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0000741556-05-000026.txt : 20050629
0000741556-05-000026.hdr.sgml : 20050629
20050629153933
ACCESSION NUMBER: 0000741556-05-000026
CONFORMED SUBMISSION TYPE: 10KSB
PUBLIC DOCUMENT COUNT: 6
CONFORMED PERIOD OF REPORT: 20050331
FILED AS OF DATE: 20050629
DATE AS OF CHANGE: 20050629
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: 05924553
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
k10fy2005.htm
ANNUAL REPORT ON FORM 10-KSB
ANNUAL REPORT ON FORM 10-KSB
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington, D. C. 20549
Form
10-KSB
x ANNUAL REPORT UNDER SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For
the fiscal year ended March 31, 2005
o TRANSITION REPORT UNDER SECTION
13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
0-13763
(Commission file
No.)
TECHNOLOGY RESEARCH CORPORATION
(Name of small business issuer in
its charter)
FLORIDA |
59-2095002 |
(State or other jurisdiction of incorporation or
organization) |
(I.R.S. Employer Identification
No.) |
5250-140th Avenue
North
Clearwater, Florida 33760
(Address
of principal executive offices)
(727)
535-0572
(Issuer’s
telephone number, including area code)
Securities
registered under Section 12(b) of the Exchange Act: None
Securities
registered under Section 12(g) of the Exchange 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 o
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. o
Issuer’s
revenues for the fiscal year ended March 31, 2005 were $39,433,347.
The
aggregate market value of the voting and non-voting common equity held
by non-affiliates as of May 31, 2005 was $27,487,798 based upon the $5.02
closing sale price for the Common Stock on the NASDAQ National Market System on
such date.
As of May 31, 2005
there were 5,774,875 shares of the Company’s common stock outstanding.
DOCUMENTS
INCORPORATED BY REFERENCE
Portions of the registrant's definitive proxy statement related to its 2005
Annual Meeting of
Shareholders to be held on August 25, 2005 are incorporated by reference
into Part
III of this Form 10-KSB.
Transitional Small Business
Disclosure Format Yes o No x
FISCAL YEAR 2005 FORM 10-KSB ANNUAL
REPORT
TABLE OF
CONTENTS
PART I |
|
|
Item 1. Description of Business |
|
Item 2. Description of Property |
|
Item 3. Legal Proceedings |
|
Item 4. Submission of Matters to a Vote of
Security Holders |
|
PART II |
|
|
Item 5. Market for Common Equity and Related
Stockholder Matters |
|
Item 6. Management's Discussion and Analysis or
Plan of Operation |
|
Item 7. Financial Statements |
|
Item 8. Changes In and Disagreements With
Accountants on Accounting and Financial Disclosure |
|
Item 8A. Controls and Procedures |
|
Item 8B. Other Information |
|
PART
III |
|
|
Item 9. Directors, Executive Officers,
Promoters and Control Persons; Compliance With Section 16(a) of the
Exchange Act |
|
Item 10. Executive Compensation |
|
Item 11. Security Ownership of Certain Beneficial
Owners and Management and Related Stockholder Matters |
|
Item 12. Certain Relationships and Related
Transactions |
|
Item 13. Exhibits |
|
Item 14. Principal Accountant Fees and
Services |
|
|
SIGNATURES |
|
Exhibit 23 —
Consent of Independent Registered Public Accountant |
|
Exhibit 31.1 — Certification of Chief Executive
Officer pursuant to section 302 of the Sarbanes-Oxley Act of
2002 |
|
Exhibit 31.2 — Certification of Chief Financial
Officer pursuant to section 302 of the Sarbanes-Oxley Act of
2002 |
|
Exhibit 32.1 — Certification of Chief Executive
Officer pursuant to section 906 of the Sarbanes-Oxley Act of
2002 |
|
Exhibit 32.2 — Certification of Chief Financial
Officer pursuant to section 906 of the Sarbanes-Oxley Act of
2002 |
|
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.
DISCLOSURE REGARDING FORWARD-LOOKING
STATEMENTS
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, and any forward looking statements made herein
are based on current expectations of the Company, involve a number of risks and
uncertainties and should not be considered as guarantees of future
performance. Such statements may be identified by terminology such as
“may,” “will,” “should,” “expects,” “scheduled,” “plans,” “intends,”
“anticipates,” “believes,” “estimates,” “potential,” or “continue,” or the
negative of such terms, or other comparable terminology. These statements
are only predictions, and actual events as well as results may differ
materially. In evaluating these statements, you should specifically
consider the information described in the Risk Factors
section. Other key factors include, but are not limited to, the acceptance
of any new products, such as Fire Shield®, introduced into the
marketplace, the effective utilization of the Company’s Honduran manufacturing
facility and Far East contract manufacturers, changes in manufacturing
efficiencies and the impact of competitive products and pricing. The
Company cannot provide any assurance that predicted future results, levels of
activity, performance or goals will be achieved, and the Company disclaims any
obligation to revise any forward-looking statements subsequent to events or
circumstances or the occurrence of unanticipated events. The factors that
could cause actual results to differ materially include, but are not limited to:
interruptions or cancellation of existing contracts, impact of competitive
products and pricing, product demand and market acceptance, risks, the presence
of competitors with greater financial resources than the Company, product
development and commercialization risks, changing economic conditions in
developing countries, and an inability to arrange additional debt or equity
financing.
ITEM 1. DESCRIPTION OF
BUSINESS
OVERVIEW
Technology
Research Corporation was incorporated under the laws of the State of
Florida in 1981. TRC is an internationally recognized leader in the
design, manufacture and marketing of electrical safety products that save
lives, protect people against serious injury from electrical shock and/or
prevent electrical fires in the home and workplace. Based on its core
technology in ground fault sensing and leakage current detection, the Company's
products are designed to meet the needs of the consumer, commercial and
industrial markets worldwide. TRC also supplies power monitoring and
control equipment to the United States military and its prime contractors of its
tactical vehicles, naval vessels and mobile electric generators.
The Company's core commercial and military product applications form the
foundation upon which its technological expertise may be further refined and
applied to new product offerings and resulting business expansion. The
Company's Fire Shield® and Surge Guard Plus™ product lines are
examples of such a strategy, and the Company is now focused on developing the
markets for these products to their full potential. A
significant opportunity for the Company's commercial market expansion was
recently created by the adoption of the Underwriter's Laboratory ("UL")
requirement for cord fire protection on room air conditioners ("RAC")
manufactured for domestic sale after August 1, 2004. The
Company's Fire Shield® LCDI Power Cord effectively responds
to such requirement, and the Company will continue
to pursue additional UL mandates for other applications which could
benefit from the Company's technologies.
The Company's
revenues related to the new RAC market in fiscal 2005 were
approximately $12,500,000. Revenues relating to this
application are seasonal with the majority of revenues being generated
during the Company's third and fourth fiscal quarters. In
addition to the higher revenues generated by the RAC market, the
Company achieved organic growth of approximately 11% for fiscal
2005 as compared to fiscal 2004.
The Company’s primary challenge for fiscal 2005 was to penetrate the new
RAC market. In implementing its plan to support this new market, the
Company incurred additional operating expenses and start-up costs, including
those associated with manufacturing inefficiencies, warranty repair
costs and freight expense, which negatively impacted net income.
The
timing and customization of RAC orders and the implementation and coordination
of ramping up its manufacturing plant in Honduras and bringing on line several
Far East contract manufacturers in a compressed time frame were some of the
challenges that faced the Company in fiscal 2005. The Company believes
it is better positioned to perform more efficiently for this
application in fiscal 2006. The Company plans to leverage its
fiscal 2005 capital investment and expanded manufacturing capabilities to more
efficiently penetrate the RAC market in subsequent years and improve
net income.
The Company's
operating strategy is based on these key objectives:
-
to increase profitability by improving operating
efficiencies;
-
to strengthen and expand its markets and distribution
channels;
-
to broaden the applications within target markets for its existing
products;
-
to expand the scope of its product content;
-
to expand its manufacturing capabilities;
-
to maintain a conservative capital structure; and
-
to pursue strategic acquisitions to the extent favorable
opportunities are presented.
The Company plans
to pursue its operating strategy; however, actual results could differ
materially from those projected or assumed in any of its forward-looking
statements within this report. The Company's future financial condition
and results of operations, as well as its operational and financial
expectations, are subject to inherent risks and uncertainties. Some, but
not all, of the factors impacting these risks and uncertainties are set forth
below in the section entitled "Risk Factors."
Revenues contributed
by commercial and military products and royalties from license agreements are as
follows:
Year ended March 31, |
|
|
Commercial |
|
% |
|
|
Military |
|
% |
|
|
Royalties |
|
% |
|
|
Total |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
$ |
27,022,170 |
|
68.5 |
|
$ |
12,269,581 |
|
31.1 |
|
$ |
141,596 |
|
0.4 |
|
$ |
39,433,347 |
|
2004 |
|
|
11,941,713 |
|
49.1 |
|
|
12,304,263 |
|
50.6 |
|
|
90,661 |
|
0.3 |
|
|
24,336,637 |
|
2003 |
|
|
10,254,998 |
|
57.7 |
|
|
7,386,144 |
|
41.6 |
|
|
120,794 |
|
0.7 |
|
|
17,761,936 |
|
2002 |
|
|
10,276,165 |
|
61.6 |
|
|
6,241,266 |
|
37.4 |
|
|
166,854 |
|
1.0 |
|
|
16,684,285 |
|
2001 |
|
|
12,117,588 |
|
67.2 |
|
|
5,687,823 |
|
31.5 |
|
|
231,563 |
|
1.3 |
|
|
18,036,974 |
|
The Company's backlog
of unshipped orders at March 31, 2005 was approximately $9 million. This backlog
consists of approximately 82% of commercial product orders and approximately 18%
of military product orders, all of which are expected to ship within
the year ended March 31, 2006.
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.
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 also provide electrical shock protection and 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.
In June 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: (i) the
Fire Shield® Power Surge Strip - a consumer product; (ii) the Fire
Shield® Safety Circuit - an OEM product; (iii) the Fire Shield®
Power Cord - an OEM product; and (iv) 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 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 surge 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, thus eliminating the need for
two separate products.
Impact of New and
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 the fiscal years from 1996 through 1999 as the majority of
the sprayer/washer manufacturers opted for the lower cost 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 actively involved 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.
In July 2001, a
requirement was added to the 2002 NEC for cord fire prevention on room air
conditioners. UL Standard 484 for room air conditioners was revised to
reflect this change in the NEC and became effective in August 2004. This
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.
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 also has
placed some products with major retailers, primarily Wal-Mart, Home
Depot and Radio Shack, as well as with many independent retailers. The
Company's products are also being offered through magazines, catalogs and
E-commerce retailers.
License
Agreements. The Company has entered into several license and sales
and marketing agreements concerning its portable GFCI, ALCI, ELCI and LCDIs
products. These agreements are intended to assist the
Company's market penetration into those areas where it would be difficult
for the Company to compete on a direct basis.
On June 4, 2002, the
Company announced the signing of a cross license agreement (the "Agreement")
with Tecumseh Products Company ("Tecumseh") 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 Compressor Fault Interrupter ("CFI") technology, which
brings an advanced level of protection to refrigeration and air conditioning
systems worldwide. The licensed product is targeted at 15 to 20 million
refrigeration and air conditioning systems sold worldwide each year. Under
the term of the Agreement, either party has the right to manufacture and sell
the licensed product and a royalty will be paid by the selling party to the
other party for the use of its technology. The Company believes
that Tecumseh will launch this product in fiscal 2006 and that
will contribute to revenue growth in fiscal 2007. The Company
expects that this product will be UL and International Electrotechnical
Commission ("IEC") approved within the next couple of months which approves the
product for use in both the United States and the United Kingdom.
On March 31,
2005, Applica Consumer Products, Inc. ("Applica") and the Company
terminated three license agreements which were related to Applica's use
of the Company's Fire Shield®
technology. As a result, the Company received a $50,000 payment from
Applica which was recorded in the fourth quarter ended March 31, 2005.
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 tenth 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 is generally less volatile
than 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
$5,003,070 in fiscal 2005 and $4,545,847 in fiscal 2004, an increase of
10%. The Company also supplies such products for maintenance and spare
parts support directly to the U.S. military. Direct U.S. military sales,
which include these products and those mentioned below, decreased from
$6,892,693 in fiscal 2004 to $6,368,386 in fiscal 2005, a decrease of 8%.
