to manufacture, have manufactured, use and sell products that use the Company's Fire Shield cord set technology.*** 10.7 $3,000,000 Revolving Credit Agreement, dated December 14, 1999, between the Company and SouthTrust Bank*** 10.8 The 2000 Long Term Incentive Plan.*** 10.9 License Agreement, dated March 24, 2002, between the Company and Tecumseh Products Company granting use of the Company's Fire Shield technology to be integrated into a protective product for Refrigeration and Air Conditioning Systems against electric faults.*** 10.10 Amended Revolving Credit Agreement, dated November 12, 2002, between the Company and its subsidiary and SouthTrust Bank, extending the maturity date to December 14, 2004.***** 10.11 License Agreement with Applica Inc. (previously named Windmere- Durable Holdings, Inc.), dated December 1, 2002, replacing the Agreement dated December 31, 1999, between the Company and Applica Inc. granting Applica Inc. an exclusive license to manufacture, have manufactured, use and sell kitchen appliances using the Company's Fire Shield safety circuit technology.***** 10.12 Employment Agreement, dated April 16, 2003, between the Company and Jerry T. Kendall.***** 10.13 Technical Consulting Agreement, effective January 1, 2004, between the Company and Raymond H. Legatti.***** (23) Independent Auditors' Consent. ***** (99) Additional Exhibits: 99.1 Certification of Chairman and Chief Executive Officer pursuant to 18 U.S.C. Section 1350. ***** 99.2 Certification of Vice President and Chief Financial Officer pursuant to 18 U.S.C. Section 1350. ***** 28 * Previously filed with and as part of the Registrant's Registration Statement on Form S-1 (No. 33-24647). ** Previously filed with and as a part of the Registrant's Registration Statement on Form S-1 (No. 33-31967). *** Previously filed with and as part of the Registrant's Annual Report on Form 10-K. **** Previously filed with and as part of the Registrant's Post-Effective Amendment No. 1 to Form S-1 (No. 33-31967) ***** Filed herewith. (b) Reports on Form 8-K No reports on Form 8-K have been filed by the registrant during the last quarter of the fiscal year. 29 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. TECHNOLOGY RESEARCH CORPORATION Dated: 6/17/2003 By: /s/ Robert S. Wiggins --------- ---------------------- Robert S. Wiggins Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons in the capacities and on the dates indicated: Signature Title Date /s/ Robert S. Wiggins Chairman, Chief Executive 6/17/2003 Robert S. Wiggins Officer, and Director (Principal Executive Officer) /s/ Scott J. Loucks Vice President of Finance and 6/17/2003 Scott J. Loucks Chief Financial Officer (Principal Financial Officer) /s/ Raymond B. Wood Senior Vice President 6/17/2003 Raymond B. Wood Government Operations and Marketing and Director /s/ Raymond H. Legatti Director and 6/20/2003 Raymond H. Legatti Senior Vice President /s/ Gerry Chastelet Director 6/17/2003 Gerry Chastelet /s/ Edmund F. Murphy, Jr. Director 6/17/2003 Edmund F. Murphy, Jr. /s/ Martin L. Poad Director 6/17/2003 Martin L. Poad 30 CERTIFICATION I, Robert S. Wiggins, certify that: 1. I have reviewed this annual report on Form 10-K of Technology Research Corporation: 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: June 17, 2003 /s/ Robert S. Wiggins Robert S. Wiggins Chairman of the Board and Chief Executive Officer 31 CERTIFICATION I, Scott J. Loucks, certify that: 1. I have reviewed this annual report on Form 10-K of Technology Research Corporation: 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: June 17, 2003 /s/ Scott J. Loucks Scott J. Loucks Vice President of Finance and Chief Financial Officer, 32 TECHNOLOGY RESEARCH CORPORATION AND SUBSIDIARY Index Schedule I Page Independent Auditors' Report F-1 Financial Statements: Consolidated Balance Sheets F-2 Consolidated Statements of Operations F-3 Consolidated Statements of Stockholders' Equity F-4 Consolidated Statements of Cash Flows F-5 Notes to Consolidated Financial Statements F-6 Schedule II Valuation and Qualifying Accounts for the Years Ended March 31, 2003, 2002 and 2001 F-19 Independent Auditors' Report The Board of Directors and Stockholders Technology Research Corporation: We have audited the consolidated financial statements of Technology Research Corporation and subsidiary as listed in the accompanying index. In connection with our audits of the consolidated financial statements, we have audited the financial statement schedule as listed in the accompanying index. These consolidated financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedule based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Technology Research Corporation and subsidiary as of March 31, 2003 and 2002, and the results of their operations and their cash flows for each of the years in the three-year period ended March 31, 2003, in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein. /s/ KPMG LLP Tampa, Florida May 2, 2003 F-1 TECHNOLOGY RESEARCH CORPORATION AND SUBSIDIARY Consolidated Balance Sheets March 31, 2003 and 2002 Assets 2003 2002 Current assets: ---- ---- Cash and cash equivalents $ 2,529,562 1,163,099 Accounts receivable, less allowance for doubtful accounts of $44,902 in 2003 and $11,908 in 2002 (note 4) 2,772,825 2,516,603 Inventories (notes 2 and 4) 4,663,876 4,798,731 Prepaid expenses and other current assets 122,323 97,720 Deferred income taxes (note 5) 288,708 271,569 Income taxes receivable 19,766 - ---------- ---------- Total current assets 10,397,060 8,847,722 ---------- ---------- Property, plant and equipment (notes 3 and 4) 9,777,497 9,493,313 Less accumulated depreciation 6,391,480 5,795,667 ---------- ---------- Net property, plant and equipment 3,386,017 3,697,646 ---------- ---------- Noncurrent deferred income taxes,net (note 5) - 162,861 Other assets 52,612 58,708 ---------- ---------- $ 13,835,689 12,766,937 ========== ========== Liabilities and Stockholders' Equity Current liabilities: Trade accounts payable $ 1,052,817 551,300 Accrued expenses: Compensation 313,749 228,210 Other 50,108 65,212 Dividends payable 96,781 68,804 Deferred income 10,525 - ---------- ---------- Total current liabilities 1,523,980 913,526 Debt (note 4) - 500,000 Deferred income 39,475 50,000 Noncurrent deferred income taxes, net (note 5) 195,604 - ---------- ---------- Total liabilities 1,759,059 1,463,526 ---------- ---------- Stockholders' equity (note 6): Common stock, $.51 par value. Authorized 10,000,000 shares; issued and outstanding 5,440,370 shares in 2003 and 5,437,497 share in 2002 2,785,554 2,784,088 Additional paid-in capital 7,528,194 7,526,472 Retained earnings 1,803,027 1,032,996 ---------- ---------- 12,116,775 11,343,556 Treasury stock, at cost - 21,500 shares (40,145) (40,145) ---------- ---------- Total stockholders' equity 12,076,630 11,303,411 Commitments and contingencies (notes 7 and 10) $ 13,835,689 12,766,937 ========== ========== See accompanying notes to consolidated financial statements. F-2 TECHNOLOGY RESEARCH CORPORATION AND SUBSIDIARY Consolidated Statements of Operations Years ended March 31, 2003, 2002 and 2001 2003 2002 2001 Operating revenues: ---- ---- ---- Net sales (note 8) $ 17,641,142 16,517,431 17,805,411 Royalties 120,794 166,854 231,563 ---------- ---------- ---------- 17,761,936 16,684,285 18,036,974 ---------- ---------- ---------- Operating expenses: Cost of sales 11,896,230 12,096,800 13,904,256 Selling, general, and administrative 3,190,338 3,175,724 3,490,326 Research, development, and engineering 1,225,651 1,049,649 1,197,874 ---------- ---------- ---------- 16,312,219 16,322,173 18,592,456 ---------- ---------- ---------- Operating income (loss) 1,449,717 362,112 (555,482) ---------- ---------- ---------- Other income (expense): Interest and sundry income 7,483 12,629 58,947 Interest expense (1,153) (79,337) (135,519) Loss on disposal of property, plant and equipment (31,718) (933) (5,320) ---------- ---------- ---------- (25,388) (67,641) (81,892) ---------- ---------- ---------- Income (loss) before income taxes 1,424,329 294,471 (637,374) Income taxes expense (benefit) (note 5) 409,538 94,111 (225,827) ---------- ---------- ---------- Net income (loss) $ 1,014,791 200,360 (411,547) ========== ========== ========== Basic earnings (loss) per share $ 0.19 0.04 (0.08) Diluted earnings (loss) per share $ 0.19 0.04 (0.08) Weighted average number of common and equivalent shares outstanding: Basic 5,438,381 5,437,497 5,439,811 Diluted 5,482,450 5,457,896 5,439,811 See accompanying notes to consolidated financial statements. F-3 TECHNOLOGY RESEARCH CORPORATION AND SUBSIDIARY Consolidated Statements of Stockholders' Equity Years ended March 31, 2003, 2002 and 2001 Additional Total Common stock paid-in Retained Treasury stockholders' Shares Amount capital earnings stock equity Balances at ------ ------ ------- --------- -------- ---------- March 31, 2000: 5,455,756 $ 2,782,435 7,528,473 1,679,150 - 11,990,058 Dividends - $.04 per share - - - (217,468) - (217,468) Net loss - - - (411,547) - (411,547) Exercise of stock options via exchange of 2,534 common shares and cash of $(348) for 5,775 new common shares 3,241 1,653 (2,001) - - (348) Treasury stock, at cost (21,500) - - - (40,145) (40,145) --------- --------- --------- --------- -------- ---------- Balances at March 31, 2001: 5,437,497 2,784,088 7,526,472 1,050,135 (40,145) 11,320,550 Dividends - $.04 per share - - - (217,499) - (217,499) Net income - - - 200,360 - 200,360 --------- --------- --------- --------- -------- ---------- Balances at March 31, 2002: 5,437,497 2,784,088 7,526,472 1,032,996 (40,145) 11,303,411 Dividends - $.045 per share - - - (244,760) - (244,760) Net income - - - 1,014,791 - 1,014,791 Exercise of stock options 2,873 1,466 1,722 - - 3,188 --------- --------- --------- --------- -------- ---------- Balances at March 31, 2003: 5,440,370 $ 2,785,554 7,528,194 1,803,027 (40,145) 12,076,630 ========= ========= ========= ========= ======== ========== See accompanying notes to consolidated financial statements.
F-4 TECHNOLOGY RESEARCH CORPORATION AND SUBSIDIARY Consolidated Statements of Cash Flows Years ended March 31, 2003, 2002 and 2001 2003 2002 2001 Cash flows from operating activities: ---- ---- ---- Net income (loss) $ 1,014,791 200,360 (411,547) Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Loss on disposal of equipment 31,718 933 5,320 Change in allowance for doubtful accounts 32,994 (48,852) 12,561 Depreciation 857,374 897,236 800,977 Decrease (increase) in accounts receivable (289,216) 897,066 (271,837) Decrease (increase) in income taxes receivable (19,766) 278,500 (201,900) Decrease (increase) in inventories 134,855 1,553,543 (1,143,685) Decrease (increase) in prepaid expenses and other current assets (24,603) 36,011 (75,016) Decrease (increase) in deferred income taxes 341,326 127,442 (145,427) Decrease (increase) in other assets 6,096 - 30,534 Increase (decrease) in deferred income - (23,530) (141,176) Increase (decrease) in trade accounts payable 501,517 (1,028,651) 774,609 Increase (decrease) in accrued expenses 70,435 (47,374) (9,166) --------- --------- --------- Net cash provided by (used in) operating activities 2,657,521 2,842,684 (775,753) --------- --------- --------- Cash flows from investing activities: Capital expenditures for property, plant and equipment (577,463) (397,604) (725,680) --------- --------- --------- Net cash used in investing activities (577,463) (397,604) (725,680) --------- --------- --------- Cash flows from financing activities: Net (repayments) borrowings under line-of-credit agreement (500,000) (1,250,000) (750,000) Acquisition of treasury stock - - (40,145) Proceeds from exercise of stock options and warrants 3,188 - (348) Dividends paid (216,783) (216,753) (219,312) --------- --------- --------- Net cash used in financing activities (713,595) (1,466,753) (1,009,805) --------- --------- --------- Net increase (decrease) in cash and cash equivalents 1,366,463 978,327 (2,511,238) Cash and cash equivalents at beginning of year 1,163,099 184,772 2,696,010 --------- --------- --------- Cash and cash equivalents at end of year$ 2,529,562 1,163,099 184,772 ========= ========= ========= Supplemental cash flow information: Cash paid for interest $ 1,153 79,337 139,761 Cash paid (received) for income taxes $ (226,393) (278,500) 121,500 See accompanying notes to consolidated financial statements. F-5 TECHNOLOGY RESEARCH CORPORATION AND SUBSIDIARY Notes to Consolidated Financial Statements March 31, 2003, 2002 and 2001 (1) Summary of Significant Accounting Policies (a) Description of Business Technology Research Corporation and subsidiary (the Company) is engaged in the design, development, manufacturing, and marketing of electronic control and measurement devices related to the distribution of electrical power and specializes in electrical safety products that prevent electrocution, electrical fires and protect against serious injury from electrical shock. The Company's corporate headquarters are located in Clearwater, Florida. The Company incorporated TRC Honduras, S.A. de C.V., a wholly owned subsidiary, for the purpose of manufacturing the Company's high volume products in Honduras. The Company primarily sells its products to original equipment manufacturers involved in a variety of industries including business machinery and personal care appliances and to governmental entities. The Company performs credit evaluations of all new customers and generally does not require collateral. Historically, the Company has experienced minimal losses related to receivables from individual customers or groups of customers in any particular industry or geographic area. The Company's customers are located throughout the world. See note 8 for further information on major customers. The Company also licenses its technology for use by others in exchange for a royalty or product purchases. Licensees are located in Australia, France, Italy, Japan, the United Kingdom and the United States. (b) Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. (c) Financial Instruments The Company believes the carrying value of its debt approximates fair value due to its short-term nature and the variable interest rate at March 31, 2002. (d) Principles of Consolidation The consolidated financial statements include the financial statements of Technology Research Corporation and its wholly owned subsidiary, TRC Honduras, S.A. de C.V. All significant intercompany balances and transactions have been eliminated in consolidation. (e) Cash Equivalents For purposes of the consolidated statements of cash flows, the Company considers all short-term investments with a maturity of three months or less to be cash equivalents. F-6 TECHNOLOGY RESEARCH CORPORATION AND SUBSIDIARY Notes to Consolidated Financial Statements March 31, 2003, 2002 and 2001 (f) Revenue Recognition The Company recognizes revenue when an order has been received, pricing is fixed, product has been shipped, and collectibility is reasonably assured. Title to goods passes to customers upon shipment, there are no customer acceptance provisions included in sales contracts and the Company has no installation obligation subsequent to product shipment. Similarly, revenue is recognized upon shipment to distributors as title passes to them without additional involvement or obligation. Collection of receivables related to distributor sales is not contingent upon subsequent sales to third parties. Cost of sales includes the Company's estimate of any additional warranty, rework or other concessions the Company expects to incur in connection with a sale. Government sales are fixed price contracts. The Company has not experienced losses in the past on such contracts. Should the Company identify a loss on a future contract, the Company would account for the loss under Statement of Position 81-1, Accounting for Performance of Construction-Type and Certain Production Type Contracts, and record a charge against earnings in the period the estimated loss was identified. The Company accrues minimum royalties due from customers over the related royalty period. Royalties earned in excess of minimum royalties due are recognized as reported by the licensees. The Company enters into license agreements and receives nonrefundable license fees in exchange for the use of technology previously developed by the Company. The licensee receives the right to manufacture and sell certain products exclusively within specified geographic areas. The upfront fees are recorded as deferred revenue and recognized as income on a straight-line basis when earned, in accordance with Staff Accounting Bulletin 101, Revenue Recognition in Financial Statements. (g) Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of In 2003, the Company accounts for long-lived assets in accordance with Statement of Financial Accounting Standards (SFAS) No. 144, Accounting for Impairment or Disposal of Long-Lived Assets. This statement requires that long-lived assets be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future net cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized by the amount by which the carrying amount of the asset exceeds the fair value of the asset. This statement requires companies to separately report discontinued operations and extends that reporting to a component of an entity that either has been disposed of or is classified as held for sale. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell. In 2002 and 2001, the Company accounts for long-lived assets in accordance with SFAS No. 121, Accounting for Long-Lived Assets and for Long-Lived Assets to be Disposed of. This statement requires that long-lived assets be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of asset to future net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value, less costs to sell. F-7 TECHNOLOGY RESEARCH CORPORATION AND SUBSIDIARY Notes to Consolidated Financial Statements March 31, 2003, 2002 and 2001 (h) Inventories Inventories are stated at the lower of cost or market. Cost is determined using the first-in, first-out method. (i) Property, Plant, and Equipment Property, plant, and equipment are stated at cost. Depreciation is calculated on the straight-line method over the estimated useful lives of the assets. (j) Income Taxes Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. (k) Stock-Based Compensation The Company applies the intrinsic-value-based method of accounting prescribed by Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations including Financial Accounting Standards Board (FASB) Interpretation No. 44, Accounting for Certain Transactions Involving Stock Compensation, an Interpretation of APB Opinion No. 25, issued in March 2000, to account for its two incentive stock option plans. Under this method, compensation expense is recorded on the date of grant only if the current market price of the underlying stock exceeded the exercise price. SFAS No. 123, Accounting for Stock-Based Compensation, established accounting and disclosure requirements using a fair-value-based method of accounting for stock-based employee compensation plans. As allowed by SFAS No. 123, the Company has elected to continue to apply the intrinsic-value-based method of accounting described above, and has adopted only the disclosure requirements of SFAS No. 123. The following table illustrates the effect on net income if the fair-value-based method had been applied to all outstanding and unvested awards in each period. F-8 TECHNOLOGY RESEARCH CORPORATION AND SUBSIDIARY Notes to Consolidated Financial Statements March 31, 2003, 2002 and 2001 2003 2002 2001 ---- ---- ---- Net income (loss), as reported $ 1,014,791 200,360 (411,547) Deduct total stock-based employee compensation expense determined under fair-value-based method for all rewards, net of tax (104,598) (99,578) (104,296) ========= ========= ======== Pro forma net income $ 910,193 100,782 (515,843) ========= ========= ======== Income (loss) per common share: As reported $ 0.19 0.04 (0.08) Pro forma $ 0.17 0.02 (0.09) Pro forma net income (loss) reflects only options granted after March 31, 1995. Therefore, the full impact of calculating compensation costs for stock options under SFAS No. 123 is not reflected in the pro forma net income (loss) amounts presented above because compensation cost is reflected over the options' vesting period of three to ten years, and compensation costs for options granted prior to April 1, 1995 are not considered. (l) Earnings (Loss) per Share Basic earnings (loss) per share have been computed by dividing net income (loss) by the weighted average number of common shares outstanding. Common share equivalents included in the dilutive weighted average shares outstanding computation represent shares issuable upon assumed exercise of stock options which would have a dilutive effect in years where there is net income. (m) Recently Issued Accounting Standards In June 2001, FASB issued SFAS No. 143, Accounting for Asset Retirement Obligations. SFAS No. 143 requires the Company to record the fair value of an asset retirement obligation as a liability in the period in which it incurs a legal obligation associated with the retirement of tangible long-lived assets that result from the acquisition, construction, development and/or normal use of the assets. The Company would also record a corresponding asset, which is depreciated over the life of the asset. Subsequent to the initial measurement of the asset retirement obligation, the obligation will be adjusted at the end of each period to reflect the passage of time and changes in the estimated future cash flows underlying the obligation. The Company is required to adopt SFAS No. 143 on April 1, 2003. Adoption of SFAS No. 143 did not have a material effect on the consolidated financial statements. In April 2002, the FASB issued SFAS No. 145, Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections. SFAS No. 145 amends existing guidance on reporting gains and losses on the extinguishment of debt to prohibit the classification of the gain or loss as extraordinary, as the use of such extinguishments have become part of the risk management strategy of many companies. SFAS No. 145 also amends SFAS No. 13 to require sale-leaseback accounting for certain lease modifications that have economic effects similar to sale-leaseback transactions. The provisions of the Statement related to the rescission of F-9 Statement No. 4 is applied in fiscal years beginning after May 15, 2002. Earlier application of these provisions is encouraged. The provisions of the Statement related to Statement No. 13 were effective for transactions occurring after May 15, 2002, with early application encouraged. The adoption of SFAS No. 145 did not have a material effect on the Company's consolidated financial statements. In June 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities. SFAS No. 146 addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies Emerging Issues Task Force (EITF) Issue 94-3, Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity. The provisions of this Statement are effective for exit or disposal activities that are initiated after December 31, 2002, with early application encouraged. The adoption of SFAS No. 146 did not have a material effect on the Company's consolidated financial statements. In November 2002, the FASB issued Interpretation No. 45, Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness to Others, an interpretation of FASB Statements No. 5, 57 and 107 and a Rescission of FASB Interpretation No. 34. This Interpretation elaborates on the disclosures to be made by a guarantor in its interim and annual financial statements about its obligations under guarantees issued. The Interpretation also clarifies that a guarantor is required to recognize, at inception of a guarantee, a liability for the fair value of the obligation undertaken. The initial recognition and measurement provisions of the Interpretation are applicable to guarantees issued or modified after December 31, 2002 and did not have a material effect on the Company's consolidated financial statements. In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based Compensation - Transition and Disclosure, an amendment of FASB Statement No. 123. This Statement amends SFAS No. 123, Accounting for Stock-Based Compensation, to provide alternative methods of transition for a voluntary change to the fair value method of accounting for stock-based employee compensation. In addition, this Statement amends the disclosure requirements of SFAS No. 123 to require prominent disclosures in both annual and interim