-----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, HfG3o3b17Gm647c7DNLTgHd7ub6hBKhQwjjyZS69DzdmgiHT6umgrw5UgxWCAh4Z C6NLibwZSn6FLpfB6Csoew== 0000741556-04-000012.txt : 20040624 0000741556-04-000012.hdr.sgml : 20040624 20040623204659 ACCESSION NUMBER: 0000741556-04-000012 CONFORMED SUBMISSION TYPE: 10KSB PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 20040331 FILED AS OF DATE: 20040624 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: 10KSB SEC ACT: 1934 Act SEC FILE NUMBER: 000-13763 FILM NUMBER: 04878212 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 10KSB 1 k10fy2004.txt ANNUAL REPORT OF FORM 10-KSB U.S. SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-KSB (MARK ONE) [X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended March 31, 2004 OR [ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For transition period from __________ to __________. Commission file number 0-13763 TECHNOLOGY RESEARCH CORPORATION (Name of Small Business issuer 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) Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Check if there is no disclosure of delinquent filers in response to Item 405 of Regulation S-B is not contained in this form, and no disclosure will 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-KSB or any amendment to this Form 10-KSB. [ ] Revenues for the issuer's fiscal year ended March 31, 2004 were $24,336,637. The aggregate market value of common stock held by non-affiliates of the Registrant, as of September 30, 2003 was $39,141,375, based upon the $7.18 closing sale price for the Common Stock on the NASDAQ National Market System on such date. As of May 28, 2004, the number of shares outstanding of the Registrant's common stock, $.51 par value, was 5,753,592. DOCUMENTS INCORPORATED BY REFERENCE The Registrant's Definitive Proxy Statement related to its 2004 Annual Meeting of Shareholders to be held on August 26, 2004 will be incorporated by reference into Part III of this Form 10-KSB 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-KSB. Transitional Small Business Disclose Format(Check one): Yes [ ] No [X] TABLE OF CONTENTS PART I Page Item 1. Business .................................................... 3 Item 2. Properties .................................................. 18 Item 3. Legal Proceedings ........................................... 19 Item 4. Submission of Matters to a Vote of Security Holders ..........19 PART II Item 5. Market for Common Equity and Related Security Holder Matters 19 Item 6. Management's Discussion and Analysis or Plan of Operation ... 20 Item 7. Financial Statements ........................................ 27 Item 8. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure ...................... 28 Item 8A. Controls and Procedures ..................................... 28 PART III Item 9. Directors, Executive Officers, Promoters and Control Persons; Compliance With Section 16(a) of the Exchange Act ........... 29 Item 10. Executive Compensation ...................................... 29 Item 11. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters .................. 29 Item 12. Certain Relationships and Related Transactions .............. 29 Item 13. Exhibits and Reports on Form 8-K ............................ 29 Item 14. Principal Accountant Fees and Services ...................... 31 SIGNATURES ........................................................... 32 CERTIFICATION OF CEO - Robert S. Wiggins ............................. 33 CERTIFICATION OF CFO - Scott J. Loucks ............................... 34 As used in this Annual Report on Form 10-KSB, "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-KSB 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 especially in the section labeled Risk Factors. 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 and off-shore contract manufacturers, 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 Fire Shield 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 -------- ---------- ---- -------- ---- ---------- 2004 $ 11,941,713 49.3 $ 12,304,263 50.7 $ 24,245,976 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 Royalties from license agreements are as follows: Year Ended March 31 Royalties -------- --------- 2004 $ 90,661 2003 120,794 2002 166,854 2001 231,563 2000 126,121 The Company's backlog of unshipped orders at March 31, 2004 was approximately $10.26 million. This backlog consists of approximately 28% of commercial product orders and approximately 72% of military product orders, over 90% of which is expected to ship within the year ended March 31, 2005. 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 four 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; and (4) the Fire Shield Safety Extension Cord - a consumer product. The Company believes that its Fire Shield technology represents a significant opportunity for 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 5 parts, which could cause fires and other damage. Xerox Corporation voluntarily uses the Company's ELCI products to protect certain of its analog business machines. The Company's line of Surge Guard and Surge Guard Plus products are designed to meet the rigorous requirements of the Recreational Vehicle ("RV") market. These products provide a combination of surge and GFCI protection and have both OEM and after-market applications. In addition, the Company's recently developed the Surge Guard Automatic Transfer Switch, which incorporates a transfer switch into the functionality of the Surge Guard products. 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 Years 1996 through 1999 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. The revised standard UL 1776 that again required the use of GFCIs for UL listed sprayer/washers was issued effective as of May 6, 2000. 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 is well-positioned to generate 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 6 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 purchasing 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. 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 several license and sales and marketing agreements concerning its portable GFCI, ALCI, ELCI and LCDIs. These agreements are with entities located in France, Japan, 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 process of implementing a marketing strategy to incorporate this protective device into its 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 7 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. 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 ninth 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 5/10/15/30/60KW Tactical Quiet Generator ("TQG") Systems programs. The Company is currently actively supplying these parts to Fermont, a division of Engineered Support Systems, Inc., which is the prime contractor. In addition, the Company is also supplying to Fermont control equipment related to the 3KW TQG systems program which first began in November 1998. Sales to Fermont were $4,545,847 in Fiscal Year 2004 and $3,937,999 in Fiscal Year 2003, an increase of 15%. The Company also supplies such products for maintenance and 8 spare parts support directly to the U.S. military. Direct U.S. military sales, which include these products and those mentioned below, increased from $2,850,188 in Fiscal Year 2003 to $6,892,693 in Fiscal 2004, an increase of 142%, primarily as the result of increased military activities. Sales other then to Fermont or the U.S. military were $865,723 in Fiscal 2004, up from $597,957 in Fiscal Year 2003, an increase of 45%. 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. 9 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. 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. The Company molds most of 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. 10 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, no federal income tax for any profits generated by the subsidiary, and various other benefits. 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. For the emerging room air conditioning market, the Company plans to establish manufacturing capability in the same geographical areas as those of the room air conditioning manufacturers, whether it be in China, Korea, India or in Honduras for the U.S. requirements. The Company continues to manufacture its military products and distribute certain of its commercial products, which are manufactured off-shore, through its 43,000 square foot facility in Clearwater, Florida. Patents, Licenses, and Trademarks The Company holds seven patents in the U.S., seven in Great Britain, four in Italy, three in Germany and France, two in Australia, and one in Canada, Sweden and Japan with respect to the Company's products giving rise to portable GFCI and Fire Shield (R) 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. 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 On February 25, 2003, the Company was issued a patent for 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 Company licenses its technology for use by others in exchange for royalties or product purchases. Licensees are located in France, Japan, 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, Electra Shield and Fire Shield 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. The Company will continue to market existing and new products through these channels. In addition, 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 approximately 30 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 as a component of an end user product or under their own brand labels. The Company continues to implemented a "value add" upgrade strategy, which provides finished product to those who brand label the Company's product and who are currently only receiving subassembly modules. The Company's plastic and receptacle molding capabilities are a key factor in providing "value add" upgrades to its customers. 12 The Company primarily utilizes foreign licenses and sales and marketing agreements to market its products internationally (see Patents, Licenses and Trademarks for further information). The Company's products have 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. Major Customers and Exports Significant customers who accounted for 10% or more of sales, and aggregate exports were: Year ended March 31 Customer 2004 2003 2002 -------- ---- ---- ---- U.S. Military (direct sales) $ 6,892,693 2,850,188 1,605,770 Fermont (a division of ESSI, a U.S. Government Prime Contractor) 4,545,847 3,937,999 3,855,593 ---------- --------- --------- Totals sales for major customers $ 11,438,540 6,788,187 5,461,363 ========== ========= ========= Exports: Canada $ 344,020 417,094 293,650 Far East 1,389,773 1,020,078 1,288,102 Europe 2,207,887 2,632,357 1,899,842 Mexico - - 169,833 Australia 28,303 36,020 3,167 South America 13,867 6,484 6,458 Middle East 23,770 14,257 15,000 --------- --------- --------- Total exports $ 4,007,620 4,126,290 3,676,052 ========= ========= ========= The Company's military product sales are primarily to military procurement logistic agencies for field service support on previously shipped military equipment and to OEM prime contractors of electric generators. In Fiscal Year 2004, military sales were approximately 51% of total sales, compared to 42% in Fiscal Year 2003. Direct sales to the U.S. military up 142%, sales to Fermont were up 15%, and overall, military sales increased approximately 67% primarily as the result of increased military activities. Direct U.S. military sales accounted for 28% while Fermont accounted for 19% of the Company's total sales for Fiscal Year 2004, compared to 16% and 22%, respectively, for Fiscal Year 2003. The Company's exports were down 2.9% in Fiscal Year 2004, compared to the prior year, primarily due to lower sales to a sprayer/washer manufacturer in Europe, in the amount of $503,591. Exports to the Far East were positively impacted by a hair dryer manufacturer whose manufacturing operations are located in China. All other exports to the Company's international OEM customers were relatively flat year over year. 13 The Company has no relationship with any of its customers except as a supplier of product. Competition The commercial and military business of the Company is highly competitive. In the commercial market, the Company has significant competition, except with respect to its Fire Shield products. As a result, the Company may not be able to maintain current profit margins due to price erosion. The Company believes, however, that product knowledge, patented technology, ability to respond quickly to customer requirements, positive customer relations, price, technical background and industry experience are major competitive factors, and that it competes favorably with respect to these factors. In addition, the Company's patented GFCI technology utilizes, in certain adaptations, waterproofing 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 that do not exceed 750 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 16 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 products, 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. 14 The Company spent $1,380,295 in Fiscal Year 2004, $1,225,651 in Fiscal Year 2003 and $1,049,649 in Fiscal Year 2002 on research, development and engineering activities, and the Company anticipates spending levels to increase by approximately 9% in Fiscal Year 2005. All engineering activities are expensed as incurred with some funding being received from time to time by customers for special projects. Such funding was less than 5% of the overall engineering budget for Fiscal Year 2004. Employees As of March 31, 2004, the Company employed 103 persons on a full time basis, and of that total 59 employees were engaged in manufacturing operations, 16 in engineering, 15 in marketing and 13 in administration. The Company's Honduran subsidiary employed 220 persons on a full time basis as of March 31, 2004, and of that total, 217 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. Risk Factors The reader should carefully consider the following risk factors, together with the other information contained in this annual report on Form 10-KSB, before purchasing securities of the Company. If any of the events or circumstances described in the following risks actually occurs, the business, financial condition or results of operations of the Company could be materially adversely affected. 1. Growth Strategy. As part of our growth strategy, we plan to: - introduce new products and further develop product brands; - reduce product costs to increase competitive edge; - enhance product quality to met or exceed customer demands; and - optimize supply chain efficiency. These strategic objectives may not be realized or, if realized, may not result in increased revenue, profitability or market presence. Executing the Company's strategy may also place a strain on its production, information technology systems and other resources. To manage the growth effectively, the Company must maintain a high level of manufacturing quality and efficiency, properly manage its third party suppliers, continue to enhance its operational, financial and management systems, including its database management, inventory control and distribution systems, and expand, train and manage its employee base, especially as it relates to the Company's manufacturing plans to service the emerging room air conditioning market. The Company may not be able to effectively manage its growth in any one or more of these areas. 15 2. Raw Material and Component Costs. Raw materials and components constitute a significant portion of the Company's cost of goods. Factors that are largely beyond the Company's control, such as movements in commodity prices for the specific materials required, may affect the future cost of raw materials and components. As an example, the Company's products require a substantial amount of plastic. Because the primary resource used in manufactured plastics is petroleum, the cost and availability of plastic varies to a great extent with the price of petroleum. Recently, the Company has experienced increases in prices of plastic, as well as steel, aluminum and copper, which could continue in the Fiscal Year 2005. In addition, any inability of the Company's suppliers to timely deliver raw materials or components or any unanticipated changes in our suppliers could be disruptive and costly. Any significant failure by the Company to obtain raw materials on a timely basis at an affordable cost or any significant delays or interruptions of supply would have a material adverse effect on the Company. 3. Large Customers. The Company must receive a continuous flow of new orders from its large customers, and failure to obtain anticipated orders or delays or cancellations of orders or significant pressure to reduce prices from key customers could have a material adverse effect on the Company. In addition, as a result of the desire to more closely manage inventory levels, there is a growing trend in business, especially in retail, to make purchases on a "just-in-time" basis. This requires the Company to shorten its lead time for production in certain cases and more closely anticipate demand, which could in the future require the carrying of additional inventories or require additional expenses to expedite delivery. 