Sales other than to Fermont or the U.S. military were $898,125 in fiscal 2005,
up from $865,723 in fiscal 2004, an increase of 4%.
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, vibration and endurance testing requirements, and they are
furnished for new vessel production, retrofit upgrades and existing vessel spare
part support.
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 be incurred.
All government
contracts contain a provision that allows for cancellation by the government
"for convenience." However, the government must pay for costs incurred and
a percentage of profits expected if a contract is canceled. Contract
disputes may arise which could result in a suspension of such contract or a
reduction in the amounts claimed.
Testing and Qualification
A number of the
Company's commercial products must be tested and approved by UL or an approved
testing laboratory. UL publishes certain "Standards of Safety" which
various types of products must meet and perform specific tests to ascertain
whether the products meet the prescribed standards. If a product passes
these tests, it receives UL approval. Once the Company's products have been
initially tested and qualified by UL, they are subject to regular field checks
and quarterly reviews and evaluations. UL may withdraw its approval for
such products if they fail to pass these tests and if prompt corrective action
is not taken. The Company's portable electrical safety products have
received UL approval. In addition, certain of the Company's portable GFCI,
ALCI and ELCI products have successfully undergone similar testing procedures
conducted by comparable governmental testing facilities in Europe, Canada and
Japan.
As a
result of a National Electrical Manufacturers Association ("NEMA") sponsored
investigation of the long-term performance and installations of GFCI Dual Outlet
Receptacles across the United States, UL announced on November 1, 2001 that it
would toughen the test standard for all such devices, which included the
Company's portable GFCI devices. All of the Company's GFCI devices were
required to be re-tested and re-certified by January 1, 2003, according to the
published UL timetable. The re-certification tested for 1) expanded surge
requirements, 2) new requirements for moisture and corrosion, and 3) new
requirements for reverse line-load miswiring. Of those products that represent
significant revenues to the Company, re-certification is 100% complete.
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 to 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 2000
certified manufacturing facility and an approved supplier to several major
corporations, and holds UL, Canadian Standards Association ("CSA") and the
German standards association, Verband Deutsher Elektrotechniker ("VDE"),
approvals.
Environmental
Regulations
The Company's
operations involve the use of hazardous and toxic materials and is subject
to federal, state and local laws governing the use, storage and handling of such
materials. The Company falls under the Conditionally Exempt Small
Quantity Generators Rule as define by the Environmental Protection Agency
("EPA") due to the small amounts of hazardous waste that it generates each year,
and the cost of disposing such materials is not material to the Company’s
financial condition, results of operations or cash flows.
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.
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. leases 58,000 square feet of property which is 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 moved approximately
30-40% of its Honduran production in fiscal 2004 to a contract manufacturer
in China with which the Company had acquired substantial experience prior to its
setting up operations in Honduras. In fiscal 2005, the Company
established manufacturing capability for the emerging room air conditioning
market in the same geographical areas as those of the room air conditioning
manufacturers, whether it be in China, 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 and Trademarks
The Company
holds eight patents in the U.S., seven in Great Britain, four in Italy and
Germany, three France and Australia and one in Canada, Sweden and Japan
with respect to the Company's products giving rise to portable GFCI and Fire
Shield® technologies.
Several other patent applications have been filed by the Company and are
awaiting action, and the issuance of patents with respect thereto will
complement the Company's core technology and products. The Company's U.S.
patents will be valid for either 20 years from filing or 17 years from date of
issue in the United States. The term of the Company's patents in all other
countries vary from 15 to 20 years.
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.
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.
The Company 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, licensees 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 activities 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.
The Company has no
relationship with any of its customers except as a supplier of product.
One particular customer has help fund the development of a product for which the
Company will supply to that customer.
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 revenues, and aggregate exports were:
|
|
|
Year
ended March 31, |
|
|
|
|
|
|
Customer |
|
|
2005 |
|
|
|
2004 |
|
|
|
2003 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
Military (direct sales) |
|
$ |
6,368,386 |
|
|
|
6,892,693 |
|
|
|
2,850,188 |
|
Fermont,
a division of ESSI, a U.S. Government
Prime Contractor |
|
|
5,003,070 |
|
|
|
4,545,847 |
|
|
|
3,937,999 |
|
Total sales for major customers |
|
$ |
11,371,456 |
|
|
|
11,438,540 |
|
|
|
6,788,187 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exports: |
|
|
|
|
|
|
|
|
|
|
|
|
Canada |
|
$ |
25,305 |
|
|
|
344,020 |
|
|
|
417,094 |
|
Far East |
|
|
6,292,584 |
|
|
|
1,389,773 |
|
|
|
1,020,078 |
|
Europe |
|
|
2,239,319 |
|
|
|
2,207,887 |
|
|
|
2,632,357 |
|
Australia |
|
|
4,898 |
|
|
|
28,303 |
|
|
|
36,020 |
|
South America |
|
|
6,544 |
|
|
|
13,867 |
|
|
|
6,484 |
|
Middle East |
|
|
26,209 |
|
|
|
23,770 |
|
|
|
14,257 |
|
Total exports |
|
$ |
8,594,859 |
|
|
|
4,007,620 |
|
|
|
4,126,290 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 2005, military sales
were approximately 31% of total sales, compared to 51% in fiscal 2004.
Direct sales to the U.S. military were down 8%, sales to Fermont were
up 10%, and overall, military sales remained steady year to year. Direct
U.S. military sales accounted for 16% while Fermont accounted for 13% of the
Company's total sales for fiscal 2005, compared to 28% and 19%, respectively,
for fiscal 2004.
The Company's exports
were up 114% in fiscal 2005, compared to the prior year, primarily due
to RAC product shipments to customers located in the Far
East. All other exports to the Company's international OEM customers were
relatively flat year over year.
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 operational factors
with respect to which it compares favorably with its competitors.
In the military
market, 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 20 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 to develop new products, the Company's ground fault
sensing and leakage current detection products continue to be more
widely accepted in the marketplace. And accordingly, the Company will
continue to modify existing and/or design new products to compete
in these new markets.
The
Company spent $2,034,385 in fiscal 2005, $1,380,295 in fiscal 2004 and
$1,225,651 in fiscal 2003 on research, development and engineering activities,
and the Company anticipates spending levels to be at approximately 5%
of revenues in fiscal 2006. 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 2% of the overall engineering
budget for fiscal 2005.
Employees
Overall, the
Company and its subsidiary employed an average of approximately 600 employees
throughout fiscal 2005. As of March 31, 2005, the Company employed 107
persons on a full time basis at its headquarters in Clearwater, Florida, and of
that total 54 employees were engaged in manufacturing operations, 20 in
engineering, 18 in marketing and 15 in administration. The number of
persons employed at the Company's Honduran subsidiary increased
from 220 to 905 in fiscal 2005 due to the ramp up of production
for U.S. requirements of the new RAC market. As of March 31,
2005, 895 employees were engaged in manufacturing operations and 10 in
administration. Due to the seasonality of the RAC market and depending
on future RAC production requirements placed on the Company's Honduran
facility, the number of personnel may vary significantly from the first
half of the Company's fiscal year compared to the second half of the
fiscal year.
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. Competition for 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.
Risk Factors
Shareholders
and investors should carefully consider the following risk factors,
together with the other information contained in this Annual Report,
before making any investment decision with respect to the
Company's securities:
-
Failure to achieve our growth strategy
-
Access to capital to fund growth
-
Unavailability and cost increases in raw materials and
components
-
The loss of or significant decrease in sales to large
customers
-
Adverse changes in the operations of global manufacturing
facilities
-
Interruptions in manufacturing operations
-
Infringement or loss of proprietary rights
-
Seasonality
-
Competition from larger companies that produce similar
products
-
Newly acquired businesses or product lines
-
Government regulations could adversely impact our
operations
Failure to
achieve our growth strategy. The Company
has adopted the following strategic objectives:
-
to increase profitability by improving operating
efficiencies;
-
to strengthen and expand its markets and distribution
channels;
-
to broaden the applications within target markets for its existing
products;
-
to expand the scope of its product content;
-
to expand its manufacturing capabilities;
-
to maintain a conservative capital structure; and
-
to pursue strategic acquisitions to the extent favorable
opportunities are presented.
Any or all of
these 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.
The
scope, complexity and timing of the emerging RAC market is placing new
and increased demands on the Company's production capabilities,
information technology systems and other resources. To manage the growth
effectively, the Company must: (i) maintain a high level of manufacturing
quality and efficiency; (ii) properly manage its third party suppliers and
independent sub-contract manufacturers; (iii) continue to enhance its
operational, financial and management systems, including its database
management, inventory control and distribution systems; (iv) expand, train and
manage its employee base; (v) compete with aggressive price cutting by
competitors; and (vi) vigorously protect and defend its Fire Shield®
patents and intellectual property. As a result, the Company will
be challenged to effectively capture, manage and maintain the
growth expected from this new market.
Unavailability
and cost increases in raw materials and components. 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 fiscal 2006.
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.
The loss
of or significant decrease in sales to large customers. The
Company must receive a continuous flow of new orders from its large
customers. 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.
Adverse
changes in the operations of 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 2005, the Company entered into additional
contract manufacturing relationships in China 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 labor costs could have a
material adverse effect on the Company’s result of operations.
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 by contract manufacturers
located in China. These manufacturing facilities are subject to hazards
that could result in material damage to any such facilities. Such
damage to or prolonged interruption in the operations of such facilities
for repairs, labor disruption or other reasons, would have a material adverse
effect on the Company.
Infringement
or Loss of Proprietary Rights. The Company believes that its
rights in owned and licensed names are of increasing importance to its
business success 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 the Company has 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. 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.
Seasonality.
Historically, the Company’s business has not been materially seasonal, but to
the extent that the Company continues to participate in the new room air
conditioner market, 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 third and fourth 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.
Competition from
larger companies that produce similar products. The markets
for the Company’s products are highly competitive. The Company believes
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 have
substantially greater facilities, personnel, financial and other resources.
Some competitors may be willing to reduce prices and accept lower profit
margins to compete with the Company. As a result of this competition, the
Company could lose market share and sales, or be forced to reduce its prices to
meet competition.
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.
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.
Regarding
compliance with Section 404 of the Sarbanes-Oxley Act of 2002, weaknesses
in internal controls over financial reporting, currently unknown, may
be identified as the Company documents, tests and assesses such controls.
The risks
listed above are not the only risks that the Company faces.
Additional risks that are not yet known or that the Company believes to be
immaterial may also impair business operations.
ITEM 2. DESCRIPTION OF
PROPERTY.
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 area and 10,000 square feet of warehouse space.
The Company's
wholly-owned subsidiary in Honduras, TRC Honduras S.A. de C.V., leases 58,000
square feet of building space from ZIP San Jose, an industrial park located
in San Pedro Sula, Honduras. These facilities include 10,000 square feet
of office area, as well as 30,000 square feet of production area and 18,000
square feet of warehouse space. TRC Honduras S.A. de C.V.
produces the majority of the Company's
commercial products.
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, results 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, 2005.
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, 2005 and 2004 as reported by NASDAQ,
and the dividends declared with respect to each quarter ended within such
years.
|
|
|
Market Price
|
|
|
|
|
|
Fiscal
Year Ended |
|
|
High |
|
|
|
Low |
|
|
|
Cash
Dividends |
|
March 31, 2005: |
|
|
|
|
|
|
|
|
|
|
|
|
First quarter |
|
$ |
16.30 |
|
|
|
10.25 |
|
|
$ |
0.015 |
|
Second quarter |
|
|
12.75 |
|
|
|
5.86 |
|
|
|
0.015 |
|
Third quarter |
|
|
8.25 |
|
|
|
6.31 |
|
|
|
0.015 |
|
Fourth quarter |
|
|
7.45 |
|
|
|
4.95 |
|
|
|
0.015 |
|
|
|
|
|
|
|
|
|
|
|
$ |
0.060 |
|
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 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of May 31, 2005,
the approximate number of the Company's record shareholders was 340. This number
does not include any adjustment for shareholders beneficially owning common
stock held of record by any institutional fiduciary, which the Company believes
to represent an additional 3,658 shareholders.
The Company's
authorized capital stock, as of May 31, 2005, consisted of 10,000,000 shares of
common stock, par value $.51, of which 5,774,875 shares were outstanding.