financial statements. Certain of the disclosure modifications are required for fiscal years ending after December 15, 2002 and are included in the notes to these consolidated financial statements. In January 2003, the FASB issued Interpretation No. 46, Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51. This Interpretation addresses the consolidation by business enterprises of variable interest entities as defined in the Interpretation. The Interpretation applies immediately to variable interests in variable interest entities created after January 31, 2003, and to variable interests in variable interest entities obtained after January 31, 2003. The application of this Interpretation is not expected to have a material effect on the Company's consolidated financial statements. The Interpretation requires certain disclosures in consolidated financial statements issued after January 31, 2003 if it is reasonably possible that the Company will consolidate or disclose information about variable interest entities when the Interpretation becomes effective. In April 2003, the FASB issued SFAS No. 149, Amendment of Statement 133 on Derivative Instruments and Hedging Activities. This statement amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts and for F-10 hedging activities under SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities. This statement is effective for contracts entered into or modified after June 30, 2003, except for hedging relationships designated after June 30, 2003. The adoption of SFAS No. 149 is not expected to have a material effect on the Company's consolidated financial statements. In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity. This statement establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. It requires that an issuer classify a financial instrument that is within its scope as a liability. This statement is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. The adoption of SFAS No. 150 is not expected to have a material effect on the Company's consolidated financial statements. (2) Inventories Inventories at March 31, 2003 and 2002 consist of: 2003 2002 ---- ---- Raw materials $ 3,020,076 3,130,889 Work in process 265,645 190,348 Finished goods 1,378,155 1,477,494 --------- --------- $ 4,663,876 4,798,731 ========= ========= Approximately 44% and 47% of inventories were located in Honduras at March 31, 2003 and 2002, respectively. (3) Property, Plant and Equipment Property, plant and equipment at March 31, 2003 and 2002 consists of: Estimated 2003 2002 useful lives ---- ---- ------------ Building and improvements $ 1,608,138 1,608,756 20 years Machinery and equipment 8,169,359 7,884,557 5 - 15 years --------- --------- ------------ $ 9,777,497 9,493,313 ========= ========= Approximately 25% and 28% of property, plant and equipment is located in Honduras at March 31, 2003 and 2002, respectively. F-11 TECHNOLOGY RESEARCH CORPORATION AND SUBSIDIARY Notes to Consolidated Financial Statements March 31, 2003, 2002 and 2001 (4) Debt Debt at March 31, 2003 and 2002 consists of a $3,000,000 line of credit due in December 2004 with an outstanding balance of zero and $500,000 at March 31, 2003 and 2002, respectively. Interest is based on LIBOR plus 175 basis points 3.03% and 3.78% at March 31, 2003 and 2002, respectively. Borrowings under the line of credit are secured by all accounts receivable, inventories, and property, plant, and equipment, and require the Company to maintain certain financial ratios, minimum working capital and minimum tangible net worth amounts. The Company was in compliance with these covenants at March 31, 2003. (5) Income Taxes The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at March 31, 2003 and 2002 are presented below: 2003 2002 ---- ---- Deferred tax assets: Accounts receivable, principally due to allowance for doubtful accounts $ 16,165 4,287 Inventories, principally due to valuation allowance for financial reporting purposes and additional costs inventoried for tax purposes 253,882 283,059 Accrued expenses, principally due to accrual for financial reporting purposes 18,661 33,076 Charitable contribution carryover 12,790 - Net operating loss carryforwards 20,341 270,048 Tax credit carryforwards 39,705 93,063 -------- -------- Total gross deferred tax assets 361,544 683,533 Less valuation allowance - 78,152 -------- -------- 361,544 605,381 -------- -------- Deferred tax liabilities: Property, plant and equipment, principally due to differences in depreciation (268,440) (170,951) -------- -------- Net deferred tax assets $ 93,104 434,430 ======== ======== F-12 TECHNOLOGY RESEARCH CORPORATION AND SUBSIDIARY Notes to Consolidated Financial Statements March 31, 2003, 2002 and 2001 Net deferred tax assets are included in the accompanying consolidated balance sheets at March 31, 2003 and 2002 as: 2003 2002 ---- ---- Deferred income taxes, current asset $ 288,708 271,569 Deferred income taxes, noncurrent asset - 162,861 Deferred income taxes, noncurrent liability (195,604) - -------- -------- $ 93,104 434,430 ======== ======== Management assesses the likelihood deferred tax assets will be realized which is dependent upon the generation of taxable income during the periods in which those temporary differences are deductible. Management considers historical taxable income, the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. Based upon the level of historical taxable income and projections for future taxable income, management believes the Company will realize the benefits of these deductible differences at March 31, 2003. The valuation allowance at March 31, 2002 related to tax credit carryforwards which management expected to expire unused. At March 31, 2003, the Company has net operating loss carryforwards for state income tax purposes of approximately $493,000, which are available to offset future taxable income through 2022. The Company has approximately $39,700 of alternate minimum tax credit carryforward. This credit is not subject to an expiration date. Income tax expense (benefit) for the years ended March 31, 2003, 2002, and 2001 consists of: 2003 2002 2001 ---- ---- ---- Current: Federal $ 68,212 (33,331) (80,400) State - - - -------- -------- --------- 68,212 (33,331) (80,400) -------- -------- --------- Deferred: Federal 312,071 117,247 (133,874) State 29,255 10,195 (11,553) -------- -------- --------- 341,326 127,442 (145,427) -------- -------- --------- $ 409,538 94,111 (225,827) ======== ======== ========= F-13 TECHNOLOGY RESEARCH CORPORATION AND SUBSIDIARY Notes to Consolidated Financial Statements March 31, 2003, 2002 and 2001 Income tax expense (benefit) for the years ended March 31, 2003, 2002 and 2001 differs from the amounts computed by applying the Federal income tax rate of 34% to pretax income (loss) as a result of the following: 2003 2002 2001 ---- ---- ---- Computed expected tax expense (benefit) $ 484,272 100,120 (216,707) (Reduction) increase in income taxes resulting from: Foreign activity for which no income tax has been provided (102,435) (17,691) (17,000) State income taxes, net of Federal income tax effect 19,309 6,525 (7,400) Other 14,842 5,157 15,280 Change in valuation allowance (78,152) - - Tax credits expired 71,702 - - -------- -------- --------- $ 409,538 94,111 (225,827) ======== ======== ========= The operating results of the foreign manufacturing subsidiary are not subject to foreign tax since it is operating under a tax holiday for at least 20 years. The foreign operations resulted in income of approximately $301,000 in 2003, $44,000 in 2002, and $51,000 in 2001. No income taxes have been provided on these results of operations. The total amount of undistributed earnings of the foreign subsidiary for income tax purposes was approximately $570,000 at March 31, 2003 and $269,000 at March 31, 2002. It is the Company's intention to reinvest undistributed earnings of its foreign subsidiary and thereby indefinitely postpone its remittance. Accordingly, no provision has been made for foreign withholding taxes or United States income taxes which may become payable if undistributed earnings of the foreign subsidiary was paid as dividends to the Company. It is not practicable to calculate the unrecognized deferred tax liability on those earnings. (6) Stock Options and Grants The Company has two qualified incentive stock option plans, one performance- incentive stock option plan, and one nonqualified stock option plan (the Plans). Options granted under the Plans are granted to directors, officers and employees at fair value and expire ten years after the date of grant. Except for the performance incentive stock option plan, options granted under the Plans generally vest over three years. Options granted under the performance incentive stock option plan vest at the end of year ten but are subject to accelerated vesting if certain targets are met. Options may be exercised by payment of cash or with stock of the Company owned by the officer or employee. During 2000, stockholders approved a Long Term Incentive Plan with an aggregate of 300,000 shares reserved for this plan. F-14 TECHNOLOGY RESEARCH CORPORATION AND SUBSIDIARY Notes to Consolidated Financial Statements March 31, 2003, 2002 and 2001 Option transactions and other information relating to the Plans for the three years ended March 31, 2003 are as follows: Qualified Performance Non- Long-term incentive incentive qualified incentive Weighted stock stock stock stock average option option option option exercise plans plan plan Total price ------- ------- ------- --------- -------- -------- Outstanding at March 31, 2000 152,260 300,000 54,434 - 506,694 3.67 Granted - - - 93,000 93,000 1.82 Exercised (5,207) - (568) - (5,775) 1.48 Canceled (4,001) - (5,700) - (9,701) 1.63 ------- ------- ------- --------- -------- Outstanding at March 31, 2001 143,052 300,000 48,166 93,000 584,218 3.41 Granted - - - 100,250 100,250 1.64 Canceled (8,968) (50,000) (1,500) (15,000) (75,468) 3.97 ------- ------- ------- --------- -------- Outstanding at March 31, 2002 134,084 250,000 46,666 178,250 609,000 3.07 Granted - - - 40,000 40,000 1.92 Canceled (3,000) - - - (3,000) 1.06 ------- ------- ------- --------- -------- Outstanding at March 31, 2003 131,084 250,000 46,666 218,250 646,000 3.01 ------- ------- ------- --------- -------- Total number of options available under the plans 166,667 400,000 333,333 300,000 1,200,000 Exercisable at March 31, 2003 124,567 - 46,666 130,422 301,655 1.68 Available for issue at March 31, 2003 - 150,000 - 81,750 317,000 The per share weighted average fair value of stock options granted during 2003, 2002 and 2001 was $1.92, $1.64 and $1.82, respectively, on the date of grant using the Black Scholes option pricing model, with the following assumptions: (1) risk free interest rate - 1.00% to 6.26%, (2) expected life - 6.5 to 10.0 years, (3) expected volatility - 73% to 93%, and (4) expected dividends - 1.7% to 5.8%. The Company has also reserved 32,667 shares of its common stock for issuance to employees or prospective employees at the discretion of the Board of Directors of which 16,033 shares are available for future issue. There were no reserved shares issued during the years ended March 31, 2003, 2002 or 2001. F-15 TECHNOLOGY RESEARCH CORPORATION AND SUBSIDIARY Notes to Consolidated Financial Statements March 31, 2003, 2002 and 2001 At March 31, 2003, the range of exercise prices and weighted average remaining contractual life of options outstanding and exercisable was as follows: Options Outstanding Options Exercisable - ------------------------------------------------- ---------------------------- Number Weighted average Weighted Number Weighted Range of outstanding remaining average exercisable average exercise as of contractual exercise as of exercise prices March 31, 2003 life(years) price March 31, 2003 price - -------- -------------- -------------- --------- -------------- -------- $1.06-1.19 25,250 6.2 $ 1.10 25,250 $ 1.10 $1.20-1.64 208,500 6.5 1.59 163,317 1.61 $1.65-2.05 140,250 7.9 1.79 91,755 1.80 $2.06-2.74 17,000 9.2 2.30 16,333 2.31 $2.75-5.13 255,000 3.3 5.08 5,000 $ 2.75 -------------- -------------- --------- -------------- -------- 646,000 5.6 $ 3.01 301,655 1.68 ======= === ======== ======= ======= (7) Leases The Company leases the land on which its operating