4. Global Manufacturing Facilities. The Company manufactures a significant number of products in Honduras and obtains a significant proportion of the raw materials and sub-assembly components used in the manufacturing of its products outside the United States. In Fiscal Year 2005, the Company plans to enter into additional contract manufacturing relationships in China, Korea and India to accommodate the requirements of the emerging room air conditioner market. International operations are subject to risks including, among others: - labor unrest; - political instability; - lack of developed infrastructure; - longer payment cycles and greater difficulty in collecting accounts; - import and export duties and quotas; - changes in domestic and international customs and tariffs; - unexpected changes in regulatory environments; - difficulty in complying with a variety of foreign laws; - difficulty in obtaining distribution and support; and - potentially adverse tax consequences. Labor in Honduras has historically been readily available and at cost in the median range as compared to labor costs available in other nations; however, the Company cannot be assured that labor will continue to be available in Honduras at costs consistent with historical levels. A substantial increase in 16 labor costs could have a material adverse effect on the Company's result of operations. 5. Interruptions in Manufacturing Operations. Approximately 50% of the Company's revenues are derived from products manufactured or assembled at the Company's manufacturing facility in Honduras and from a contract manufacturer located in China. These manufacturing facilities are subject to hazards that could result in material damage to any such facility. Any such damage to either facility, or prolonged interruption in the operations of either facility for repairs, labor disruption or other reasons, would have a material adverse effect on the Company. 6. Infringement or Loss of Proprietary Rights. The Company believes that its rights in owned and licensed names are an increasing part of its business and that its ability to create demand for its products is dependent to a large extent on its ability to exploit these trademarks, especially with regard to its Fire Shield brand name. There can be no assurance as to the breadth or degree of protection that these trademarks may afford the Company, or that it will be able to successfully leverage its trademarks in the future. The costs associated with protecting its intellectual property rights, including litigation costs, may be material. The Company also cannot be sure that it will be able to successfully assert its intellectual property rights or that these rights will not be invalidated, circumvented or challenged. Any inability to do so, particularly with respect to names in which we have made significant capital investments, or a successful intellectual property challenge or infringement proceeding against the Company, could have a material adverse effect on the Company. The Company manufactures its products with features for which it has filed or obtained licenses for patents and design registrations in the United States and in several foreign countries. With respect to its applications for patents, there can be no assurance that any patents will be obtained. If obtained, there can be no assurance that such patents will afford the Company commercially significant protection of its technologies or that it will have adequate resources to enforce its patents. 7. Seasonality. Historically, the Company's business has not been materially seasonal, but to the extent that the Company participates in the new room air conditioner market, the Company's revenues may vary significantly from quarter to quarter. The normal manufacturing cycle for room air conditioners is typically from late fall through early spring which would result in higher revenues during the Company's fourth quarter, and to a lesser extent, during its first and third quarters. This seasonality may also result in cash layouts or additional interest expense due to an increased need to borrow funds to maintain sufficient working capital to support such increased demand. 8. Competing with Other Large Companies that Produce Similar Products. The markets for the Company's products are highly competitive. The Company believe that competition is based upon several factors, including price, quality, access to retail shelf space, product features and enhancements, brand names, new product introductions, marketing support and distribution systems. The Company competes with established companies, a number of which 17 have substantially greater facilities, personnel, financial and other resources than itself. Some competitors may be willing to reduce prices and accept lower profit margins to compete with us. As a result of this competition, the Company could lose market share and sales, or be forced to reduce its prices to meet competition. 9. Newly Acquired Businesses or Product Lines. The Company may acquire partial or full ownership in businesses or may acquire rights to market and distribute particular products or lines of products. The acquisition of a business or of the rights to market specific products or use specific product names may involve a financial commitment, either in the form of cash or stock consideration. There is no guarantee that the acquired businesses or product lines will contribute positively to earnings. The anticipated synergies may not materialize, cost savings may be less than expected, sales of products may not meet expectations, and acquired businesses may carry unexpected liabilities. 10. Government Regulations Could Adversely Impact Our Operations. Throughout the world, most federal, state, provincial and local authorities require Underwriters Laboratory, Inc. or other safety regulation certification prior to marketing electrical products in those jurisdictions. Most of the Company's products have such certifications; however, there can be no assurance that its products will continue to meet such specifications. Many foreign, federal, state and local governments also have enacted laws and regulations that govern the labeling and packaging of products and limit the sale of product containing certain materials deemed to be environmentally sensitive. A determination that the Company's products are not in compliance with such rules and regulations could result in the imposition of fines or an award of damages to private litigants. The risks listed below are not the only risks that we face. Additional risks that are not yet known or that the Company believes to be immaterial may also impair business operations. ITEM 2. PROPERTIES The Company's executive offices and U.S. manufacturing facility are located on 4.7 acres of leased land in the St. Petersburg-Clearwater Airport Industrial Park. The lease, with options, extends for 40 years until 2021 and is subject to certain price escalation provisions every five years. This leased land is adequate to enable the Company to expand this facility to 60,000 square feet. The present facility provides a total of 43,000 square feet, including 10,000 square feet of offices and engineering areas, as well as 23,000 square feet of production areas and 10,000 square feet of warehouse space. In March 1997, the Company entered into a five year lease agreement with ZIP San Jose, an industrial park located in San Pedro Sula, Honduras, for a 42,000 square foot building in which the Company manufactures its high-volume products. This operating lease was extended in 2002, 2003 and 2004 for one additional year, respectively. 18 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's financial condition, result of operations or cash flows. 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, 2004. PART II ITEM 5. MARKET FOR 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, 2004 and 2003 as reported by NASDAQ, and the dividends declared with respect to each quarter ended within such years. Market Price Cash Fiscal Year Ended High Low Dividends March 31, 2004: First Quarter $ 4.25 $ 2.33 $ 0.015 Second Quarter 8.35 3.65 0.015 Third Quarter 20.50 6.76 0.015 Fourth Quarter 23.00 10.02 0.015 ----- $ 0.060 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 As of May 28, 2004, the approximate number of the Company's record shareholders was 351. 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 3,842 shareholders. The Company's authorized capital stock, as of May 28, 2004, consisted of 10,000,000 shares of common stock, par value $.51, of which 5,753,592 shares were outstanding. 19 As of the record date of March 31, 2003, the Company increased its quarterly cash dividend from $.01 per share to $.015 per share. Dividends of $.06 per share and $.045 per share were paid by the Company in Fiscal Year 2004 and Fiscal Year 2003, respectively. ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION Critical Accounting Policies The Company's critical accounting policies are: (1) revenue recognition; (2) provision for excess and obsolete inventory; (3) provision for income taxes; (4) allowance for doubtful accounts; and (5) impairment of long-lived assets. 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 or in a few cases upon receipt, 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. Provision for Excess and Obsolete Inventory. The Company's financial statements include an estimate associated with a valuation allowance with respect to inventory. Various assumptions and other factors underlie the determination of this estimate. The process of determining this estimate is fact specific and takes into account primarily historical experience and expected economic conditions. The Company evaluates this estimate on a monthly basis and makes adjustments each quarter where facts and circumstances dictate. The Company evaluates all inventory which has not had activity for twelve months. As of March 31, 2004, the Company's inventory reserve was $312,341 or approximately 5% of total inventory. 20 Provision for Income Taxes. Significant management judgment is required in developing the Company's provision for income taxes, including the determination of any foreign withholding taxes or any United States income taxes on undistributed earnings of the foreign subsidiary, deferred tax assets and liabilities and any valuation allowances that might be required to be applied against the deferred tax assets. 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. The Company applies the Comparable Profits Method ("CPM") transfer pricing method to determine the amounts its subsidiary charges to the parent. Allowance for Doubtful Accounts. The Company records an allowance for estimated losses resulting from the inability of our customers to make required payments on their balances. We assess the credit worthiness of our customers based on multiple sources of information and analyze such factors as our historical bad debt experiences, publicly available information regarding our customers and the inherent credit risk related to them, information from subscription based credit reporting companies, trade association data and reports, current economic trends and changes in customer payment terms or payment patterns. This assessment requires significant judgment. If the financial condition of our customers were to worsen, additional write-offs may be required, resulting in write-offs that are not included in the allowance for doubtful accounts at March 31, 2004. Impairment of Long-Lived Assets. The Company reviews long-lived assets for possible impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable in accordance with Statement of Financial Accounting Standards No. 144 "Accounting for Impairment or Disposal of Long-Lived Assets". In evaluating the fair value and future benefits of its assets, management performs an analysis of the anticipated undiscounted future net cash flows of the individual assets over the remaining amortization period. The Company recognizes an impairment loss if the carrying value of the asset exceeds the expected future cash flows. 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. 21 Operating Results Fiscal Years 2004 and 2003 Comparison The Company's operating revenues for the year ended March 31, 2004 were $24,336,637, compared to $17,761,936 reported in the prior year, an increase of 37%. Net income was $2,676,156 for the current year, compared to $1,014,791 reported in the prior year, an increase of 164%. Basic earnings were $.48 per share and diluted earnings were $.46 per share in the current year, compared to basic and diluted earnings of $.19 per share for the prior year. The improvement in net income for Fiscal Year 2004, compared to Fiscal Year 2003 was due to an increase in revenues and gross profit margins. Commercial and military revenues increased by $1,686,715 and $4,918,119, respectively, while royalty revenues decreased by $30,133. The increase in commercial revenues was primarily attributed to product expansion into retail stores. Total retail sales were $1,666,564 in the current year compared to $300,502 in the prior year. New accounts in the Recreational Vehicle, Brand Label and Commercial Distribution markets contributed to the remainder of the growth. Military revenues continue to be strong due to direct military shipments of support parts for existing systems and control devices related to the Tactical Quiet Generator (TQG) programs. The increase in direct military shipments is primarily the result of on-going U.S. military activity. The Company made significant progress in establishing Fire Shield as a brand name during Fiscal 2004. Fire Shield product sales were $922,550, or 7.7% of commercial sales, compared to $304,139, or 3.0% of commercial sales in the prior year. In addition, the Company recorded royalty income of $78,060 for the current year from Applica Inc., a licensee that incorporates a Fire Shield cord set on its line of Black & Decker(R) portable heaters. The Company's Fire Shield LCDI products meet UL's requirement for cord fire protection on room air conditioners manufactured after August 1, 2004. This represents an estimated total market of $60 million for which the Company's products will compete. The Company's Fire Shield LCDI products have been and are currently being evaluated by most room air conditioning manufacturers. The normal manufacturing cycle for room air conditioners is typically from late fall through early spring. This means that the selection of cord fire protection products need to be finalized by the manufacturers to assure delivery of these products in early fall to their worldwide manufacturing locations. The Company recently announced orders for this application, of approximately $1.9 million, and is currently negotiating supply agreements with several major room air conditioning manufacturers. The Company's patented Fire Shield technology has numerous applications and represents significant growth potential for the Company. The Company achieved its best performance ever in Fiscal Year 2004 with record revenues and net income for the fiscal year. Gross profit margins improved as the result of product mix plus productivity and quality improvements in manufacturing. The Company expects its core military and commercial business to remain strong in the coming year. In addition, the Company could achieve significant growth in the coming year depending on the amount of business it captures in the emerging room air conditioner market. The Company's gross profit margin was approximately 39% of net sales for Fiscal Year 2004 compared to 33% in the prior year. The improvement was primarily the result of product mix plus productivity and quality improvements in manufacturing. 22 Selling, general and administrative expenses for Fiscal Year 2004 were $4,304,979, compared to $3,190,338 for the prior year, an increase of 35%. The increase in expenses was generally due to increased personnel and business related activities to support the Company's expanding business as well as sales and performance bonuses for meeting or exceeding revenue targets and for over- achieving the Company's 2004 business plan. Specifically, salary related expenses increased by $670,983, advertising costs by $139,038, professional fees by $78,983, outside sales commissions by $70,146, insurance expense by $56,296, travel expense by $31,661, bad debt expense by $24,000, product samples by $21,623 and other expenses by $21,911. Selling expenses were $2,393,868 for Fiscal Year 2004, compared to $1,854,671 for the prior year, an increase of 29%. General and administrative expenses were $1,911,111 for Fiscal Year 2004, compared to $1,335,667 for the prior year, an increase of 43%. Research, development and engineering expenses for Fiscal Year 2004 were $1,380,295, compared to $1,225,651 for the prior year, an increase of 13%. The increase was related to the Company designing and qualifying products for the room air conditioner market. Specifically, salary related expense increased by $187,250 offset by lower Underwriters Laboratories ("UL") fees and other costs of $43,126 and $10,520, respectively. Interest and sundry income, net of interest expense for Fiscal Year 2004 was $14,853, compared to $6,330 for the prior year, reflecting no debt and interest income on increased cash balances. Income tax expense for the years ended March 31, 2004 and 2003 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 an indefinite period. The foreign operations resulted in income of approximately $733,000 in 2004 and $301,000 in 2003, 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 $1,273,000 at March 31, 2004 and $540,000 at March 31, 2003. 