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 $.06 per
share were paid by the Company in fiscal 2005 and fiscal 2004,
respectively.
To Company's debt
covenants restrict dividends paid by the Company to the greater of 50% of
operating profits for the previous twelve months on a rolling basis or
$360,000.
ITEM 6. MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Critical Accounting Policies
The
preparation of financial statements and related disclosures, in conformity with
United States generally accepted accounting principles, requires management to
make judgments, assumptions and estimates that affect the amounts reported.
Certain of these significant accounting policies are considered to be critical
accounting policies, as defined below.
A critical accounting policy is defined as one that is both material to the
presentation of the Company’s financial statements and requires management to
make difficult, subjective or complex judgments that could have a material
effect on the Company’s financial condition and results of operations.
Specifically, critical accounting estimates have the following attributes:
i) the Company is required to make assumptions about matters that are highly
uncertain at the time of the estimate; and ii) different estimates the Company
could reasonably have used, or changes in the estimates actually used resulting
from events that could be reasonably foreseen as likely to have a
material effect on the Company’s financial condition or results of operations.
Estimates and assumptions about future events and their effects cannot be
determined with certainty. The Company bases its estimates on historical
experience and on various other assumptions believed to be applicable and
reasonable under the circumstances. These estimates may change as new
events occur, as additional information is obtained and as the Company’s
operating environment changes. These changes have historically been minor
and have been included in the consolidated financial statements once
known. In addition, management is periodically faced with uncertainties,
the outcomes of which are not within its control and will not be known for
prolonged periods of time. These uncertainties are discussed in the
sections above entitled Forward-Looking Statements and Risk Factors. Based
on a critical assessment of its accounting policies and the underlying judgments
and uncertainties affecting the application of those policies, management
believes that the Company’s consolidated financial statements are fairly stated
in accordance with United States generally accepted accounting
principles and present a meaningful presentation of the Company’s financial
condition and results of operations.
Management
believes that the following are critical accounting policies:
Revenue
Recognition. The Company recognizes revenue from commercial
customers when an order has been received, pricing is fixed, title to the
product has passed and collectibility is reasonably assured. Title
generally passes upon shipment to the customer; however, in a limited number of
cases, title passes upon receipt of shipment by the customer. There are no
customer acceptance provisions included in the Company's sales contracts and the
Company has no installation obligation subsequent to product shipment.
Similarly, revenue from sales to distributors is recognized 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.
The Company
may enter into government contracts that fall within the scope of Statement of
Position 81-1, Accounting for Performance of Construction-Type and Certain
Production-Type Contracts (SOP 81-1) ("non-standard" products) or fall outside
the scope of SOP 81-1 ("standard" products). For government contracts
within the scope of SOP 81-1, the Company records revenue under a units of
delivery model with revenues and costs equal to the average unit value times the
number of units delivered. Any estimated loss on an overall contract would
be recognized in the period determined in accordance with SOP 81-1. For
government contracts outside the scope of SOP 81-1, the Company records revenue
the same as commercial customers discussed above and would record a loss in the
event the costs to fulfill a government contract are in excess of the associated
revenues. The Company has not experienced past losses on government
contracts. 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 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.
Inventory
Valuation. The Company's financial statements include an
estimate associated with the determination of the lower of cost or market
valuation with respect to inventories. 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
inventories which has not had activity for the most recent 12
months.
Income
Taxes. Significant management judgment is required in
developing the Company’s provision for income taxes, including the determination
of any accrual for tax contingencies, 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 their repatriation. Accordingly, no
provision has been made for foreign withholding taxes or United States income
taxes which may become payable if undistributed earnings of its foreign
subsidiary are paid as dividends to the Company. The Company applies the
Comparable Profits Method for transfer pricing to determine the amounts its
subsidiary charges to the parent.
Warranty.
The
Company generally provides a one year warranty period for all of its
products. The Company also provides coverage on certain of its surge
products for "downstream" damage of products not manufactured by the
Company. The Company's warranty provision represents management's estimate
of probable liabilities, calculated as a function of sales volume and historical
repair experience for each product under warranty.
Allowance
for Doubtful Accounts. The Company records an allowance for
estimated losses resulting from the inability of isolated customers to
make timely payments of amounts due on account of product
purchases. The Company assess the credit worthiness of its
customers based on multiple sources of information, including publicly available
credit data, subscription based credit reports, trade association data, and
analyze factors such as historical bad debt experience, changes in customer
payment terms or payment patterns, credit risk related to industry and
geographical location and economic trends. This assessment requires significant
judgment. If the financial condition of the Company's customers
were to worsen, additional write-offs could be required, resulting in
write-offs not included in the Company's current allowance for
doubtful accounts.
Impairment
of Long-Lived Assets. The Company reviews long-lived assets
for possible impairment of carrying value 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 benefit of the
Company's assets, management performs an analysis of the anticipated
undiscounted future net cash flows to be derived from the use of
individual assets over their remaining amortization period. If the
carrying amount of an asset exceeds its anticipated undiscounted cash flows, the
Company recognizes an impairment loss equal to the difference between
its carrying value and its fair value.
Results
of Operations
Fiscal
2005 and 2004 Comparison
Revenues for fiscal 2005 were $39,433,347,
compared to $24,336,637 reported in fiscal 2004, an increase of 62%. The
increase in commercial revenues was primarily attributed to RAC product
shipments and strong growth in the Company’s core commercial business.
Military revenues remain steady due to solid demand for its control devices
related to the Tactical Quiet Generator programs for both existing and new
systems. The increase in royalty income was due to cancellation fees
recorded in the fourth quarter related to the termination of certain license
agreements with Applica Inc. pertaining the use of the Company's
Fire Shield® technology.
Gross profit was 25% of total revenues for fiscal
2005, compared to 39% in fiscal 2004. The major factors impacting the
Company’s gross profit during the year were (i) higher than
planned startup expenses at its Honduran manufacturing facility and at
its three Far East contract manufacturers to produce the new Fire
Shield® LCDI Power Cords for use on room air conditioners; (ii) significant
additional freight costs which the Company incurred to meet its RAC customers’
delivery requirements; and (iii) competitive pricing required to capture market
share in the new RAC market. Having established the framework for the RAC
business in fiscal 2005, the Company expects to achieve higher profit
margins in fiscal 2006 compared to fiscal 2005.
Selling and marketing expense was $2,546,210, or 6.5%
of revenues, for fiscal 2005, compared to $2,393,868, or 9.8% of
revenues, for fiscal 2004, an increase of $152,342, or 6%. The
increase over the comparable years was due to $41,859 of salary expense
primarily for additional personnel, $65,991 for outside sales commissions
and $47,183 in travel expense. All other selling and marketing
expenses decreased by $2,691 over the comparable year. The Company
expects selling and marketing expense as a percentage of revenues to
remain approximately the same in fiscal 2006 compared to fiscal
2005.
General and administrative expense was $2,592,630, or 6.6% of
revenues, for fiscal 2005, compared to $1,911,111, or 7.9% of
revenues, for fiscal 2004, an increase of $681,519, or 36%. The
increase over the comparable years was due to $372,871 of salary
expense primarily for additional personnel, $112,477 of shareholder/board
of director expenses, $140,063 for audit and legal fees
and $54,247 for D&O insurance. All other general and
administrative expenses increased by $1,861 over the comparable
years. The Company expects general and administrative expense as
a percentage of revenues to remain approximately the same in fiscal 2006
compared to fiscal 2005.
Research
and development expense was $2,034,385, or 5.2% of revenues, for
fiscal 2005, compared to $1,380,295, or 5.7% of revenues, for fiscal 2004,
an increase of $654,090, or 47%. The increase over the
comparable years was due to $477,598 of salary expense primarily for
additional personnel, $135,879 of UL fees
and $58,073 for additional outside testing services, all of
which were related to the support of the new room air conditioner market.
All other research and development expenses decreased by $17,460 over the
comparable years. The Company expects research and
development expense as a percentage of revenues to remain
approximately the same in fiscal 2006 compared to fiscal 2005.
Other
income (expense) was ($18,855) for fiscal 2005, compared to $14,853
for fiscal 2004. The change was due to interest
expense related to the Company's borrowings on its line of credit,
whereas in the prior year, the Company had no debt and recorded
interest income on higher cash balances. The Company expects
to have decreased debt in fiscal 2006 compared to fiscal
2005.
Income
taxes as a percent of income before income taxes were 23% for fiscal
2005, compared to 30% in fiscal 2004. The Company's effective tax
rate varies based on the mix of income before income taxes derived from the
Company's Honduran subsidiary, which is not subject to income taxes, and the
balance of income before income taxes, which is subject to income taxes.
At each reporting period, the Company makes its best estimate of the effective
tax rate expected for the full fiscal year and applies that rate to the current
year-to-date income before income taxes. Any difference between the
current and preceding estimated effective tax rate expected for the full fiscal
year is reflected as an adjustment in the current quarter's income tax
expense. In accordance with SFAS 109, Accounting for Income
Taxes, the Company does not record deferred income taxes on the foreign
undistributed earnings of an investment in a foreign subsidiary that is
essentially permanent in duration. The Company’s Honduran subsidiary is
profitable which decreases the effective tax rate of the Company. If
circumstances change, and it becomes apparent that some or all of the
undistributed earnings of the subsidiary will be remitted in the foreseeable
future, but U.S. income taxes have not been recognized by the Company, the
Company will record as an expense of the current period the U.S. income taxes
attributed to that remittance. The Company expects its effective income
tax rate to be approximately 25-30% in fiscal 2006.
Net income was $2,012,509 for fiscal 2005, compared to
$2,676,156 reported in fiscal 2004, a decrease of 25%. Basic earnings were
$.35 per share and diluted earnings were $.34 per share in fiscal 2005, compared
to basic earnings of $.48 per
share and diluted earnings of $.46 per share for fiscal 2004.
Net income was negatively impacted in fiscal 2005 by higher operating expenses
and lower gross profit margins as described above.
Fiscal
2004 and 2003 Comparison
Revenues for fiscal 2004 were $24,336,637,
compared to $17,761,936 reported in fiscal 2003, an increase of 37%. The
increase in commercial revenues was primarily attributed to product expansion in
retail stores. New accounts in the Recreational Vehicle, Brand Label and
Commercial Distribution markets contributed to the remainder of the
growth. Military revenues were positively impacted in fiscal 2004 due
to the increased demand, resulting from expanded U.S. military
operations, for the Company's support parts and control
devices related to both new and existing Tactical Quiet Generator
systems.
Gross profit was 39% of total revenues for fiscal
2004, compared to 33% in fiscal 2003. The improvement was primarily
the result of product mix plus productivity and quality improvements in
manufacturing.
Selling and marketing expense was $2,393,868, or 9.8%
of revenues, for fiscal 2004, compared to $1,854,671, or 10.4% of
revenues, for fiscal 2003, an increase of $539,197, or 29%. The
increase over the comparable years was due to $289,555 of salary expense
primarily for additional personnel, $139,038 of advertising costs,
$70,146 for outside sales commissions, $21,623 of product samples,
$18,846 of travel expense, $13,316 of professional fees and $6,263 of
insurance expense. All other selling and marketing expenses decreased
by $19,590 over the comparable year.
General and administrative expense was $1,911,111, or 7.9% of
revenues, for fiscal 2004, compared to $1,335,667, or 7.5% of
revenues, for fiscal 2003, an increase of $575,444, or 43%. The
increase over the comparable years was due to $381,428 of salary
expense primarily for additional personnel,
$65,667 of professional fees and $50,033 of insurance
expense, $24,000 of bad debt expense, $15,544 in charitable
contributions, $14,697 of shareholder/board of director expenses and $12,815 of
travel expense. All other general and administrative expenses increased by
$11,260 over the comparable years.
Research
and development expense was $1,380,295, or 5.7% of revenues, for
fiscal 2004, compared to $1,225,651, or 6.9% of revenues, for fiscal 2003,
an increase of $154,644, or 13%. The increase over the
comparable years was due to $187,250 of salary expense primarily for
additional personnel, offset to some extent by UL fees of $43,126 of UL
and other expenses of $10,520. The increase in personnel was
related to the design and qualifying of products for the new room air
conditioner market.
Other
income was 14,853 for fiscal 2004, compared to $6,330 for
fiscal 2003, reflecting no debt and interest income on higher cash
balances in fiscal 2004 compared to fiscal 2003.