facility is located. This operating lease is for a period of 20 years through August 2001 with options to renew for two additional ten-year periods. The Company utilized the first ten- year option and extended the lease through August 2011. The lease provides for rent adjustments every five years. The Company is responsible for payment of taxes, insurance, and maintenance. In the event the Company elects to terminate the lease, title to all structures on the land reverts to the lessor. The Company's subsidiary leases its operating facility in Honduras. This operating lease was for five years through the year 2002 and was extended in 2002 and 2003 for one additional year, respectively. Future minimum lease payments under noncancelable operating leases as of March 31, 2003 are: Year ending March 31, --------------------- 2004 173,112 2005 24,612 2006 24,612 2007 24,612 2008 24,612 Thereafter 73,840 -------- Total minimum lease payments $ 345,400 ======== Rental expense for all operating leases was approximately $182,000 in 2003, $233,000 in 2002 and $241,000 in 2001. F-16 TECHNOLOGY RESEARCH CORPORATION AND SUBSIDIARY Notes to Consolidated Financial Statements March 31, 2003, 2002 and 2001 (8) Major Customers The Company operates in one business segment - the design, development, manufacture and marketing of electronic control and measurement devices for the distribution of electric power. The Company only reports sales and standard gross profit by market (commercial and military), no allocations of manufacturing variances and other costs of operations or assets are made to the markets. Sales by market are: 2003 2002 2001 ---------- ---------- ---------- Commercial $ 10,254,998 10,276,165 12,117,588 Military 7,386,144 6,241,266 5,687,823 ---------- ---------- ---------- $ 17,641,142 16,517,431 17,805,411 ========== ========== ========== Significant customers who accounted for 10 percent or more of sales and aggregate exports were: Year ended March 31 Customer 2003 2002 2001 -------- ---- ---- ---- Fermont (a division of ESSI, a U.S. Government Prime Contractor) $ 3,937,999 3,855,593 4,305,101 ========= ========= ========= Exports: Canada $ 417,094 293,650 579,511 Far East 1,020,078 1,288,102 805,762 Europe 2,632,357 1,899,842 2,328,325 Mexico - 169,833 383,046 Australia 36,020 3,167 83,232 South America 6,484 6,458 13,784 Middle East 14,257 15,000 22,299 --------- --------- --------- Total exports $ 4,126,290 3,676,052 4,215,959 ========= ========= ========= (9) Benefit Plan The Company's 401(k) plan covers all employees with one year of service who are at least 21 years old. Through plan year 1999, the Company matched employee contributions dollar-for-dollar up to $300. Effective for the 2000 plan year, the board of directors approved an increase in the Company match up to $400. Total Company contributions were approximately $21,700 in 2003, $26,700 in 2002, and $29,000 in 2001. (10) Litigation The Company is involved in various claims and legal actions arising in the ordinary course of business. In the opinion of the Company, the ultimate disposition of these matters will not have a material adverse effect on the Company. F-17 TECHNOLOGY RESEARCH CORPORATION AND SUBSIDIARY Notes to Consolidated Financial Statements March 31, 2003, 2002 and 2001 In November 2002, a civil complaint was filed against the Company and nine other defendants in the United States District Court in and for the District of Nevada. The compliant alleges infringement by each of the defendants of two patents registered in the name of the plaintiff, in the case of the Company arising out of its manufacture and sale of recreational vehicle voltage monitors and controllers, and seeks injunctive relief, an accounting of past profits generated from such sales, monetary damages and cost recoveries. The Company has filed a general denial of plaintiff's claims and management believes that the alleged infringement has not occurred. The Company is in the final stages of settling this claim and the expected settlement amount is not material to the Company's consolidated financial statements. (11) Stock Repurchase Plan On December 9, 1999, the Company's board of directors approved a plan for the Company to buy back up to 500,000 shares of the Company stock on the open market. Through fiscal year ended March 31, 2003, the Company has repurchased 21,500 shares at a cost of $40,145. (12) Selected Quarterly Data (Unaudited) Information (unaudited) related to operating revenue, operating income (loss), net income (loss) and earnings per share, by quarter, for the years ended March 31, 2002 and 2001 are: First Second Third Fourth quarter quarter quarter quarter ------- ------- ------- ------- Year ended March 31, 2003: Operating revenues $ 3,855,318 3,968,816 4,582,284 5,355,518 ========= ========= ========= ========= Gross profit $ 1,240,508 1,312,149 1,491,250 1,701,005 ========= ========= ========= ========= Operating income $ 187,210 304,690 465,114 492,703 ========= ========= ========= ========= Net income $ 129,455 206,131 311,963 367,242 ========= ========= ========= ========= Basic earnings per share $ .02 0.04 0.06 0.07 ========= ========= ========= ========= Diluted earnings per share $ .02 0.04 0.06 0.07 ========= ========= ========= ========= First Second Third Fourth quarter quarter quarter quarter ------- ------- ------- ------- Year ended March 31, 2002: Operating revenues $ 4,107,353 4,870,671 3,724,728 3,981,533 ========= ========= ========= ========= Gross profit $ 1,092,392 1,094,904 1,079,672 1,153,663 ========= ========= ========= ========= Operating income $ 33,599 99,475 68,080 160,958 ========= ========= ========= ========= Net income $ 2,090 56,158 43,269 98,843 ========= ========= ========= ========= Basic earnings per share $ - .01 .01 .02 ========= ========= ========= ========= Diluted earnings per share $ - .01 .01 .02 ========= ========= ========= ========= F-18 TECHNOLOGY RESEARCH CORPORATION AND SUBSIDIARY Schedule II Valuation and Qualifying Accounts Years ended March 31, 2003, 2002 and 2001 Additions ---------------------- Balances at Charged to Charged to Balances beginning costs and other at end of Description of period expenses accounts Deductions period - ----------- ---------- ---------- ---------- ---------- --------- Allowance for doubtful accounts: Year ended March 31, 2003 $ 11,908 33,001 - 7 44,902 Year ended March 31, 2002 $ 60,760 19,761 - 68,613 11,908 Year ended March 31, 2001 $ 48,199 126,105 - 113,544 60,760 F-19 EX-99.1 3 k10ex991.txt CERTIFICATION - CEO EXHIBIT 99.1 CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002, 18 U.S.C. SECTION 1350 In connection with the Annual Report of Technology Research Corporation (the "Company") on Form 10-K for the period ended March 31, 2003 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Robert S. Wiggins, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes- Oxley Act of 2002, that: (1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of Technology Research Corporation. June 17, 2003 /s/ Robert S. Wiggins ___________________________ __________________________________ Date Robert S. Wiggins Chairman of the Board and Chief Executive Officer EX-99.2 4 k10ex992.txt CERTIFICATION - CFO EXHIBIT 99.2 CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002, 18 U.S.C. SECTION 1350 In connection with the Annual Report of Technology Research Corporation (the "Company") on Form 10-K for the period ended March 31, 2003 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Scott J. Loucks, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes- Oxley Act of 2002, that: (1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of Technology Research Corporation. June 17, 2003 /s/ Scott J. Loucks ___________________________ __________________________________ Date Scott J. Loucks Vice President of Finance and Chief Financial Officer EX-23 5 k10acex-23.txt INDEPENDENT AUDITORS' REPORT EXHIBIT 23 Independent Auditors' 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 May 2, 2003, relating to the consolidated balance sheets of Technology Research Corporation and subsidiary as of March 31, 2003 and 2002, 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, 2003, and related schedule, which report appears in the March 31, 2003, annual report on Form 10-K of Technology Research Corporation. /s/ KPMG LLP St. Petersburg, Florida June 17, 2003 EX-10.10 6 k10laex-10.txt AMENDED CREDIT AGREEMENT EXHIBIT 10.10 CHANGE IN TERMS AGREEMENT Principal Amount: $3,000,000.00 Initial Rate: 3.389% Date of Agreement: November 12, 2002 DESCRIPTION OF EXISTING INDEBTEDNESS. This is a renewal of 0955169868- 0000061660. DESCRIPTION OF COLLATERAL. Borrower acknowledges this loan is secured by a Blanket Lien on All Business Assets, including but not limited to, Accounts Receivable; Chattel Paper; Contracts; Contract Rights; Documents; Equipment; Fixtures; General Intangibles; Instruments; Inventory; Rights as Seller of Goods and Rights to Returned or Repossessed Goods; Furniture; Patents; Trademarks; Licenses (including licenses on patents and trademarks); Leasehold Improvements; Partnership Interests or Joint Ventures; All records Pertaining To Any of the Collateral Listed Above. DESCRIPTION OF CHANGE IN TERMS. Extend Maturity Date to December 14, 2004; All other terms and conditions shall remain the same. PROMISE TO PAY. TECHNOLOGY RESEARCH CORPORATION; and TECHNOLOGY RESEARCH CORPORATION/HONDURAS. S.A. de C.V. (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, 2004. In addition, Borrower will pay regular monthly payments of all accrued unpaid interest due as of each payment date, beginning December 14, 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 Lender's 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 day. 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 1.639% per annum. The interest rate to be applied to the unpaid principal balance of the Note will beat a rate of 1.750 percentage points over the Index, resulting in an initial rate of 3.389% per annum. N0TICE: Under no circumstances will the effective rate of interest on the Note be more than the maximum rate allowed by applicable law. 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 p1 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 greater. 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 end 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 bear 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 materiel 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 Borrower'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 anti 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. Any of the preceding events occurs with respect to any guarantor, endorser, surety, or accommodation party of any of the Indebtedness or any guarantor, endorser, surety, or accommodation party dies or becomes incompetent, or revokes or disputes the validity of, or liability under, any Guaranty of the Indebtedness evidenced by this Note. In the event of a death, Lender, at its option, may, but shall not be required to, permit the guarantor's estate to assume unconditionally the obligations arising under the guaranty in a manner satisfactory to Lender, and, in doing so, cure any Event of Default. Change In Ownership. Any change in ownership of twenty-five percent (25%) 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: (l) 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 steps sufficient to produce compliance as soon as reasonably practical. CHANGE IN TERMS AGREEMENT Loan No: 0000061660 (Continued) Page 2 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. ATTORNEYS' FEES; EXPENSES. Lender may hire 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, Lender's reasonable attorneys' fees and Lender's legal expenses whether or not there is a lawsuit, including reasonable attorneys' fees and legal expanses for bankruptcy proceedings (including efforts to modify or vacate any auto $tic stay or injunction), and appeals. If not prohibited by applicable law. Borrower also will pay any court costs, in addition to all other sum 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 /s/ SJL) 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 extant 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 Lender's charge and setoff rights provided in this paragraph. COLLATERAL. Borrower acknowledges this Agreement is secured by any and all Commercial Security Agreements covering a Blanket Lien on All Business 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, Chief Financial Officer 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: (A) advanced in accordance with the instructions of an authorized parson 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 on is insolvent; (C) 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 IEI 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 thus 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. 