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 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. 23 For the fiscal year ended March 31, 2003, commercial revenues decreased slightly by $21,167, military revenues improved by $1,144,878 and royalty revenues decreased 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 represented approximately 2% of the Company's total revenues in Fiscal Year 2003. 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%. 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 an 24 indefinite period. 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 $540,000 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. Liquidity and Capital Resources As of March 31, 2004, the Company's cash and cash equivalents increased to $5,968,122 from the March 31, 2003 total of $2,529,562. The increase was due to cash provided by operating activities of $3,801,692 and financing activities of $152,448, offset to some extent by cash used in investing activities of $515,580, for a net increase of $3,438,560. Cash provided by operating activities was primarily due to net income of $2,676,156, depreciation of $837,020, the tax benefit of stock options exercised of $549,000, an increase in accounts payable of $495,162, accrued expenses of $403,328 and income taxes payable of $431,093, offset to some extent by an increase in inventories of $969,301 and accounts receivable of $633,984. The increases in inventories, 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 used to support expanding the Company's business and replace aging equipment. The Company's capital expenditures were $515,580 for Fiscal Year 2004 compared to $577,463 in the prior year. Cash provided by financing activities was primarily due to proceeds from the exercise of stock options in the amount of $487,315, offset to some extent by the payment of cash dividends in the amount of $334,867, for a net total of $152,448. 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. 25 On November 12, 2003, the Company renewed its $3,000,000 revolving credit loan with its institutional lender, extending the maturity date to December 14, 2005. Although the Company did not utilize its line of credit in Fiscal Year 2004, the Company has the option of borrowing at the lender's prime rate of interest minus 25 basis points or the 30-day London Interbank Offering Rate (L.I.B.O.R.) plus 175 basis points. The loan is collateralized with a perfected first security interest on all of its accounts receivable and inventories, and a blanket security interest on all of its assets. The Company continues to comply with its loan covenants. The Company has no off-balance sheet arrangements and no debt relationships other than noted above. The Company's working capital increased by $3,738,307 to $12,611,387 at March 31, 2004, compared to $8,873,080 at March 31, 2003. 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 fourth quarter dividend of $.015 per share was paid on April 23, 2004 to shareholders of record on March 31, 2004. The Company paid $.06 per share for Fiscal Year 2004. New Accounting Standards In June 2001, FASB issued SFAS No. 143, Accounting for Asset Retirement Obligations effective for fiscal years beginning after June 15, 2002. SFAS No. 143 requires the Company to record the fair value of an asset retirement obligation as a liability in the period in which it incurs a legal obligation associated with the retirement of tangible long-lived assets that result from the acquisition, construction, development and/or normal use of the assets. The Company would also record a corresponding asset, which is depreciated over the life of the asset. Subsequent to the initial measurement of the asset retirement obligation, the obligation will be adjusted at the end of each period to reflect the passage of time and changes in the estimated future cash flows underlying the obligation. The adoption of SFAS No. 143 did not have a material effect on the Company's financial condition, results of operations or cash flows. In November 2002, the FASB issued Interpretation No. 45, Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness to Others. Interpretation 45 changes the accounting for and disclosure of guarantees. Interpretation 45 requires that guarantees meeting certain characteristics be initially recorded as a liability at fair value, in contrast to FASB No. 5 which requires recording a liability only when a loss is probable and reasonably estimable. The disclosure requirements of Interpretation 45 are effective for financial statements and annual periods ending after December 15, 2002. The initial recognition and initial measurement provisions of Interpretation 45 are effective on a prospective basis to guarantees issued or modified after December 31, 2002. The adoption of Interpretation 45 did not have a material effect on the Company's financial condition, results of operations or cash flows. In January 2003, the FASB issued Interpretation No. 46, Consolidation of Variable Interest Entities. This Interpretation clarifies the application of Accounting Research Bulletin No. 51, Consolidated Financial Statements, to certain entities in which the equity investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk 26 for the entity to finance its activities without additional subordinated financial support from other parties. A variable entity is required to be consolidated by the company that has a majority of the exposure to expected losses of the variable interest entity. The Interpretation is effective immediately for variable interest entities created after January 31, 2003. For variable interest entities which an enterprise holds a variable interest that is acquired before February 1, 2003, the Interpretation applies the first fiscal year or interim period ending after December 15, 2003. In December 2003, the FASB issued a revision to the Interpretation , Interpretation 46R. The revised Interpretation clarifies some of the original Interpretation and exempts certain entities from the requirements. The revised Interpretation is effective for the fiscal year ending after December 15, 2004. The application of this Interpretation is not expected to have a material effect on the Company's financial condition, results of operations or cash flows. In April 2003, the FASB issued SFAS No. 149, Amendment of Statement 133 on Derivative Instruments and Hedging Activities. This statement amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts and for hedging activities under SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities. This statement is effective for contracts entered into or modified after June 30, 2003, except for hedging relationships designated after June 30, 2003. The adoption of SFAS No. 149 did not have a material effect on the Company's financial condition, results of operations or cash flows. In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity. This statement establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. It requires that an issuer classify a financial instrument that is within its scope as a liability. This statement is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. Initially, SFAS No. 150 required that all financial instruments meeting the criteria of SFAS No. 150 be presented as liabilities rather than being presented as minority interest between the liabilities section and the equity section of the balance sheet. However, the FASB announced on October 29, 2003, that it had indefinitely deferred certain provisions of SFAS No. 150, including those provisions regarding presentation of minority interests. The adoption of SFAS No. 150 is not expected to have a material effect on the Company's financial condition, results of operations or cash flows. ITEM 7. 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: - Report of Independent Registered Public Accounting Firm - Consolidated Balance Sheets as of March 31, 2004 and 2003 - Consolidated Statements of Operations for the years ended March 31, 2004, 2003 and 2002 27 - Consolidated Statement of Stockholders' Equity for the years ended March 31, 2004, 2003 and 2002 - Consolidated Statements of Cash Flows for the years ended March 31, 2004, 2003 and 2002 - Notes to Consolidated Financial Statements All other schedules are omitted because they are not applicable or the required information is shown in the financial statements or notes thereto. ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. ITEM 8A. 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-15(e) 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 March 31, 2004, 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. 28 PART III Part III of this Form 10-KSB is incorporated by reference from the registrant's Proxy Statement for the Annual Meeting of Shareholders to be held on August 26, 2004. ITEM 9. DIRECTOR, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT. The executive officers of the Company are as follows: Name Age Position Robert S. Wiggins 74 Chief Executive Officer, Chairman of the Board Jerry T. Kendall 63 President and Chief Operating Officer Raymond B. Wood 69 Senior Vice President of Government Operations and Marketing Scott J. Loucks 42 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. 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 seven 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. ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K (a)(1) Exhibits: 3.1 Articles of Incorporation and By-Laws* 3.2 Amended Articles of Incorporation dated September 24, 1990.*** 3.3 Amended Articles of Incorporation dated September 24, 1996.*** 3.4 Amended Articles of Incorporation dated August 21, 2003.*** 29 (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, 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.*** 10.3 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.*** 10.4 $3,000,000 Revolving Credit Agreement, dated December 14, 1999, between the Company and SouthTrust Bank*** 10.5 The 2000 Long Term Incentive Plan effective August 24, 2000.*** 10.6 Amendment to 2000 Long Term Incentive Plan to increase the number of shares from 300,000 to 600,000 effective August 21, 2003.*** 10.7 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.*** 10.8 Amended Revolving Credit Agreement, dated November 12, 2003, between the Company and its subsidiary and SouthTrust Bank, extending the maturity date to December 14, 2005.***** 10.9 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.*** 10.10 Employment Agreement, dated April 16, 2003, between the Company and Jerry T. Kendall.*** 10.11 Technical Consulting Agreement, effective January 1, 2004, between the Company and Raymond H. Legatti.*** 14.1 Code of Conduct. ***** 14.2 Code of Ethics for Principal Executive, Financial and Accounting Officers. ***** 30 (23) Consent of Independent Registered Public Accounting Firm. ***** (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. ***** * 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-KSB. **** 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. ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES Information regarding principal accounting fees and services is incorporated by reference to the information set forth under the caption "Ratification of Appointment of Independent Registered Public Accounting Firm" in the Company's Proxy Statement for the 2004 Annual Meeting of Shareholders to be filed with the SEC within 120 days after the end of the Company's fiscal year ended March 31, 2004. 31 SIGNATURES In accordance with Section 13 or 15(d) of the Exchange Act, the Registrant has caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. TECHNOLOGY RESEARCH CORPORATION Dated: 6/21/2004 By: /s/ Robert S. Wiggins --------- ---------------------- Robert S. Wiggins Chief Executive Officer In accordance with the Exchange Act, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated: Signature Title Date /s/ Robert S. Wiggins Chairman, Chief Executive 6/21/2004 Robert S. Wiggins Officer, and Director (Principal Executive Officer) /s/ Jerry T. Kendall Director and President 6/21/2004 Jerry T. Kendall /s/ Scott J. Loucks Vice President of Finance and 6/21/2004 Scott J. Loucks Chief Financial Officer (Principal Financial Officer) /s/ Raymond B. Wood Senior Vice President 6/21/2004 Raymond B. Wood Government Operations and Marketing and Director /s/ Gerry Chastelet Director 6/21/2004 Gerry Chastelet /s/ Edmund F. Murphy, Jr. Director 6/17/2004 Edmund F. Murphy, Jr. /s/ Martin L. Poad Director 6/21/2004 Martin L. Poad /s/ David F. Walker Director 6/21/2004 David F. Walker 32 CERTIFICATION I, Robert S. Wiggins, certify that: 1. I have reviewed this annual report on Form 10-KSB of Technology Research Corporation: 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and we have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. 33 Date: June 21, 2004 /s/ Robert S. Wiggins Robert S. Wiggins Chairman of the Board and Chief Executive Officer CERTIFICATION I, Scott J. Loucks, certify that: 1. I have reviewed this annual report on Form 10-KSB of Technology Research Corporation: 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and we have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and 34 (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: June 21, 2004 /s/ Scott J. Loucks Scott J. Loucks Vice President of Finance and Chief Financial Officer, 35 TECHNOLOGY RESEARCH CORPORATION AND SUBSIDIARY Index Schedule I Page Report of Independent Registered Public Accounting Firm 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 Report of Independent Registered Public Accounting Firm 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. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). 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, 2004 and 2003, and the results of their operations and their cash flows for each of the years in the three-year period ended March 31, 2004, in conformity with United States generally accepted accounting principles. /s/ KPMG LLP Tampa, Florida April 27, 2004 F-1 TECHNOLOGY RESEARCH CORPORATION AND SUBSIDIARY Consolidated Balance Sheets March 31, 2004 and 2003 Assets 2004 2003 Current assets: ---- ---- Cash and cash equivalents $ 5,968,122 2,529,562 Accounts receivable, less allowance for doubtful accounts of $31,010 in 2004 and $44,902 in 2003 (note 4) 3,420,701 2,772,825 Inventories (notes 2 and 4) 5,633,177 4,663,876 Prepaid expenses and other current assets 206,295 122,323 Deferred income taxes (note 5) 239,169 288,708 Income taxes receivable - 19,766 ---------- ---------- Total current assets 15,467,464 10,397,060 ---------- ---------- Property, plant and equipment (notes 3 and 4) 10,268,976 9,777,497 Less accumulated depreciation 7,203,205 6,391,480 ---------- ---------- Net property, plant and equipment 3,065,771 3,386,017 ---------- ---------- Other assets 38,633 52,612 ---------- ---------- $ 18,571,868 13,835,689 ========== ========== Liabilities and Stockholders' Equity Current liabilities: Trade accounts payable $ 1,547,979 1,052,817 Accrued expenses: Compensation 679,462 313,749 Other 87,723 50,108 Dividends payable 99,295 96,781 Income taxes payable 431,093 - Deferred income 10,525 10,525 ---------- ---------- Total current liabilities 2,856,077 1,523,980 Deferred income 28,951 39,475 Noncurrent deferred income taxes (note 5) 235,120 195,604 ---------- ---------- Total liabilities 3,120,148 1,759,059 ---------- ---------- Commitments and contingencies (notes 7, 9 and 10) Stockholders' equity (notes 6 and 11): Common stock, $.51 par value. Authorized 10,000,000 shares; issued and outstanding 5,728,258 shares in 2004 and 5,440,370 share in 2003 2,932,377 2,785,554 Additional paid-in capital 8,417,686 7,528,194 Retained earnings 4,141,802 1,803,027 ---------- ---------- 15,491,865 12,116,775 Treasury stock, at cost - 21,500 shares (40,145) (40,145) ---------- ---------- Total stockholders' equity 15,451,720 12,076,630 $ 18,571,868 13,835,689 ========== ========== See accompanying notes to consolidated financial statements. F-2 TECHNOLOGY RESEARCH CORPORATION AND SUBSIDIARY Consolidated Statements of Operations Years ended March 31, 2004, 2003 and 2002 2004 2003 2002 Operating revenues: ---- ---- ---- Net sales (note 8) $ 24,245,976 17,641,142 16,517,431 Royalties 90,661 120,794 166,854 ---------- ---------- ---------- 24,336,637 17,761,936 16,684,285 ---------- ---------- ---------- Operating expenses: Cost of sales 14,830,606 11,896,230 12,096,800 Selling, general, and administrative 4,304,979 3,190,338 3,175,724 Research, development, and engineering 1,380,295 1,225,651 1,049,649 Other (1,194) 31,718 933 ---------- ---------- ---------- 20,514,686 16,343,937 16,323,106 ---------- ---------- ---------- Operating income 3,821,951 1,417,999 361,179 ---------- ---------- ---------- Other income (expense): Interest and sundry income 14,853 7,483 12,629 Interest expense - (1,153) (79,337) ---------- ---------- ---------- 14,853 6,330 (66,708) ---------- ---------- ---------- Income before income taxes 3,836,804 1,424,329 294,471 Income taxes expense (note 5) 1,160,648 409,538 94,111 ---------- ---------- ---------- Net income $ 2,676,156 1,014,791 200,360 ========== ========== ========== Basic earnings per share $ 0.48 0.19 0.04 Diluted earnings per share $ 0.46 0.19 0.04 Weighted average number of common and equivalent shares outstanding: Basic 5,589,181 5,438,381 5,437,497 Diluted 5,827,726 5,482,450 5,457,896 See accompanying notes to consolidated financial statements. F-3 TECHNOLOGY RESEARCH CORPORATION AND SUBSIDIARY Consolidated Statements of Stockholders' Equity Years ended March 31, 2004, 2003 and 2002 Additional Total Common stock paid-in Retained Treasury stockholders' Shares Amount capital earnings stock equity 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 Dividends - $.06 per share - - - (337,381) - (337,381) Net income - - - 2,676,156 - 2,676,156 Tax benefit related to exercise of stock options - - 549,000 - - 549,000 Exercise of stock options 287,888 146,823 340,492 - - 487,315 --------- --------- --------- --------- -------- ---------- Balances at March 31, 2004: 5,728,258 $ 2,932,377 8,417,686 4,141,802 (40,145) 15,451,720 ========= ========= ========= ========= ======== ========== See accompanying notes to consolidated financial statements.