Income
taxes as a percent of income before income taxes were 30% for fiscal
2004, compared to 29% in fiscal 2004. The Company's effective tax
rate varies based on the mix of income before income taxes derived from the
Company's Honduran subsidiary, which is not subject to income taxes, and the
balance of income before income taxes, which is subject to income taxes.
At each reporting period, the Company makes its best estimate of the effective
tax rate expected for the full fiscal year and applies that rate to the current
year-to-date income before income taxes. Any difference between the
current and preceding estimated effective tax rate expected for the full fiscal
year is reflected as an adjustment in the current quarter's income tax
expense. In
accordance with SFAS 109, Accounting for Income Taxes, the Company does
not record deferred income taxes on the foreign undistributed earnings of an
investment in a foreign subsidiary that is essentially permanent in
duration. The Company’s Honduran subsidiary is profitable which decreases
the effective tax rate of the Company. If circumstances change, and it
becomes apparent that some or all of the undistributed earnings of the
subsidiary will be remitted in the foreseeable future, but U.S. income taxes
have not been recognized by the Company, the Company will record as an expense
of the current period the U.S. income taxes attributed to that
remittance.
Net income was $2,676,156 for fiscal 2004, compared to
$1,014,791 reported in fiscal 2003, an increase of 164%. Basic earnings
were $.48 per share and diluted earnings were $.46 per share in fiscal 2004,
compared to basic and diluted earnings of $.19 per share for fiscal
2003. Net income was positively impacted in fiscal 2004
by higher revenues and gross profit margins as described above.
Liquidity
and Capital Resources
As
of March 31, 2005, the Company's cash and cash equivalents decreased to
$815,411 from the March 31, 2004 total of $5,968,122.
Cash used by operating activities was $6,394,275, cash
used by investing activities was $3,837,792 and cash provided by
financing activities was $5,079,356, resulting in a total decrease of
$5,152,711 for fiscal 2005.
Cash
used by operating activities was primarily due to an increase in accounts
receivable, inventories and prepaid expense of $9,834,562, $5,827,125 and
$308,627, respectively, and a decrease in income taxes payable of
$318,854, offset to some extent by net income of $2,012,509, depreciation in the
amount of $947,725 and an increase in accounts payable of $6,422,941. The
increase in accounts receivable, inventories and accounts payable was primarily
the result of the Company’s increased business. The increase in prepaid
expenses was the result of the advance payments by the Company for its one year
Honduran facility lease and for its commercial property and casualty
insurances. The decrease in income taxes payable reflected lower net
income. The use of cash for operating activities is primarily attributed
to the new RAC market. Accounts receivable, inventories and accounts
payable will increase significantly in the Company's third and fourth quarters,
compared to its first and second quarters, due to the seasonal nature of the RAC
market.
Cash
used by investing activities was related to purchases of capital equipment
in the amount of $3,350,720 to support the ramp up in
production for the new RAC market at the Company’s Honduran
subsidiary and its Far East contract manufacturers. In addition, the
Company’s invested approximately $480,000 in U.S. Treasury
Bills. The Company expects capital purchases for fiscal 2006 to be more in
line with the historical range of $500,000 to $750,000.
Cash provided by financing
activities was due to borrowings under the Company's line of
credit in the amount of $5,350,000 and proceeds from exercises of stock
options in the amount of $74,113, offset to some extent by the payment of
$344,757 in cash dividends.
On December
20, 2004, the Company renegotiated the revolving credit agreement with
its institutional lender, extending the maturity date to December 14,
2006. The new facility provides for borrowings up to $6,000,000, as
compared to $3,000,000 under the old facility. The Company has the option
of borrowing at the lender's prime rate of interest minus 100 basis points
or the 30-day London Interbank Offering Rate ("LIBOR") plus 160 basis
points. The Company is currently borrowing under the LIBOR option
(4.49% rate as of March 31, 2005) as compared to a 2.86%
rate as of March 31, 2004. The loan is collateralized with a perfected
first security interest which attaches to all accounts receivable and
inventories, and a blanket security interest attaching to all assets,
and requires the Company to maintain certain financial ratios and minimum
working capital. As of March 31, 2005, the Company had $5,350,000
in outstanding borrowings, of which $2,350,000
was recorded as long-term debt. The Company has the right
to repay any outstanding borrowings at any time and intends to repay the
remaining $3,000,000 prior to March 31, 2006, and accordingly, the Company has
classified this amount as a current liability. The Company was in
compliance with the covenants as of March 31, 2005.
On April 14, 2005,
the Company entered into a $3,000,000 six-month term loan agreement with its
institutional lender. This credit facility will only be used in the event
that the Company's cash requirements extend beyond the existing line of credit
noted above. The provisions of the term loan agreement are
substantively identical to those of the existing line of credit.
The Company has no
off-balance sheet arrangements and no debt relationships other than noted
above.
The Company
believes cash flow from operations, the available bank borrowings and
current short-term investments and cash and cash equivalents will be sufficient
to meet its working capital requirements for the next 12
months.
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. When issued, this statement was effective
for financial instruments entered into or modified after May 31, 2003, and
otherwise for interim periods beginning after June 15, 2003.
Initially, the statement required that all financial instruments
meeting its criteria be presented as liabilities rather than as minority
interest between the liabilities and equity sections of the balance sheet.
On October 29, 2003, the FASB announced that it had deferred certain provisions
of SFAS No. 150. The Company does not currently have any instruments
subject to SFAS No. 150. Accordingly, final adoption did
not have a material effect on the Company’s financial condition, results of
operations or cash flows.
In November
2004, the FASB issued SFAS No. 151 - Inventory Costs, to amend the
guidance in Chapter 4, "Inventory Pricing", of FASB Accounting Research Bulletin
No. 43, Restatement and Revision of Accounting Research
Bulletins. SFAS No. 151 clarifies the accounting for abnormal amounts
of idle facility expense, freight, handling costs and waste material
(spoilage). The Statement requires that items be recognized as
current-period charges, effective during fiscal years beginning after June 15,
2005. Additionally, SFAS No. 151 requires that allocation of fixed
production overheads to the costs of conversion be based on the normal capacity
of the production facilities. The adoption of SFAS No.
151 is not expected to have a material effect on the Company's
financial condition, results of operations or cash flows.
In December 2004,
the FASB issued SFAS No. 123(R) - Accounting for Stock-Based
Compensation. SFAS No. 123(R) is a revision of SFAS No. 123 and
supersedes APB Opinion No. 25, Accounting for Stock issued to
Employees, and its related implementation guidance. This statement
establishes standards for the accounting for transactions in which an entity
exchanges its equity for goods and services. It also addresses
transactions in which an entity incurs liabilities in exchange for goods or
services that are based on the fair market value of the entity's equity
instruments or that may be settled by the issuance of those equity
instruments. The statement requires a public entity to measure the cost of
employee services received in exchange for an award of equity instruments based
on the grant-date fair value of the award. That cost is recognized over
the period during which an employee is required to provide service in exchange
for the award. This statement is effective for small business issuers as
of the beginning of the first annual period that begins after December 15,
2005. The application of SFAS No. 123(R) may have a material effect
on the Company's future financial condition, results of operations or cash
flows.
On May 25,
2005, in response to the published accounting standard referenced above,
the Company's Board of Directors approved accelerating the vesting of
all out-of-the-money, unvested stock options held by current
employees, including executive officers and directors, effective May 26,
2005. An option was considered out-of-the-money if the stated option
exercise price was greater than the closing price, $5.07, of the Company's
common stock on the effective date.
In May 2005, the FASB
issued SFAS No. 154 - Accounting Changes and Error Corrections.
This statement replaces APB Opinion No. 20, Accounting Changes, and
FASB Statement No. 3, Reporting Accounting Changes in Interim Financial
Statements, and changes the requirements for the accounting for and
reporting of a change in accounting principle. This statement provides
guidance on the accounting for and reporting of accounting changes and error
corrections. It establishes, unless impracticable, retrospective
application as the required method of reporting a change in accounting principle
in the absence of explicit transition requirements specific to the newly adopted
accounting principle. This statement also provides guidance on determining
whether retrospective application is impracticable. The correction of an
error in previously issued financial statements is not an accounting
change. However, the reporting of an error correction involves adjustments
to previously issued financial statements similar to those generally applicable
to reporting an accounting change retrospectively. Therefore, the
reporting of a correction of an error by restating previously issued financial
statements is also addressed by this statement. This statement is
effective for accounting changes and corrections of error made in fiscal years
beginning after December 15, 2005. The application of SFAS No. 154 is not
expected to have a material effect on the Company's financial condition, results
of operations or cash flows.
The following consolidated financial statements of Technology
Research Corporation and its subsidiary are included in Schedule I (i.e. indexes
F-1 through F-19) attached herewith:
-
Report of Independent Registered Public Accounting Firm
-
Consolidated Balance Sheets as of March 31, 2005 and
2004
-
Consolidated Statements of Operations for the years ended
March 31, 2005, 2004 and 2003
-
Consolidated Statement of Stockholders' Equity for the years
ended March 31, 2005, 2004 and 2003
-
Consolidated Statements of Cash Flows for the years ended
March 31, 2005, 2004 and 2003
-
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.
As of the end
of the period covered by this Annual Report, the Company carried out, under the
supervision and with the participation of the Company’s Chief Executive Officer
("CEO") and Chief Financial Officer ("CFO") ("the Certifying Officers"), an
evaluation of the effectiveness of its “disclosure controls and procedures” (as
the term is defined under Rules 13a–15(e) and 15d–15(e) promulgated under the
Securities Exchange Act of 1934 as amended). Based on this evaluation, the
Certifying Officers have concluded that the Company’s disclosure controls and
procedures were effective.
Further,
there were no significant changes in the Company's internal control over
financial reporting during the Company's fourth fiscal quarter that materially
affected, or are reasonably likely to materially affect, the
Company's internal control over financial reporting.
None.
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND
CONTROL PERSONS; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE
ACT
The
information required in Item 9 is incorporated into Part III of the Annual
Report on Form 10-KSB by reference to the Company's definitive Proxy Statement
for the Annual Meeting of Shareholders scheduled to be held on August 25,
2005.
The information
required in Item 10 is incorporated into Part III of this Annual Report on
Form 10-KSB by reference to the Company's definitive Proxy Statement
for the Annual Meeting of Shareholders scheduled to be held on August 25,
2005.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The
information required in Item 11 is incorporated into Part III of this
Annual Report on Form 10-KSB by reference to the Company's
definitive Proxy Statement for the Annual Meeting of Shareholders scheduled
to be held on August 25, 2005.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS
The
information required in Item 12 is incorporated into Part III of this
Annual Report on Form 10-KSB by reference to the Company's
definitive Proxy Statement for the Annual Meeting of Shareholders scheduled
to be held on August 25, 2005.
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.***
(10) Material contracts:
10.1 $3,000,000 Revolving Credit Agreement, dated December 14, 1999,
between the Company and SouthTrust Bank***
10.2 The 2000 Long Term Incentive Plan effective August 24,
2000.***
10.3 Amendment to 2000 Long Term Incentive Plan to increase the
number of shares from 300,000 to 600,000 effective August 21, 2003.***
10.4 Amendment to 2000 Long Term Incentive Plan to increase the
number of shares from 600,000 to 1,100,000 effective August 24, 2004.***
10.5 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.***
10.6 Amended Revolving Credit Agreement, dated December 20, 2004,
between the Company and its subsidiary and SouthTrust Bank, increasing the
amount available to borrow from $3,000,000 to $6,000,000 and extending the
maturity date to December 14, 2006.*****
10.7 $3,000,000 six-month term loan agreement, dated April 14,
2005, between the Company and its subsidiary and SouthTrust Bank.*****
(14) Code of Conduct and Code of Ethics
14.1 Code of Conduct. *****
14.2 Code of Ethics for Principal Executive, Financial and Accounting
Officers. *****
(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. *****
Footnotes:
*
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.
ITEM 14. PRINCIPAL ACCOUNTANT FEES
AND SERVICES
The
information required in Item 14 is incorporated into Part III of this
Annual Report on Form 10-KSB by reference to the Company's
definitive Proxy Statement for the Annual Meeting of Shareholders scheduled
to be held on August 25, 2005.