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, Borrower's 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. 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 Borrower's 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 personal, family or household purposes. VARIABLE RATE FREQUENCY. The interest rate change will occur on the first business day of each month based on the index Rate for that day. FURTHER ASSURANCE AND COMPLIANCE AGREEMENT. Borrower(s) arid 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. Ills 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. PRIOR NOTE. This is a renewal of 0955169868-61660. SUCCESSORS AND ASSIGNS. Subject to any limitations stated in this Agreement on transfer of Borrower's interest, this Agreement shall be binding upon and 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 CHANGE IN TERMS AGREEMENT Loan No: 0000061660 (Continued) Page 3 MISCELLANEOUS PROVISIONS. If any part of this Agreement cannot be enforced, this fact will not affect the rest of the Agreement. Borrower 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; (e) release, substitute, agree not to sue, or deal with any one or more of Borrower's sureties, endorsers, or other guarantors on any terms or in any manner Lender may choose; and (f) 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 and 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, Chief Financial Officer 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-10.12 7 k10ea10.txt EMPLOYEE AGREEMENT - JERRY T. KENDALL EXHIBIT 10.12 EMPLOYEMENT AGREEMENT The following offer letter (the "Agreement") was dated and accepted on April 16, 2003 by Technology Research Corporation ("TRC") and Jerry T. Kendall, respectively: Technology Research Corporation is pleased to offer you the position of President and Chief Operating Officer reporting directly to me. Your annual salary will be $200,000 per year paid semi-monthly. In addition, you will receive an incentive stock option of 80,000 shares at the closing stock price on the day you report to work. The Board will recommend, in its Proxy statement for the next shareholder meeting in August 2003, that you be elected to serve on the Company's Board of Directors. Reporting directly to you will be the Vice President of Finance - Chief Financial Officer, the Vice President of Engineering, the Vice President of U.S. Commercial Sales and Marketing, the Director of Clearwater Commercial Manufacturing Operations, the Vice President of International Operations and Special Programs and the President and General Manager of TRC Honduras. In addition to your salary, you will be offered an incentive sales compensation plan. For FY04, you will receive 2% of the commercial revenues and royalties in excess of $11.1 million provided those revenues and royalties exceed $11.6 million. The Board of Directors has authorized a one- time bonus of $ 15,000 for the completion and Board acceptance of a documented multi-year Strategic Plan for TRC, to be completed no later than December 31, 2003. This employment offer is contingent upon a negative drug test and successful completion of a background check. TRC benefits include group health insurance, group life insurance, short and long term disability coverage, tuition assistance, and a 401K plan. Eligibility to receive benefits commences on the 91st day of employment; however, participation in the 401K savings plan may commence on January 1st or July 1s1 after completing six months of employment. Your salary is guaranteed for the first twelve months from your start date, except in the event of termination for cause, or your resignation. After the first twelve months, your termination severance, for other than cause or resignation, would be six months salary. However, benefits terminate at midnight on your last day of employment. Should TRC be acquired by another company, it is TRC's intention to accelerate the vesting period for all of its stock option plans to the date of acquisition. Please sign and date in the space provided, acknowledging and accepting this offer. TRC's future is yet to be realized and revolves to a large degree around the Fire Shields product lines. I believe your experience will be of great value to the Company and I personally look forward to working with you to move TRC to the next level. TECHNOLOGY RESEARCH CORPORATION By: /s/ Robert S. Wiggins ----------------- Name: Robert S. Wiggins Its: Chairman of the Board and Chief Executive EXECUTIVE /s/ Jerry T. Kendall ---------------- Jerry T. Kendall EX-10.13 8 k10ta10.txt CONSULTANT AGREEMENT - RAYMOND H. LEGATTI EXHIBIT 10.13 TECHNICAL CONSULTANT AGREEMENT This Agreement ("this Agreement") is made effective as of 1st January 2004 between: TECHNOLOGY RESEARCH CORPORATION (herein "TRC"), having its principal office at: 5250 140th Ave North Clearwater Florida 33760. and RAYMOND H. LEGATTI, (herein TECHNICAL CONSULTANT), who resides at: 1567 Alexander Road, Belleair, Florida 33756 USA. The TECHNICAL CONSULTANT shall provide to TRC the services described herein. Therefore, the parties agree as follows: 1. TERM. The term shall be for a period of one year, commencing on the effective date, extendable in further one year periods if agreed by both parties within 60 days prior to the date corresponding to the end of the term. 2. TECHNICAL CONSULTANT COMPENSATION. For the term of this agreement, TRC shall pay to the Technical Consultant the amount of $125,000 for the period commencing 1st January 2004 to 31st December 2004 payable in 24 continuous twice monthly installments of $5,208.33. Said amount to be paid into the account designated by the Technical Consultant. 3. EXPENSES. 3a) If TRC agrees that it is necessary for the Technical Consultant to travel, all such reasonable travel expenses shall be paid by TRC. For the purpose of this agreement expenses are defined, and are to include as follows: All transportation costs. Hotel accommodation. Meals. 3b) Other expenses: Any other normal expenditures made by Technical Consultant for supplies or services that may be needed in support of TRC programs or projects that are considered to be under the spirit of this agreement shall be reimbursable by TRC, such expenses not to exceed $100/month. Expenditures exceeding $100 are to be pre-approved by TRC. 4. DUTIES OF THE TECHNICAL CONSULTANT. The main duty is to provide specialized technical expertise to TRC, which may include: Represent TRC interests on electrical standard committees e.g. NEMA, EPRI, EEC. CPSC etc. Provide to TRC technical advice and expertise on any reasonable request by TRC that falls within the range of knowledge and experience of the Technical Consultant. Provide technical support for key accounts (e.g. Applica, Tecumseh, Leviton, etc.) On behalf of TRC maintain courtesy contact with international TRC customers where personal relationship exist. Participation as expert witness on behalf of TRC when requested. Liaison/interface with TRC patent counsel when requested. 5. ENTIRE AGREEMENT. This Agreement contains the entire agreement of the parties and there are no other promises or conditions in any other agreement whether oral or written. 6 AMENDMENT. This Agreement may be modified or amended, if the amendment is made in writing and is signed by both parties. 7. SEVERABILITY. If any provisions of this Agreement shall be held to be invalid or unenforceable for any reason, the remaining provisions shall continue to be valid and enforceable. If a court finds that any provision of this Agreement is invalid or unenforceable, but that by limiting such provision it would become valid or enforceable, then such provision shall be deemed to be written, construed, and enforced as so limited. 8. WAIVER OF CONTRACTUAL RIGHT. The failure of either party to enforce any provision of this Agreement shall not be construed as a waiver or limitation of that party's right to subsequently enforce and compel strict compliance with every provision of this Agreement. 9. CONFLICT OF INTEREST. For the term of this agreement the Technical Consultant agrees not to participate in any other consultation services that is considered to be in conflict with the specialized safety technology practiced by TRC. 10. TERMINATION This agreement may be terminated by either party in the event of substantial failure by the other party to fulfill its obligations under the spirit of this agreement through no fault of the terminating party. As of the effective date of termination, the payment obligations described in item 2, TECHNICAL CONSULTANT COMPENSATION, of this agreement are terminated. 11. APPLICABLE LAW. This Agreement shall be governed by the laws of Florida For: Technology Research Corporation For: Technical Consultant /s/ Robert S. Wiggins 4/28/03 /s/ Raymond H. Legatti 4/30/2003 Robert S. Wiggins Date: Raymond H Legatti Date: Chairman & Chief Executive Officer EX-10.11 9 k10aaex-10.txt APPLICA INC. LICENSE AGREEMENT EXHIBIT 10.11 LICENSE AGREEMENT This License Agreement is entered into effective as of December 1, 2002 (the "Effective Date") by and between Appllca Consumer Products, Inc., with offices at 5980 Miami Lakes Drive, Miami Lakes, Florida 33014-2467 ("Applica") and Technology Research Corporation, with offices at 5250 140th Avenue North, Clearwater, Florida 33760 ("TRC") (collectively, "the Parties"). WHEREAS, Applica is involved in the design, manufacture and marketing of a broad range of branded and private-label consumer goods; and WHEREAS, TRC is engaged in development and commercialization efforts for consumer product safety circuit technology involving shock detection, insulation failure detection, flame detection and/or automatic shut-off; and WHEREAS, Applica and TRC wish to cooperate as set forth herein, to enable the development, manufacture, marketing and sale by Applica of Household Kitchen Appliances using the TRC Licensed Technology (each as defined below); and WHEREAS, Applica and TRC intend that this License Agreement cover the terms and conditions of such development, manufacture, marketing and sale. NOW, THEREFORE, the Parties agree as follows: 1. Definitions. As used herein, the following terms shall have the meanings set forth below. (a) "Affiliates" means any corporation or other entity which is directly or indirectly controlling, controlled by or under the common control with a party, where "control" means the direct or indirect ownership of more than fifty percent (50%) of the outstanding shares or other voting rights of the subject entity to elect directors (or in the case of an entity that is not a corporation, interests entitled to vote in the election of the corresponding managing authority). As used herein, the terms "Applica", "TRC", "Party" and "Parties" include each party's respective Affiliates. (b) "Intellectual Property Rights" means patents, copyrights, mask work rights, trade secrets, know-how, any and all legal rights protecting proprietary information, Confidential Information (as defined in section 10 below), and other intellectual property in existence prior to the termination or expiration of this License Agreement, but excluding rights in trademarks, trade names, service marks, or other product or corporate identifications. (c) "Improvement" means any alteration, change, modification, contribution, development, or innovation. Improvements include (without limitation): formulas, algorithms, methods, processes, databases, mechanical and electronic hardware, electronic components, computers and their parts, computer languages, computer programs and their documentation, encoding techniques, articles, writings, compositions, works of authorship, contributions, innovations and other know-how. Page 1 (c) "TRC