UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended March 31, 1998
Commission file number 0-13763
TECHNOLOGY RESEARCH CORPORATION
(Exact name of registrant as specified in its charter)
Florida 59-2095002
(State or other jurisdiction of (I.R.S. Employer
incorporation or Organization) Identification No.)
5250 140th Avenue North, Clearwater, Florida 33760
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (813) 535-0572
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
None None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock $.51 par value
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. [X]
As of May 29, 1998, the number of shares outstanding of the registrant's
common stock, $.51 par value was 5,400,253, and based on the closing sale
price on such date, the aggregate market value of the voting stock held by
nonaffiliates of the registrant was $10,506,342.
Part III of this Form 10-K is incorporated by reference from the registrant's
Proxy Statement for the Annual Meeting of Shareholders to be held on August
20, 1998.
TABLE OF CONTENTS
PART I Page
Item 1. Business .................................................... 3
Item 2. Properties .................................................. 12
Item 3. Legal Proceedings ........................................... 12
Item 4. Submission of Matters to a Vote of Security Holders ..........12
PART II
Item 5. Market for Registrant's Common Equity and
Related Stockholder Matters ................................. 13
Item 6. Selected Financial Data ..................................... 14
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations ......................... 15
Item 8. Financial Statements and Supplementary Data ................. 20
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure ...................... 20
PART III
Item 10. Directors and Executive Officers of the Registrant .......... 20
Item 11. Executive Compensation ...................................... 20
Item 12. Security Ownership of Certain Beneficial
Owners and Management ....................................... 20
Item 13. Certain Relationships and Related Transactions .............. 20
PART IV
Item 14. Exhibits, Financial Statements Schedules,
and Reports on Form 8-K ..................................... 20
SIGNATURES ........................................................... 23
Part I
ITEM 1. BUSINESS
General
The Company was incorporated in Florida in June 1981 with the intended
purpose of pursuing orders for products to be designed and manufactured for
sale to the military engine generator set controls market, a segment with
respect to which the Company's founders had acquired substantial experience.
The Company currently designs, develops, manufactures and markets electronic
control and measurement devices related to the distribution of electrical power
and specializes in electrical safety products that prevent electrical fires
and protect against electrocution and serious injury from electrical shock.
Such products include ground fault protective devices, fire prevention devices
for fires caused by aging appliance and extension cords, controls for
electrical power generating systems, transformers and magnetics. These
products are used in providing safe and efficient utilization and controlled
distribution of electricity and have consumer, commercial and governmental
applications in the United States and throughout the world.
Until the year ended March 31, 1989, a majority of the Company's revenues
were derived from sales of military products. The Company believes that its
successful design of ground fault devices for both personnel and equipment
protection as well as meeting electrical safety requirements for personal
care products, have formed the basis for the Company's success in the
consumer/commercial, non-military markets.
Net sales contributed by commercial and military products are as follows:
Year Ended
March 31 Commercial % Military % Total
-------- ---------- ---- -------- ---- -----
1998 $ 13,434,352 74.2 $ 4,667,433 25.8 $ 18,101,785
1997 12,803,181 85.3 2,200,413 14.7 15,003,594
1996 14,541,301 87.7 2,040,000 12.3 16,581,301
1995 18,095,134 86.4 2,840,423 13.6 20,935,557
1994 14,022,113 71.2 5,681,341 28.8 19,703,454
Royalties from license agreements are as follows:
Year Ended
March 31 Royalties
-------- ---------
1998 $ 329,166
1997 381,977
1996 797,920
1995 837,399
1994 785,723
The Company's backlog of unshipped orders at March 31, 1998 was approximately
$4,600,000. This backlog consists of approximately 74% commercial product
orders and approximately 26% military product orders, all of which is expected
to ship within Fiscal Year 1999.
-3-
Commercial Products and Markets
Ground fault protective devices protect equipment and people against electrical
faults which can occur between electrically "live" conductors and ground.
These ground fault conditions can damage equipment, start fires, or seriously
or fatally injure humans.
Ground Fault Circuit Interrupters ("GFCI") and Appliance Leakage Circuit
Interrupters ("ALCI") provide protection from dangerous electrical shock by
sensing leakage of electricity and cutting off power. Equipment Leakage
Current Interrupters ("ELCI") detect current leakage within machines such as
copy machines, printers and computers. GFCIs are currently available in three
types: circuit breaker, receptacle and portable. The Company specializes in
the portable types of these products.
A ground fault is a condition where electric current finds an unintentional
path to ground such as through the exposed metal parts of an appliance or tool.
Faults occur because of damage that causes internal wiring to touch these
exposed metal parts or because an appliance or tool gets wet. 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 normal adult is far below the level of current required for
a fuse to blow or a circuit breaker to trip. GFCIs constantly monitor
electric current, and as long as the amount of current returning from the
appliance 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.
An ELCI is a device intended to provide leakage current protection in
appliances and utilization equipment whose function is to interrupt all
ungrounded conductors of the supply circuit to electrical equipment in the
event a current, in excess of the trip current, occurs between live parts
and the grounded enclosure or other grounded parts. The basic standard used
to investigate these products is the Standard for Ground Fault Circuit
Interrupters, UL 943, excluding requirements concerning trip current and
time. ELCIs are considered "equipment protection" devices. The Company
has a unique versatile product called the "Electra Shield" which provides ELCI
capability, three-mode surge suppression, power line filtering, and facsimile
modem surge protection. This unique product offers multimedia protection for
home and office personal computers, fax modems, TV and entertainment systems.
An ALCI is a device intended to be used in conjunction with an electrical
appliance whose function is to interrupt both conductors of the electric
circuit to a load when a fault current to ground exceeds 4 - 6 mA and is
less than that required to operate the overcurrent protection device of the
circuit. The ALCI is intended to be used only in a circuit that has a
solidly grounded neutral conductor, and is not intended to be used in place
of a GFCI in applications where the GFCI is required. ALCIs are considered
"personnel protection" devices. This product is intended for infrequent and
short-time use, and 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.
-4-
Government and industry research into the major causes of fire has 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 and
extension cords, which have been identified as a leading cause of electrical
fires. According to the United States Consumer Product Safety Commission
("CPSC"), these types of fires caused 149,900 residential structural fires
involving electrical equipment, which resulted in 750 civilian deaths, more
than 6,320 injuries and nearly $1.3 billion in property losses. The CPSC
estimates were based on 1994 fire service reports.
The National Electrical Code (the "Code") requires GFCIs for the
protection of receptacle outlets outdoors, as well as in bathrooms, garages
and other risk areas, and in new residences, hotels and public buildings.
The Code is followed by most local government building codes. There is
increasing effort by certain groups such as the National Electric
Manufacturers Association and Consumer Products Safety Commission to require
GFCI protection in other locations and applications. The Company presently
focuses its marketing efforts in certain spot markets which have developed
in response to Code imposed requirements.
For example, a Code requirement that became effective on January 1, 1991,
requires that a protective device be incorporated into hair dryers, curling
irons and crimpers to protect users from possible electrocution. In response
to this Code change, the Company developed a smaller GFCI plug that
incorporates its patented GFCI/ALCI technology. Additionally, the Company
developed an Immersion Detection Circuit Interrupter ("IDCI") that can also be
used to protect users of these products.
Also, Article 625 of the 1996 Edition of the National Electrical Code requires
electric vehicle ("EV") charging systems to include a system that will protect
people against serious electric shock in the event of a ground fault. The
Company has shipped product to the majority of the major automobile
manufacturers in support of their small EV production builds, and the Company
is active with various standards and safety bodies, relating to the electric
vehicle, on a worldwide basis. As the EV market grows, the Company is well-
positioned to grow along with it.
The Company currently manufactures and markets various portable GFCI, ALCI and
ELCI products, such as plug-in portable adapters, several extension cord
models in various lengths, various modules for OEM customers, and variations
of such products for voltage differences in both the United States and foreign
markets. The Company has been issued several domestic and foreign patents
on its portable GFCI which incorporate design features not available on any
similar product known to the Company (see Patents, Licenses and Trademarks on
page 9 for further information). The Company has entered into seven license
agreements and three sales and marketing agreements concerning the portable
GFCI, ALCI and ELCI. These agreements are with entities located in Australia,
France, Italy, Japan, the United Kingdom and the United States and are for the
purpose of market penetration in those areas where it would be difficult for
the Company to compete on a direct basis.
-5-
On April 24, 1997, the Company came to an amicable conclusion of its license
agreement with Windmere Corporation (the "Agreement") which had been
in effect since August 2, 1988. Windmere Corporation is a large Miami,
Florida based manufacturer and distributor of a wide variety of, among other
items, portable personal care and household products utilizing electric current
(e.g. haircurlers, irons, food mixers and numerous other items), most of
which are sold both domestically and internationally. Under the Agreement,
Windmere was granted an exclusive license (subject to the rights of certain
other preexisting licensees) to sell and distribute certain GFCI/ALCI or IDCI
based electrical safety products in the United States, and to manufacture
GFCI/ALCI and IDCI units (a) in the Far East (a defined term within the
Agreement referencing most Asiatic countries) for incorporation into finished
electrical safety products to be sold throughout the world directly or by way
of Far East OEMs; or (b) in the United States for sale or distribution, at
retail, in conjunction with personal care items and household appliances. The
Company also agreed to purchase its requirements of Far East manufactured GFCI
and IDCI products from Windmere and its affiliates as long as the Company could
obtain the same in a reasonable period and at a competitive cost. The
Company's decision to produce these products at its Honduran subsidiary, along
with the fact that Windmere's use of the Company's license would be limited
going forward, brought about the termination of the Agreement.
Military Products and Markets
The Company has been honored for the calendar years 1995, 1996 and 1997 to be
rated as a Best Value Medalist for the highest rating Gold Category by the
Defense Logistics Agency, which signifies the Company's commitment to military
contract performance.