F-4 TECHNOLOGY RESEARCH CORPORATION AND SUBSIDIARY Consolidated Statements of Cash Flows Years ended March 31, 2004, 2003 and 2002 2004 2003 2002 Cash flows from operating activities: ---- ---- ---- Net income $ 2,676,156 1,014,791 200,360 Adjustments to reconcile net income to net cash provided by operating activities: Loss (gain) on disposal of equipment (1,194) 31,718 933 Change in allowance for doubtful accounts (13,892) 32,994 (48,852) Depreciation 837,020 857,374 897,236 Tax benefit of stock options exercised 549,000 - - Decrease (increase) in accounts receivable (633,984) (289,216) 897,066 Decrease (increase) in income taxes receivable 19,766 (19,766) 278,500 Decrease (increase) in inventories (969,301) 134,855 1,553,543 Decrease (increase) in prepaid expenses and other current assets (83,972) (24,603) 36,011 Decrease in deferred income taxes 89,055 341,326 127,442 Decrease in other assets 13,979 6,096 - Increase (decrease) in deferred income (10,524) - (23,530) Increase (decrease) in trade accounts payable 495,162 501,517 (1,028,651) Increase (decrease) in accrued expenses 403,328 70,435 (47,374) Increase in income taxes payable 431,093 - - --------- --------- --------- Net cash provided by operating activities 3,801,692 2,657,521 2,842,684 --------- --------- --------- Cash flows from investing activities: Capital expenditures for property, plant and equipment (515,580) (577,463) (397,604) --------- --------- --------- Net cash used in investing activities (515,580) (577,463) (397,604) --------- --------- --------- Cash flows from financing activities: Repayments under line-of-credit agreement - (500,000) (1,250,000) Proceeds from exercise of stock options 487,315 3,188 - Dividends paid (334,867) (216,783) (216,753) --------- --------- --------- Net cash provided by (used in) financing activities 152,448 (713,595) (1,466,753) --------- --------- --------- Net increase in cash and cash equivalents 3,438,560 1,366,463 978,327 Cash and cash equivalents at beginning of year 2,529,562 1,163,099 184,772 --------- --------- --------- Cash and cash equivalents at end of year $ 5,968,122 2,529,562 1,163,099 ========= ========= ========= Supplemental cash flow information: Cash paid for interest $ - 1,153 79,337 Cash paid (received) for income taxes $ 71,734 87,977 (278,500) See accompanying notes to consolidated financial statements. F-5 TECHNOLOGY RESEARCH CORPORATION AND SUBSIDIARY Notes to Consolidated Financial Statements March 31, 2004, 2003 and 2002 (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 the consolidated financial statements requires management to make estimates and assumptions relating to the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. (c) 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. (d) Cash Equivalents Cash equivalents amounted to $2,015,608 and $6,491 at March 31, 2004 and 2003, respectively, and consisted of a money market account. For purposes of the consolidated statements of cash flows, the Company considers all short-term investments with original maturities of three months or less to be cash equivalents. F-6 TECHNOLOGY RESEARCH CORPORATION AND SUBSIDIARY Notes to Consolidated Financial Statements March 31, 2004, 2003 and 2002 (e) 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 ("SAB 101"), Revenue Recognition in Financial Statements and Staff Accounting Bulletin 104 ("SAB 104"). SAB 104 was released in December 2003 and revises portions of the previously released SAB 101. The SAB 104 revisions did not impact the Company's revenue recognition. (f) Impairment or Disposal of Long-Lived Assets 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 estimated undiscounted future 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. Assets to be disposed by sale would be separately presented in the consolidated balance sheet and reported at the lower of the carrying amount or fair value less costs to sell and are no longer depreciated. The assets and liabilities of a disposed group classified as held for sale would be presented separately in the appropriate asset and liability sections of the consolidated balance sheet. Prior to the adoption of SFAS No. 144 in 2003, the Company accounted F-7 TECHNOLOGY RESEARCH CORPORATION AND SUBSIDIARY Notes to Consolidated Financial Statements March 31, 2004, 2003 and 2002 for long-lived assets in accordance with SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of. The adoption of SFAS No. 144 did not affect the Company's consolidated financial statements. (g) Inventories Inventories are stated at the lower of cost or market. Cost is determined using the first-in, first-out method. (h) 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. (i) 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. (j) 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. 148, Accounting for Stock-Based Compensation-Transition and Disclosure, an amendment of SFAS 123, provides more prominent and more frequent disclosures in the financial statements regarding the effects of stock-based compensation. 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. 148. No stock-based employee compensation expense is reflected in the net income, as all options granted under the plans had an exercise price at least equal to the market price of the underlying stock on the date of grant. The following table illustrates the effect on net income and earnings per share if the Company had applied fair-value recognition and measurement provisions of FASB Statement No. 123 to stock-based employee compensation: Year ended March, 31 2004 2003 2002 ---- ---- ---- Net income $ 2,676,156 1,014,791 200,360 F-8 TECHNOLOGY RESEARCH CORPORATION AND SUBSIDIARY Notes to Consolidated Financial Statements March 31, 2004, 2003 and 2002 Total stock-based employee compensation expense determined under fair-value-based method for all rewards, net of related tax effect (117,759) (104,598) (99,578) ========= ========= ======== Pro forma net income $ 2,558,397 910,193 100,782 ========= ========= ======== Earnings per common share: Reported earnings per share-basic $ 0.48 0.19 0.04 Pro forma earnings per share-basic $ 0.46 0.17 0.02 Reported earnings per share-diluted $ 0.46 0.19 0.04 Pro forma earnings per share-diluted $ 0.44 0.17 0.02 Pro forma net income reflects only options granted after March 31, 1995. Therefore, the full impact of calculating compensation costs for stock options under SFAS No. 123 is not reflected in the pro forma net income amounts presented above because compensation cost is reflected over the options' vesting period of three to ten years, and compensation costs for options granted prior to April 1, 1995 are not considered. (k) Earnings per Share Basic earnings per share have been computed by dividing net income by the weighted average number of common shares outstanding. Diluted earnings per share have been computed by dividing net income by the weighted average number of common and common equivalent shares outstanding. The weighted average common and common shares outstanding have been adjusted to include the number of shares that would have been outstanding if the stock options had been exercised, at the average market price of the period, with the proceeds being used to buy shares from the market (i.e. the treasury stock method). The table below reconciles the calculation of the diluted and basic earnings per share: Year ended March, 31 2004 2003 2002 ---- ---- ---- Net income $ 2,676,156 1,014,791 200,360 ========= ========= ========= Weighted average shares outstanding - basic 5,589,181 5,438,381 5,437,497 Dilutive common shares issuable upon exercise of stock options 238,545 44,069 20,399 --------- --------- --------- 5,827,726 5,482,450 5,457,896 ========= ========= ========= Earnings per common share: Basic $ 0.48 0.19 0.04 Diluted $ 0.46 0.19 0.04 For the year ended March 31, 2004, options to purchase 153,606 shares of common stock were considered anti-dilutive for the purposes of calculating earnings per share. For the year ended March 31, 2003, options to purchase 287,000 shares were considered anti-dilutive for purposes of calculation earnings per share. F-9 TECHNOLOGY RESEARCH CORPORATION AND SUBSIDIARY Notes to Consolidated Financial Statements March 31, 2004, 2003 and 2002 (l) Warranty The Company generally provides a one year warranty period for all of its products. Certain products also provide coverage for "downstream" damage of products not manufactured by the Company. Prior to 2004, warranty costs have been minimal and no warranty accrual was required at the end of the reporting period. Beginning in 2004, a warranty accrual in the amount of $20,000 was established. Total warranty expense amounted to $20,000 and charges to the warranty liability amounted to $20,000 in 2004. The provision represents management's estimate of probable liabilities, calculated as a function of sales volume and historical repair experience for each product under warranty. (m) Recently Issued Accounting Standards In June 2001, FASB issued SFAS No. 143, Accounting for Asset Retirement Obligations effective for fiscal years beginning after June 15, 2002. SFAS No. 143 requires the Company to record the fair value of an asset retirement obligation as a liability in the period in which it incurs a legal obligation associated with the retirement of tangible long-lived assets that result from the acquisition, construction, development and/or normal use of the assets. The Company would also record a corresponding asset, which is depreciated over the life of the asset. Subsequent to the initial measurement of the asset retirement obligation, the obligation will be adjusted at the end of each period to reflect the passage of time and changes in the estimated future cash flows underlying the obligation. The adoption of SFAS No. 143 did not have a material effect on the Company's financial condition, results of operations or cash flows. In November 2002, the FASB issued Interpretation No. 45, Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness to Others. Interpretation 45 changes the accounting for and disclosure of guarantees. Interpretation 45 requires that guarantees meeting certain characteristics be initially recorded as a liability at fair value, in contrast to FASB No. 5 which requires recording a liability only when a loss is probable and reasonably estimable. The disclosure requirements of Interpretation 45 are effective for financial statements and annual periods ending after December 15, 2002. The initial recognition and initial measurement provisions of Interpretation 45 are effective on a prospective basis to guarantees issued or modified after December 31, 2002. The adoption of Interpretation 45 did not have a material effect on the Company's financial condition, results of operations or cash flows. In January 2003, the FASB issued Interpretation No. 46, Consolidation of Variable Interest Entities. This Interpretation clarifies the application of Accounting Research Bulletin No. 51, Consolidated Financial Statements, to certain entities in which the equity investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. A variable entity is required to be consolidated by the company that has a majority of the exposure to expected losses of the variable interest entity. The Interpretation is effective immediately for variable interest entities created after January 31, 2003. For F-10 TECHNOLOGY RESEARCH CORPORATION AND SUBSIDIARY Notes to Consolidated Financial Statements March 31, 2004, 2003 and 2002 variable interest entities which an enterprise holds a variable interest that is acquired before February 1, 2003, the Interpretation applies the first fiscal year or interim period ending after December 15, 2003. In December 2003, the FASB issued a revision to the Interpretation , Interpretation 46R. The revised Interpretation clarifies some of the original Interpretation and exempts certain entities from the requirements. The revised Interpretation is effective for the fiscal year ending after December 15, 2004. The application of this Interpretation is not expected to have a material effect on the Company's financial condition, results of operations or cash flows. In April 2003, the FASB issued SFAS No. 149, Amendment of Statement 133 on Derivative Instruments and Hedging Activities. This statement amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts and for hedging activities under SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities. This statement is effective for contracts entered into or modified after June 30, 2003, except for hedging relationships designated after June 30, 2003. The adoption of SFAS No. 149 did not have a material effect on the Company's financial condition, results of operations or cash flows. In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity. This statement establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. It requires that an issuer classify a financial instrument that is within its scope as a liability. This statement is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. Initially, SFAS No. 150 required that all financial instruments meeting the criteria of SFAS No. 150 be presented as liabilities rather than being presented as minority interest between the liabilities section and the equity section of the balance sheet. However, the FASB announced on October 29, 2003, that it had indefinitely deferred certain provisions of SFAS No. 150, including those provisions regarding presentation of minority interests. The adoption of SFAS No. 150 is not expected to have a material effect on the Company's financial condition, results of operations or cash flows. (2) Inventories Inventories at March 31, 2004 and 2003 consists of: 2004 2003 ---- ---- Raw materials $ 3,473,288 3,020,076 Work in process 434,090 265,645 Finished goods 1,725,799 1,378,155 --------- --------- $ 5,633,177 4,663,876 ========= ========= Approximately 40% and 44% of inventories were located in Honduras at March 31, 2004 and 2003, respectively. F-11 TECHNOLOGY RESEARCH CORPORATION AND SUBSIDIARY Notes to Consolidated Financial Statements March 31, 2004, 2003 and 2002 (3) Property, Plant and Equipment Property, plant and equipment at March 31, 2004 and 2003 consists of: Estimated 2004 2003 useful lives ---- ---- ------------ Building and improvements $ 1,614,517 1,608,138 20 years Machinery and equipment 8,654,459 8,169,359 5 - 15 years --------- --------- ------------ $ 10,268,976 9,777,497 ========== ========= Approximately 24% and 25% of property, plant and equipment is located in Honduras at March 31, 2004 and 2003, respectively. (4) Debt Debt at March 31, 2004 and 2003 consists of a $3,000,000 line of credit due in December 2005 with an outstanding balance of zero at March 31, 2004 and 2003. Interest is based on LIBOR plus 175 basis points which was 2.86% and 3.03% at March 31, 2004 and 2003, 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, 2004. (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, 2004 and 2003 are presented below: 2004 2003 ---- ---- Deferred tax assets: Accounts receivable, principally due to allowance for doubtful accounts $ 11,164 16,165 Inventories, principally due to valuation allowance for financial reporting purposes and