Innovations" means any Improvement conceived solely by TRC (i.e., without contribution from Applica), related to or useful for the use of the safety circuit technology described in attached Exhibit A in a Household Kitchen Appliance, and not generally known by those in the fields of consumer product design, including but not limited to the best, optimal or an otherwise improved method to in whole or part carry out or implement the TRC Licensed Technology in a Household Kitchen Appliance. (d) "Applica Innovations" means any Improvement conceived solely by Applica (i.e., without contribution from TRC), related to or useful for the use of the safety circuit technology described in attached Exhibit A in a Household Kitchen Appliance, and not generally known by those in the fields of consumer product design, including but not limited to the best, optimal or an otherwise improved method to in whole or part carry out or implement the TRC Licensed Technology in a Household Kitchen Appliance. (e) "Joint Innovations" means any Improvement conceived by either Applica or TRC with contribution from both Applica and TRC, related to or useful for the use of the safety circuit technology described in aftached Exhibit A in a Household Kitchen Appliance, and not generally known by those in the fields of consumer product design, including but not limited to the best, optimal or an otherwise improved method to in whole or part cany out or implement the TRC Licensed Technology in a Household Kitchen Appliance. (f) "TRC Licensed Technology" means (i) the safety circuit technology described in attached Exhibit A; (ii) TRC Innovations; (iii) TRC Patents; and (iv) know-how related to, or useful for, the use of all or part of the technology described in (i), (ii), and (iii) herein, in Household Kitchen Appliances. (g) "TRC Patent(s)" means all patent applications and any patents issued therefrom, in any country, including but not limited to any and all continuation, divisional, continued, continuing, continuation-in-part, or reissue thereof, including one or more issued or pending claims covering any part of (i) the safety circuit technology described in attached exhibit A; (ii) TRC Innovations; and (iii) know-how related to, or useful for, the use of all or part of the technology described in (i) and (ii) herein, in Household Kitchen Appliances, including without limitation U.S. patent number 6,525,914 issued February 25, 2003. (h) "Applica Patent(s)" means all patent applications and any patents issued therefrom, in any country, including but not limited to any and all continuation, divisional, continued, continuing, continuation-in-part, or reissue thereof, including one or more issued or pending claims covering any Applica Innovations. Page 2 (i) "Joint Patent(s) means all patent applications and any patents issued therefrom, in any country, including but not limited to any and all continuation, divisional, continued, continuing, continuation-in-part, or reissue thereof, including one or more issued or pending claims covering any Joint Innovations, including without limitation U.S. patent application serial number 10/255,167 filed September 24, 2002. (j) "Household Kitchen Appliances" means products such as toasters, toaster ovens, and coffee makers, of the type typically sold through consumer retail outlets, including but not limited to the following types of retail outlets: mass merchant (e.g., Wal-Mart, Target, K-Mart); department store (e.g., Macy's, Dillards); home centers (e.g., Home Depot, Lowe's); hardware (e.g., Ace Hardware, True Value); discounters (e.g., Dollar Stores); liquidators (e.g., Consolidated); sporting goods (e.g., Oshmans, SportMart); electronic (e.g., Home Shopping Network, QVC, Amazon.com); club (e.g., COSTCO, Sam's Club); specialty catalog (e.g., Sharper Image, Brookstone, Sky Mall); and other specialty retailers (e.g., Linens-N-Things, Bed, Bath & Beyond, Best Buy, Fry's Electronics), but shall not include products specifically designed for and specifically distributed to or through industrial or commercial applications for use therein. 2. Cooperation and Development. The Parties agree to cooperate from time to time upon mutually agreeable terms (to be set forth in separate written agreements) with respect to the development and manufacture of Applica Household Kitchen Appliances that exploit the TRC Licensed Technology. TRC shall provide Applica with written reports, test data, prototypes, product information, component sourcing information, engineering drawings, calculations, and any other TRC Licensed Technology reasonably required by Applica for the development and manufacture of such Household Kitchen Appliances. Upon mutually agreeable terms, TRC shall provide assistance to Applica in the process for obtaining U.L. certification for such Household Kitchen Appliances. A TRC Fee Schedule for such cooperation and assistance, which schedule is non- binding and subject to further negotiation and approval of both TRC and Applica in the context of future specific proposed projects, is attached hereto as Exhibit B. 3. License Grants and Restrictions. (a) TRC Grant - Americas Region. (i) Household Kitchen Appliances. TRC hereby grants to Applica in and throughout North, Central and South America and the Caribbean (the "Americas Region") an exclusive, perpetual, irrevocable but subject to the termination clauses herein, royalty-bearing license under TRC Licensed Technology, to design, have designed, to make, have made, offer for sale, sell, assemble, have assembled, test, have tested, use and otherwise dispose of Household Kitchen Appliances that exploit the TRC Licensed Technology. Page 3 (ii) Other Consumer Products. TRC hereby grants to Applica for the Americas Region (as defined in paragraph 3(a)(i) above) a right of first refusal and option for the TRC Licensed Technology for an exclusive, perpetual, irrevocable but subject to the termination clauses herein, royalty-bearing license under the TRC Licensed Technology, to design, have designed, to make, have made, offer for sale, sell, assemble, have assembled, test, have tested, use and otherwise dispose of consumer products that are not Household Kitchen Appliances covered by the grant of paragraph 3(a)(i) above. For each Americas Region country, TRC may engage itself or with third parties related to the design, development, manufacture, distribution, marketing or sale of such consumer products in or for such country if, within a sixty (60) day period from TRC having provided Applica with a detailed written notice including: (x) an identification of the country; (y) a statement of specific desire to move forward in such country; and (z) a reference to this section 3 of this Agreement and to such 60-day period, Applica has failed to exercise its right of first refusal and option. The Parties agree that such 60-day period may be extended by mutual written consent of the Parties. (b) TRC Grant - Other Regions. TRC hereby grants to Applica for each country outside of the Americas Region (as defined in paragraph 3(a) above) a right of first refusal and option for an exclusive, perpetual, irrevocable but subject to the termination clauses herein, royalty-bearing license under TRC Licensed Technology, to design, have designed, to make, have made, offer for sale, sell, assemble, have assembled, test, have tested, use and otherwise dispose of Household Kitchen Appliances in or for each such country. For each such country, TRC may engage itself or with third parties related to the design, development, manufacture, distribution, marketing or sale of such Household Kitchen Appliances in or for such country if, within a sixty (60) day period from TRC having provided Applica with a detailed written notice including: (x) an identification of the country; (y) a statement of specific desire to move forward in such country; and (z) a reference to this section 3 of this Agreement and to such 60-day period, Applica has failed to exercise its right of first refusal and option. The Parties agree that such 60-day period may be extended by mutual written consent of the Parties. (c) Except as specifically provided in section 18(a) of this License Agreement, nothing in this contract shall be construed to understand that Applica has the right to otherwise transfer to any third party the rights granted to Applica by TRC under this License Agreement. (d) Sublicensing. Applica has the right to sublicense to any third party the rights granted to Applica by TRC under this License Agreement, subject to the terms and conditions set forth in this License Agreement. TRC and Applica shall share equally (i.e., 50/50 split) all royalty payments received by Applica from any sublicensees. In the event that the rights granted to Applica hereunder by TRC are automatically converted from exclusive to non-exclusive rights pursuant to paragraph 4(c)(iii) below, TRC shall have the right to grant non-exclusive rights to third parties for the rights granted to Applica by TRC under this License Agreement, and TRC and Applica shall share equally (i.e., 50/50 split) all royalty payments received by TRC from any such licensees. Page 4 (e) Representation and Warranties. TRC represents and warrants that (i) TRC has the right to grant the licenses granted herein, and to transfer or disclose, as the case may be, the TRC Licensed Technology to Applica under this License Agreement, and (ii) to the best knowledge of TRC, the TRC Licensed Technology does not infringe on the intellectual property rights of any third party. (1) No Applica Grant. Applica under this License Agreement does not grant to TRC any license, sublicense, use or other right for or to any information, materials, innovations, technology or other know-how owned or controlled by Applica, except as specifically set forth herein. (g) Jointly Owned Technology. For Joint Innovations and Joint Patents, (collectively "Jointly Owned Technology") the Parties acknowledge and agree that both Parties enjoy rights equivalent to TRC and Applica having granted to each other a fully-paid, worldwide cross-license to make, have made, use, sell, offer for sale, lease or otherwise dispose of such Jointly Owned Technology, but that the Parties agree and are subject to the following restrictions: (i) Applica may not exploit Jointly Owned Technology in the development, manufacture or sale of products other than Household Kitchen Appliances without the advance written consent of TRC; (ii) TRC may not exploit Jointly Owned Technology in the development, manufacture or sale of any products without the advance written consent of Applica; (iii) Applica may not grant to any third party without the advance written consent of TRC any license or sublicense to Jointly Owned Technology that would exploit such Jointly Owned Technology in the development, manufacture or sale of products other than Household Kitchen Appliances; and (iv) TRC may not grant to any third party without the advance written consent of Applica any license or sublicense to Jointly Owned Technology that would exploit such Jointly Owned Technology in the development, manufacture or sale of any products; and (v) Neither TRC nor Applica may threaten or initiate any legal action against any third party concerning any Jointly Owned Technology without the advance written consent of the other, which consent shall not be unreasonably withheld. 