The Company is currently a supplier of control equipment used in engine
generator systems purchased by the United States military and its prime
contractors. The term "control equipment" refers to the electrical controls
used to control the electrical power output of the generating systems. In
general, the controls monitor and regulate the operation of generator mobile
electric generating system sets. Electric generating systems are basic to all
branches of the military, and demand has remained relatively constant, unlike
products utilized in armaments and missiles. Sales are made either directly
to the government for support parts or to prime contractors for new electric
generator sets which incorporate the Company's products. The Company is a
qualified supplier for 37 control equipment products as required by the
Department of Defense and is a supplier of the following types of control
equipment, among others: protective relays and relay assemblies,
instrumentation transducer controls, fault locating panel indicators, current
transformer assemblies for current sensing control and instrumentation, motor
operated circuit breaker assemblies and electrical load board and voltage
change board assemblies. These products are primarily furnished for spare
parts support for existent systems in the military inventory.
In late 1989, the Company completed the redesign of the control equipment
related to the Tactical Quiet Generator Systems program and provided prototype
units to a prime contractor for testing, which was completed in the third
fiscal quarter for the year ended March 31, 1992. Subsequently, the Company
received production orders for these products from the U.S. Government's prime
contractor in the approximate amount of $7,500,000 covering the time period
from August 1992 to October 1994. All deliveries have been completed under
this contract, and an additional $4,900,000 contract for these products was
-6-
awarded to the Company by a prime contractor in March 1995, which covers
approximately a two-year period of which deliveries began in the second quarter
of Fiscal Year 1997. Shipments to this program will not be as strong during
Fiscal Year 1999 as the current phase of the contract nears completion and
until the next phase of the recently awarded follow-on contract is placed and
scheduled in production by the prime contractor. Additionally, several new
government contracts have been awarded with similar control equipment for the
engine generator systems, and the Company has positioned itself with the
Government prime contractors to be a participant in this business.
The Company continues to furnish various types of electrical power monitors
for military Naval Shipboard requirements. The monitors are used on all
classes of Naval surface vessels, such as minesweepers, destroyers guided
missile cruisers and aircraft carriers in addition to other types of Naval
vessels. The monitors are furnished for new vessel production, retrofit
upgrades and existent vessels requiring spare support parts. The Company also
supplies the military with electrical devices for control and monitoring of the
on-board auxiliary power diesel electric generating system for the new C2v
Armored Chassis Tactical Vehicle, Electronic Command Post System and the newly
developed armored ambulances. These devices include A.C. power monitor
assemblies (which provide system protection and status display on on-board
computers), generator voltage regulators, power transformers, A.C. overcurrent
and short circuit protection monitor assemblies and current sensing
transformers. All of these products have met the high shock and vibration and
endurance testing requirements during both highly accelerated stress screening
tests and vehicle road testing at Aberdeen Proving Grounds. The Company
is now receiving order releases for the initial low rate production phase for
C2v vehicles.
The Company's contracts with the U.S. Government are on a fixed-price bid
basis and are not subject to price renegotiation. As with all fixed-price
contracts, should manufacturing costs exceed the selling price, the contract
could result in a loss. 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 so canceled. On occasion, contract disputes arise which
could result in a suspension of the 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. UL publishes certain "Standards of Safety" which various types of
products must meet and performs specific tests to ascertain whether a product
meets 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.
The Company's military products are subject to testing and qualification
standards imposed by the United States government. The Company has
established a quality control system which has been qualified by the United
-7-
States Department of Defense to operate under the requirements of a
particular specification (MIL-I-45208). To the extent the Company designs
a product which it believes to meet those specifications, it submits the
products to a government testing laboratory, such as that located at Ft.
Belvoir, Virginia. If approved, the product is rarely subject to
requalification; however, the military may disqualify a product if it is
subject to frequent or excessive operational failures. Further, the current
specifications and requirements could be changed at any time, which would
require the Company to redesign its existing products or develop new
products which would have to be submitted for testing and qualification
prior to their approval for purchase by the military or its prime
contractors. Certain contracts require testing and acceptance by government
inspectors prior to shipment of the product.
The Company is presently enhancing its quality processes with the objective
to meet the ISO 9000 Series International Quality Standards, and the Company's
wholly owned foreign subsidiary, TRC/Honduras S.A. de C.V., has been
recommended by an independent certifying organization for ISO 9002
certification.
Design and Manufacturing
The Company currently designs almost all of the products which it produces
and generally will not undertake special design work for customers unless it
receives a contract 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 which the Company
manufactures from raw materials are its transformers and magnetic products.
The manufacture of such products primarily involves the winding of wire
around magnetic steel cores. The remainder of the products which the
Company manufactures are assembled from component parts produced by other
manufacturers.
On February 3, 1997, the Company's Board of Directors approved the
incorporation of TRC Honduras, S.A. de C.V., a wholly owned subsidiary of
Technology Research Corporation, for the purpose of manufacturing the Company's
high-volume products. This decision was made in line with the Company's goal of
always striving to improve quality, profit margins and customer satisfaction.
TRC Honduras, S.A. de C.V. resides in a leased 42,000 square foot building
located in ZIP San Jose, a free trade zone and industrial park, in San Pedro
Sula, Honduras. The lease is for a term of five years with an option to
extend the lease for another five years. The benefits of being located in a
free trade zone include no Honduran duties on imported raw materials or
equipment, no sales or export tax on exported finished product, a twenty year
Honduran federal income tax holiday and a ten year Honduran municipal income
tax holiday for the profits generated by the Honduran subsidiary, and various
other benefits. TRC Honduras, S.A. de C.V. has been funded by the Company with
equity of $1,400,000 to be used for machinery, equipment and various start-up
costs.
The Company continues to manufacture its military and low-volume commercial
products in its 43,000 square foot facility in Clearwater, Florida.
-8-
Patents, Licenses, and Trademarks
The Company's President, Mr. Legatti, has designed for the Company and the
Company has been issued four U.S. patents and two British, Canadian, Italian
and Australian patents with respect to its portable GFCIs that have features
not presently available on any similar product known to the Company. Also,
patents on the same device have been issued from France, Japan, Germany and
three other countries. The patents will be valid for 20 years in the United
States running from January 1986. Duration of patents in the other countries
vary from 15 to 20 years.
The Company licenses its technology for use by others in exchange for a
royalty or product purchases. Licensees are located in Australia, France,
Italy, Japan, the United Kingdom and the United States. Each licensee agrees
to pay the Company a royalty or purchase product based on schedules set forth
in the applicable agreement. The Company agrees to provide certain technical
support and assistance to its licensees. The licensees have agreed to
indemnify and hold the Company harmless against any liability associated with
the manufacture and sale of products subject to the license agreement,
including but not limited to defects in materials or workmanship.
The Company has no other patents on or licensee agreements with respect to
its products or technology, but has registered its TRC trademark with the U.S.
Office of Patents and Trademarks.
Marketing
The Company's products are sold throughout the world, primarily through an
expanded in-house sales force, licenses and sales and marketing agreements.
Although the Company will continue to market existing and new products through
these mediums, the Company is looking for other viable mediums 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 marketing activity through the use of additional
distributors and sales representative organizations. The Company's internal
distribution division, TRC Distribution, is supported by 25 independent sales
representatives who sell to 662 electrical, industrial and safety distributors.
The Company also markets through OEMs that sell the Company's GFCI products
under their own brand label. Additionally, the Company has exhibited its GFCI
products at numerous trade shows which have resulted in new commercial markets,
including the recreational vehicle industry and the appliance industry.
In Fiscal Year 1997, the Company implemented a consumer sales program for its
Safe Living/Smart Products using independent distributors that specialize in
selling products directly to the household consumer. The Company modified this
program in Fiscal Year 1998 and has increased its public relations efforts to
heighten consumer awareness for these products. The Company has targeted
Electric Utilities as a distribution channel for selling its products to the
consumer since many utilities are in the process of dealing with deregulation
and are seeking other sources of revenue from their rate paying customer. The
Company is working with a number of these utilities to implement programs to
sell various Safe Living/Smart Products.
-9-
The Company utilizes primarily foreign licenses and sales and marketing
agreements to market its products internationally (see Patents, Licenses and
Trademarks on page 9 for further information). The Company's products have
world-wide application, and the Company believes that international demand
for these products will continue to contribute to the Company's growth.
The Company offers its customers no specific product liability protection
except with regards to those customers that are specifically named as "Broad
Form Vendors" under its product liability coverage. The Company does extend
protection to purchasers in the event there is a claimed patent infringement
that pertains to the Company's portion of the final product. The Company also
carries product and general liability insurance for protection in such cases.
Major Customers and Exports
Individual customers and aggregate exports which accounted for 10% or more of
sales were:
Year ended March 31
-------------------
Customer 1998 1997 1996
-------- ---- ---- ----
Xerox Corporation $ 2,838,905 2,529,398 1,686,421
Noma Appliance & Electric, Inc.,
f/k/a Fleck Manufacturing, Inc.
(a Xerox Corporation supplier) 1,666,516 1,776,424 2,358,887
Other Xerox Corporation suppliers 133,044 802,800 2,474,142
Fermont Division 2,817,079 - -
--------- --------- ---------
$ 7,455,544 5,108,622 6,519,450
Exports:
Canada $ 1,894,215 1,831,898 2,367,890
Far East 486,277 1,057,605 1,967,494
Europe 2,554,772 1,396,823 1,750,257
Mexico 979,187 736,992 569,845
Australia 218,530 150,760 438,875
South America 20,994 82,838 -
Middle East 3,397 5,324 -
--------- --------- ---------
Total exports $ 6,157,372 5,262,240 7,094,361
========= ========= =========
Sales to Xerox Corporation and its suppliers were down from the previous fiscal
year due primarily to a price reduction effective August 1, 1997. Xerox and
its suppliers accounted for approximately 26% of the Company's sales for Fiscal
Year 1998, compared to approximately 34% for the prior fiscal year, and because
they account for such a large percentage of the Company's sales, the loss of
Xerox as a customer would have a material adverse effect on the Company's
business. Higher exports to Europe and Mexico and lower exports to the Far
East can primarily be attributed to Xerox's international suppliers. Overall,
exports to the Company's international OEM customers were stronger for Fiscal
Year 1998 compared to the Company's prior fiscal year.