additional costs inventoried for tax purposes 203,052 253,882 Accrued expenses, principally due to accrual for financial reporting purposes 24,953 18,661 Charitable contribution carryover - 12,790 Net operating loss carryforwards - 20,341 Tax credit carryforwards - 39,705 -------- -------- Total gross deferred tax assets 239,169 361,544 -------- -------- F-12 TECHNOLOGY RESEARCH CORPORATION AND SUBSIDIARY Notes to Consolidated Financial Statements March 31, 2004, 2003 and 2002 Deferred tax liabilities: Property, plant and equipment, principally due to differences in depreciation (235,120) (268,440) -------- -------- Net deferred tax asset $ 4,049 93,104 ======== ======== Net deferred tax assets are included in the accompanying consolidated balance sheets at March 31, 2004 and 2003 as: 2004 2003 ---- ---- Deferred income taxes, current asset $ 239,169 288,708 Deferred income taxes, noncurrent liability (235,120) (195,604) -------- -------- $ 4,049 93,104 ======== ======== Management assesses the likelihood that the deferred tax assets will be realized which is dependent upon the generation of taxable income during the periods in which those temporary differences become 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 over the periods in which the deferred tax assets are deductible, management believes the Company will realize the benefits of these deductible differences at March 31, 2004. Income tax expense (benefit) for the years ended March 31, 2004, 2003, and 2002 consists of: 2004 2003 2002 ---- ---- ---- Current: Federal $ 1,015,734 68,212 (33,331) State 55,859 - - -------- -------- --------- 1,071,593 68,212 (33,331) -------- -------- --------- Deferred: Federal 84,107 312,071 117,247 State 4,948 29,255 10,195 -------- -------- --------- 89,055 341,326 127,442 -------- -------- --------- $ 1,160,648 409,538 94,111 ======== ======== ========= Income tax expense for the years ended March 31, 2004, 2003 and 2002 differs from the amounts computed by applying the Federal income tax rate of 34% to income before income taxes as a result of the following: F-13 TECHNOLOGY RESEARCH CORPORATION AND SUBSIDIARY Notes to Consolidated Financial Statements March 31, 2004, 2003 and 2002 2004 2003 2002 ---- ---- ---- Computed expected tax expense $ 1,304,513 484,272 100,120 (Reduction) increase in income taxes resulting from: Foreign activity for which no income tax has been provided (249,121) (102,435) (17,691) State income taxes, net of Federal income tax effect 40,133 19,309 6,525 Change in valuation allowance - (78,152) - Tax credits expired - 71,702 - Other 65,123 14,842 5,157 -------- -------- --------- $ 1,160,648 409,538 94,111 ========= ======== ========= The operating results of the foreign manufacturing subsidiary are not subject to foreign tax since it is operating under an indefinite tax holiday. The foreign operations resulted in income of approximately $733,000 in 2004, $301,000 in 2003, and $44,000 in 2002. 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 $1,273,000 at March 31, 2004. 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, and during 2003, an additional 300,000 shares were approved by the shareholders for an aggregate total of 600,000 shares to be reserved for issuance under this plan. F-14 TECHNOLOGY RESEARCH CORPORATION AND SUBSIDIARY Notes to Consolidated Financial Statements March 31, 2004, 2003 and 2002 Option transactions and other information relating to the Plans for the three years ended March 31, 2004 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, 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 Granted - - - 342,900 342,900 10.03 Exercised (107,184) - (42,039) (138,665) (287,888) 3.41 Cancelled (17,616) - (1,927) - (19,543) 1.40 ------- ------- ------- --------- -------- Outstanding at March 31, 2004 6,284 250,000 2,700 422,485 681,469 $ 7.10 ------- ------- ------- --------- -------- Total number of options available under the plans 166,667 400,000 333,333 600,000 1,500,000 Exercisable at March 31, 2004 6,284 - 2,700 49,503 58,487 $ 1.71 Available for issue at March 31, 2004 - 150,000 - 38,850 188,850 The per share weighted average fair value of stock options granted during 2004, 2003 and 2002 was $10.03, $1.92 and $1.64, respectively, on the date of grant using the Black Scholes option pricing model, with the following assumptions: Years Ended March 31, --------------------- 2004 2003 2002 ---- ---- ---- Expected dividend yield 0.01% 1.70% 2.50% Risk free interest rate 5.00% 1.00% 2.00% Expected volatility 92.28% 92.63% 100.14% Expected life 7.31 years 8.93 years 3.80 years F-15 TECHNOLOGY RESEARCH CORPORATION AND SUBSIDIARY Notes to Consolidated Financial Statements March 31, 2004, 2003 and 2002 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, 2004, 2003 or 2002. At March 31, 2004, 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, 2004 life(years) price March 31, 2004 price - -------- -------------- -------------- --------- -------------- -------- $1.06-1.43 1,000 5.0 $ 1.06 1,000 $ 1.06 $1.44-1.63 38,650 5.5 1.52 20,317 1.54 $1.64-2.05 51,252 6.8 1.76 34,503 1.77 $2.06-2.74 80,667 9.0 2.72 667 2.06 $2.75-5.13 252,000 2.2 5.11 2,000 2.75 $5.13-12.34 257,900 10.00 12.34 - - -------------- -------------- --------- -------------- -------- 681,469 6.5 $ 7.10 58,487 $ 1.71 ======= === ======== ======= ======= (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, 2003 and 2004 for one additional year, respectively. Future minimum lease payments under noncancelable operating leases as of March 31, 2004 are: Year ending March 31, --------------------- 2005 $ 180,812 2006 24,612 2007 24,612 2008 24,612 2009 24,612 Thereafter 59,479 -------- Total minimum lease payments $ 338,739 ======== F-16 TECHNOLOGY RESEARCH CORPORATION AND SUBSIDIARY Notes to Consolidated Financial Statements March 31, 2004, 2003 and 2002 Rental expense for all operating leases was approximately $187,000 in 2004, $182,000 in 2003 and $233,000 in 2002. (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: 2004 2003 2002 ---------- ---------- ---------- Commercial $ 11,941,713 10,254,998 10,276,165 Military 12,304,263 7,386,144 6,241,266 ---------- ---------- ---------- $ 24,245,976 17,641,142 16,517,431 ========== ========== ========== Significant customers who accounted for 10 percent or more of sales and aggregate exports were: Year ended March 31 Customer 2004 2003 2002 -------- ---- ---- ---- U.S. Military (direct sales) $ 6,892,693 2,850,188 1,605,770 Fermont (a division of ESSI, a U.S. Government Prime Contractor) 4,545,847 3,937,999 3,855,593 ---------- --------- --------- Totals sales for major customers $ 11,438,540 6,788,187 5,461,363 ========== ========= ========= Exports: Canada $ 344,020 417,094 293,650 Far East 1,389,773 1,020,078 1,288,102 Europe 2,207,887 2,632,357 1,899,842 Mexico - - 169,833 Australia 28,303 36,020 3,167 South America 13,867 6,484 6,458 Middle East 23,770 14,257 15,000 --------- --------- --------- Total exports $ 4,007,620 4,126,290 3,676,052 ========= ========= ========= (9) Benefit Plan The Company's 401(k) plan covers all employees with six months and 1,000 hours of service who are at least 21 years old. The Company matches employee contributions dollar-for-dollar up to $400. Total Company contributions were approximately $25,000 in 2004, $21,700 in 2003, and $26,700 in 2002. F-17 TECHNOLOGY RESEARCH CORPORATION AND SUBSIDIARY Notes to Consolidated Financial Statements March 31, 2004, 2003 and 2002 (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's financial condition, result of operations or cash flows. (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 the year ended March 31, 2004, the Company has repurchased 21,500 shares at a cost of $40,145. F-18 TECHNOLOGY RESEARCH CORPORATION AND SUBSIDIARY Notes to Consolidated Financial Statements March 31, 2004, 2003 and 2002 (13) Selected Quarterly Data (Unaudited) Information (unaudited) related to operating revenue, operating income, net income and earnings per share, by quarter, for the years ended March 31, 2004 and 2003 are: First Second Third Fourth quarter quarter quarter quarter ------- ------- ------- ------- Year ended March 31, 2004: Operating revenues $ 5,659,915 6,212,654 5,805,556 6,658,512 ========= ========= ========= ========= Gross profit $ 1,928,812 2,449,486 2,334,702 2,702,370 ========= ========= ========= ========= Operating income $ 778,522 1,163,167 935,060 944,008 ========= ========= ========= ========= Net income $ 584,100 793,860 680,388 617,808 ========= ========= ========= ========= Basic earnings per share $ 0.11 0.14 0.12 0.11 ========= ========= ========= ========= Diluted earnings per share $ 0.10 0.14 0.11 0.10 ========= ========= ========= ========= 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 $ 0.02 0.04 0.06 0.07 ========= ========= ========= ========= Diluted earnings per share $ 0.02 0.04 0.06 0.07 ========= ========= ========= ========= F-19 EX-10.8 2 k10ex10-8.txt CREDIT RENEWAL AGREEMENT EXHIBIT 10.8 MASTER LOAN DOCUMENTS MODIFICATION AGREEMENT This MASTER LOAN DOCUMENTS MODIFICATION AGREEMENT (the "Agreement") dated as of the 12th day of November, 2003, is by and between SOUTHTRUST BANK, an Alabama banking corporation (the "Bank") and TECHNOLOGY RESEARCH CORPORATION and TECHNOLOGY RESEARCH CORPORATION / HONDURAS , S.A.DE C.V. (the "Borrowers"). RECITALS: A. The Bank and the Borrowers are party to a Business Loan Agreement dated as of November 12, 2002 (the "Loan Agreement") pursuant to which the Bank has made a revolving line of credit available to Borrowers in the principal amount of up to $3,000,000.00 outstanding at any time. B. Borrowers' obligation to repay advances made by the Bank pursuant to the Loan Agreement is evidenced by a Revolving Loan Note dated as of December 14, 1999, as amended by a Change in Terms Agreement dated as of August 31, 2000, a Change in Terms Agreement dated as of December 24, 2001 and a Change in Terms Agreement dated as of November 12, 2002 (collectively, the "Note"). The Bank is the owner and holder of the Note. C. Borrowers' obligations under the Loan Agreement and the Note are secured by a Commercial Security Agreement (the "Security Agreement") dated as of November 12, 2002, and by a security interest in favor of the Bank, as secured party, in the collateral described in the Security Agreement. D. The Loan Agreement, the Note, the Security Agreement and all loan agreements, financing statements and documents executed in connection with the transactions contemplated thereby are referred to collectively herein as the "Loan Documents". E. The Borrowers have requested the Bank to renew and extend the maturity date of the revolving loan evidenced by the Loan Documents and the Bank is willing to do so as provided in this Agreement; NOW, THEREFORE, in consideration of the premises, and of the mutual promises hereafter set forth, and the sum of Ten Dollars ($10.00) paid each to the other, the receipt and sufficiency of which as consideration is hereby acknowledged, the parties agree as follows: 1. THE RECITALS. The parties acknowledge and agree that the facts stated in the recitals above are true and correct and the parties incorporate such recitals in this Agreement as a part thereof for all purposes. 2. THE NOTE. The Bank agrees to renew the revolving loan made available to Borrowers pursuant to the Loan Agreement and evidenced by the Note and to extend the maturity date thereof as provided in a 2003 Renewal Note of Borrower of even date with this Agreement payable by Borrower to the Bank in the principal amount of up to $3,000,000.00 outstanding at any time (the "2003 Renewal Note") in the form attached hereto as Exhibit "A". The principal outstanding under the 2003 Renewal Note shall accrue interest and Borrower shall make payments of principal and interest to the Bank in the manner and at the times provided in the 2003 Renewal Note. Borrower shall execute and deliver the 2003 Renewal Note to the Bank concurrently with the execution and delivery of this Agreement. The 2003 Renewal Note shall be deemed to have amended, restated, replaced and superceded the Note. The loan evidenced by the Note, as renewed and evidenced by the 2003 Renewal Note, shall continue to be secured by the Security Agreement. 3. THE LOAN AGREEMENT. The Loan Agreement is hereby amended to add the following provisions: Facility Fee. The Borrowers shall pay to the Bank on the first Business Day of January, 2004, and on the first Business Day of each January, April, July and October thereafter, and on the Maturity Date (as defined in the 2003 Renewal Note), in arrears, a fee calculated on a daily basis equal to twelve and one half basis points (.125%) per annum on the daily unused portion of the revolving loan remaining undisbursed from time to time. Minimum Tangible Net Worth. The Borrowers shall maintain, on a consolidated basis, a Tangible Net Worth (as defined by GAAP) of not less than $8,500,000.00, measured quarterly. Fixed Charge Coverage Ratio. The Borrowers shall maintain, on a consolidated basis, a minimum Fixed Charge Coverage Ratio of 1.5 to 1.0, measured quarterly on a rolling 4 quarters basis. For purposes hereof, the term "Fixed Charge Coverage Ratio" means (After-Tax Income + Total Depreciation & Amortization + Total Lease Expense + Interest Expense) divided by (Total Lease Expense + Interest Expense + Capitalized Interest + Current Maturities of Long Term Debt). Minimum Working Capital. The Borrowers shall maintain, on a consolidated basis, minimum Working Capital (as defined by GAAP) of $7,000,000.00, measured quarterly. Compliance Certificates. The Affirmative Covenant relating to compliance certificates is hereby amended to read as follows: "Unless waived in writing by Lender, provide Lender at least quarterly within 45 days of the end of each fiscal quarter of Borrower, with a certificate executed by Borrower's chief financial officer, or other officer or person acceptable to Lender, certifying that the representations and warranties set forth in this Agreement are true and correct as of the date of the certificate and further certifying that, as of the date of the certificate, no Event of Default exists under this Agreement." Financial Reporting. Borrower shall provide to Lender: (1) Quarterly Financial Statements. As soon as available and in any event within forty five (45) days after the end of each of the first three quarters of each fiscal year of the Borrower, consolidating and consolidated statements of income of the Borrower and balance sheets for the period commencing at the end of the previous fiscal year, if any, and ending with the end of such month, and a statement of change in cash flow of the Borrower for the portion of the fiscal year ended with the last day of such month, all in reasonable detail on a combined basis and stating in comparative form the respective figures for the corresponding date and period in the previous fiscal year, if any, and all prepared in accordance with GAAP consistently applied (except for footnotes) and certified by the chief financial officer of the Borrower (subject to year- end adjustments); (2) Annual Audited Financial Statements. As soon as available and in any event within one hundred twenty (120) days after the end of each fiscal year of the Borrower, audited consolidating and consolidated financial statements prepared by an independent certified public accountant acceptable to the Bank on a combined basis including, without limitation, a balance sheet of the Borrower as of the end of such fiscal year and a statement of income and retained earnings of the Borrower for such fiscal year, and a statement of change in cash flow, all in reasonable detail and stating in comparative form the respective figures for the corresponding date and period in the prior fiscal year, if any, and all prepared by an independent certified public accountant acceptable to the Bank in accordance with GAAP consistently applied and certified by the chief financial officer of the Borrower; (3) Inventory and Receivables Agings. As soon as available and in any event within forty five (45) days after the end of each fiscal quarter of each fiscal year of the Borrower, inventory and accounts receivable agings prepared in accordance with GAAP consistently applied and certified by the chief financial officer of the Borrower. Prohibition Against Indebtedness. Borrower shall not, without the prior written consent of the Lender which may be granted or withheld in its sole and absolute discretion, create or incur any additional indebtedness, whether direct or contingent liability of Borrower, except indebtedness owed to the Lender. Integration of Change in Terms Agreement. The terms and provisions of the Change in Terms Agreement dated as of November 12, 2002 not expressly modified by this Agreement or by the 2003 Renewal Note are incorporated herein by reference as a part of the Loan Agreement. "GAAP" means, for purposes of this Agreement, generally accepted accounting principles in the United States, consistently applied. "Note" is revised to mean the 2003 Renewal Note. 4. SECURITY AGREEMENT. The Security Agreement is hereby modified to change the name of the secured Lender (defined in the Security Agreement) to "SouthTrust Bank, an Alabama banking corporation", reflecting the correct name of the Lender. The Security Agreement is further modified and shall be deemed to provide that the Security Agreement continues in full force and effect and continues to secure the loan evidenced by the Note as renewed by the 2003 Renewal Note. 5. LOAN DOCUMENTS MODIFICATION. Each of the Loan Documents (other than the Note and the Security Agreement) are hereby modified to reflect that they shall apply to and secure the 2003 Renewal Note and all modifications, amendments, renewals and extensions thereof, equally and ratably with the Note. 6. NOVATION. Except as provided in this Agreement, the obligations evidenced by the Loan Agreement, the Note, the Security Agreement and the other Loan Documents are unaffected, unchanged and unimpaired. By entering into this Agreement, the parties have no intention whatsoever to extinguish or discharge the indebtedness evidenced by the Note, or to affect any novation or to release or discharge the lien and security interest create by the Security Agreement. 