In
accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
|
TECHNOLOGY
RESEARCH CORPORATION |
|
|
By:
/s/ Jerry
T. Kendall
|
|
Jerry T. Kendall |
|
President
and Chief Executive Officer |
|
(Principal
Executive Officer) |
|
|
|
Date:
June 29, 2005 |
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/
Jerry T. Kendall |
President
and Chief Executive Officer |
6/29/2005 |
Jerry T. Kendall |
(Principal
Executive Officer) |
|
|
|
|
/s/
Scott J. Loucks |
Chief
Financial Officer |
6/29/2005 |
Scott J. Loucks |
(Principal
Financial and Accounting Officer) |
|
|
|
|
/s/
Raymond B. Wood |
Director
and Senior Vice President of Government Operations |
6/29/2005 |
Raymond B. Wood |
and
Marketing |
|
|
|
|
/s/
Robert S. Wiggins |
Chairman
of the Board |
6/29/2005 |
Robert S. Wiggins |
|
|
|
|
|
/s/
Gerry Chastelet |
Director |
6/29/2005 |
Gerry Chastelet |
|
|
|
|
|
/s/ Edmund F.
Murphy, Jr. |
Director |
6/29/2005 |
Edmund F. Murphy, Jr. |
|
|
|
|
|
/s/
Martin L. Poad |
Director |
6/29/2005 |
Martin L. Poad |
|
|
|
|
|
/s/
David F. Walker |
Director |
6/29/2005 |
David F. Walker |
|
|
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, 2005 and
2004, and the results of their operations and their cash flows for each of the
years in the three-year period ended March 31, 2005, in conformity with
U.S. generally accepted accounting principles.
/s/ KPMG LLP
Tampa, Florida
May 9, 2005
Consolidated
Balance Sheets
March 31,
2005 and 2004
ASSETS |
2005 |
|
2004 |
Current
assets: |
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents |
|
|
$ |
815,411 |
|
|
|
5,968,122 |
|
Short-term investments |
|
|
|
487,072 |
|
|
|
- |
|
Trade
and other accounts receivable, net of allowance for |
|
|
doubtful
accounts of $171,725 in 2005 and $31,010 in 2004 (note 6) |
|
|
|
13,114,548 |
|
|
|
3,420,701 |
|
Inventories,
net (notes 2 and 6) |
|
|
|
11,460,302 |
|
|
|
5,633,177 |
|
Deferred income taxes (note 7) |
|
|
|
488,413 |
|
|
|
239,169 |
|
Prepaid
expenses and other current assets |
|
|
|
514,922 |
|
|
|
206,295 |
|
Total
current assets |
|
26,880,668 |
|
|
|
15,467,464 |
|
|
Property,
plant and equipment, net of accumulated depreciation of |
|
|
$8,089,950
and $7,203,205 (note 3) |
|
|
|
5,470,156 |
|
|
|
3,065,771 |
|
Other
assets |
|
|
|
96,004 |
|
|
|
38,633 |
|
Total
assets |
$ |
32,446,828 |
|
|
|
18,571,868 |
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS'
EQUITY |
|
|
|
|
|
|
|
|
|
Current
liabilities: |
|
|
|
|
|
|
|
|
|
Short term debt (note 6) |
|
|
$ |
3,000,000 |
|
|
|
- |
|
Trade accounts payable |
|
|
|
7,970,920 |
|
|
|
1,547,979 |
|
Accrued expenses |
|
|
|
1,327,944 |
|
|
|
767,185 |
|
Accrued dividends |
|
|
|
100,175 |
|
|
|
99,295 |
|
Income taxes payable |
|
|
|
112,239 |
|
|
|
431,093 |
|
Deferred revenue |
|
|
|
- |
|
|
|
10,525 |
|
Total current liabilities |
|
12,511,278 |
|
|
|
2,856,077 |
|
Long-term debt (note
6) |
|
|
|
2,350,000 |
|
|
|
- |
|
Deferred revenue
- long term |
|
|
|
- |
|
|
|
28,951 |
|
Deferred
income taxes (note 7) |
|
|
|
378,143 |
|
|
|
235,120 |
|
Total liabilities |
|
15,239,421 |
|
|
|
3,120,148 |
|
|
|
|
|
Stockholders'
equity: |
|
|
|
Common stock $0.51 par value; 10,000,000 shares authorized,
|
|
|
|
5,795,375 shares and 5,749,758 shares issued, and |
|
|
|
5,773,875 shares and 5,728,258 shares outstanding |
|
|
|
2,955,641 |
|
|
|
2,932,377 |
|
Additional paid-in capital |
|
|
|
8,483,237 |
|
|
|
8,417,686 |
|
Retained
earnings |
|
|
|
5,808,674 |
|
|
|
4,141,802 |
|
Common
stock held in treasury, 21,500 shares at cost |
|
|
|
(40,145 |
) |
|
|
(40,145 |
) |
Total
stockholders' equity |
|
17,207,407 |
|
|
|
15,451,720 |
|
Total
liabilities and stockholders' equity |
$ |
32,446,828 |
|
|
|
18,571,868 |
|
|
|
|
|
|
|
|
|
The
accompanying notes are an integral part of the consolidated financial
statements.
Consolidated
Statements of Operations
Years
ended March 31, 2005, 2004 and 2003
|
|
2005 |
|
|
|
2004 |
|
|
|
2003 |
|
Revenues
(note 10): |
|
|
|
|
|
|
|
|
|
|
|
Commercial |
$ |
27,022,170 |
|
|
|
11,941,713 |
|
|
|
10,254,998 |
|
Military |
|
12,269,581 |
|
|
|
12,304,263 |
|
|
|
7,386,144 |
|
Royalties |
|
141,596 |
|
|
|
90,661 |
|
|
|
120,794 |
|
Total
revenues |
|
39,433,347 |
|
|
|
24,336,637 |
|
|
|
17,761,936 |
|
Cost
of sales |
|
29,618,620 |
|
|
|
14,830,606 |
|
|
|
11,896,230 |
|
Gross profit |
|
9,814,727 |
|
|
|
9,506,031 |
|
|
|
5,865,706 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses: |
|
|
|
|
|
|
|
|
|
|
|
Selling and marketing |
|
2,546,210 |
|
|
|
2,393,868 |
|
|
|
1,854,671 |
|
General and administrative |
|
2,592,630 |
|
|
|
1,911,111 |
|
|
|
1,335,667 |
|
Research and development |
|
2,034,385 |
|
|
|
1,380,295 |
|
|
|
1,225,651 |
|
Other |
|
(1,390 |
) |
|
|
(1,194 |
) |
|
|
31,718 |
|
Total operating expenses |
|
7,171,835 |
|
|
|
5,684,080 |
|
|
|
4,447,707 |
|
Income from operations |
|
2,642,892 |
|
|
|
3,821,951 |
|
|
|
1,417,999 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense |
|
(48,303 |
) |
|
|
- |
|
|
|
(1,153 |
) |
Other income |
|
29,448 |
|
|
|
14,853 |
|
|
|
7,483 |
|
|
|
(18,855 |
) |
|
|
14,853 |
|
|
|
6,330 |
|
Income
before income taxes |
|
2,624,037 |
|
|
|
3,836,804 |
|
|
|
1,424,329 |
|
Income
tax expense (note 7) |
|
611,528 |
|
|
|
1,160,648 |
|
|
|
409,538 |
|
Net income |
$ |
2,012,509 |
|
|
|
2,676,156 |
|
|
|
1,014,791 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
per share - basic |
$ |
0.35 |
|
|
|
0.48 |
|
|
|
0.19 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
per share - diluted |
$ |
0.34 |
|
|
|
0.46 |
|
|
|
0.19 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
outstanding - basic |
|
5,754,816 |
|
|
|
5,589,181 |
|
|
|
5,438,381 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
outstanding - diluted |
|
5,954,068 |
|
|
|
5,827,726 |
|
|
|
5,482,450 |
|
The
accompanying notes are an integral part of the consolidated financial
statements.
Consolidated Statements of Stockholders' Equity
Years
ended March 31, 2005, 2004 and 2003
|
|
|
Common stock |
|
|
|
|
|
|
|
|
|
|
|
|
Shares |
|
Amount |
|
Additional paid-in
capital |
|
Retained earnings |
|
Treasury stock |
|
Total stockholder's equity |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances
as of March 31, 2002: |
|
|
5,437,497 |
$ |
2,784,088 |
|
7,526,472 |
|
1,032,996 |
|
(40,145) |
|
11,303,411 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends - $0.045 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 as of March 31, 2003: |
|
|
5,440,370 |
|
2,785,554 |
|
7,528,194 |
|
1,803,027 |
|
(40,145) |
|
12,076,630 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends - $0.06 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 as of March 31, 2004: |
|
|
5,728,258 |
|
2,932,377 |
|
8,417,686 |
|
4,141,802 |
|
(40,145) |
|
15,451,720 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends - $0.06 per share |
|
|
- |
|
- |
|
- |
|
(345,637 |
) |
- |
|
(345,637 |
) |
Net income |
|
|
- |
|
- |
|
- |
|
2,012,509 |
|
- |
|
2,012,509 |
|
Tax
benefit related to exercise of stock options |
|
|
- |
|
- |
|
14,702 |
|
- |
|
- |
|
14,702 |
|
Exercise of stock options |
|
|
45,617 |
|
23,264 |
|
50,849 |
|
- |
|
- |
|
74,113 |
|
Balances as of March 31, 2005: |
|
|
5,773,875 |
$ |
2,955,641 |
|
8,483,237 |
|
5,808,674 |
|
(40,145) |
|
17,207,407 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
accompanying notes are an integral part of the consolidated financial
statements.
Consolidated
Statements of Cash Flows
Years
ended March 31, 2005, 2004 and 2003
|
2005
|
2004
|
|
2003 |
Cash
flows from operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income |
|
|
$ |
2,012,509 |
|
|
|
2,676,156 |
|
|
|
1.014,791 |
|
Adjustments to reconcile net income to net cash (used) provided by
operating activities: |
|
|
|
|
|
|
Change in allowance for doubtful accounts |
|
|
|
140,715 |
|
|
|
(13,892 |
) |
|
|
32,994 |
|
Tax benefit of stock options exercised |
|
|
|
14,702 |
|
|
|
549,000 |
|
|
|
- |
|
Depreciation |
|
|
|
947,725 |
|
|
|
837,020 |
|
|
|
857,374 |
|
Loss (gain) on disposal of assets |
|
|
|
(1,390 |
) |
|
|
(1,194 |
) |
|
|
31,718 |
|
Changes
in operating assets and liabilities: |
|
|
|
|
|
|
Trade
and other accounts receivable, net |
|
|
|
(9,834,562 |
) |
|
|
(633,984 |
) |
|
|
(289,216 |
) |
Income taxes receivable |
|
|
|
- |
|
|
|
19,766 |
|
|
|
(19,766 |
) |
Inventories, net |
|
|
|
(5,827,125 |
) |
|
|
(969,301 |
) |
|
|
134,855 |
|
Deferred income taxes |
|
|
|
(106,221 |
) |
|
|
89,055 |
|
|
|
341,326 |
|
Prepaid expenses and other current assets |
|
|
|
(308,627 |
) |
|
|
(83,972 |
) |
|
|
(24,603 |
) |
Other assets |
|
|
|
(57,371 |
) |
|
|
13,979 |
|
|
|
6,096 |
|
Trade
accounts payable |
|
|
|
6,422,941 |
|
|
|
495,162 |
|
|
|
501,517 |
|
Accrued
expenses |
|
|
|
560,759 |
|
|
|
403,328 |
|
|
|
70,435 |
|
Income
taxes payable |
|
|
|
(318,854 |
) |
|
|
431,093 |
|
|
|
- |
|
Deferred revenue |
|
|
|
(39,476 |
) |
|
|
(10,524 |
) |
|
|
- |
|
Net
cash (used) provided by operating activities |
|
(6,394,275 |
) |
|
|
3,801,692 |
|
|
|
2,657,521 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities: |
|
|
|
|
|
|
Purchase
of capital expenditures |
|
|
|
(3,350,720 |
) |
|
|
(515,580 |
) |
|
|
(577,463 |
) |
Purchases
of short-term investments |
|
|
|
(487,072 |
) |
|
|
- |
|
|
|
- |
|
Net
cash used by investing activities |
|
(3,837,792 |
) |
|
|
(515,580 |
) |
|
|
(577,463 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities: |
|
|
|
|
|
|
Borrowings under
line of credit |
|
|
|
5,350,000 |
|
|
|
- |
|
|
|
(500,000 |
) |
Proceeds
from the exercise of stock options |
|
|
|
74,113 |
|
|
|
487,315 |
|
|
|
3,188 |
|
Cash
dividend paid |
|
|
|
(344,757 |
) |
|
|
(334,867 |
) |
|
|
(216,783 |
) |
Net
cash provided (used) by financing activities |
|
5,079,356 |
|
|
|
152,448 |
|
|
|
(713,595 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Net
increase (decrease) in cash and cash equivalents |
|
|
|
(5,152,711 |
) |
|
|
3,438,560 |
|
|
|
1,366,463 |
|
Cash
and cash equivalents at beginning of year |
|
|
|
5,968,122 |
|
|
|
2,529,562 |
|
|
|
1,163,099 |
|
Cash
and cash equivalents at end of year |
$ |
815,411 |
|
|
|
5,968,122 |
|
|
|
2,529,562 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental
cash flow information: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for interest |
|
|
$ |
36,991 |
|
|
|
- |
|
|
|
1,153 |
|
Cash paid for income taxes |
|
|
$ |
1,036,603 |
|
|
|
71,734 |
|
|
|
87,977 |
|
The
accompanying notes are an integral part of the consolidated financial
statements.