The Company's military product sales are primarily to OEM prime contractors
and secondarily to military procurement logistic agencies for system support
parts. In Fiscal Year 1998, military sales were approximately 26% of total
sales, compared to 15% in the prior year. The increase was primarily due to
the level of sales with Fermont Division, the U. S. Government's prime
contractor for the Tactical Quiet Generator Systems Program, of which the
Company was in full production in Fiscal Year 1998.
-10-
The Company has no relationship with any of its customers except as a
supplier of product.
Competition
The commercial and military business of the Company is highly competitive.
In the commercial market, the Company has significant competition, except
with respect to the "Fire Shield" products. The Company believes, however,
that product knowledge, patented technology, ability to respond quickly to
customer requirements, positive customer relations, price, technical
background and industry experience are major competitive factors, and that it
competes favorably with respect to these factors. In addition, the Company's
patented GFCI technology utilizes, in certain adaptations, waterproofing, a
retractable ground pin and "trip mechanism" techniques, each of which
provides the Company, in the judgment of its management, with a current
competitive advantage.
In the military market, the Company's products must initially pass
government specified tests. The Company must compete with other companies,
some being larger and some smaller than the Company, acting as suppliers of
similar products to prime government contractors. The Company believes that
knowledge of the procurement process, engineering and technical support, price
and delivery are major competitive factors in the military market. The Company
believes that it has strength in all of these areas due to senior management's
involvement in the government procurement process and experience in the design
engineering requirements for military equipment. A substantial portion of
spare part procurement is set aside for small business concerns, which are
defined in general as entities with fewer than 1,000 employees. Because the
Company is classified as a small business concern, it qualifies for such set
aside procurements for which larger competitors are not qualified. The entry
barriers to the military market are great because of the need, in most cases,
for products to pass government tests and qualifications.
Research, Development and Engineering
The Company employs 23 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 presently existing products to meet the
needs of the Company's customers.
In connection with its efforts in developing the GFCI product, the Company
believes that the increasing use of portable GFCI protection will provide
new markets for its expansion into the commercial marketplace, and
accordingly, the Company has modified its GFCI designs to fit these markets
and new applications. There can be no assurance, however, that the Company can
maintain its sales levels in the commercial market in view of the possibility
that an increased level of competition may develop.
The Company spent $1,223,422 in Fiscal Year 1998, $1,147,630 in Fiscal Year
1997 and $975,568 in Fiscal Year 1996 on research, development and
engineering activities. None of these activities were sponsored or financed
by customers, and all are expensed as incurred. The Company anticipates
spending levels to remain constant in the new fiscal year.
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Employees
As of March 31, 1998, the Company employed 145 persons on a full time basis,
and of that total, 91 employees were engaged in manufacturing operations, 23 in
engineering, 19 in marketing and 12 in administration.
The Company's subsidiary employed 338 persons on a full time basis as of
March 31, 1998, and of that total, 333 employees were engaged in manufacturing
operations and 5 in administration.
None of the Company's employees are represented by a collective bargaining
unit, and the Company considers its relations with employees to be stable.
ITEM 2. PROPERTIES
The Company's executive offices and U.S. manufacturing facility are located on
4.7 acres of leased land in the St. Petersburg-Clearwater Airport Industrial
Park. The lease, with options, extends for 40 years until 2021 and is subject
to certain price escalation provisions every five years. This leased land is
adequate to enable the Company to expand this facility to 60,000 square feet.
The present facility provides a total of 43,000 square feet, including 10,000
square feet of offices and engineering areas, as well as 23,000 square feet of
production areas and 10,000 square feet of warehouse space.
In March 1997, the Company entered into a five year lease agreement with
ZIP San Jose, an industrial park located in San Pedro Sula, Honduras, for a
42,000 square foot building in which the Company manufactures its high-volume
products. The Company has the option of extending the lease another five years
if it wishes. Lease payments began in May 1997 and continue through July 2002.
ITEM 3. LEGAL PROCEEDINGS
The Company is involved in various claims and legal actions arising in the
ordinary course of business. In the opinion of the Company, the ultimate
disposition of these matters will not have a material adverse effect on the
Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of the fiscal year ended March 31, 1998.
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Part II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SECURITY HOLDER
MATTERS
The Company's shares of Common Stock are registered under 12(g) of the
Securities Exchange Act of 1934 and are traded in the over-the-counter market
utilizing the NASDAQ trading system, to which the Company gained admittance in
December 1984, under the symbol "TRCI". In November 1995, NASDAQ approved the
Company's application for listing on the National Market. 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, 1998, 1997 and 1996 as
reported by the NASDAQ system.
Market Price Cash
Fiscal Year Ended High Low Dividends
March 31, 1998: ---- ---- ---------
First Quarter ................. 4 1/8 3 1/16 $ .06
Second Quarter ................. 4 1/2 3 9/16 .06
Third Quarter ................. 4 9/16 3 .06
Fourth Quarter ................. 3 7/16 1 15/16 -
----
$ .18
March 31, 1997:
First Quarter ................. 6 1/4 4 1/2 $ .06
Second Quarter ................. 5 3/8 3 7/8 .06
Third Quarter ................. 4 5/8 4 .06
Fourth Quarter ................. 4 9/16 3 13/16 .06
----
$ .24
March 31, 1996:
First Quarter ................. 5 1/4 3 $ .06
Second Quarter ................. 6 3/16 4 5/16 .06
Third Quarter ................. 5 1/2 3 3/4 .06
Fourth Quarter ................. 5 11/16 3 7/8 .06
----
$ .24
As of May 29, 1998, the approximate number of the Company's shareholders was
700. This number does not include any adjustment for shareholders owning
common stock in the Depository Trust name or otherwise in "Street" name,
which the Company believes represents an additional 2,500 shareholders.
On August 23, 1995, at the Company's Annual Meeting, the shareholders
approved a one share for three share reverse stock split, by a majority vote
of 82.24%. The record date for the reverse stock split was September 15,
1995, and the Company's financial information now reflects the reverse split
for all periods presented.
The Company's authorized capital stock, as of May 29, 1998, consisted of
10,000,000 shares of authorized common stock, par value $.51, of which
5,400,253 shares were issued and outstanding.
On March 16, 1998, the Company announced that its Board of Directors suspended
its fourth quarter dividend. The Company's Board of Directors will review
the Company's dividend policy on a quarterly basis and make a determination at
such time as to whether the Company will resume payment of a dividend based on
the Company's cash and earnings position. The Company declared dividends of
$.18 per share during Fiscal Year 1998 and $.24 per share during Fiscal Years
1997 and 1996.
-13-
ITEM 6. SELECTED FINANCIAL DATA
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
Year ended March 31:
Operating revenues $ 18,430,951 15,385,571 17,379,221 21,772,956 20,489,177
Gross profit $ 4,836,280 4,747,997 5,895,687 5,246,105 5,618,096
Net income (loss) $ (196,314) 566,658 2,038,785 1,867,957 2,296,778
Basic earnings
per share $ (.04) .11 .39 .36 .48
Weighted average number
of common shares
outstanding 5,332,571 5,321,698 5,281,932 5,159,614 4,809,434
Diluted earnings
per share $ (.04) .10 .38 .35 .45
Weighted average number
of common and
equivalent shares
outstanding 5,332,571 5,441,620 5,404,885 5,339,953 5,083,007
Cash dividends
declared $ .18 .24 .24 - -
March 31:
Working capital $ 6,875,679 9,651,145 10,931,740 10,089,672 9,102,131
Total assets $ 15,746,818 15,637,949 15,380,590 14,813,938 13,443,899
Current
liabilities $ 4,243,200 2,903,154 1,867,678 2,119,000 2,216,719
Long-term debt $ 131,250 206,250 281,350 356,350 831,350
Total liabilities $ 4,374,450 3,109,404 2,149,028 2,475,350 3,123,069
Retained earnings $ 1,241,176 2,397,353 3,108,371 2,340,267 470,310
Total stockholders'
equity $ 11,372,368 12,528,545 13,231,562 12,338,588 10,320,830
-14-
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Operating Results:
Fiscal Years 1998 and 1997 Comparison
The Company's operating revenues (net sales and royalties) for the fiscal year
ended March 31, 1998 ("Fiscal Year 1998") were $18,430,951, compared to
$15,385,571 reported for the Company's fiscal year ended March 31, 1997
("Fiscal Year 1997"), an increase of approximately 20%. The Company lost
$196,314 for Fiscal Year 1998, compared to earning $566,658 for Fiscal Year
1997, and basic and diluted earnings were $(.04) per share for Fiscal Year
1998, compared to basic earnings of $.11 per share and diluted earnings of
$.10 per share for Fiscal Year 1997. Common and equivalent shares outstanding
were comparable from year to year.
The Company's higher revenues for Fiscal Year 1998 were due to commercial sales
increasing by $631,171 and military sales increasing by $2,467,020 over the
prior year. The increase in commercial sales was primarily due to the level
of business with the Company's international OEM customers while sales to the
Company's domestic OEM customers were flat during Fiscal Year 1998. Sales to
Xerox Corporation and its suppliers decreased by $343,969 primarily due to
a price reduction which went into effect August 1, 1997. The increase in
military sales was primarily due to the Company being in full production of the
products related to the Tactical Quiet Generator Systems program. Shipments to
this program will not be as strong in Fiscal Year 1999 as the current phase of
the contract nears completion and until the next phase of the recently awarded
follow-on contract is placed and scheduled in production by the Prime
Contractor. The Company expects, however, continued growth in commercial sales
with additional participation from the U.S. OEM market for the reasons stated
below. Sales to Xerox should be steady.
Royalty income was down, as expected, by $52,811 due to less royalties from
Windmere Corporation. In April 1997, the Company agreed to accept a final
payment of $100,000 from Windmere to license the Company's products with the
understanding that no future royalties would be paid to the Company. On
May 17, 1997, the Company granted an exclusive license to Yaskawa Control of
Japan for the Company's full line of commercial electrical protection devices
and the Company's protective devices for the electric vehicle charging systems.
The Company received a licensing fee of $125,000 from Yaskawa Control in Fiscal
Year 1998 which substantially offset the loss of royalty income from Windmere
Corporation.