6. WAIVER OF DEFENSES. As an important inducement and as additional consideration to the Bank, the Borrowers, for themselves and for their respective successors, heirs and assigns to the extent permitted by law, each hereby waive and agree not to assert as a defense to any action for collection of the Note, the 2003 Renewal Note or for foreclosure of the security interests created by the Security Agreement, any defense which it now has or which may arise in the future under the Loan Documents or the 2003 Renewal Note by reason of any act or omission by the Bank, its agents or employees heretofore taken or omitted to be taken and in any way connected with the transactions evidenced or contemplated by the Loan Documents or the 2003 Renewal Note, including, without limitation, any such acts or omissions relating to required disclosures which Borrower acknowledge have been made in full and fair manner as may be required by law. 6. PAYMENT OF EXCISE AND INTANGIBLE TAXES. Borrowers agree to pay in full, concurrently with the execution hereof, or subsequent thereto if not fully paid, any and all documentary and intangible taxes due on the 2003 Renewal Note or any renewal or modification thereof or on this Agreement and other excise taxes, together with interest and penalties, if any, determined to be due on delinquent or unpaid amounts. Borrowers further agree to indemnify and save the Bank harmless from any and all such taxes and charges later determined to be due. 7. CLOSING COSTS AND ATTORNEYS' FEES. Borrowers shall pay all closing costs, including, without limitation, the reasonable attorneys' fees incurred by the Bank in connection with this Agreement and any related documents. 8. MISCELLANEOUS. This Agreement contains the final, complete, and exclusive expression of the understanding between the parties regarding the transactions contemplated by it. A waiver or modification of any provisions of this Agreement is valid only if the waiver or modification is in writing signed by each party. The failure or delay by the Bank to exercise any right, power or privilege under this Agreement will not operate as a waiver of any such right, power or privilege. The titles and headings preceding the text of the sections of this Agreement have been inserted solely for convenience of reference and do not affect this Agreement's meaning or effect. This Agreement is a Florida contract and it is the intent of the parties that it be construed according to the laws of the State of Florida. Borrowers may not assign their interest in this Agreement without the prior written approval of the Bank, and this Agreement binds the successors and assigns of the parties. IN WITNESS WHEREOF, the parties have executed this Agreement as of the date set forth above. TECHNOLOGY RESEARCH CORPORATION By: /s/ Scott J. Loucks Name: Scott J. Loucks Title: VP Finance, CFO TECHNOLOGY RESEARCH CORPORATION/ HONDURAS , S.A. DE C.V. By: /s/ Scott J. Loucks Name: Scott J. Loucks Title: Secretary, Director SOUTHTRUST BANK, an Alabama banking corporation By: /s/ Marisol Lugo Name: Maricol Lugo Title: V.P. EXHIBIT "A" 2003 RENEWAL NOTE $3,000,000.00 November 12, 2003 Being indebted for value received, TECHNOLOGY RESEARCH CORPORATION and TECHNOLOGY RESEARCH CORPORATION / HONDURAS, S.A. DE C.V. (collectively, jointly and severally, the "Borrowers"), jointly and severally promise to pay to SOUTHTRUST BANK, an Alabama banking corporation (the "Lender"), or order, at its offices in the City of Birmingham, Alabama, or at such other address as may be designated from time to time by the holder hereof to the Borrower the sum of up to THREE MILLION DOLLARS ($3,000,000.00) or so much thereof as is advanced hereunder together with interest on the unpaid balance from the date of disbursement until maturity at a rate per annum equal to the Applicable Rate as defined below. Within the limits provided in the Loan Agreement, Borrower may borrow, make payments and reborrow under this Note. Interest shall accrue on the basis of an assumed year of 360 days and shall be charged for the actual number of days elapsed in an Interest Period. Notwithstanding anything in the Note to the contrary, no Interest Period may end later than the Maturity Date and if the Maturity Date falls in less than one month, then the interest rate applicable to this Note shall not be the LIBOR Rate during the remaining term but rather shall be the Base Rate. After the occurrence of an Event of Default, the interest rate applicable to this Note may not be continued at or converted to the LIBOR Rate but shall be the Default Rate. The following definitions shall apply for the purpose of determination of the interest rate applicable to the Note from time to time: "Applicable Rate" means either the LIBOR Rate or the Base Rate or the Default Rate, as such interest rate may apply to the Loan evidenced by this Note as provided herein. "Base Rate" means a rate of interest equal to twenty five basis points (.25%) below the rate quoted as the "prime rate" as reported in the "Money Rates" section of the Wall Street Journal (or the arithmetic average of the rates so quoted, if more than one rate is quoted) or, in the event of discontinuance of such publication or such section thereof, the Base Rate shall mean the monthly average prime rate as reported and published in the Federal Reserve Bulletin published monthly by the Board of Governors of the Federal Reserve System under the table styled "Prime Rate Charged by Banks on Short Term Business Loans". In the event of the discontinuance of both such publications or such section or table thereof, the Base Rate shall mean the prime rate as from time to time announced or published by Citibank, N.A. at its principal office in New York, New York. The terms "Base Rate" and "prime rate" are intended by the parties to be benchmarks only and are not to be construed as indicating that such rates are the best or lowest rates offered by the Lender to any of its customers regardless of their creditworthiness. "Default Rate" means a rate per annum equal to the highest rate then allowable by law, or 18%, whichever is lesser. "Eurocurrency Reserve Percentage" means, with respect to each Interest Period, a percentage (expressed as a decimal) equal to the percentage in effect two Business Days prior to the first day of such Interest Period, as prescribed by the Board of Governors of the Federal Reserve System (or any successor), for determining reserve requirements applicable to any "Eurocurrency liabilities" pursuant to Regulation D or any other applicable regulation of the Board of Governors which prescribes reserve requirements applicable to "Eurocurrency liabilities" as presently defined in Regulation D. "Interbank Rate" means, with respect to each Interest Period, the rate per annum at which dollar deposits in immediately available funds are offered to the Bank two Business Days prior to the beginning of such Interest Period by major banks in the London interbank eurodollar market as at or about 11:00 a.m. London time, for delivery on the first day of such Interest Period, for the number of days comprised therein and in an amount comparable to the amount of the Loan to which such Interest Period relates. "Interbank Rate (Reserve Adjusted)" means, for any Interest Period, a rate per annum (rounded upwards, if necessary, to the nearest 1/100 of 1%) determined pursuant to the following formula: Interbank Rate = _________Interbank Rate_________ (Reserve Adjusted) 1 - Eurocurrency Reserve Percentage "Interest Period" means, (i) when the applicable interest rate is the Base Rate, one (1) day, and (ii) when the applicable interest rate is the LIBOR Rate, the period commencing on the effective date of Borrower's election as provided hereinbelow and ending on (but excluding) the day 30, 60 or 90 days thereafter, in either case as the Borrower may select in its relevant notice to the Bank as provided in this Note, provided, however, that (a) if any Interest Period would otherwise end on a day which is not a Business Day, such Interest Period shall end on the next succeeding Business Day; and (b) no Interest Period may end later than the Maturity Date, provided that the Applicable Rate shall be the Base Rate for any Interest Period of less than thirty (30) days by. "LIBOR Rate" means an adjustable rate of interest per annum equal to the Interbank Rate (Reserve Adjusted) plus 175 basis points, fixed for Interest Periods of 30, 60 or 90 days. The Borrower shall select the initial Applicable Rate to apply to the Loan by providing written notice thereof (which may be by telefacsimile) to the Bank at least three (3) Business Days prior to the date of this Note. If timely notice of the initial Applicable Rate is not provided as required hereby, then the initial Applicable Rate shall be the Base Rate. Subject to the provisions hereof, the Borrower shall have the right to (i) continue the current Applicable Rate from time to time, or (ii) to convert the Applicable from either the LIBOR Rate or the Base Rate to the other, or (iii) to continue or change the Interest Period applicable to the Loan while the Applicable Rate is the LIBOR Rate, in each case by submitting to the Bank (effective upon receipt) (x) in the case of continuation of the LIBOR Rate, and conversion of the Base Rate to the LIBOR Rate, at least three (3) Business Days prior to the end of a current Interest Period, and (y) in the case of conversion of the LIBOR Rate to the Base Rate, on or before 12:00 p.m. Eastern Time on the Business Day prior to the date on which the conversion shall be effective, a written notice of Borrower's election to continue the Applicable Rate in its current form or to convert the Applicable Rate or to continue or change the applicable Interest Period as described in said notice. Such continuation or conversion shall take effect at the end of the current Interest Period. If no such notice of election is received by the Bank from the Borrower within the time prescribed prior to the end of a current Interest Period, then the Applicable Rate shall be converted to the Base Rate. Notwithstanding anything herein to the contrary, no Interest Period may end later than the Maturity Date and if the Maturity Date falls in less than thirty (30) days, then the Loan shall not accrue interest at the LIBOR Rate during the remaining term but rather shall accrue interest at a rate per annum equal to the Base Rate. After the occurrence and during the continuance of an Event of Default, the interest rate may not be continued at a LIBOR Rate but shall be the Default Rate. If as a result of a regulatory change the Bank shall reasonably determine that it is unlawful for the Bank to make, continue or maintain any loan accruing interest at a LIBOR Rate, the obligation of the Bank to continue or maintain the Loan evidenced by this Note at a LIBOR Rate shall, upon such determination (and telephonic notice thereof, to be subsequently confirmed in writing, to the Borrowers which notice shall, in the absence of manifest error, create a rebuttable presumption as to the effect of such regulatory change as specified above), forthwith be suspended until the earliest date the Bank can determine and notify the Borrowers that the circumstances causing such suspension no longer exist, and the LIBOR Rate applicable to this Note shall automatically convert to the Base Rate on the last day(s) of the then current respective Interest Period(s) with respect thereto or sooner, if required by such regulatory change, provided that the Bank shall take any reasonable actions available to it (including designation of its lending offices) consistent with legal and regulatory restrictions that will avoid the need for such suspension and will not, in the reasonable judgment of the Bank, be otherwise materially disadvantageous to the Bank. If the Bank shall have reasonably determined that quotations of interest rates for the relevant deposits referred to in the definition of "Interbank Rate" are not being provided in the relevant amounts or for the relevant maturities for purposes of determining rates of interest for LIBOR Rate determinations as provided herein or that, by reason of circumstances affecting the London interbank eurodollar market, adequate means do not exist for ascertaining the LIBOR Rate for any loan to which such rate is the applicable rate, then, upon telephonic notice from the Bank to the Borrowers to be subsequently confirmed in writing (such notice, in the absence of manifest error, to create a rebuttable presumption as to the effect specified above), the obligations of the Bank to continue the loan evidenced by this Note at a LIBOR Rate shall forthwith be suspended and interest shall accrue on principal outstanding under this Note at the Base Rate until the earliest date that the Bank can reasonably determine and notify the Borrowers that the circumstances causing such suspension no longer exist, provided that the Bank shall take any reasonable actions available to it to obtain the necessary quotations of interest rates in the London interbank eurodollar market (or another Eurodollar market acceptable to the Bank and to the Borrowers). In the event that the Bank shall incur any loss or expense (including any loss or expense incurred by reason of the liquidation or reemployment of deposits or other funds acquired by the Bank to make, continue or maintain any portion of the principal amount of any Loan at a LIBOR Rate) as a result of any repayment or prepayment of the principal amount of any Loan on a date other than the scheduled last day of the Interest Period applicable thereto then, upon written notice from the Bank to the Borrowers the Borrowers shall, within five days of receipt thereof, pay directly to the Bank such amount as will (in the reasonable determination of the Bank) reimburse the Bank for such loss or expense. Such written notice shall, in the absence of manifest error, create a rebuttable presumption of the amount of such losses or expenses. The Borrower shall pay to Lender monthly installments of interest commencing with a payment due November 14, 2003 and on the same day of each month thereafter provided that all unpaid principal plus accrued interest shall be due and payable and shall be paid on December 14, 2005 (the "Maturity Date"). Payment shall be made at the Maturity Date without demand, counterclaim, offset, deduction or defense, (whether now or hereafter conferred by statute or otherwise.) All payments made upon this Note shall be applied first to the payment of accrued interest and thereafter in reduction of principal. Any payment not received within ten (10) days when due shall be subject to, and it is agreed that the holder hereof shall collect thereon, a "late charge" in the amount of five percent (5%) of the amount of the delinquent payment to defray costs of collection and losses of the holder. Said late charge shall be immediately due and payable and shall be paid by the maker hereof without notice or demand by the holder. The holder's entitlement to collect a late charge shall in no way detract from or affect its right to accelerate payment of this Note in the event of a failure by Borrower to make any payment hereunder when due. Privilege is hereby reserved to prepay the principal of this Note in whole or in part at any time without notice, premium or penalty for the privilege of such prepayment; provided, however, that payment of accrued interest shall be due and payable and shall be paid at the time of and together with any such prepayment. Notwithstanding any other provision of this Note or of any instrument securing this Note or any other instrument executed in connection with the Loan evidenced hereby, it is expressly agreed that amounts payable under this Note or under the other aforesaid instruments for the payment of interest or any other payment in the nature of or which would be considered as interest or other charge for the use or loan of money shall not exceed the highest