TECHNOLOGY
RESEARCH CORPORATION AND
SUBSIDIARY
Notes to
the Consolidated Financial Statements
March 31,
2005 and 2004
(1) Summary of Significant Accounting
Policies
(a) Description of Business
Technology Research Corporation and subsidiary (the “Company”)
is an internationally recognized leader in the design, manufacture and marketing
of electrical safety products that save lives, protect people against
serious injury from electrical shock and/or prevent electrical fires in the home
and workplace. Based on its core technology in ground fault sensing, the
Company's products are designed to meet the needs of the consumer, commercial
and industrial markets worldwide. The Company also supplies
power monitors and control equipment to the United States military and its prime
contractors, primarily for use on mobile electric generators. 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 direct to the customer, through
retail stores, to original equipment manufacturers and through electrical
distributors involved in a variety of industries 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 10 for further information on
major customers. The Company also licenses its technology for use by
others in exchange for a royalty or product purchases.
(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 $29,835 and $2,015,608 as of March
31, 2005 and 2004, respectively, and consisted of money market accounts.
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.
(e) Short-term investments
The value
of the short-term investment totaled $487,072 as of
March 31, 2005, which consists of corporate securities in the amount
of $2,079 and original cost plus accrued interest on U.S. Treasury Bills in
the amount of $484,993. The Company considers all of its short-term
investments to be held-to-maturity, and therefore, are recorded at
amortized cost.
TECHNOLOGY
RESEARCH CORPORATION AND
SUBSIDIARY
Notes to the Consolidated Financial Statements
March 31, 2005 and 2004
(f) Revenue Recognition
The
Company recognizes revenue from commercial customers when an order has been
received, pricing is fixed, title to the product has passed and
collectibility is reasonably assured. Title generally passes upon shipment
to the customer; however, in a limited number of cases, title passes upon
receipt of shipment by the customer. There are no customer acceptance
provisions included in the Company's sales contracts and the Company has no
installation obligation subsequent to product shipment. Similarly, revenue
from sales to distributors is recognized 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.
The
Company may enter into government contracts that fall within the scope of
Statement of Position 81-1, Accounting for Performance of Construction-Type and
Certain Production-Type Contracts (SOP 81-1) ("non-standard" products) or fall
outside the scope of SOP 81-1 ("standard" products). For government
contracts within the scope of SOP 81-1, the Company records revenue under a
units of delivery model with revenues and costs equal to the average unit value
times the number of units delivered. Any estimated loss on an overall
contract would be recognized in the period determined in accordance with SOP
81-1. For government contract outside the scope of SOP 81-1, the Company
records revenue the same as commercial customers discussed above and would
record a loss in the event the costs to fulfill a government contract are in
excess of the associated revenues. The Company has not experienced past
losses on government contracts.
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 within specified geographic areas.
The nonrefundable license fees are recorded as deferred revenue and recognized
as income on a straight-line basis over the exclusivity period of the
agreement. A termination or change to the initial license agreement could
result in an accelerated recognition of the deferred revenue. License fees
are included in royalty revenue.
(g) 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 half-year method over the estimated useful
lives of the assets.
(i) Impairment or Disposal of Long-Lived
Assets
The Company reviews long-lived assets for possible impairment of
carrying value 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
benefit of the Company's assets, management performs an analysis of
the anticipated undiscounted future net cash flows to be derived
from the use of individual assets over their remaining amortization
period. If the carrying amount of an asset exceeds its anticipated
undiscounted cash flows, the Company recognizes an impairment loss equal to
the difference between its carrying value and its fair
value.
TECHNOLOGY
RESEARCH CORPORATION
Notes to the Consolidated Financial Statements
March 31, 2005 and 2004
(j) Income Taxes
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carryforwards. Deferred tax assets
and liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are expected to
be recovered or settled. The effect on deferred tax assets and liabilities
of a change in tax rates is recognized in income in the period that includes the
enactment date.
(k)
Stock-Based Compensation
The
Company accounts for stock options at intrinsic value in accordance with
Accounting Principles Board Opinion No. 25, Accounting for Stock Issued
to Employees (“APB 25”), and related interpretations. Had
compensation cost for the Company’s stock options been determined based upon the
fair value at the grant date for awards under the plans consistent with the
methodology prescribed under Statement of Financial Accounting Standards
No. 123, Accounting for Stock-Based Compensation (“SFAS 123”), the
Company’s net income would have been adjusted to the pro forma amounts indicated
below:
|
|
|
Years ended March
31, |
|
|
|
|
|
|
|
2005 |
|
|
|
2004 |
|
|
|
2003 |
|
|
|
|
|
|
Net
income - as reported |
|
$ |
2,012,509 |
|
|
|
2,676,156 |
|
|
|
1,014,791 |
|
Deduct:
Total stock-based compensation expense determined |
|
|
|
|
|
|
|
|
|
|
|
|
under fair value based method, net of income taxes |
|
|
(852,159 |
) |
|
|
(117,759 |
) |
|
|
(104,598 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income - pro forma |
|
$ |
1,160,350 |
|
|
|
2,558,397 |
|
|
|
910,193 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
earnings per share: |
|
|
|
|
|
|
|
|
|
|
|
|
As
reported |
|
$ |
0.35 |
|
|
|
0.48 |
|
|
|
0.19 |
|
Pro
forma |
|
$ |
0.20 |
|
|
|
0.46 |
|
|
|
0.17 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
earnings per share |
|
|
|
|
|
|
|
|
|
|
|
|
As
reported |
|
$ |
0.34 |
|
|
|
0.46 |
|
|
|
0.19 |
|
Pro
forma |
|
$ |
0.20 |
|
|
|
0.44 |
|
|
|
0.17 |
|
TECHNOLOGY
RESEARCH CORPORATION
Notes to the Consolidated Financial Statements
March 31, 2005 and 2004
(l) Earnings
per share
Basic earnings
per share have been computed by dividing net earnings by the weighted
average number of common shares outstanding.
Diluted earnings
per share have been computed by dividing net earnings by the weighted
average number of common and common equivalent shares outstanding.
The
weighted average common and common equivalent shares outstanding figure has been
adjusted
to include the number of shares that would have been outstanding if the stock
options had been exercised, at the average market price of the period,
with the proceeds being used to buy shares from the market (i.e. the
treasury
stock method).
The table
below reconciles the calculation of basic and diluted earnings per
share:
|
Year ended March
31, |
|
|
|
2005
|
2004
|
2003
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income |
|
|
$ |
2,012,509 |
|
|
2,676,156 |
|
|
1,014,791 |
|
Weighted
average shares outstanding - basic |
|
|
|
5,754,816 |
|
|
5,589,181 |
|
|
5,438,381 |
|
Dilutive
common shares issuable upon exercise of stock options |
|
|
|
199,252 |
|
|
238,545 |
|
|
44,069 |
|
Weighted
average shares outstanding - diluted |
|
|
|
5,954,068 |
|
|
5,827,726 |
|
|
5,482,450 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per common share: |
|
|
Basic |
|
|
$ |
0.35 |
|
|
0.48 |
|
|
0.19 |
|
Diluted |
|
|
$ |
0.34 |
|
|
0.46 |
|
|
0.19 |
|
For
the year ended March 31, 2005, options to purchase 245,400 shares
were
considered anti-dilutive for the purposes of calculating earnings
per share. For the year ended March 31, 2004,
options to purchase 257,900 shares of common
stock were considered anti-dilutive for purposes of calculating earnings
per share.
TECHNOLOGY
RESEARCH CORPORATION
Notes to the Consolidated Financial Statements
March 31, 2005 and 2004
(m) Recently Issued Accounting
Standards
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. When issued,
this statement was effective for financial instruments entered into or modified
after May 31, 2003, and otherwise for interim periods beginning after June 15,
2003. Initially, the statement required that all financial
instruments meeting its criteria be presented as liabilities rather than as
minority interest between the liabilities and equity sections of the balance
sheet. On October 29, 2003, the FASB announced that it had deferred
certain provisions of SFAS No. 150. The Company does not currently have
any instruments subject to SFAS No. 150. Accordingly, final adoption is
not expected to have a material effect on the Company’s financial condition,
results of operations or cash flows.
In November 2004, the FASB issued SFAS No. 151 - Inventory
Costs, to amend the guidance in Chapter 4, "Inventory Pricing", of FASB
Accounting Research Bulletin No. 43, Restatement and Revision of Accounting
Research Bulletins. SFAS No. 151 clarifies the accounting for
abnormal amounts of idle facility expense, freight, handling costs and waste
material (spoilage). The Statement requires that items be recognized as
current-period charges, effective during fiscal years beginning after June 15,
2005. Additionally, SFAS No. 151 requires that allocation of fixed
production overheads to the costs of conversion be based on the normal capacity
of the production facilities. The adoption of SFAS No. 151 is not expected
to have a material effect on the Company's financial condition, results of
operations or cash flows.
In December 2004, the FASB issued SFAS No. 123(R)
- - Accounting for Stock-Based Compensation. SFAS No. 123(R)
is a revision of SFAS No. 123 and supersedes APB Opinion No. 25, Accounting
for Stock issued to Employees, and its related implementation
guidance. This statement establishes standards for the accounting for
transactions in which an entity exchanges its equity for goods and
services. It also addresses transactions in which an entity incurs
liabilities in exchange for goods or services that are based on the fair market
value of the entity's equity instruments or that may be settled by the issuance
of those equity instruments. The statement requires a public entity to
measure the cost of employee services received in exchange for an award of
equity instruments based on the grant-date fair value of the award. That
cost is recognized over the period during which an employee is required to
provide service in exchange for the award. This statement is effective for
small business issuers as of the beginning of the first annual period that
begins after December 15, 2005. The application of SFAS No.
123(R) may have a material effect on the Company's future financial
condition, results of operations or cash flows.
In May 2005, the FASB
issued SFAS No. 154 - Accounting Changes and Error Corrections.
This statement replaces APB Opinion No. 20, Accounting Changes, and
FASB Statement No. 3, Reporting Accounting Changes in Interim Financial
Statements, and changes the requirements for the accounting for and
reporting of a change in accounting principle. This statement provides
guidance on the accounting for and reporting of accounting changes and error
corrections. It establishes, unless impracticable, retrospective
application as the required method of reporting a change in accounting principle
in the absence of explicit transition requirements specific to the newly adopted
accounting principle. This statement also provides guidance on determining
whether retrospective application is impracticable. The correction of an
error in previously issued financial statements is not an accounting
change. However, the reporting of an error correction involves adjustments
to previously issued financial statements similar to those generally applicable
to reporting an accounting change retrospectively. Therefore, the
reporting of a correction of an error by restating previously issued financial
statements is also addressed by this statement. This statement is
effective for accounting changes and corrections of error made in fiscal years
beginning after December 15, 2005. The application of SFAS No. 154 is not
expected to have a material effect on the Company's financial condition, results
of operations or cash flows.