The Company has taken a number of actions to make Fiscal Year 1999 a profitable
year with revenue growth. First, for the past few months, the Company has
employed a highly experienced manufacturing professional, who has extensive
knowledge of the Company's product lines to work with the Honduran management
team. In addition, Steve Jackson, Vice President of Operations for the
Company, has been recently assigned to reside full time in Honduras until such
time as the operating inefficiencies have been corrected and the operation
contributes to the Company's profitability. Second, the Company's operating
budgets for Fiscal Year 1999 have been slashed by approximately $800,000 from
last year's actual operating expenditures. Third, the Company has consolidated
its U.S. Commercial Sales functions under Edward A. Schiff, who has been
promoted to Vice President U.S. Commercial Sales and Marketing. This
consolidation will provide increased focus on specific market segments
facilitating revenue growth for the Company's commercial and consumer business.
-15-
Although the Company's revenues were higher for Fiscal Year 1998, compared to
Fiscal Year 1997, net income decreased as a result of higher period expenses
and lower gross margins. Higher period expenses were primarily due to the
Company's special marketing programs, and lower gross margins were a result of
manufacturing inefficiencies and inventory adjustments related to the Company
restructuring its manufacturing operations from a contract manufacturer in
China to its wholly owned subsidiary in Honduras(see next paragraph). The
lower gross margins resulted from approximately $1,200,000 of additional
manufacturing cost variances incurred for the Company to produce its products
in Fiscal Year 1998, compared to the prior year, with the majority of these
variances occurring in the third and fourth quarters.
The Company's wholly owned subsidiary, TRC Honduras, S.A. de C.V., recorded a
loss of $375,264 for Fiscal Year 1998. As part of the Company's on-going
plan to produce its high-volume products at its Honduran subsidiary, the
Company added six additional products to the production process in Honduras in
the third quarter. Unfortunately, the manufacturing complexities associated
with adding these additional products caused its subsidiary not to meet its
production shipment plan for the third and fourth quarters, and the result was
that additional product continued to be produced at the Company's Clearwater
facility causing the use of temporary employees and heavy overtime as well as
higher labor rates in order to meet customer delivery commitments.
Total expenses for marketing the Company's "Fire Shield" and consumer Safe
Living/Smart Products were $373,648 and $380,950 for Fiscal Year 1998,
respectively. Although no significant sales have been recorded to date for
these products, the Company has received its first order for OEM "Fire Shield"
cord sets to be used with portable heaters. The Company hopes that this is the
first step in convincing other appliance manufacturers to incorporate
"Fire Shield" into their products to prevent dangerous electrical cord fires.
The Company will continue to pursue its marketing plan to sell its line of
OEM "Fire Shield" products and will continue to work to have some of them
included in the National Electrical Code.
The Company's gross profit margin was approximately 27% of net sales for Fiscal
Year 1998 compared to 32% for the prior year. The difference was primarily
due to weaker profit margins resulting from the price reduction to Xerox
Corporation and manufacturing inefficiencies, inventory adjustments and
the Company restructuring its manufacturing operations from a contract
manufacturer in China to its wholly owned subsidiary in Honduras. The Company
believes this restructuring will ultimately result in lower duty, freight and
product costs thus positioning the Company to remain competitive in the future.
Selling, general and administrative expenses for Fiscal Year 1998 were
$4,023,205, compared to $3,458,872 for the prior year, an increase of
approximately 16%. Selling expenses were $2,710,774 for Fiscal Year 1998,
compared to $2,257,128 for the prior year, an increase of approximately 20%,
reflecting expenses related to the marketing of the "Fire Shield" products and
the consumer marketing program. General and administrative expenses were
$1,312,431, compared to $1,201,744 for the prior year, an increase of
approximately 9%, reflecting the additional administration expenses of the
Company's Honduran subsidiary.
Research, development and engineering expenses for Fiscal Year 1998 were
$1,223,422, compared to $1,147,630 for the prior year, an increase of
approximately 7%, reflecting primarily higher salary expenses related to a
a greater number of employees in the department.
-16-
Interest expense, net of interest and sundry income, for Fiscal Year 1998 was
$4,462, compared to interest and sundry income, net of interest expense, of
$173,670 for the prior year, reflecting higher interest expense, due to the
Company using its line of credit, and lower returns and average balances on
the Company's short-term investments.
Income tax expense for Fiscal Year 1998 was $110,671, compared to $130,484 in
the prior year, which was based on U.S. income before income tax of $289,621
and $697,142, respectively. The Internal Revenue Code does not allow a tax
benefit for losses on foreign subsidiaries, and no tax benefit is available in
Honduras. For this reason, the Company did not record any tax benefit from
the loss of $375,264 recorded by TRC Honduras S.A. de C.V., the Company's
wholly owned foreign subsidiary. The actual tax rate for Fiscal Year 1997 was
less than the expected tax rate, primarily due to the Company receiving a
favorable ruling from the State of Florida as discussed below.
Fiscal Years 1997 and 1996 Comparison
The Company's operating revenues (net sales and royalties) for the Company's
fiscal year ended March 31, 1997 ("Fiscal Year 1997") were $15,385,571,
compared to $17,379,221 reported for the Company's fiscal year ended March 31,
1996 ("Fiscal Year 1996"), a decrease of approximately 11%. The Company's net
income for the Fiscal Year 1997 was $566,658, compared to $2,038,785 for Fiscal
Year 1996, and basic earnings were $.10 per share and diluted earnings were
$.11 per share for Fiscal Year 1997, compared to basic earnings of $.39 per
share and diluted earnings of $.38 per share for Fiscal Year 1996. Common and
equivalent shares outstanding were comparable from year to year.
The Company's lower revenues for Fiscal Year 1997 were due to commercial sales
decreasing by $1,738,121 from the prior year as a result of the level of
business with Xerox and, to a lesser extent, the sprayer/washer market.
Revenues from the high pressure sprayer/washer market were negatively
impacted in Fiscal Year 1997, as well as Fiscal Year 1996, by a provision in
the National Electrical Code permitting the use of double-insulation for
certain sprayer/washer products to be sold without a GFCI provided they are
used with a GFCI. This provision was eliminated in the National Electrical
Code, effective January 1996. The revenues associated with Xerox were
negatively impacted by a price reduction on October 1, 1996 and by the
transition period of the Company supplying Xerox with its European product
requirements instead of Temic Telefunken, which had an impact on both royalties
from Temic and shipments of piece parts to Temic which were used by Temic to
manufacture finished product. Military sales increased by $160,414 from the
previous year due to the Company entering into full production of the products
related to the Tactical Quiet Generator Systems program, which has an expected
value of $4,900,000 over approximately two years.
Royalty income for Fiscal Year 1997 was $381,977, compared to $797,920 for
Fiscal Year 1996, a decrease of $415,943, or approximately 52%. The Company's
royalties were down, as expected, due to less royalties received from Windmere
Corporation and Temic(Telefunken Microelectronics)GmbH. The Company received
less royalties from Windmere, because Windmere, in an effort to reduce their
product cost because of competitive pressures, negotiated a lower royalty
agreement with the Company effective in Fiscal Year 1997. The Company received
less royalties from Temic in Fiscal Year 1997 as a result of Xerox transferring
their European product requirements back to TRC during Fiscal Year 1997.
-17-
The Company's revenues rose steadily throughout Fiscal Year 1997 since its
first quarter ended June 30, 1996. The Company did not, however, experience
the anticipated revenues from the "Fire Shield" products and the consumer
marketing initiative, which were needed, in addition to the Company's existing
business, to achieve revenue growth over Fiscal Year 1996.
The Company's gross profit margin was approximately 32% of net sales for Fiscal
Year 1997 compared to 36% for the prior year. The difference was primarily
due to weaker profit margins resulting from the price reduction to Xerox
Corporation and the transition period of the Company shipping product directly
to Xerox and its suppliers from China in the fourth quarter.
Selling, general and administrative expenses for Fiscal Year 1997 were
$3,458,872, compared to $2,734,096 for the prior year, an increase of
approximately 27%. Selling expenses were $2,257,128 for Fiscal Year 1997,
compared to $1,747,194 for the prior year, an increase of approximately 29%,
reflecting expenses related to the marketing of the "Fire Shield" products and
the consumer marketing program totaling approximately $650,000. General and
administrative expenses were $1,201,744, compared to $986,902 for the prior
year, an increase of approximately 22%, reflecting primarily higher travel and
salary related expenses of which the majority was attributed to those employees
who spent 100% of their time promoting the Company's "Fire Shield" products.
Research, development and engineering expenses for Fiscal Year 1997 were
$1,147,630, compared to $975,568 for the prior year, an increase of
approximately 18%, reflecting primarily higher salary expenses related to a
a greater number of employees in the department.
Interest and sundry income, net of interest expense, for Fiscal Year 1997 was
$173,670, compared to $220,656 for the prior year, reflecting lower returns
and average balances on the Company's short-term investments.
Income tax expense as a percentage of net income before income taxes was
approximately 19% for Fiscal Year 1997, compared to 36% in the prior year.
The actual tax rate for Fiscal Year 1997 was less than the expected tax rate,
primarily due to the Company receiving a favorable ruling from the State of
Florida on August 20, 1996 regarding apportionment factors for state income tax
purposes. As a result of this ruling, the Company amended previously filed
state income tax returns. Accordingly, in the third quarter, the Company
recorded a $240,000 state income tax credit, net of federal income taxes and
adjustments in deferred taxes of $110,000, related to state income taxes paid
in Fiscal Years 1993, 1994, 1995 and 1996. As long as the Company maintains
"nexus" (doing business) outside the State of Florida, the Company's
apportionment factors will result in a lower effective income tax rate.
-18-
Liquidity and Capital Resources
As of March 31, 1998, the Company's cash and cash equivalents decreased to
$1,153,798 from the March 31, 1997 total of $1,307,567, and short term
investments decreased to $1,033,902 from the March 31, 1997 total of
$3,031,013. The short term investments are comprised of U.S. Treasury Bills.