rate allowed by law, from time to time, and in the event the provisions of this Note or of such other instruments referred to above in this paragraph with respect to the payment of interest or other charge for the use or loan of money shall result in exceeding such limitation, then the excess over such limitation shall not be payable and the amount otherwise agreed to have been paid shall be reduced by the excess so that such limitation will not be exceeded, and if any payment actually made shall result in such limitation being exceeded, the amount of the excess shall constitute and be treated as a payment on the principal hereof and shall operate to reduce such principal by the amount of such excess, or if in excess of the principal indebtedness, such excess shall be refunded. This Note shall be in default upon the occurrence of any default or event of default under the terms of this Note or any document executed in connection with the Loan evidenced by this Note. In any event, this Note shall be in default upon failure of the Borrower to make any payment hereunder when due, without notice or demand. In the event of default the holder of this Note may, at its option, declare all unpaid indebtedness evidenced by this Note and any modifications thereof, immediately due and payable without notice regardless of the date of maturity. Failure at any time to exercise this option shall not constitute a waiver of the right to exercise the same at any other time. From and after the stated, or if this Note is accelerated, the accelerated, maturity date of this Note, it shall bear interest at the Default Rate. The parties acknowledge that this Note may be assigned and that any holder of this Note shall be entitled to recover directly against any endorser or guarantor hereof without first proceeding against the Borrower or any other party. Each Obligor (which term shall mean and include each Borrower, endorser, guarantor and all others who may become liable for all or any part of the obligations evidenced and secured hereby), does hereby jointly and severally: (a) consent to any forbearance or extension of the time or manner of payment hereof and to the release of all or any part of any security held by the Lender to secure payment of this Note and to the subordination of the lien of the mortgage and any other instrument of security securing this Note as to all or any part of the property encumbered thereby, all without notice to or consent of that party; (b) agree that no course of dealing or delay or omission or forbearance on the part of the Lender in exercising or enforcing any of its rights or remedies hereunder or under any instrument securing this Note shall impair or be prejudicial to any of the Lender's rights and remedies hereunder or to the enforcement hereof and that the Lender may extend, modify or postpone the time and manner of payment and performance of this Note and any instrument securing this Note, may grant forbearance and may release, wholly or partially, any security held by the Lender as security for this Note and release, partially or wholly, any person or party primarily or secondarily liable with respect to this Note, all without notice to or consent by any party primarily or secondarily liable hereunder and without thereby releasing, discharging or diminishing its rights and remedies against any other party primarily or secondarily liable hereunder; and (c) waive notice of acceptance of this Note, notice of the occurrence of any default hereunder or under any instrument securing this Note and presentment, demand, protest, notice of dishonor and notice of protest and notices of any and all action at any time taken or omitted by the Lender in connection with this Note or any instrument securing this Note and waives all requirements necessary to hold that party to the liability of that party. All parties liable for the payment of this Note agree to pay the Lender reasonable attorneys' fees and costs, whether or not an action be brought, for the services of counsel employed after maturity or default to collect this Note or any principal or interest due hereunder, or to protect the security, if any, or enforce the performance of any other agreement contained in this Note or in any instrument of security as aforesaid, including costs and attorneys' fees on any appeal, or in any proceedings under the Bankruptcy Code or in any post judgment proceedings. This Note is executed under seal and constitutes a contract under the laws of the State of Florida, and shall be enforceable in a Court of competent jurisdiction in that State. TECHNOLOGY RESEARCH CORPORATION By: /s/ Scott J. Loucks Name: Scott J. Loucks Title: VP Finance, CFO TECHNOLOGY RESEARCH CORPORATION/ HONDURAS , S.A. DE C.V. By: /s/ Scott J. Loucks Name: Scott J. Loucks Title: Secretary, Director EX-14.1 3 k10ccex-14.txt EMPLOYEE CODE OF CONDUCT Exhibit 14.1 Technology Research Corporation's Code of Conduct INTRODUCTION Technology Research Corporation's ("TRC") reputation depends on the conduct of its employees, officers and directors who have an obligation to TRC and its shareholders to act in a responsible, moral and ethical manner when representing TRC and conducting TRC business. This Code of Conduct covers a wide range of business practices and procedures and applies to TRC and its subsidiaries and contains guidelines that supplement all other TRC policies and procedures as exist from time to time, including the TRC Employee Handbook. This Code of Conduct does not cover every issue that may arise, but it sets out important principles that should guide all TRC employees. The Code of Conduct should also be provided to and followed by TRC's agents and representatives, including subcontractors, consultants and independent contractors and others conducting business on behalf of TRC. The purpose of the Code of Conduct is to promote: i) Honest and ethical conduct, including properly addressing actual or apparent conflicts of interest between personal and professional relationships; ii) Compliance with applicable governmental laws and regulations; iii) Full, fair, accurate, timely and understandable disclosure in TRC's annual and quarterly reports and in other public communications made by TRC; and iv) Prompt internal reporting to an appropriate person or persons of violations of this Code of Conduct and underlying TRC policies and procedures and standards that are incorporated into this Code of Conduct. COMPLIANCE with LAWS, RULES and REGULATIONS TRC requires that all employees, officers and directors obey the laws, rules and regulations applicable to TRC in the cities, states and countries where TRC does business. You are expected to use good judgment and common sense in seeking to comply with all applicable laws, rules and regulations and to ask for advice when you are uncertain about them. CONFLICT of INTEREST TRC employees, officers and directors have an obligation to conduct business in a manner that prevents actual or potential conflicts of interest between personal and professional relationships. TRC recognizes that investors are harmed when the real or apparent private interests of a director, officer or employee is in conflict with TRC's interests. An actual or potential conflict of interest occurs when an employee, officer or director is in a position to influence a decision that may result in a personal gain (kickback, bribe, substantial gift or special consideration) for the employee, a relative or close associate, or when someone receives improper personal benefits as a result of his or her position with TRC. A conflict situation can arise when an employee, officer or director takes actions or has interests that may make it difficult to perform his or her duties objectively and effectively. If a TRC employee works simultaneously for a competitor, customer or supplier, a conflict of interest will likely be present. The best policy is to avoid any direct or indirect business connection with our customers, suppliers or competitors, except on TRC's behalf. Conflict of interest situations may not always be clearly defined, so if you have a question you should consult with TRC's Compliance Officer. Any employee, officer or director who becomes aware of a conflict of interest or potential conflict of interest should bring it to the attention of a supervisor, manager or TRC's Compliance Officer. GIFTS, GRATUITIES, BRIBES and KICKBACKS No gifts or gratuities should be given to or accepted by TRC employees from a customer, vendor, dealer, supplier, the media, shareholders or any organization doing business with TRC which could, in any way, be construed as influencing or rewarding a particular course of action. Generally speaking, any gift or gratuity which has more than a nominal value or which is not related to a normal sales promotion should not be accepted or given. Relationships with suppliers must be based entirely on sound business decisions and fair dealings. In short, gifts and entertainment can create a "conflict of interest" that may harm the interests of TRC. Bribes and kickbacks are criminal acts, strictly prohibited by law. You must not offer, give, solicit or receive any form of bribe or kickback anywhere in the world. Any TRC employee or associate who pays or receives bribes or kickbacks will be immediately terminated and reported to the appropriate authorities. CORPORATE OPPORTUNITIES Employees, officers and directors are prohibited from taking for themselves personal opportunities that are discovered through the use of corporate property, information or position without the consent of the TRC Board of Directors. No employee may use corporate property, information or position for improper personal gain, and no employee may compete with TRC directly or indirectly. TRC PROPERTY All employees should endeavor to protect TRC's assets and ensure their efficient use. Theft, carelessness and waste have a direct impact on TRC's profitability. Any suspected incident of fraud or theft should be immediately reported for investigation. TRC equipment should not be used for non-TRC related business, though incidental personal use may be permitted. The obligation of TRC employees to protect TRC's assets includes proprietary and/or confidential information. Confidential information includes intellectual property such as trade secrets, patents, trademarks and copyrights, as well as marketing plans and strategies, engineering and manufacturing ideas, designs, data bases, salary information and any unpublished financial data and reports. The unauthorized release, use or distribution of this confidential information violates TRC policies. PROTECTION OF TRC CLIENT OR VENDOR INFORMATION You may not use or reveal TRC client or vendor confidential or proprietary information to others. In addition, you should take appropriate steps, including securing documents, limiting access to computers and electronic media and undertaking proper disposal methods to prevent unauthorized access to such information. Proprietary and confidential information includes business methods, pricing and marketing data, strategy, computer code, screens, experimental research or other confidential information received from TRC's current, former and prospective clients, vendors and associates. COMPANY TRAVEL When traveling at TRC's expense, employees, officers and directors are representatives of TRC and appropriate personal conduct is imperative at all times during such travel. This is applicable to both U.S. and international travel. COMPETITION AND FAIR DEALING TRC seeks to outperform our competition fairly and honestly. Stealing proprietary information, possessing trade secret information that was obtained without the owner's consent, or inducing such disclosures by past or present employees of other companies is strictly prohibited. Each employee should endeavor to deal fairly with TRC's customers, suppliers, competitors and employees. No TRC employee should take unfair advantage through manipulation, concealment, abuse of privileged information, misrepresentation of material facts or any other intentional unfair-dealing practice. Aggressive selling activities should not include misstatements, innuendo, or rumors about our competitors and their products and financial condition. FULL, FAIR, ACCURATE AND TIMELY DISCLOSURE TRC must always strive to retain the trust of our investors. Any disclosures that are made in any public reports provide essential information regarding TRC that is made available to U.S. securities exchanges and government regulators. In any reports and documents that TRC files with, or submits to, the Securities and Exchange Commission or any other governmental agency, and in our other public communications, TRC disclosures must be full, fair, accurate and timely. INSIDER STOCK TRANSACTIONS From time to time, TRC employees, officers and directors may have material inside information about TRC, either positive or negative, that is not publicly available. When this information becomes publicly available, it may have an immediate influence, up or down, on the price of TRC's stock. Directors, officers and employees are expected to comply fully with federal and state securities laws with respect to the disclosure of "material" corporate information and insider trading rules regarding TRC stock. These laws provide substantial civil and criminal penalties for individuals who fail to comply. If an employee, officer or director benefits from a TRC stock transaction utilizing "inside information," that individual has violated the SEC's insider trading rules. Family members, friends or other personal associates receiving "material inside information" from an employee, officer or director are also subject to the same insider trading rules. Information that reasonably can be expected to affect the market value of TRC stock or to influence investor decisions regarding TRC stock is considered "material". This information could include the procurement or loss of a major contract, potential merger, sale or acquisition transaction, financial and key business data, earnings statements and forecasts, changes in management, significant litigation matters or gain or loss of a substantial customer or supplier. If you have a question about compliance with these insider trading laws, you should contact the TRC Compliance Officer. RELATIONS with GOVERNMENT EMPLOYEES TRC employees or representatives must always exercise good judgment in relationships with officials or employees of federal, state or local governments to avoid any conduct which could be in any way construed as influence or rewarding an improper course of action by any employee of federal, state or local government or any agent or department thereof. Bribery and Graft - TRC employees or representatives shall not offer or furnish anything of value to any government employee in return for such an employee performing or refraining from performing an official act. Specifically, the Foreign Corrupt Practices Act generally makes it unlawful to give anything of value to foreign government officials, foreign political parties, party officials, or candidates for public office for the purpose of obtaining, or retaining, business for TRC. Gratuities - TRC employees or representatives shall not offer or furnish any gifts, gratuity, favor, entertainment, loan or anything of value, either directly or indirectly, to any employee of an agency or department of any federal, state or local government with which TRC is engaged, or endeavoring to engage, in procurement activities or business or financial transactions of any sort. Family members of government employees are viewed in the same light as government employees. DRUG and ALCOHOL ABUSE TRC has a zero tolerance Drug and Alcohol Abuse policy. A summary of this policy is contained in the Employee Handbook, and the entire policy is available for review in TRC's Human Resources Department. EQUAL EMPLOYMENT OPPORTUNITY TRC affords equal opportunity to all qualified persons and does so without regard to race, religion, age, sex, national origin, ancestry, disability, marital status, veteran status or any other legally protected status in accordance with applicable local, state, and federal laws. TRC also reasonably accommodates individuals with disabilities and those with bona fide religious beliefs. IMMIGRATION LAW COMPLIANCE TRC complies with the Immigration Reform and Control Act of 1986 and is committed to employing in the United States only United States citizens and aliens who are authorized to work in the United States. NON-HARASSMENT POLICY TRC is committed to maintaining a work environment that is free of discrimination. In keeping with this commitment, TRC will not tolerate harassment of TRC employees by anyone, including any supervisor, manager, co- worker, vendor, client, contractor, customer or other regular visitors of TRC. Harassment consists of unwelcome conduct, whether verbal, physical, or visual, that is based upon a person's protected status, such as sex, color, race, ancestry, national origin, age, disability, veteran status or other legally protected group status. More specifically, sexual