4. Payments. (a) Household Kitchen Appliances Royalty Payment. During the term of this License Agreement, for each unit manufactured by Applica of a Household Kitchen Appliance covered by a claim of a TRC Patent, Applica shall pay TRC a royalty of US$0.10. Page 5 (b) Most Favored Licensee. If TRC grants to any third party a license to manufacture or sell Household Kitchen Appliances that exploit the TRC Licensed Technology under circumstances requiring payment by such third party of a royalty at a rate ("Third Party Royalty Rate") which is which is less than the royalty rate then enjoyed by Applica for Household Kitchen Appliances that exploit the TRC Licensed Technology, then: (i) TRC shall promptly notify Applica of such Third Party Royalty Rate, and (ii) Applica shall automatically enjoy for such Household Kitchen Appliances, effective as of the effective date of such third party grant by TRC, a royalty rate of not more than such Third Party Royalty Rate. (c) Minimums and Non-Performance Penalties. (i) Applica shall pay TRC a one-time, non-refundable payment of US$50,000 if Applica does not market launch a product exploiting the TRC Licensed Technology on or before June 30, 2004. (ii) In specific consideration of future activities of TRC and Applica toward the establishment of a UL mandate for use of the TRC Licensed Technology in Household Kitchen Appliances, Applica agrees that a minimum royalty payment of US$100,000 will be paid to TRC under this Agreement for calendar year 2005. If the cumulative amount actually paid to TRC pursuant to paragraph 4(a) above for calendar year 2005 is less than US$100,000, then no later than February 14, 2006, Applica shall pay TRC, in addition to the amount due under paragraph 4(a) for the immediately preceding calendar quarter (the "Q4 2005 Payment Amount"), the difference between US$100,000 and the Q4 2005 Payment Amount. (iii) For each of calendar years 2006 and 2007, if the cumulative amount actually paid to TRC pursuant to paragraph 4(a) above for such calendar year is less than US$150,000, then no later than February 14 of the immediately following calendar year, Applica shall have the option of either: (x) paying TRC, in addition to the amount due under paragraph 4(a) for the respective immediately preceding calendar quarter (the "Respective Q4 Payment Amount"), the difference between US$150,000 and the Respective Q4 Payment Amount; or (y) automatically converting all exclusive rights granted to Applica hereunder by TRC to non-exclusive rights. (iv) The Parties agree to meet at a mutually convenient time and place on or about the end of 2005 to assess and discuss future opportunities for the commercialization of the TRC Licensed Technology, and to renegotiate with respect to the terms set forth in paragraph 4(c)(iii) above. Page 6 5. Royalty Reports and Payment Terms. Within forty-five (45) days after the end of each quarter year ending on the last day of March, June, September and December of each calendar year during the Term, Applica shall provide TRC with a written statement reflecting Applica's sales of Household Kitchen Appliances that exploit the TRC Licensed Technology during the immediately preceding calendar quarter and shall pay the amount (if any) due pursuant to section 4 above. The first statement provided by Applica under this Agreement shall cover the period commencing with the first sale of such Household Kitchen Appliances to the end of the quarter being reported. All payments made by Applica under this License Agreement will be payable by Applica in United States dollars to TRC at the following address: Technology Research Corporation, ATTN: Ray Legatti, 5250 140th Avenue North, Clearwater, Florida 33760, or at any other address specified by TRC in a notice provided to Applica in accordance with the terms of paragraph 18(e) below. 6. Accounts. Applica shall keep, for three (3) years after the date of each submission to TRC of a written statement under paragraph 5 above, true and accurate records and books of accounts containing data reasonably required for verification of Applica's manufacture of Household Kitchen Appliances that exploit the TRC Licensed Technology. Applica shall permit a public accountant selected by TRC and approved by Applica (which approval by Applica shall not be unreasonably withheld) to inspect such records and books of accounts during normal business hours at Applica's premises or another mutually agreed-upon location, provided: (i) that reasonable prior notice of the inspection is given to Applica, (ii) that no more than one inspection takes place in any consecutive 12-month period, and (iii) that the inspection is for not more than the immediately prior three-year period. All expenses associated with the inspection shall be borne by TRC unless the inspection reveals an underpayment by Applica of more than ten percent (10%) of the amount that should have been paid during the period for which the inspection was conducted. In the event of such underpayment, Applica shall pay the reasonable costs of such inspection. If the public accountant shall determine that additional payment is due, TRC shall issue an invoice for such additional amount with supporting documentation by the public accountant, and Applica agrees to pay such invoice with twenty (20) business days of receipt. If the inspection reveals an overpayment by Applica, TRC shall provide Applica with prompt notice of such overpayment and shall within twenty (20) business days refund to Applica the overpaid amount. 7. Ownership of Intellectual Property. (a) Each Party shall own its technology, intellectual property, and know-how developed independently of the other Party. (b) The Parties shall jointly own any jointly-developed technology, intellectual property, and know-how, and TRC and Applica shall enjoy such ownership subject to the provisions of section 3(g) above. Page 7 8. Option to Acquire TRC-Owned Patents and Rights. Applica shall enjoy a right of first refusal to acquire from TRC the TRC Patents and other TRC-owned Intellectual Property Rights to which this License Agreement generally is directed. 9. Term and Termination. (a) This License Agreement will remain in effect for a period from the Effective Date until the latest expiration of any TRC Patent or Joint Patent, unless this License Agreement is terminated earlier: (i) for convenience at any time by mutual written consent of the Parties; or (ii) pursuant to one of the provisions of paragraph 9(b) below. (b) Either Party has the right to terminate this Agreement under and subject to any of the following conditions: (i) breach of any material provision of this Agreement by the other Party, provided that the other Party does not cure or remedy such breach within thirty (30) days after receipt of written notice of such breach. (ii) the other Party becomes subject of a voluntary or involuntary petition in bankruptcy or any proceeding relating to insolvency, receivership, liquidation or composition for the benefit of creditors if such petition or proceeding is not dismissed with prejudice within sixty (60) days after filing. (c) Absent any cure, termination of this License Agreement under any provision of paragraph 9(b) above shall be effective thirty (30) days after issuance of a written notice of termination to the other Party by the non-defaulting Party. (e) Effect of Termination. Paragraphs 3(g), 5, 6, 7, 9, 10, 14, 15, 16 and 18 shall to the extent applicable survive any expiration or termination of this License Agreement. (f) No Waiver of Default. The failure of either Party to exercise a right of termination hereunder for any one or more defaults shall not be construed to prejudice such Party's right of termination hereunder for such or any other or subsequent default. (g) Automatic Termination of Former Affiliates. The rights under this Agreement of each Affiliate of a Party automatically shall terminate as of the date each such entity ceases to be an Affiliate of such Party. Page 8 10. Confidentiality. (a) Definition of Confidential Information. "Confidential Information" shall mean that information of either Party or its Affiliates ("Discloser") which is developed under this License Agreement or which is disclosed to the other Party ("Recipient") by reason of the Parties' relationship under this License Agreement, either directly of indirectly, in any written or recorded form, orally, or by inspection, and, either in writing and marked as "confidential," "proprietary," or in some other similar and readily discernable manner, or if disclosed orally, is identified or reduced to writing similarly marked, within thirty (30) days of disclosure. Notwithstanding the foregoing, Confidential Information shall not include any information that: (i) was in the public domain at the time it was disclosed; (ii) was known to Recipient at the time of disclosure and not subject to a duty of confidentiality at the time of disclosure, and as can be evidenced in writing; (iii) is disclosed with the prior written approval of the other Party hereto; (iv) is disclosed to others without restrictions to confidentiality; (v) was independently developed by Recipient without use of or reference to the Confidential Information of the other party, and as can be evidenced in writing; or (vi) becomes known to Recipient, on a non-confidential basis, from a source other than the other party hereto, without breach of this Agreement by Recipient. (b) Use of Confidential Information. Recipient shall receive and use the Confidential Information only in connection with this License Agreement and will not use Confidential Information for any other purpose, and shall not disclose such Confidential Information to any person or persons who do not need to have knowledge of such Confidential Information in the course of their employment or contractor relationship with Recipient. (c) Protection of Confidential Information. Both Parties agree to take reasonably sufficient actions to safeguard and preserve the confidentiality required by this License Agreement including at a minimum such measures as it uses with its own comparable confidential information. Both Parties agree to have each of their employees sign their own respective employee confidentiality agreements which shall include terms sufficient to inform their employees of their obligations under this Agreement. (d) Return of Confidential Information. Upon termination of this Agreement, upon request from the other Party, all Confidential Information and any copies thereof shall be immediately returned by the Recipient to the other Party at the other Party's expense, or shall be destroyed by the Recipient. Each Party shall have the right to retain one copy for its legal files for the sole purpose of demonstrating actions under this License Agreement. 11. Warranties. The Parties hereby agree and warrant, to the extent applicable, as follows: (a) Information provided by each Party to the other is provided "AS IS". (b) Each party warrants that it is authorized to provide to the other the information provided under the License Agreement, and that it is authorized to enter into this License Agreement. Page 9 (c) TRC warrants that to the best knowledge of TRC, neither the technology to which Applica has access under the License Agreement, nor its manufacture, use, sale or offer for sale, infringes on the intellectual property rights of any third party. (d) TRC warrants that to the best knowledge of TRC, there are no threatened or pending lawsuits or other legal or administrative actions that would adversely affect performance under this Agreement or that would reduce the value of the rights granted hereunder. (e) Except as provided in this section 11 and in paragraph 3(e) above, no other warranties of any kind are provided by either party under the License Agreement. 12. Offensive Litigation. (a) Notice of Suspected Infringement. If either TRC or Applica have a good faith suspicion that any TRC Patent, Applica Patent or Joint Patent is being infringed, either directly, indirectly, contributorily or otherwise, by a third party, the party possessing such suspicion shall promptly notify the other of such suspicion of infringement and the basis therefore. (b) Infringement of TRC Patents. TRC may in its sole discretion take action to enforce any TRC Patent. Applica agrees to reasonably cooperate with TRC in any such enforcement efforts by TRC. If TRC becomes involved in any litigation, arbitration, mediation or other proceeding related to enforcement of any TRC Patent, TRC agrees to bear the reasonable expenses incurred by Applica associated with any such proceedings. TRC shall be entitled to all amounts received from any third parties resulting from such enforcement efforts by TRC. If Applica provides TRC notice of suspected infringement of any TRC Patent, TRC shall have 30 days from receipt of such notice to inform Applica that TRC will take action to enforce such TRC Patent. If TRC fails to so inform Applica by the end of such 30-day period, then Applica may in its sole discretion exercise a right to take action to enforce such TRC Patent. TRC agrees to reasonably cooperate with Applica in any such enforcement efforts by Applica. If Applica becomes involved in any litigation, arbitration, mediation or other proceeding related to enforcement of any TRC Patent, Applica agrees to bear the reasonable expenses incurred by TRC associated with any such proceedings. Applica shall be entitled to all amounts received from any third parties resulting from such enforcement efforts by Applica. 