On August 15, 1998, the Company expects to renew its commercial line of credit,
which is currently $2,500,000, with its institutional lender for another year,
maturing in August 1999. The Company continues to have the option of borrowing
at the lender's prime rate of interest or the 30-day London Interbank Offering
Rate (L.I.B.O.R.) plus 200 basis points. The Company also has available a
Banker's Acceptance agreement which gives the Company the option of borrowing
up to $750,000 under the line of credit with the interest rate being determined
by the lender's International Division at the time of borrowing. The Company's
debt from advances on its line of credit was $2,450,100 as of March 31, 1998.
The Company's working capital decreased by $2,775,466 to $6,875,679 at March
31, 1998, compared to $9,651,145 at March 31, 1997. The decrease was
primarily a result of the Company funding its Honduran subsidiary and the
Company's earnings not exceeding its dividend. The Company believes cash flow
from operations, the available bank line, and its short term investments and
current cash position will be sufficient to meet its working capital
requirements for the immediate future.
The mortgage payable to the Company's institutional lender as of March 31, 1998
was $206,250, compared to $281,250 at March 31, 1997, reflecting the Company's
payments on principal for the twelve-month period.
On March 16, 1998, the Company announced that its Board of Directors suspended
its fourth quarter dividend. The Company's Board of Directors will review
the Company's dividend policy on a quarterly basis and make a determination at
such time as to whether the Company will resume payment of a dividend based on
the Company's cash and earnings position. The Company declared dividends of
$.18 per share during Fiscal Year 1998 and $.24 per share during Fiscal Years
1997 and 1996.
"Safe Harbor" Statement under the Private Securities Litigation Reform Act of
1995: The statements in this report that relate to future plans,
expectations, events, performance and the like are forward-looking statements,
within the meaning of the Private Securities Litigation Act of 1995 and the
Securities Exchange Act of 1934. Actual results or events could differ
materially from those described in the forward-looking statements due to a
variety of factors, including those set forth in the Company's reports on
Form 10-K and 10-Q filed with the Securities and Exchange Commission.
-19-
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Response to this item is submitted in a separate section of this report
starting at Page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
None.
PART III
Part III of this Form 10-K is incorporated by reference from the registrant's
Proxy Statement for the Annual Meeting of Shareholders to be held on August
20, 1998.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
Page
(A) 1. Independent Auditors' Report F-1
2. Consolidated Financial Statements:
Consolidated Balance Sheets F-2
Consolidated Statements of Income F-3
Consolidated Statements of Stockholders' Equity F-4
Consolidated Statements of Cash Flows F-5
Notes to Consolidated Financial Statements F-6
3. Schedule II - Valuation and Qualifying Accounts F-19
4. Exhibits included herein: (See next page)
(B) Reports on Form 8K
No reports on Form 8K have been filed by the registrant during the last
quarter of the fiscal year.
-20-
INDEX TO EXHIBITS (Item 14(A)3)
Exhibit
(3) (a) Articles of Incorporation and By-Laws*
(b) Certificate of Amendment to the Articles of Incorporation,
dated September 24, 1990***
(c) Certificate of Amendment to the Articles of Incorporation,
dated September 24, 1996***
(10) Material contracts:
(a) License Agreement, dated as of January 1, 1985, between the
Company and Societe BACO, a French corporation, granting BACO a
non-exclusive right to manufacture the Company's GFCI products
in France, and the non-exclusive right to sell GFCI products
other than in North America.*
(b) License Agreement between the Company and B & R Electrical
Products, Ltd., an English corporation ("B & R") dated
January 1, 1985, granting B & R a limited exclusive license to
manufacture GFCI products within the United Kingdom and a non-
exclusive license to market other such products other than in
North America.*
(c) License Agreement, dated as of January 8, 1987, between the
Company and HPM INDUSTRIES PTY LTD, an Australian corporation
("HPM"), granting to HPM an exclusive license to manufacture and
sell GFCI products in Australia, New Zealand, New Guinea, Papua
and Fiji.*
(d) License Agreement between the Company and Windmere Corporation,
dated August 2, 1988, granting to Windmere an exclusive (subject
to previously existing marketing rights held by others under
separate license agreements) license to sell and distribute the
Company's patented GFCI and Immersion Detector Circuit
Interrupter ("IDCI") products within the United States, and to
manufacture the GFCI and IDCI products in certain Asiatic
countries.*
(e) Incentive Stock Option Plan, dated October 15, 1981.*
(f) The 1993 Incentive Stock Option Plan, which was previously filed
with and as part of the Registrant's Registration Statement on
Form S-8 (No. 33-62397).
(g) Non-Qualified Stock Option Agreements, dated as of various dates,
between the Company and each of its current directors and
officers, as well as two independent consultants, an independent
entity which had provided the Company with certain technology
rights and certain former directors.*
(h) The 1993 Amended and Restated Non-Qualified Stock Option Plan,
which was previously filed with and as part of the Registrant's
Registration Statement on Form S-8 (No. 33-62379).
-21-
(i) $600,000 Loan Agreement, dated January 8, 1993, between the
Company and First Union National Bank of Florida.***
(j) License Agreement, dated November 23, 1992, between the Company
and TEMIC Telefunken Microelectronic GmbH, a German corporation,
granting Telefunken an exclusive right to manufacture the
Company's ELCI product line in Europe for sale to Xerox
Corporation, its European affiliates, or its authorized
suppliers.***
(k) $2,500,000 Revolving Credit Agreement, dated November 12, 1993,
between the Company and First Union National Bank of Florida.***
(l) License Agreement, dated May 17, 1997, between the Company and
Yaskawa Controls Company, Ltd., a Japanese company, granting
Yaskawa an exclusive right to market and manufacture the Company's
products developed for use in electrical vehicle charging
systems.***
(m) Sales and Marketing Agreement, dated May 17, 1997, between the
Company and Yaskawa Controls Company, Ltd., a Japanese company,
granting Yaskawa exclusive sales and marketing rights to the
Company's full line of commercial electrical protection devices,
including "Fire Shield", "Shock Shield" and "Electra Shield".***
(23) Consents of Experts and Counsel:
(a) Consent of Independent Certified Public Accountants. *****
* Previously filed with and as part of the Registrant's Registration
Statement on Form S-1 (No. 33-24647).
** Previously filed with and as a part of the Registrant's Registration
Statement on Form S-1 (No. 33-31967).
*** Previously filed with and as part of the Registrant's Annual Report
on Form 10-K.
**** Previously filed with and as part of the Registrant's Post-Effective
Amendment No. 1 to Form S-1 (No. 33-31967)
***** Filed herewith.
-22-
Independent Auditors' Report
----------------------------
The Board of Directors and Stockholders
Technology Research Corporation:
We have audited the consolidated financial statements of Technology Research
Corporation and subsidiary as listed in the accompanying index. In connection
with our audits of the consolidated financial statements, we also have audited
the financial statement schedule as listed in the accompanying index. These
consolidated financial statements and financial statement schedule are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these consolidated financial statements and financial statement
schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the consolidated 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, 1998 and 1997, and the results of
their operations and their cash flows for each of the years in the three-year
period ended March 31, 1998 in conformity with generally accepted accounting
principles. Also in our opinion, the related financial statement schedule,
when considered in relation to the basic consolidated financial statements
taken as a whole, present fairly, in all material respects, the information set
forth therein.
KPMG PEAT MARWICK LLP
St. Petersburg, Florida
May 1, 1998
F-1
TECHNOLOGY RESEARCH CORPORATION
AND SUBSIDIARY
Consolidated Balance Sheets
March 31, 1998 and 1997
Assets 1998 1997
Current assets: ---- ----
Cash and cash equivalents $ 1,153,798 1,307,567
Short-term investments (note 2) 1,033,902 3,031,013
Accounts receivable, less allowance for doubtful accounts of
$64,700 in 1998 and $69,500 in 1997 (note 6) 2,711,056 2,304,449
Income tax receivable 253,019 178,130
Inventories (notes 3 and 6) 5,325,409 5,142,768
Prepaid expenses and other current assets 235,595 178,972
Deferred income taxes (note 4) 406,100 411,400
---------- ----------
Total current assets 11,118,879 12,554,299
---------- ----------
Property, plant and equipment (notes 5 and 6) 9,033,808 6,817,411
Less accumulated depreciation (4,476,692) (3,859,909)
---------- ----------
Net property, plant and equipment 4,557,116 2,957,502
---------- ----------
Deferred income taxes (note 4) 55,928 102,120
Other assets 14,895 24,028
---------- ----------
70,823 126,148
---------- ----------
$ 15,746,818 15,637,949
========== ==========
Liabilities and Stockholders' Equity
Current liabilities:
Current installments of debt (note 6) $ 2,525,100 652,999
Trade accounts payable 1,216,624 1,607,116
Accrued expenses:
Compensation 372,218 260,261
Other 83,645 36,288
Dividends payable 45,613 346,490
---------- ----------
Total current liabilities 4,243,200 2,903,154
Debt, excluding current installments (note 6) 131,250 206,250
---------- ----------
Total liabilities 4,374,450 3,109,404
---------- ----------
Stockholders' equity (note 7):
Common stock, $.51 par value. Authorized
10,000,000 shares; issued and outstanding
5,332,571 in 1998 and 1997 2,719,611 2,719,611
Additional paid-in capital 7,411,581 7,411,581
Retained earnings 1,241,176 2,397,353
---------- ----------
Total stockholders' equity 11,372,368 12,528,545
---------- ----------
Commitments and contingencies (notes 8, 10 and 11)
$ 15,746,818 15,637,949
========== ==========
See accompanying notes to consolidated financial statements.