TECHNOLOGY
RESEARCH CORPORATION
Notes to the Consolidated Financial Statements
March 31, 2005 and 2004
(2) Inventories
Inventories
at March 31, 2005 and 2004 consist of the following:
|
2005
|
|
2004 |
|
|
|
|
Raw
materials |
|
|
$ |
8,669,678 |
|
|
|
3,473,288 |
|
Work-in-process |
|
|
|
628,622 |
|
|
|
434,090 |
|
Finished
goods |
|
|
|
2,162,002 |
|
|
|
1,725,799 |
|
Total |
|
|
$ |
11,460,302 |
|
|
|
5,633,177 |
|
|
|
|
|
Approximately 47% and 40% of inventories were located in Honduras as
of March 31, 2005 and 2004, respectively.
(3)
Property, Plant and Equipment
Property,
plant and equipment as of March 31, 2005 and 2004 consists of:
|
|
|
2005 |
|
|
|
2004 |
|
Estimated
useful lives |
|
|
|
|
|
|
|
|
|
|
|
|
Building
and improvements |
|
$ |
1,639,993 |
|
|
|
1,614,517 |
|
20
years |
|
Machinery
and equipment |
|
|
11,920,113 |
|
|
|
8,654,459 |
|
5
- 15 years |
|
|
|
$ |
13,560,106 |
|
|
|
10,268,976 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Approximately 30% and 24% of property, plant and equipment is located
in Honduras as of March 31, 2005 and 2004, respectively.
TECHNOLOGY
RESEARCH CORPORATION
Notes to the Consolidated Financial Statements
March 31, 2005 and 2004
(4) Vacation
The
Company corrected an error in accounting for accrued vacation by
recording additional vacation expense of $185,545 during the quarter
ended December 31, 2004. The expense was charged to cost of sales
($49,110), selling and marketing ($52,793), general and administrative ($47,346)
and research and development ($36,296). Approximately $27,500 of
the vacation expense was earned in the nine months ended December 31, 2004,
$19,400 in the 2004 fiscal year, $8,300 in the 2003 fiscal year, $4,100 in the
2002 fiscal year and $126,200 in prior fiscal years. The Company
analyzed the effect of the misstatement on prior periods ($158,045) in
accordance with APB Opinion No. 20 and No. 28 and SAB 99 and determined
that while the adjustment was significant with respect to the quarter ended
December 31, 2004, it was not material with respect to the estimated income
for the 2005 fiscal year or to the trends on earnings among fiscal years or
the quarters within all affected fiscal years. Accordingly,
following the guidance of APB Opinion No. 28, the Company recorded the full
amount of the vacation expense during the quarter ended December 31, 2004.
As of March 31, 2005, the Company again analyzed the effect of the misstatement
on prior periods in accordance with APB Opinion No. 20 and No. 28 and SAB 99 and
concluded that the misstatement was not material to the year ended March 31,
2005 or to the trends on earnings among fiscal years or the quarters within all
affected years.
(5) Warranty
The
Company generally provides a one year warranty period for all of its
products. The Company also provides coverage on certain of its surge
products for "downstream" damage of products not manufactured by the
Company. The Company's warranty provision represents management's estimate
of probable liabilities, calculated as a function of sales volume and historical
repair experience for each product under warranty. The Company's warranty
provision increased by $290,447 in fiscal 2005 due to higher
revenue volume, especially with regard to those revenues generated by initial
volumes of off-shore production of a new line of product. A roll-forward
of the activity in the Company's warranty liability for the
years ended March 31, 2005 and 2004 is as follows:
|
|
Years ended March 31, |
|
|
|
|
|
|
|
2005 |
|
2004 |
|
|
|
|
|
|
|
Beginning
balance |
$ |
20,000 |
|
- |
|
Warranty expense |
|
354,163 |
|
20,000 |
|
Warranty claims |
|
(63,716 |
) |
- |
|
Ending balance |
$ |
310,447 |
|
20,000 |
|
|
|
|
|
|
|
TECHNOLOGY
RESEARCH CORPORATION
Notes to the Consolidated Financial Statements
March 31, 2005 and 2004
(6) Debt
On
December 20, 2004, the Company renegotiated the revolving
credit agreement with its institutional lender, extending the maturity date
to December 14, 2006. The new facility also provides for borrowings up to
$6,000,000, as compared to $3,000,000 under the old facility. The Company
has the option of borrowing at the lender's prime rate of interest
minus 100 basis points or the 30-day London Interbank Offering Rate
("LIBOR") plus 160 basis points. The Company is currently
borrowing under the LIBOR option at a 4.49% rate as of March
31, 2005 as compared to a 2.86% rate as of March 31, 2004. The
loan is collateralized with a perfected first security interest which
attaches to all accounts receivable and inventories, and a blanket security
interest attaching to all assets and requires the Company to maintain
certain financial ratios and minimum working capital. As of March 31,
2005, the Company had $5,350,000 in outstanding borrowings, of
which $2,350,000 was recorded as long-term debt. The
Company has the right to repay any outstanding borrowings at any time and
intends to repay the remaining $3,000,000 prior to March 31, 2006, and
accordingly, the Company has classified this amount as a current
liability. The Company was in compliance with the covenants as
of March 31, 2005.
On April 14, 2005, the Company entered into a $3,000,000 six-month
term loan agreement with its institutional lender. This credit facility
will only be used if necessary in the event that the Company's cash requirements
extend beyond the existing line of credit noted above. The terms of the
agreement are the same as the existing line of credit.
The Company has no off-balance sheet arrangements and no debt
relationships other than noted above.
(7) Income Taxes
The tax effects of temporary differences that give rise to
significant portions of the deferred tax assets and deferred tax liabilities as
of March 31, 2005 and 2004 are presented below:
|
|
|
2005 |
|
|
|
2004 |
|
Deferred
tax assets: |
|
|
|
|
|
|
|
|
Accounts receivable, principally due to allowance for doubtful
accounts |
|
$ |
61,821 |
|
|
|
11,164 |
|
Inventories, principally due to valuation allowance for financial
reporting
purposes and additional costs inventoried for tax
purposes |
|
|
407,496 |
|
|
|
203,052 |
|
Accrued expenses |
|
|
96,526 |
|
|
|
24,953 |
|
Total gross deferred tax assets |
|
|
565,843 |
|
|
|
239,169 |
|
|
|
|
|
|
|
|
|
|
Deferred
tax liabilities: |
|
|
|
|
|
|
|
|
Property, plant and equipment, principally due to differences in
depreciation |
|
|
(378,143 |
) |
|
|
(235,120 |
) |
Prepaid expenses |
|
|
(77,430 |
) |
|
|
- |
|
Total
gross deferred tax liability |
|
|
(455,573 |
) |
|
|
(235,120 |
) |
Net
deferred tax assets |
|
$ |
110,270 |
|
|
|
4,049 |
|
|
|
|
|
|
|
|
|
|
TECHNOLOGY
RESEARCH CORPORATION
Notes to the Consolidated Financial Statements
March 31, 2005 and 2004
Net deferred tax assets included in the accompanying consolidated
balance sheets as of March 31, 2005 and 2004 are as follows:
|
|
|
2005 |
|
|
|
2004 |
|
|
|
|
|
|
|
|
|
|
Deferred
income taxes, current asset |
|
$ |
488,413 |
|
|
|
239,169 |
|
Deferred
income taxes, noncurrent liability |
|
|
(378,143 |
) |
|
|
(235,120 |
) |
|
|
$ |
110,270 |
|
|
|
4,049 |
|
|
|
|
|
|
|
|
|
|
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, 2005.
Income tax expense (benefit) for the years ended March 31, 2005,
2004, and 2003 consists of:
|
|
|
2005 |
|
|
|
2004 |
|
|
|
2003 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current: |
|
|
|
|
|
|
|
|
|
|
|
|
Federal |
|
$ |
663,822 |
|
|
|
1,015,734 |
|
|
|
68,212 |
|
State |
|
|
53,927 |
|
|
|
55,859 |
|
|
|
- |
|
|
|
|
717,749 |
|
|
|
1,071,593 |
|
|
|
68,212 |
|
Deferred: |
|
|
|
|
|
|
|
|
|
|
|
|
Federal |
|
|
(100,320 |
) |
|
|
84,107 |
|
|
|
312,071 |
|
State |
|
|
(5,901 |
) |
|
|
4,948 |
|
|
|
29,255 |
|
|
|
|
(106,221 |
) |
|
|
89,055 |
|
|
|
341,326 |
|
|
|
$ |
611,528 |
|
|
|
1,160,648 |
|
|
|
409,538 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TECHNOLOGY
RESEARCH CORPORATION
Notes to the Consolidated Financial Statements
March 31, 2005 and 2004
Income tax expense for the years ended March 31, 2005, 2004 and
2003 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:
|
|
|
2005 |
|
|
|
2004 |
|
|
|
2003 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Computed
expected tax expense |
|
$ |
892,173 |
|
|
|
1,304,513 |
|
|
|
484,272 |
|
Increase
(reduction) in income taxes resulting from: |
|
|
|
|
|
|
|
|
|
|
|
|
Foreign activity for which no income taxes have been
provided |
|
|
(334,252 |
) |
|
|
(249,121 |
) |
|
|
(102,435 |
) |
State income taxes, net of Federal income tax effect |
|
|
31,697 |
|
|
|
40,133 |
|
|
|
19,309 |
|
Change in valuation allowance |
|
|
- |
|
|
|
- |
|
|
|
(78,152 |
) |
Tax credits expired |
|
|
- |
|
|
|
- |
|
|
|
71,702 |
|
Other |
|
|
21,910 |
|
|
|
65,123 |
|
|
|
14,842 |
|
|
|
$ |
611,528 |
|
|
|
1,160,648 |
|
|
|
409,538 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The operating results of the foreign manufacturing subsidiary
are not subject to foreign tax as it is operating under an indefinite tax
holiday granted on January 7, 2002 by the Honduran Secretary of Industry and
Commerce. Prior to January 7, 2002, the subsidiary operated under a
20-year tax holiday. The foreign operations generated income of
approximately $983,000 in 2005, $733,000 in 2004, and $301,000 in 2003. 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 $2,256,000 at March 31, 2005. 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.
(8)
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 initial aggregate of 300,000 shares reserved for this
plan, and during 2003 and 2004, an additional 300,000 and 500,000 shares were
approved by the shareholders for an aggregate total of 1,100,000 shares to be
reserved for issuance under this plan.
TECHNOLOGY
RESEARCH CORPORATION
Notes to the Consolidated Financial Statements
March 31, 2005 and 2004
In
December 2004, the Financial Accounting Standards Board published Statement of
Financial Accounting Standards No. 123 (Revised 2004), Share-Based
Payment ("SFAS 123R"), which is effective for small business issuers from
the first annual period that begins after December 15, 2005, will require
that compensation cost related to share-based payment transactions, including
stock options, be recognized in the financial statements. Accordingly, the
Company will implement the revised standard in its first quarter
ending June 30, 2006. Currently, the Company accounts for its
share-based payment transactions under the provisions of APB 25, which does not
necessarily require the recognition of compensation cost in the consolidated
statement of operations of the financial
statements.