harassment will not be tolerated. ENVIRONMENTAL HEALTH and SAFETY TRC strives to protect the environment and the health and safety of its employees and will ensure such protection through full compliance with all applicable environmental laws and regulations. Each employee has the responsibility for maintaining a healthy and safe workplace for all employees by following safety and health rules and practices and reporting accident, injuries and unsafe equipment, practices or conditions. FINANCIAL INTEGRITY - ACCURACY of BOOKS and PUBLIC REPORTS Employees, officers and directors must honestly and accurately report all business transactions and be responsible for accuracy of TRC records and reports. TRC documents a wide range of its activities. The integrity of these records are used to make important business decisions and must be maintained at all times. It is essential that TRC records are accurate and complete. This Code of Conduct prohibits the preparation of false or misleading documentation regarding both the amount or purpose of TRC related transactions. These actions include, for example, reports relating to financial data, booking costs, time sheets, payroll and benefits records, expense reports, performance and sales records. All TRC books, records and accounts shall be maintained in accordance with all applicable regulations and standards and accurately reflect the true nature of the transaction they record. The financial statements of TRC are required to conform to generally accepted accounting policies and TRC's accounting policies. No undisclosed or unrecorded account or fund may be established for any purpose. No false or misleading entries may be made in TRC's books or records for any reason, and no disbursements of corporate funds or other corporate property made without adequate supporting documentation. It is the policy of TRC to provide full, fair, accurate, timely and understandable disclosure in reports and documents filed with, or submitted to, the Securities and Exchange Commission and in other public communications. Falsification of any TRC, client or third-party record is prohibited. There should be no undocumented or improperly approved side agreements with vendors or customers. For example, if a customer's obligation to pay is contingent, that contingency should be set forth in writing. Any supplemental agreements to a written contract should be referenced in the contract. The use of TRC funds or assets for any unethical purpose is prohibited. No documents may be altered or signed by those lacking proper authority. No payment on behalf of TRC shall be made or approved with the understanding that it will be used, or might be used, for something other than the stated purpose. TRC's financial books, records and statements shall properly document all assets and liabilities, accurately reflect all transactions and shall be retained in accordance with TRC's record retention policies and all applicable laws and regulations. Employees, officers and directors should report any concerns regarding questionable accounting or auditing matters to the Audit Committee Chairman. RETENTION OF BUSINESS RECORDS TRC business records must be maintained for the periods specified by TRC's record retention policy. Records may be destroyed only at the expiration of the pertinent period. In no case may documents involved in a pending or threatened litigation, government inquiry or under subpoena or other regulatory information request be discarded or destroyed, regardless of the period specified in TRC's record retention policy. In addition, you may never destroy, alter or conceal, with an improper purpose, any record or otherwise impede any official proceeding, either personally, in conjunction with, or by attempting to influence another person. COMPLIANCE with the CODE of CONDUCT All employees, officers and directors have a responsibility to understand and follow the Code of Conduct. A violation of this Code of Conduct may result in appropriate disciplinary action, including the possible termination of employment. REPORTING SUSPECTED NON-COMPLIANCE Every employee, officer and director has the responsibility to ask questions, seek guidance, report suspected violations and express concerns regarding compliance with this Code of Conduct. Any employee, officer or director who knows or believes that any other employee, officer, director or representative of TRC has engaged or is engaging in TRC-related conduct that violates applicable law or this Code of Conduct should report such information to his or her supervisor or to TRC's Compliance Officer. You may report such conduct openly or anonymously without fear of "retaliation." TRC will not discipline, discriminate against or retaliate against any employee who reports such conduct in good faith, whether or not such information is ultimately proven to be correct, or who cooperates in any investigation or inquiry regarding such conduct. TRC will not allow retaliation against any employee that raises a concern, seeks advice, or reports misconduct that may violate this Code of Conduct. Individuals engaging in retaliatory conduct will be subject to disciplinary action, which may include termination of employment. If you suspect that you or someone you know has been retaliated against for raising a compliance, ethics or integrity issue under this Code of Conduct, you should immediately contact the TRC Compliance Officer or contact the Ethics Hotline maintained by TRC or other reporting channel established under this Code of Conduct. Any supervisor who receives a report of a violation of the Code of Conduct or alleged violations that are addressed to TRC's Human Resources Department must immediately inform the TRC Compliance Officer. This Code of Conduct is not all encompassing and questions about situations or transactions that are not specifically addressed in the Code of Conduct should be addressed to the TRC Compliance Officer or your supervisor. Questions or information concerning possible violations of this Code of Conduct may be provided anonymously. Reports of possible violations of financial or accounting policies, including details and relevant documents, may be sent (anonymously if you wish) to the Chairman of the Audit Committee, TRC Board of Directors, P. O. Box 17469, Clearwater, Florida 34622. Your calls, detailed notes and/or emails will be dealt with confidentially. Shortly, the Company will implement a toll free Ethics Hot Line call center for reporting alleged violations (anonymously if you wish) of the Code of Conduct. It will include a Web based reporting system as an option. The call center is an independent organization utilizing skilled interviewers. Reports of other violations of the Code of Conduct may be sent (anonymously if you wish) to the TRC Compliance Officer, George Pressly, 5250 140th Avenue North, Clearwater, Florida 33760. Your calls, detailed notes, conversations and/or emails will be dealt with confidentially. PROCESSING of COMPLIANCE COMPLAINTS It is strongly recommended that all alleged violations be reported to your supervisor, and matters involving Human Resource issues should continue to be reported to the TRC Human Resource Department for resolution. It is preferable that alleged violations be reported in writing. Reported alleged violations involving financial integrity or accounting policies will be investigated by the Chairman of the Audit Committee of the Board of Directors. Other reported violations will be investigated by Human Resources or the appropriate department under the guidance of TRC's Compliance Officer. All reports are taken seriously. Each allegation is investigated and, if substantiated, resolved through appropriate corrective action and/or discipline. If an individual reporting a complaint or providing information chooses to identify him or herself, he or she will be provided with feedback when the Compliance Officer completes his review. The Compliance Officer and TRC, to the extent practical and possible, will not disclose the identity of the person reporting a violation or who participates in the investigation. Employees should be aware that the Compliance Officer, and those assisting in the investigation, are obligated to act in the best interest of TRC, and do not act as personal representatives or lawyers for the employees, officers or directors. DISSEMINATION and AMENDMENT This Code of Conduct shall be distributed to each new employee, officer and director of TRC upon commencement of his or her employment or other relationship with TRC and shall also be distributed annually to each employee, officer and director of TRC. Each employee, officer and director shall certify that he or she has received, read and understands the Code of Conduct and has and will comply with its terms. TRC reserves the right to amend or alter this Code of Conduct at any time for any reason. The most current version will be found on TRC's website at www.trci.net and in TRC's corporate files. WAIVERS of the CODE of CONDUCT Any waiver of this Code of Conduct for employees, officers or directors may be made only by the Audit Committee of the Board of Directors. Such waivers are expected to be rare and will be promptly disclosed as required by law or stock exchange regulation. NO CONTRACT of EMPLOYMENT This Code of Conduct does not create any contractual rights of any kind between TRC and its employees or between TRC and third parties. EX-14.2 4 k10ceex-14.txt CODE OF ETHICS FOR FINANCIAL OFFICERS Exhibit 14.2 TECHNOLOGY RESEARCH CORPORATION CODE OF ETHICS FOR PRINCIPAL EXECUTIVES, FINANCIAL AND ACCOUNTING OFFICERS Introduction. This Technology Research Corporation ("TRC") Code of Ethics for Principal Executives, Financial and Accounting Officers has been adopted by the Board of Directors of TRC to promote honest and ethical conduct, proper disclosure of financial information in TRC's periodic reports, and compliance with applicable laws, rules and regulations by TRC's senior officers who have financial responsibilities. TRC expects all of its employees to act in accordance with the highest standards of personal and professional integrity in all aspects of their activities, to comply with all applicable laws, rules and regulations to deter wrongdoing and abide by the TRC Code of Conduct and other policies and procedures adopted by TRC that govern the conduct of its employees. This Code of Ethics for Principal Executive Officers, Financial and Accounting Officers is intended to supplement the TRC Code of Conduct. The Principal Executives and Senior Financial Officers subject to this Code of Ethics will be designated and informed of such designation by TRC. As used in this Code, the term "Principal Executive Officer" or "Financial and Accounting Officer" means TRC's Chief Executive Officer, Chief Operating Officer and Chief Financial Officer. Principles and Practices. In performing their duties, each Principal Executive Officer or Financial and Accounting Officer must: (1) maintain high standards of honest and ethical conduct and avoid any actual or apparent conflict of interest as defined in the TRC Code of Conduct; (2) promote full, fair, timely and accurate disclosure in all reports and other documents that TRC files with, or furnishes or submits, to the U.S. Securities and Exchange Commission, and national securities exchanges as well as other public communications and reports made by TRC; (3) promptly bring to the attention of his respective immediate supervisor and the Chairman of the Audit Committee any material information of which he may become aware that affects the disclosures made by TRC in its public filings, if such information is not already being adequately disclosed in public filings being prepared for TRC; (4) report to his respective immediate supervisor and the Chairman of the Audit Committee any conflict of interest that may arise and any material transaction or relationship that reasonably could be expected to give rise to any violation of this Code of Ethics; (5) comply with and take all reasonable actions to cause others to comply with applicable governmental laws, rules and regulations; (6) report all violations of this Code of Ethics by a Principal Executive Officer or Financial and Accounting Officer to his respective immediate supervisor and the Chairman of the Audit Committee, (7) promptly bring to the attention of the Chairman of the Audit Committee any evidence he may have concerning any (a) unethical behavior or dishonest or illegal acts in violation of the TRC Code of Conduct involving any management or other employee who has a significant role in TRC's financial reporting, disclosures or internal controls or (b) fraud, whether or not material, that involves management or other employees who have a significant role in TRC's financial reporting, disclosures or internal controls; (8) take all reasonable measures to protect the confidentiality of non- public information about TRC or its subsidiaries and their customers obtained or created in connection with their activities on behalf of TRC and to prevent the unauthorized disclosure of such information unless required by applicable law or regulation or legal or regulatory process; and (9) promptly report any possible violation of this Code of Ethics to his respective immediate supervisor and the Chairman of the Audit Committee. Accountability. The Principal Executives, Financial and Accounting Officers will be held accountable for their adherence to this Code of Ethics. Failure to observe the terms of this Code of Ethics may result in disciplinary action, including termination of employment. Violations of this Code of Ethics may also constitute violations of law and may result in civil and criminal penalties for the Principal Executive, Financial or Accounting Officer, their supervisor and/or TRC. Waiver. Any request for a waiver of any provision of this Code of Ethics must be in writing and addressed to the TRC Audit Committee. Any waiver of this Code of Ethics will be disclosed promptly on Form 8-K or any other means approved by the U.S. Securities and Exchange Commission. Compliance. The TRC Board of Directors shall determine, or designate appropriate persons to determine, appropriate actions to be taken in the event of violations of this Code of Ethics or TRC Code of Conduct by any Principal Executive, Financial or Accounting Officer. Such action shall be reasonably designed to deter wrongdoing and to promote accountability for adherence to the TRC Code of Conduct and to this Code of Ethics. Should any Principal Executive, Financial or Accounting Officer choose to report a possible violation of this Code of Ethics or the TRC Code of Conduct, he may choose to remain anonymous by filing a report in accordance with the procedures established in the TRC Code of Conduct. Personal Commitment to the TRC Code of Ethics for Principal Executives, Financial and Accounting Officers: I acknowledge that I have received and read the TRC Code of Ethics for Principal Executives, Financial and Accounting Officers, dated May 3, 2004 and understand my obligations as an employee to comply with the Code of Ethics. I understand that my agreement to comply with the Code of Ethics does not constitute a contract of employment. Signed copies are on file located at the Company's Corporate Headquarters. - 2 - EX-32.1 5 k10ex321.txt CERTIFICATION - CEO EXHIBIT 32.1 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 Quarterly Report of Technology Research Corporation (the "Company") on Form 10-KSB for the period ended March 31, 2004 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 (15 U.S.C. 78m or 78o(d)); and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. June 21, 2004 /s/ Robert S. Wiggins ___________________________ __________________________________ Date Robert S. Wiggins Chairman of the Board and Chief Executive Officer EX-32.2 6 k10ex322.txt CERTIFICATION - CFO EXHIBIT 32.2 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 Quarterly Report of Technology Research Corporation (the "Company") on Form 10-KSB for the period ended March 31, 2004 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 (15 U.S.C. 78m or 78o(d)); and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. June 21, 2004 /s/ Scott J. Loucks ___________________________ __________________________________ Date Scott J. Loucks Vice President of Finance and Chief Financial Officer EX-23 7 k10acex-23.txt CONSENT OF REGISTERED PUBLIC ACCOUNTS EXHIBIT 23 Consent of Independent Registered Public Accounting Firm The Board of Directors Technology Research Corporation: We consent to incorporation by reference in the registration statements (No. 333-96975 and No. 333-110825) on Form S-8 of Technology Research Corporation of our report dated April 27, 2004, with respect to the consolidated balance sheets of Technology Research Corporation and subsidiary as of March 31, 2004 and 2003, 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, 2004, which report appears in the March 31, 2004 annual report on Form 10-KSB of Technology Research Corporation. /s/ KPMG LLP Tampa, Florida June 23, 2004 -----END PRIVACY-ENHANCED MESSAGE-----