F-2
TECHNOLOGY RESEARCH CORPORATION
AND SUBSIDIARY
Consolidated Statements of Income
Years ended March 31, 1998, 1997 and 1996
1998 1997 1996
Operating revenues: ---- ---- ----
Net sales (note 9) $ 18,101,785 15,003,594 16,581,301
Royalties 329,166 381,977 797,920
---------- ---------- ----------
18,430,951 15,385,571 17,379,221
---------- ---------- ----------
Operating expenses:
Cost of sales 13,265,505 10,255,597 10,685,614
Selling, general, and administrative 4,023,205 3,458,872 2,734,096
Research, development, and engineering 1,223,422 1,147,630 975,568
---------- ---------- ----------
18,512,132 14,862,099 14,395,278
---------- ---------- ----------
Operating income (loss) (81,181) 523,472 2,983,943
---------- ---------- ----------
Other income (deductions):
Interest and sundry income 131,727 206,944 262,623
Interest expense (136,380) (33,274) (41,967)
Gain on foreign exchange 191 - -
---------- ---------- ----------
(4,462) 173,670 220,656
---------- ---------- ----------
Income (loss) before income taxes (85,643) 697,142 3,204,599
Income taxes (note 4) 110,671 130,484 1,165,814
---------- ---------- ----------
Net income (loss) $ (196,314) 566,658 2,038,785
========== ========== ==========
Basic earnings (loss) per share $ (.04) .11 .39
==== ==== ====
Diluted earnings (loss) per share $ (.04) .10 .38
==== ==== ====
Weighted average number of common and
equivalent shares outstanding:
Basic 5,332,571 5,321,698 5,281,932
Diluted 5,332,571 5,441,620 5,404,885
========== ========== ==========
See accompanying notes to consolidated financial statements.
F-3
TECHNOLOGY RESEARCH CORPORATION
AND SUBSIDIARY
Consolidated Statements of Stockholders' Equity
Years ended March 31, 1998, 1997 and 1996
Retained
Additional earnings Total
Common stock paid-in (accumulated stockholders'
Shares Amount capital deficit) equity
Balances at ------ ------ ------- ------- ------
March 31, 1995: 5,246,278 $ 2,675,398 7,322,923 2,340,267 12,338,588
Exercise of stock
options via exchange
of 113 common shares
and cash of $124,870
for 72,737 new common
shares 72,624 37,039 87,831 - 124,870
Dividends - - - (1,270,681) (1,270,681)
Net income - - - 2,038,785 2,038,785
--------- --------- --------- --------- ----------
Balances at
March 31, 1996:
5,318,902 2,712,437 7,410,754 3,108,371 13,231,562
Exercise of stock
options via exchange
of 667 common shares
and cash of $8,001 for
14,336 new common
shares 13,669 7,174 827 - 8,001
Dividends - - - (1,277,676) (1,277,676)
Net income - - - 566,658 566,658
--------- --------- --------- --------- ----------
Balances at
March 31, 1997: 5,332,571 2,719,611 7,411,581 2,397,353 12,528,545
Dividends - - - (959,863) (959,863)
Net loss - - - (196,314) (196,314)
--------- --------- --------- --------- ----------
Balances at
March 31, 1998: 5,332,571 $ 2,719,611 7,411,581 1,241,176 11,372,368
========= ========= ========= ========= ==========
See accompanying notes to consolidated financial statements.
F-4
TECHNOLOGY RESEARCH CORPORATION
AND SUBSIDIARY
Consolidated Statements of Cash Flows
Years ended March 31, 1998, 1997 and 1996
1998 1997 1996
Cash flows from operating activities: ---- ---- ----
Net income (loss) $ (196,314) 566,658 2,038,785
Adjustments to reconcile net income (loss)
to net cash provided by (used in)
operating activities:
Accretion of interest (114,825) (185,977) (216,814)
Allowance for doubtful accounts (4,800) (14,500) (23,000)
Depreciation and amortization 622,219 494,292 493,201
Loss on sale of equipment - - 107
Decrease (increase) in
accounts receivable (401,807) 317,203 751,574
Decrease (increase) in inventories (182,641) 83,994 (1,280,737)
Increase in prepaid expenses and
other current assets (56,623) (84,767) (57,342)
Increase in income taxes receivable (74,889) (178,130) -
Decrease in deferred income taxes 51,492 90,480 64,000
Decrease (increase) in other assets 3,697 (23,505) 52,812
Increase (decrease) in
accounts payable (390,492) 370,525 (491,741)
Increase (decrease) in
accrued expenses 159,314 77,505 (11,133)
Decrease in income taxes payable - (991) (84,500)
--------- --------- ---------
Net cash provided by (used in)
operating activities (585,669) 1,512,787 1,235,212
--------- --------- ---------
Cash flows from investing activities:
Maturities of short-term investments 3,112,000 5,190,000 4,832,000
Purchases of short-term investments (1,000,064) (3,950,338) (5,957,756)
Capital expenditures for property,
plant and equipment (2,216,397) (1,030,145) (599,028)
Proceeds from sale of equipment - - 8,002
--------- --------- ---------
Net cash provided by (used in)
investing activities (104,461) 209,517 (1,716,782)
--------- --------- ---------
Cash flows from financing activities:
Net borrowings under line-of-credit
agreement 1,872,101 577,899 -
Principal payments on mortgage
note payable (75,000) (75,000) (75,000)
Proceeds from exercise of
stock options and warrants - 8,001 124,870
Dividends paid (1,260,740) (1,267,238) (934,629)
--------- --------- ---------
Net cash provided by (used in)
financing activities 536,361 (756,338) (884,759)
--------- --------- ---------
Net increase (decrease) in cash and
cash equivalents (153,769) 965,966 (1,366,329)
Cash and cash equivalents at
beginning of year 1,307,567 341,601 1,707,930
--------- --------- ---------
Cash and cash equivalents at end of year $ 1,153,798 1,307,567 341,601
========= ========= =========
Supplemental cash flow information:
Cash paid for interest $ 136,380 33,274 41,967
========= ========= =========
Cash paid for income taxes $ 134,068 219,125 1,186,314
========= ========= =========
See accompanying notes to consolidated financial statements.
F-5
TECHNOLOGY RESEARCH CORPORATION
AND SUBSIDIARY
Notes to Consolidated Financial Statements
March 31, 1998, 1997 and 1996
(1) Summary of Significant Accounting Policies
(a) Description of Business
Technology Research Corporation and subsidiary (the Company) is engaged in the
design, development, manufacturing, and marketing of electronic control and
measurement devices related to the distribution of electrical power and
specializes in electrical safety products that prevent electrical fires and
protect against electrocution and serious injury from electrical shock. The
Company's corporate headquarters are located in Clearwater, Florida. During
February 1997, 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 beginning in April 1997. The Company primarily sells its
products to governmental entities and original equipment manufacturers involved
in a variety of industries including business machinery and personal care
appliances. 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 9 for further
information on major customers. The Company also licenses its technology for
use by others in exchange for a royalty or product purchases. Licensees are
located in Australia, France, Italy, Japan, the United Kingdom and the United
States.
(b) Use of Estimates
Management of the Company has made a number of estimates and assumptions
relating to the reporting of assets and liabilities and the disclosure of
contingent assets and liabilities to prepare these financial statements in
conformity with generally accepted accounting principles. Actual results could
differ from those estimates.
(c) Foreign Currency Translation
The U.S. dollar is the functional currency of the Honduran subsidiary. Foreign
currency denominated assets and liabilities of this subsidiary are translated
at the rates of exchange at the balance sheet date. Income and expense items
are translated at average monthly rates of exchange. Gains and losses from
foreign currency transactions of this subsidiary are included in operations.
(d) Financial Instruments
The Company believes the book value of its financial instruments (short-term
investments, accounts receivable, trade accounts payable, accrued expenses,
dividends payable, income taxes receivable and payable and debt) approximate
their fair value due to their short-term nature or with respect to debt, the
interest rate appropriately reflects the credit risk.
F-6
TECHNOLOGY RESEARCH CORPORATION
AND SUBSIDIARY
Notes to Consolidated Financial Statements
(e) 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.
(f) Cash Equivalents
For purposes of the statements of cash flows, the Company considers all short-
term investments purchased with a maturity of three months or less to be cash
equivalents. There were no short-term investments considered cash equivalents
at March 31, 1998 or 1997.
(g) Short-Term Investments
The Company considers all of its short-term investments to be "held-to-
maturity," and therefore, are recorded at amortized cost.
(h) Revenue Recognition
Sales and cost of sales related to governmental contracts are recognized under
the unit-of-delivery method, whereby sales and cost of sales are recorded as
units are delivered. All other sales and cost of sales are recognized as
product is shipped. The Company accrues minimum royalties due over the related
royalty period. Royalties earned in excess of minimum royalties due are
recognized as reported by the licensees.
(i) Impairment of Long-Lived Assets and
Long-Lived Assets to Be Disposed Of
The Company reviews long-lived assets and certain identifiable intangibles
whenever events or changes in circumstances indicate that the carrying amount
of an asset may not be recoverable. Recoverability of assets to be held and
used is measured by a comparison of the carrying amount of an asset to future
net cash flows expected to be generated by the asset. If such assets are
considered to be impaired, the impairment to be recognized is measured by the
amount by which the carrying amount of the assets exceed the fair value of the
assets. Assets to be disposed of are reported at the lower of the carrying
amount or fair value, less costs to sell.
(j) Inventories
Inventories are stated at the lower of cost or market. Cost is determined
using the first-in, first-out method.
F-7
TECHNOLOGY RESEARCH CORPORATION
AND SUBSIDIARY
Notes to Consolidated Financial Statements
(k) Property, Plant and equipment
Property, plant and equipment are stated at cost. Depreciation is calculated
on the straight-line method over the estimated useful lives of the assets.
(l) Income Taxes
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss 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.
(m) Stock-Based Compensation
Prior to April 1, 1996, the Company accounted for its stock option plan in
accordance with the provisions of Accounting Principles Board Opinion No. 25
(APB 25), Accounting for Stock Issued to Employees, and related
interpretations. As such, compensation expense would be recorded on the date
of grant only if the current market price of the underlying stock exceeded the
exercise price. On April 1, 1996, the Company adopted Statement of Financial
Accounting Standards No. 123 (SFAS 123), Accounting for Stock-Based
Compensation, which permits entities to recognize as expense over the vesting
period the fair value of all stock-based awards on the date of grant.
Alternatively, SFAS 123 also allows entities to continue to apply the
provisions of APB 25 and provide pro forma net income and pro forma earnings
per share disclosures for employee stock option grants made in 1995 and future
years as if the fair-value-based method defined in SFAS 123 had been applied.