Option transactions and other information relating to the Plans for
the three years ended March 31, 2005 are as follows:
|
|
Qualified
incentive stock option plan |
|
Performance
incentive stock option plan |
|
Non-qualified
stock option plan |
|
Long-term
incentive stock option plan |
|
Total |
|
|
Weighted
average exercise price |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
as of 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
as of 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 |
|
Canceled |
|
(17,616 |
) |
- |
|
(1,927 |
) |
- |
|
(19,543 |
) |
|
1.40 |
|
Outstanding
as of March 31, 2004 |
|
6,284 |
|
250,000 |
|
2,700 |
|
422,485 |
|
681,469 |
|
|
7.10 |
|
Granted |
|
- |
|
- |
|
- |
|
63,500 |
|
63,500 |
|
|
6.24 |
|
Exercised |
|
(3,167 |
) |
- |
|
(1,700 |
) |
(40,750 |
) |
(45,617 |
) |
|
1.63 |
|
Canceled |
|
- |
|
- |
|
- |
|
(18,500 |
) |
(18,500 |
) |
|
11.25 |
|
Outstanding
as of March 31, 2005 |
|
3,117 |
|
250,000 |
|
1,000 |
|
426,735 |
|
680,852 |
|
$ |
7.27 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
number of options available under the plans |
|
166,667 |
|
400,000 |
|
333,333 |
|
1,100,000 |
|
2,000,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable
as of March 31, 2005 |
|
3,117 |
|
- |
|
1,000 |
|
168,655 |
|
172,772 |
|
$ |
8.12 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available
as of March 31, 2005 |
|
- |
|
150,000 |
|
- |
|
493,850 |
|
643,850 |
|
|
|
|
TECHNOLOGY
RESEARCH CORPORATION
Notes to the Consolidated Financial Statements
March 31, 2005 and 2004
The per share weighted average exercise price of stock
options granted during 2005, 2004 and 2003 was $6.24, $10.03 and $1.92,
respectively, on the date of grant using the Black-Scholes option pricing model,
with the following assumptions:
|
|
Years
Ended March 31, |
|
|
|
|
|
|
|
2005 |
|
2004 |
|
2003 |
|
|
|
|
|
|
|
|
|
Expected
dividend yield |
|
0.94% |
|
0.01% |
|
1.70% |
|
Risk
free interest rate |
|
4.16% |
|
3.54% |
|
3.95% |
|
Expected
volatility |
|
97.65% |
|
92.28% |
|
92.63 |
|
Expected
life |
|
7.07
years |
|
7.31
years |
|
8.93
years |
|
As of March 31, 2005, the range of exercise prices and
weighted average remaining contractual life of options outstanding and
exercisable was as follows:
|
|
|
Options
Outstanding
|
|
Options
Exercisable
|
|
|
Range
of exercise prices |
|
Number
of outstanding as of March 31, 2005 |
|
Weighted
average remaining contractual life(years) |
|
|
Weighted
average exercise price |
|
Number
exercisable as of March 31, 2005 |
|
|
Weighted
average exercise price |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
1.50
- 1.63 |
|
9,117 |
|
5.6 |
|
$ |
1.56 |
|
9,117 |
|
$ |
1.56 |
|
$ |
1.64
- 2.05 |
|
38,835 |
|
6.6 |
|
|
1.76 |
|
35,502 |
|
|
1.77 |
|
$ |
2.06
- 2.74 |
|
80,000 |
|
8.1 |
|
|
2.73 |
|
26,667 |
|
|
2.73 |
|
$ |
2.75
- 5.13 |
|
250,000 |
|
1.3 |
|
|
5.13 |
|
- |
|
|
- |
|
$ |
5.14
- 8.30 |
|
57,500 |
|
9.9 |
|
|
5.96 |
|
- |
|
|
- |
|
$ |
8.31
- 12.34 |
|
245,400 |
|
9.0 |
|
|
12.34 |
|
101,486 |
|
|
12.34 |
|
|
|
|
680,852 |
|
6.0 |
|
$ |
7.27 |
|
172,772 |
|
$ |
8.12 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 such
shares issued during the years ended March 31, 2005, 2004 or 2003.
(9)
Leases
The
Company leases the land on which its operating facility is located in
Clearwater, Florida. This operating lease was 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.
TECHNOLOGY
RESEARCH CORPORATION
Notes to the Consolidated Financial Statements
March 31, 2005 and 2004
The
Company's subsidiary leases its operating facility in Honduras. The
initial operating lease was for five years through February 2002, and since
then, has been extended on a yearly basis trough February 2006. In
addition, the Company's subsidiary entered into a three-year lease for
additional warehouse space in Honduras at the same location.
Future
minimum lease payments under non-cancelable operating leases as of March 31,
2005 are:
Year
ending March 31, |
|
|
|
|
2006 |
|
$ |
256,404 |
|
2007 |
|
|
88,402 |
|
2008 |
|
|
70,812 |
|
2009 |
|
|
30,528 |
|
2010 |
|
|
30,528 |
|
Thereafter |
|
|
30,528 |
|
Total minimum lease payments |
|
$ |
507,202 |
|
|
|
|
|
|
Rental
expense for all operating leases was approximately $239,000 in 2005, $187,000 in
2004 and $182,000 in 2003.
(10)
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:
|
|
|
Year
ended March 31, |
|
|
|
|
|
|
Customer |
|
|
2005 |
|
|
|
2004 |
|
|
|
2003 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
Military (direct sales) |
|
$ |
6,368,386 |
|
|
|
6,892,693 |
|
|
|
2,850,188 |
|
Fermont,
a division of ESSI, a U.S. Government
Prime Contractor |
|
|
5,003,070 |
|
|
|
4,545,847 |
|
|
|
3,937,999 |
|
Total sales for major customers |
|
$ |
11,371,456 |
|
|
|
11,438,540 |
|
|
|
6,788,187 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exports: |
|
|
|
|
|
|
|
|
|
|
|
|
Canada |
|
$ |
25,305 |
|
|
|
344,020 |
|
|
|
417,094 |
|
Far East |
|
|
6,292,584 |
|
|
|
1,389,773 |
|
|
|
1,020,078 |
|
Europe |
|
|
2,239,319 |
|
|
|
2,207,887 |
|
|
|
2,632,357 |
|
Australia |
|
|
4,898 |
|
|
|
28,303 |
|
|
|
36,020 |
|
South America |
|
|
6,544 |
|
|
|
13,867 |
|
|
|
6,484 |
|
Middle East |
|
|
26,209 |
|
|
|
23,770 |
|
|
|
14,257 |
|
Total exports |
|
$ |
8,594,859 |
|
|
|
4,007,620 |
|
|
|
4,126,290 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TECHNOLOGY
RESEARCH CORPORATION
Notes to the Consolidated Financial Statements
March 31, 2005 and 2004
(11) 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 $28,000 in 2005, $25,000 in 2004 and $21,700 in 2003
(12) 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.
(13) 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, 2005, the Company has
repurchased 21,500 shares at a cost of $40,145.
(14) 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, 2005 and 2004 are:
|
|
|
First
Quarter |
|
|
|
Second
Quarter |
|
|
|
Third
Quarter |
|
|
|
Fourth
Quarter |
|
Year
ended March 31, 2005: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
$ |
7,130,944 |
|
|
|
7,069,527 |
|
|
|
9,704,795 |
|
|
|
15,528,081 |
|
Gross profit |
|
|
2,621,528 |
|
|
|
2,143,679 |
|
|
|
2,051,814 |
|
|
|
2,997,706 |
|
Income from operations |
|
|
999,971 |
|
|
|
467,720 |
|
|
|
163,445 |
|
|
|
1,011,756 |
|
Net income |
|
|
673,670 |
|
|
|
318,045 |
|
|
|
162,913 |
|
|
|
857,881 |
|
Basic earnings per share |
|
|
0.12 |
|
|
|
0.06 |
|
|
|
0.03 |
|
|
|
0.15 |
|
Diluted earnings per share |
|
|
0.11 |
|
|
|
0.05 |
|
|
|
0.03 |
|
|
|
0.15 |
|
|
|
|
First Quarter |
|
|
|
Second Quarter |
|
|
|
Third Quarter |
|
|
|
Fourth Quarter |
|
Year
ended March 31, 2004: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
$ |
5,659,915 |
|
|
|
6,212,654 |
|
|
|
5,805,556 |
|
|
|
6,658,512 |
|
Gross profit |
|
|
1,940,072 |
|
|
|
2,491,498 |
|
|
|
2,367,919 |
|
|
|
2,706,542 |
|
Income from operations |
|
|
778,522 |
|
|
|
1,163,167 |
|
|
|
934,912 |
|
|
|
945,350 |
|
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 |
|
EX-23
2
exhibit23.htm
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTANT
Unassociated Document
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) of Form S-8 of Technology Research Corporation of our
report dated
May 9, 2005, with respect to the consolidated balance sheets of
Technology Research
Corporation and subsidiary as of March 31, 2005 and 2004, and the
related consolidated
statements of operations, sotckholders' equity and cash flows for
each of the years in the
three-year period ended March 31, 2005, which report appears in the
March 31, 2005
annual report on Form 10-KSB of Technology Research
Corporation.
/s/ KPMG LLP
Tampa, Florida
June 29, 2005
EX-31.1
3
exhibit311.htm
CERTIFICATIONS OF CEO PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT
Unassociated Document
Exhibit
31.1
CERTIFICATIONS
I, Jerry T. Kendall,
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 small
business issuer as of, and for, the periods presented in this
report; |
|
|
4. |
The
small business issuer's other certifying officer 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 small
business issuer and 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 small business issuer,
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 small business issuer'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 small business issuer's
internal control over financial reporting that occurred during the small
business issuer's most recent fiscal quarter that has materially affected,
or is reasonably likely to materially affect, the small business issuer's
internal control over financial reporting; and |
|
|
5. |
The
small business issuer's other certifying officer and I have disclosed,
based on our most recent evaluation of internal control over financial
reporting, to the small business issuer's auditors and the audit committee
of the small business issuer's board of directors (or persons performing
the equivalent functions): |
|
|
|
|
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 small business issuer'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 small business issuer's
internal control over financial reporting. |
|
DATE: June
29, 2005 |
/s/ Jerry T. Kendall |
|
Jerry T.
Kendall |
|
President
and Chief Executive Officer |
EX-31.2
4
exhibit312.htm
CERTIFICATIONS OF CFO PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT
Unassociated Document
Exhibit
31.2
CERTIFICATIONS
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 small
business issuer as of, and for, the periods presented in this
report; |
|
|
4. |
The
small business issuer's other certifying officer 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 small
business issuer and 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 small business issuer,
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 small business issuer'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 small business issuer's
internal control over financial reporting that occurred during the small
business issuer's most recent fiscal quarter that has materially affected,
or is reasonably likely to materially affect, the small business issuer's
internal control over financial reporting; and |
|
|
5. |
The
small business issuer's other certifying officer and I have disclosed,
based on our most recent evaluation of internal control over financial
reporting, to the small business issuer's auditors and the audit committee
of the small business issuer's board of directors (or persons performing
the equivalent functions): |
|
|
|
|
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 small business issuer'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 small business issuer's
internal control over financial reporting. |
|
DATE: June 29,
2005 |
/s/ Scott J. Loucks |
|
Scott J. Loucks |
|
Vice
President of Finance and Chief Financial
Officer |
EX-32.1
5
exhibit321.htm
CERTIFICATIONS OF CEO PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT
Unassociated Document
Exhibit
32.1
CERTIFICATION
PURSUANT TO
18 U.S.C.
§1350,
AS ADOPTED
PURSUANT TO
SECTION 906
OF THE SARBANES-OXLEY ACT OF 2002
In connection with
this Annual Report on Form 10-KSB of Technology
Research Corporation (the “Company”) for the year ended March 31,
2005, as filed with the Securities and Exchange Commission on the date hereof
(the “Report”), the undersigned President and Chief Executive Officer certify,
pursuant to 18 U.S.C. §1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, that:
|
(1) |
The
Report fully complies with the requirements of Section 13(a) or 15(d) of
the Securities Exchange Act of 1934; and |
|
|
(2) |
The
information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of the
Company. |
|
|
Date: June 29,
2005 |
/s/ Jerry T. Kendall |
|
Jerry T.
Kendall |
|
President
and Chief Executive Officer |
|
|
|
|
A signed
original of this written statement required by Section 906 has been provided to
Technology Research Corporation and will be retained by Technology
Research Corporation and furnished to the Securities and Exchange
Commission or its staff upon request.
EX-32.2
6
exhibit322.htm
CERTIFICATIONS OF CFO PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT
Unassociated Document
Exhibit
32.2
CERTIFICATION
PURSUANT TO
18 U.S.C.
§1350,
AS ADOPTED
PURSUANT TO
SECTION 906
OF THE SARBANES-OXLEY ACT OF 2002
In connection with
this Annual Report on Form 10-KSB of Technology
Research Corporation (the “Company”) for the year ended March 31,
2005, as filed with the Securities and Exchange Commission on the date hereof
(the “Report”), the undersigned Vice President of Finance and
Chief Financial Officer certify, pursuant to 18 U.S.C. §1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
|
(1) |
The
Report fully complies with the requirements of Section 13(a) or 15(d) of
the Securities Exchange Act of 1934; and |
|
|
(2) |
The
information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of the
Company. |
|
|
Date: June 29,
2005 |
/s/ Scott J. Loucks |
|
Scott J. Loucks |
|
Vice
President of Finance and Chief Financial Officer |
|
|
|
|
A signed
original of this written statement required by Section 906 has been provided to
Technology Research Corporation and will be retained by Technology
Research Corporation and furnished to the Securities and Exchange
Commission or its staff upon request.
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