13. TRC Patent Validity/Enforceability Challenges. The obligation to pay royalties to TRC under this Agreement with respect to any TRC Patent shall continue until the expiration of such TRC Patent, or termination of this Agreement, whichever is later, except as follows: If a challenge in any judicial or administrative forum to the validity or enforceability of any TRC Patent results in an intial determination from which an appeal may be taken that such TRC Patent is invalid or unenforceable, then beginning on the date of such initial determination all royalty payments due based solely on such TRC Page 10 Patent shall be made into an escrow account established by Applica for the receipt of such payments, provided that in the event of a final determination from which no appeal may be taken that such TRC Patent is invalid or unenforceable, then all obligations to pay royalties under this Agreement with respect to such TRC Patent shall end, and the amount held in such escrow account shall be returned to Applica, and further provided that in the event of a final determination from which no appeal may be taken that such TRC Patent is not invalid or is not unenforceable, then all obligations to pay royalties under this Agreement with respect to such TRC Patent shall continue, and the amount held in such escrow account shall be paid to TRC. 14. Indemnification. TRC agrees to defend or at its option to settle any and all claims, demands, suits or proceedings made or brought against Applica to the extent based on a claim that technology provided by TRC, or its use, infringes any patent, copyright, trade secret or other intellectual property rights of any third party. In any such claim, demand, suit or proceeding for which TRC assumes the defense or settlement, TRC shall pay or reimburse Applica for any damages, costs, or expenses awarded against Applica or agreed to by TRC as part of a settlement, to the extent based upon such a claim (plus its reasonable attorneys' fees and costs) provided that Applica gives TRC (i) prompt written notice of the claim and all material documentation, (ii) the exclusive authority to defend or settle and control the defense, (iii) all information relevant to the claim and reasonable assistance in defending or settling any such claim, demand, suit or proceeding; and (iv) its cooperation, including not making any admission or compromise. Applica will have the right to participate in such defense or settlement negotiations at its expense, with counsel of its own choosing. 15. Limitation of Liability. TO THE MAXIMUM EXTENT PERMITTED BY LAW, IN NO EVENT WILL EITHER PARTY, OR EITHER PARTY'S OFFICERS, DIRECTORS, SHAREHOLDERS, AFFILIATES, EMPLOYEES, INSURERS, ATTORNEYS, AGENTS, OR PERMITTED SUCCESSORS OR ASSIGNS, BE HELD LIABLE, WHETHER IN CONTRACT, WARRANTY, TORT (INCLUDING NEGLIGENCE OR BREACH OF STATUTORY DUTY), STRICT LIABILITY, INDEMNITY, CONTRIBUTION, OR OTHERWISE, FOR ANY INDIRECT, SPECIAL, PUNITIVE, EXEMPLARY, INCIDENTAL, OR CONSEQUENTIAL LOSS, DAMAGES, COST, OR EXPENSE OF ANY KIND WHATSOEVER, HOWSOEVER CAUSED, OR FOR ANY LOSS OF PRODUCTION, LOSS OF CAPITAL, LOSS OF SOFTWARE, 1NTERUPTION OR LOSS OF BUSINESS, ANY LOSS OF PROFIT, LOSS OF REVENUES, CONTRACTS, BUSINESS, GOODWILL OR ANTICIPATED SAVINGS OR WASTED MANAGEMENT TIME, EVEN IF ADVISED OF THE POSSIBILITY OR IT WOULD FORESEEABLY ARISE FROM THE PERFORMANCE OF THIS AGREEMENT. 16. Publicity. The Parties acknowledge and agree that neither Party is authorized to speak on behalf of the other. With respect to the general subject matter to which the License Agreement is directed, TRC agrees that in all third party communications TRC will not make any reference to Black & Decker; to any Applica current or future product plans; nor to any Applica current or future marketing or sales plans; without the advance written consent of Applica. Neither Applica nor TRC shall issue any press release related to the subject matter of this License Agreement without the advance written approval of the other. Page 11 17. (a) Patent Marking. Applica agrees to place in a conspicuous location on each Household Kitchen Appliance covered by a claim of a TRC Patent or a Joint Patent, and sold in the United States, a patent notice in the form authorized by 35 U.S.C. 287 setting forth the number of each such United States TRC Patent or Joint Patent. Upon reasonable request from TRC, Applica will provide a similar patent number notice on each Household Kitchen Appliance covered by a claim of a TRC Patent or a Joint Patent, and sold outside the United States. (b) Reference to TRC and the FIRE SHIELD(R) Trademark. For each product for which a royalty is due TRC under this Agreement, Applica agrees that, in a manner similar to that being employed by Applica on the Effective Date with respect to certain heater products sold by or for Applica, Applica will reference TRC' s FIRE SHIELD(R) trademark as being owned by TRC; provided, that Applica shall not be obligated hereunder to make any such reference if The Black & Decker Company objects to use of that trademark in connection with a Black & Decker brand product, or if such trademark becomes abandoned or no longer owned by TRC. 18. Other Provisions. (a) Assignment. The rights and obligations of this License Agreement are not assignable by either Party without the prior written approval of the other Party, except pursuant to a merger, sale of all or substantially all assets or other corporate reorganization, or to a wholly-owned subsidiary or other Affiliate. (b) Independent Contractors. No partnership, joint venture, agency, or other such legal relationship is created between the Parties under this License Agreement. The Parties' relationship will be that of independent contractors at all times. (c) Governing Law/Jurisdiction. This License Agreement shall be governed by the laws of the State of Florida, excluding that body of law known as conflicts of law. The parties shall negotiate in good faith to resolve any dispute that arises between them relating to this License Agreement. (d) Attorneys' Fees. The prevailing Party in any legal action arising out of, or related to this License Agreement shall be entitled, in addition to any other rights and remedies it may have, to reimbursement for its expenses incurred in such action, including court costs and reasonable attorneys' fees. (e) Notices. All notices or communications to be given under this Agreement shall be in writing and shall be deemed delivered upon hand delivery; upon acknowledged telex or facsimile communication; five days after deposit in the United States mail, postage prepaid, by certified or registered mail; or by overnight air courier or other express delivery service addressed to the Parties at their addresses set forth above. A Party's address for notice may be changed by notice pursuant to this paragraph 13(e). Page 12 (f) Amendment. The terms and conditions of this License Agreement may not be superseded, modified, or amended except in a writing which states that it is such a modification, and is signed by officers or duly authorized representatives of the Parties. (g) Entire Agreement. This License Agreement constitutes the entire agreement between the Parties as to the subject matter hereof, and supersedes and replaces all prior or contemporaneous agreements, written or oral, regarding such subject matter. (h) Confidentiality of Agreement. Unless otherwise required by law or this License Agreement, no public disclosure of the subject matter of this License Agreement shall be made by either Party unless approved by the other, such approval not to be unreasonably withheld, provided that the Parties shall be entitled without such approval to make any disclosures required by law. (i) Counterparts. This License Agreement may be executed simultaneously in two or more counterparts, each of which shall be deemed an original, but all of which together constitute one and the same agreement. (j) Enforceability of Agreement Provisions. The illegality or unenforceability of any provision of this License Agreement shall not affect the enforceability of the remaining provisions of this License Agreement, unless such illegal or unenforceable provision is an essential material part of this License Agreement, in which case the Parties agree to negotiate in good faith regarding modification of such illegal or unenforceable provision. (k) Vicarious Performance Through Affiliates. Each Party hereunder may perform any of its duties and obligations, or exercise any of its rights, through any of its Affiliates, and performance by any Affiliate shall be deemed to be performance by the respective Party. Any Affiliate performing any duty or obligation or exercising any right shall conclusively be deemed to be bound by the terms of this Agreement as if a signatory hereto. Each Party shall be fully liable hereunder for breach of the terms of this Agreement by its Affiliate(s). (l) Patent Costs. TRC shall pay all fees, expenses, taxes, annuities, maintenance fees and other costs associated with the preparation, filing, prosecution, issuance, reexamination, reissue, and maintenance of all TRC Patents and any TRC- owned Intellectual Property Rights to which this License Agreement is generally directed. Applica shall pay all fees, expenses, taxes, annuities, maintenance fees and other costs associated with the preparation, filing, prosecution, issuance, reexamination, reissue, and maintenance of U.S. Patent Application Serial No. 10/255,167. Page 13 (m) Construction. Each Party has cooperated in the drafting of this Agreement, and this Agreement shall not be construed against any Party on the basis that the Party was the drafter. The headings are for convenience and are not to be used in construing the meaning of any provision of this Agreement. (n) Independent Legal Advice. The Parties acknowledge that they have been advised, or have had the opportunity to be advised, by their own independently selected counsel and other advisors in connection with this Agreement and that they enter into this Agreement solely on the basis of that advice and on the basis of their own independent investigation of all the facts, laws and circumstances material to this Agreement or any provisions thereof, and not in any manner or to any degree based upon any statement or omission by the other Party and/or its counsel or representatives. (o) Force Majeure. Neither Party shall be responsible for delays or failures in performance resulting from acts beyond the control of the Parties, including, without limitation, acts of God, strikes, lock-outs, riots, acts of war or terrorism, epidemics, governmental regulations imposed after the fact, fire, communication line failures, power failures, earthquakes or other disasters. IN WITNESS WHEREOF, the Parties hereto have executed this License Agreement effective as of the Effective Date. TECHNOLOGY RESEARCH CORP. APPLICA CONSUMER PRODUCTS, INC. By: /s/ Raymond H. Legatti By: /s/ Brian Guptill Name: Raymond H. Legatti Name: Brian Guptill Title: President Title: V.P. Engineering Page 14 EXHIBIT A SAFETY CIRCUIT TECHT4OLOGY DESCRIPTION The safety circuit technology as described in U.S. Patent Number 6,525,914 issued February 25, 2003 ("the '914 patent") (hereby incorporated by reference herein), but specifically excluding any and all technologies not described in the '914 patent that are described in other patents owned by TRC. Page 15 EXHIBIT B TRC FEE SCHEDULE Upon mutual agreeable terms and written consent of the Parties, TRC is prepared to offer Applica a TRC Project Engineer who shall be available to assist Applica in the further development and manufacture of Household Kitchen Appliances using the TRC Licensed Technology; and technicians, draftsmen, and laboratory testing facilities, at the following rates: Technicians: US$50 per hour Draftsman: US$50 per hour Lab Testing Facilities: US$500 per day Design Engineering: US$150 per hour Page 16 -----END PRIVACY-ENHANCED MESSAGE-----