The Company has elected to continue to apply the provisions of APB 25 and
provide the pro forma disclosure provisions of SFAS 123 (see note 7).
(n) Earnings Per Share
The Company calculates basic and diluted earning (loss) per share in accordance
with SFAS 128, Earnings Per Share, which is effective for periods ending after
December 15, 1997. SFAS 128 replaces the presentation of primary earnings per
share and fully diluted earnings per share previously found in APB 15, Earnings
Per Share with basic earnings per share and diluted earnings per share.
Basic earnings per share has been computed by dividing net income by the
weighted average number of common shares outstanding. Common share equivalents
included in the dilutive weighted average shares outstanding computation
represent shares issuable upon assumed exercise of stock options and
convertible debt which would have a dilutive effect in years where there are
earnings.
F-8
TECHNOLOGY RESEARCH CORPORATION
AND SUBSIDIARY
Notes to Consolidated Financial Statements
(o) Year 2000
The Company has developed a plan to deal with the Year 2000 problem and has
begun converting its computer systems to be Year 2000 compliant. The plan
provides for the conversion efforts to be completed by the end of 1999. The
Year 2000 problem is the result of computer programs being written using two
digits rather than four to define the applicable year. The total cost of the
project is being funded through operating cash flows. The Company is expensing
all costs associated with these system changes as the costs are incurred.
(2) Short-Term Investments
The Company considers all of its investment securities to be held-to-maturity.
These securities are all classified in short-term investments on the
consolidated balance sheets and mature within one year. The amortized cost,
gross unrealized holding gains, gross unrealized holding losses, and fair value
for held-to-maturity securities at March 31, 1998 and 1997 were as follows:
Gross unrealized
Amortized holding Fair
cost Gains Losses value
---- ----- ------ -----
March 31, 1998 -
U.S. Treasury securities $ 1,033,902 - - 1,033,902
========= ====== ====== =========
March 31, 1997 -
U.S. Treasury securities $ 3,031,013 - - 3,031,013
========= ====== ====== =========
(3) Inventories
Inventories at March 31, 1998 and 1997 consist of:
1998 1997
---- ----
Raw materials $ 4,499,524 3,138,639
Work in process 387,170 1,309,312
Finished goods 438,715 694,817
--------- ---------
$ 5,325,409 5,142,768
========= =========
At March 31, 1998, approximately 27% of inventories were located in Honduras.
At March 31, 1997, approximately 16% of inventories were located in China.
F-9
TECHNOLOGY RESEARCH CORPORATION
AND SUBSIDIARY
Notes to Consolidated Financial Statements
(4) Income Taxes
The tax effects of temporary differences that give rise to significant portions
of the deferred tax assets and deferred tax liabilities at March 31, 1998 and
1997 are presented below:
1998 1997
---- ----
Deferred tax assets:
Accounts receivable, principally due to
allowance for doubtful accounts $ 23,300 25,000
Inventories, principally due to valuation
allowance for financial reporting purposes
and additional costs inventoried for
tax purposes 252,500 281,000
Accrued expenses, principally due to accrual
for financial reporting purposes 65,600 41,000
Net operating loss carryforwards 182,000 249,000
Tax credit carryforwards 214,000 214,000
-------- --------
Total gross deferred tax assets 737,400 810,000
Less valuation allowance (187,000) (187,000)
-------- --------
550,400 623,000
-------- --------
Deferred tax liabilities:
Property, plant and equipment, principally
due to differences in depreciation (88,372) (106,000)
Other - (3,480)
-------- --------
(88,372) (109,480)
-------- --------
Net deferred tax assets $ 462,028 513,520
======== ========
Net deferred tax assets are included in the accompanying balance sheets at
March 31, 1998 and 1997 as:
1998 1997
---- ----
Deferred income taxes, current asset $ 406,100 411,400
Deferred income taxes, noncurrent asset 55,928 102,120
-------- --------
$ 462,028 513,520
======== ========
F-10
TECHNOLOGY RESEARCH CORPORATION
AND SUBSIDIARY
Notes to Consolidated Financial Statements
Management assesses the likelihood deferred tax assets will be realized which
is dependent upon the generation of taxable income during the periods in which
those temporary differences are deductible. Management considers historical
taxable income, the scheduled reversal of deferred tax liabilities, projected
future taxable income, and tax planning strategies in making this assessment.
In order to fully realize the deferred tax asset related to net operating loss
and tax credit carryforwards, the Company will need to generate future taxable
income of approximately $170,000 each year prior to the expiration of the net
operating loss and tax credit carryforwards in 2003 and 2002, respectively.
Based upon the level of historical taxable income and projections for future
taxable income, management believes it will realize the benefits of these
deductible differences, net of the existing valuation allowance at March 31,
1998. The valuation allowance at March 31, 1998 and 1997 relates to tax credit
carryforwards which management expects to expire unused.
At March 31, 1998, the Company has net operating loss carryforwards for Federal
income tax purposes of approximately $476,000, which are available to offset
future taxable income through 2003. The Company also has available tax credit
carryforwards for Federal income tax purposes of approximately $214,000, which
are available to offset future Federal income taxes through 2002. As a result
of an ownership change in 1989, the Internal Revenue Code limits the income tax
benefit of net operating loss and tax credit carryforwards to approximately
$65,000 each year.
Income tax expense for the years ended March 31, 1998, 1997 and 1996 consists
of:
1998 1997 1996
---- ---- ----
Current:
Federal $ 59,179 156,748 936,214
State - (116,744) 165,600
-------- -------- ---------
59,179 40,004 1,101,814
-------- -------- ---------
Deferred:
Federal 48,600 77,000 55,000
State 2,892 13,480 9,000
-------- -------- ---------
51,492 90,480 64,000
-------- -------- ---------
$ 110,671 130,484 1,165,814
======== ======== =========
F-11
TECHNOLOGY RESEARCH CORPORATION
AND SUBSIDIARY
Notes to Consolidated Financial Statements
Income tax expense for the years ended March 31, 1998, 1997 and 1996 differs
from the amounts computed by applying the Federal income tax rate of 34% to
pretax income as a result of the following:
1998 1997 1996
---- ---- ----
Computed expected tax (benefit) expense $ (29,000) 237,000 1,090,000
Increase (reduction) in income taxes
resulting from:
Foreign losses for which no
income tax benefit has been
provided 128,000 - -
State income taxes, net of
Federal income tax benefit 2,000 (68,000) 115,000
Other 9,671 (38,516) (39,186)
-------- -------- ---------
$ 110,671 130,484 1,165,814
======== ======== =========
The operating results of the foreign manufacturing subsidiary are not subject
to foreign tax since it is operating under a tax holiday for at least twenty
years. The foreign operations resulted in losses for the year ended March 31,
1998 of approximately $375,000 because of the tax holiday. No tax benefit of
the loss has been provided.
(5) Property, Plant and equipment
Property, plant and equipment at March 31, 1998 and 1997 consists of:
Estimated
1998 1997 useful lives
---- ---- ------------
Building and improvements $ 1,512,205 1,458,716 20 years
Machinery and equipment 7,521,603 5,358,695 5 - 15 years
--------- --------- ------------
$ 9,033,808 6,817,411
========= =========
Approximately 20% of property, plant and equipment is located in Honduras.
F-12
TECHNOLOGY RESEARCH CORPORATION
AND SUBSIDIARY
Notes to Consolidated Financial Statements
(6) Debt
Debt at March 31, 1998 and 1997 consists of the following:
1998 1997
---- ----
$2,500,000 line of credit, interest at LIBOR plus 200
basis points (7.69% at March 31, 1998); payable
monthly, due September 1998; secured by receivables,
inventories and equipment (subject to provisions
stated below) $ 2,450,100 577,999
First mortgage note payable; interest at LIBOR plus 200
basis points at March 31, 1998 and prime at March 31,
1997 (7.69% at March 31, 1998 and 1997); due in
monthly installments of $6,250, plus interest, matures
December 2000; secured by operating facility 206,250 281,250
--------- ---------
Total debt 2,656,350 859,249
Less current installments (2,525,100) (652,999)
--------- ---------
Debt, excluding current installments $ 131,250 206,250
========= =========
Borrowings under the line of credit are limited to 80% of eligible accounts
receivable under 90 days, plus the lesser of 40% of eligible inventory or
$450,000. The line of credit is secured by receivables, inventories, and
equipment, and requires the Company to maintain certain financial ratios and a
minimum tangible net worth amount.
The aggregate maturities of long-term debt are:
Year ending March 31,
---------------------
1999 $ 2,525,100
2000 75,000
2001 56,250
---------
$ 2,656,350
=========
F-13
TECHNOLOGY RESEARCH CORPORATION
AND SUBSIDIARY
Notes to Consolidated Financial Statements
(7) Stock Options, Grants and Warrants
The Company has two qualified incentive stock option plans, one performance
incentive stock option plan, and one nonqualified stock option plan (the
Plans). Options granted under the Plans are granted to directors, officers and
employees at fair value and expire ten years after the date of grant. Except
for the Performance Plan, options granted under the Plans generally vest over
three years. Options granted under the Performance Plan vest at the end of
year ten but are subject to accelerated vesting if certain targets are met.
Options may be exercised by payment of cash or with stock of the Company owned
by the officer or employee.
Option transactions and other information relating to the Plans for the three
years ended March 31, 1998 are as follows:
Qualified Performance Non-
incentive incentive qualified Weighted
stock stock stock average
option option option exercise
plans plan plan Total price
------- ------- ------- --------- --------
Outstanding at March 31, 1995 220,456 - 181,428 401,884 $ 3.04
Granted 9,800 - 29,474 39,274 5.44
Exercised (58,737) - (14,000) (72,737) 1.64
Canceled (67,866) - - (67,866) 4.31
------- ------- ------- --------- --------
Outstanding at March 31, 1996 103,653 - 196,902 300,555 3.91
Granted 50,750 400,000 10,000 460,750 5.08
Exercised (6,002) - (8,334) (14,336) 0.75
Canceled (1,234) - - (1,234) 5.46
------- ------- ------- --------- --------
Outstanding at March 31, 1997 147,167 400,000 198,568 745,735 4.70
Granted 1,000 - - 1,000 4.31
Canceled (14,020) - (2,000) (16,020) 5.29
------- ------- ------- --------- --------
Outstanding at March 31, 1998 134,147 400,000 196,568 730,715 4.34
======= ======= ======= ========= ========
Total number of options available
under the plans 713,334 400,000 333,333 1,446,667
======= ======= ======= =========
Exercisable at March 31, 1998 90,068 - 189,635 279,703 3.13
======= ======= ======= =========
Available for issue
at March 31, 1998 8,384 - 28,541 36,925
======= ======= ======= =========
The per share weighted average fair value of stock options granted during 1998
and 1997 was $1.85 and $2.14, respectively, on the date of grant using the
Black Scholes option pricing model, with the following assumptions: (1) risk
free interest rate - 6.17% to 6.85%, (2) expected life - 6.5 to 10 years, (3)
expected volatility - 72% to 75%, and (4) expected dividends - 5.1% to 5.8%.
F-14
TECHNOLOGY RESEARCH CORPORATION
AND SUBSIDIARY
Notes to Consolidated Financial Statements
At March 31, 1998, the range of exercise prices and weighted average remaining
contractual life of options outstanding and exercisable was as follows:
Options Outstanding Options Exercisable
- ------------------------------------------------- ----------------------------
Number Weighted average Weighted Number Weighted
Range of outstanding remaining average exercisable average
exercise as of contractual exercise as of exercise
prices March 31, 1998 life price March 31, 1998 price
- -------- ------------- -------------- --------- -------------- --------
$4.13 - $5.53 134,147 6.86 5.19 90,068 5.38
$5.12 400,000 8.25 5.12 400,000 5.12
$ .75 8,334 3.61 .75 8,334 .75
$1.31 - $1.37 145,766 .65 1.36 145,766 1.36
$4.88 - $5.53 42,468 7.49 5.33 35,535 5.33
The Company grants options at fair value and applies APB 25 in accounting for
its Plans. Accordingly, no compensation cost has been recognized for stock
options in the financial statements. Had the Company determined compensation
cost based on the fair value at the grant date for its stock options under SFAS
123, the Company's net income at March 31, 1998 and 1997 would have been
reduced to the pro forma amounts indicated below:
1998 1997 1996
---- ---- ----
Net income (loss):
As reported $ (196,314) 566,658 2,038,785
========= ========= =========
Pro forma $ (223,516) 476,123 2,016,755
========= ========= =========
Income (loss) per common share:
As reported $ (.04) .10 .38
==== ==== ====
Pro forma $ (.04) .09 .37
==== ==== ====
Pro forma net income reflects only options granted in 1998, 1997 and 1996.
Therefore, the full impact of calculating compensation costs for stock options
under SFAS 123 is not reflected in the pro forma net income amounts presented
above because compensation cost is reflected over the options' vesting period
of three to ten years, and compensation costs for options granted prior to
April 1, 1995 are not considered.
The Company has also reserved 32,667 shares of its common stock for issuance to
employees or prospective employees at the discretion of the Board of Directors
of which 16,033 shares are available for future issue. There were no reserved
shares issued during the years ended March 31, 1998, 1997 or 1996.
F-15
TECHNOLOGY RESEARCH CORPORATION
AND SUBSIDIARY
Notes to Consolidated Financial Statements
(8) Leases
The Company leases the land on which its operating facility is located. This
operating lease is for a period of twenty years through 2001 with options to
renew for two additional ten-year periods. The lease provides for rent
adjustments every five years. The Company is responsible for payment of taxes,
insurance, and maintenance. In the event the Company elects to terminate the
lease, title to all structures on the land reverts to the lessor. The
Company's subsidiary leases its operating facility in Honduras. This operating
lease is for five years through the year 2002, with an option to renew for an
additional five-year term. The Company also leases certain office equipment
under long-term operating lease agreements.
Future minimum lease payments under noncancelable operating leases as of March
31, 1998 are:
Year ending March 31,
---------------------
1999 $ 249,000
2000 243,000
2001 224,000
2002 206,000
Thereafter 17,000
--------
Total minimum lease payments $ 939,000
========
Rental expense for all operating leases was approximately $76,000 in 1998,
$80,000 in 1997 and $56,000 in 1996.
(9) 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.
Significant customers which accounted for 10% or more of sales and aggregate
exports were:
Year ended March 31
-------------------
Customer 1998 1997 1996
-------- ---- ---- ----
Xerox Corporation $ 2,838,905 2,529,398 1,686,421
Noma Appliance & Electric, Inc.,
f/k/a Fleck Manufacturing, Inc.
(a Xerox Corporation supplier) 1,666,516 1,776,424 2,358,887
Other Xerox Corporation suppliers 133,044 802,800 2,474,142
Fermont Division 2,817,079 - -
--------- --------- ---------
$ 7,455,544 5,108,622 6,519,450
F-16
TECHNOLOGY RESEARCH CORPORATION
AND SUBSIDIARY
Notes to Consolidated Financial Statements
Year ended March 31
-------------------
Customer 1998 1997 1996
-------- ---- ---- ----
Exports:
Canada $ 1,894,215 1,831,898 2,367,890
Far East 486,277 1,057,605 1,967,494
Europe 2,554,772 1,396,823 1,750,257
Mexico 979,187 736,992 569,845
Australia 218,530 150,760 438,875
South America 20,994 82,838 -
Middle East 3,397 5,324 -
--------- --------- ---------
Total exports $ 6,157,372 5,262,240 7,094,361
========= ========= =========
(10) Benefit Plan
The Company's 401(k) plan covers all employees with one year of service who are
at least twenty-one years old. The Company matches employee contributions
dollar-for-dollar up to $300. Total Company contributions were approximately
$29,000 in 1998, $25,000 in 1997 and $19,000 in 1996.
(11) Litigation
The Company is involved in various other claims and legal actions arising in
the ordinary course of business. In the opinion of management, the ultimate
disposition of these matters will not have a material adverse effect on the
Company's consolidated financial position, results of operations or liquidity.
F-17
TECHNOLOGY RESEARCH CORPORATION
AND SUBSIDIARY
Notes to Consolidated Financial Statements
(12) Selected Quarterly Data (Unaudited)
Information (unaudited) related to operating revenues, operating income, net
income and earnings per share, by quarter, for the years ended March 31, 1998
and 1997 are:
First Second Third Fourth
quarter quarter quarter quarter
------- ------- ------- -------
Year ended March 31, 1998:
Operating revenues $ 4,811,585 4,545,950 4,658,113 4,415,303
========= ========= ========= =========
Gross profit $ 1,488,247 1,336,956 1,140,074 871,003
========= ========= ========= =========
Operating income (loss) $ 467,494 106,385 (145,509) (509,551)
========= ========= ========= =========
Net income (loss) $ 326,315 74,019 (130,444) (466,204)
========= ========= ========= =========
Basic earnings per share $ .06 .01 (.02) (.09)
==== ==== ==== ====
Diluted earnings per share $ .06 .01 (.02) (.09)
==== ==== ==== ====
Year ended March 31, 1997:
Operating revenues $ 3,377,467 3,688,927 3,879,627 4,439,550
========= ========= ========= =========
Gross profit $ 974,406 1,189,761 1,072,710 1,511,120
========= ========= ========= =========
Operating income $ 58,541 255,499 168,095 41,337
========= ========= ========= =========
Net income $ 71,027 301,917 144,073 49,641
========= ========= ========= =========
Basic earnings per share $ .01 .05 .03 .01
==== ==== ==== ====
Diluted earnings per share $ .01 .05 .03 .01
==== ==== ==== ====
The fourth quarter of the year ended March 31, 1998 was adversely affected by
an approximately $270,000 reduction in inventory as a result of the Company's
physical inventory. It is not practicable to determine what, if any, other
quarters are affected by this adjustment.
F-18
TECHNOLOGY RESEARCH CORPORATION
AND SUBSIDIARY
Schedule II
Valuation and Qualifying Accounts
Years ended March 31, 1998, 1997 and 1996
Additions
----------------------
Balances at Charged to Charged to Balances
beginning costs and other at end of
Description of period expenses accounts Deductions period
----------- ---------- ---------- ---------- ---------- ---------
Allowance for
doubtful accounts:
Year ended
March 31, 1998 $ 69,500 - - 4,800 64,700
======= ===== ===== ====== ======
Year ended
March 31, 1997 $ 84,000 - - 14,500 69,500
======= ===== ===== ====== ======
Year ended
March 31, 1996 $ 107,000 - - 23,000 84,000
======= ===== ===== ====== ======
F-19
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
TECHNOLOGY RESEARCH CORPORATION
Dated: 6/27/1998 By: /s/ Robert S. Wiggins
Robert S. Wiggins
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons in the capacities and
on the dates indicated:
Signature Title Date
Chairman, Chief Executive
Officer, and Director
/s/ Robert S. Wiggins 6/27/1998
Robert S. Wiggins
/s/ Raymond H. Legatti President and Director 6/26/1998
Raymond H. Legatti
/s/ Edmund F. Murphy, Jr. Director 6/23/1998
Edmund F. Murphy, Jr.
/s/ Jerry T. Kendall Director 6/17/1998
Jerry T. Kendall
Senior Vice President
Government Operations
and Marketing and
/s/ Raymond B. Wood Director 6/26/1998
Raymond B. Wood
-23-
Consent of Independent Certified Public Accountants
---------------------------------------------------
The Board of Directors
Technology Research Corporation:
We consent to incorporation by reference in the registration statements
(Nos. 33-62379 and No. 33-62397) on Form S-8 of Technology Research
Corporation of our report dated May 1, 1998, relating to the consolidated
balance sheets of Technology Research Corporation and subsidiary as of
March 31, 1998 and 1997, and the related consolidated statements of income,
stockholders' equity and cash flows for each of the years in the three-year
period ended March 31, 1998, and related schedule, which report appears in the
March 31, 1998, annual report on Form 10-K of Technology Research Corporation.
KPMG Peat Marwick LLP
St. Petersburg, Florida
June 25, 1998
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