UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
DC 20549
FORM
10-K
(Mark One)
SECURITIES
EXCHANGE ACT OF 1934
For
the fiscal year ended September 30, 2009 or
SECURITIES
EXCHANGE ACT OF 1934
For the
transition period from _______________________ to
______________________.
Commission
File Number 1-9789
TECH/OPS
SEVCON, INC.
(Exact
name of registrant as specified in its charter)
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Delaware
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04-2985631
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(State
or other jurisdiction of incorporation or organization)
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(I.R.S.
Employer Identification No.)
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155
Northboro Road, Southborough, Massachusetts 01772
(Address
of Principal Executive
Offices) (Zip
Code)
Registrant's
Area Code and Telephone Number (508) 281 5510
Securities
registered pursuant to Section 12(b) of the Act:
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(Title of Each Class)
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(Name
of Exchange on Which Registered)
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COMMON STOCK, PAR VALUE $.10 PER SHARE
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NASDAQ
CAPITAL MARKET
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Securities
registered pursuant to Section 12(g) of the Act: None
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act.
Yes o No
x
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act.
Yes o No
x
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
o
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding
12 months (or for such shorter period that the registrant was required to submit
and post such files). Yes o No o
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
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer or a smaller reporting company. See
the definitions of “large accelerated filer”, “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act.
|
Large
accelerated filer o
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Accelerated
filer o
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Non-accelerated
filer o
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Smaller
reporting company x
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|
(Do
not check if a smaller reporting company)
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Securities Exchange Act of 1934). Yes o No x
As of
March 28, 2009, 3,326,322 common shares were outstanding, and the aggregate
market value of the common shares (based upon the closing price on the Nasdaq
Stock Market) held by non-affiliates was $3,650,000. As of December 2, 2009,
3,326,322 common shares were outstanding.
Documents
incorporated by reference: Portions of the Proxy Statement for Annual Meeting of
Stockholders to be held January 26, 2010 are incorporated by reference into Part
III of this report.
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ITEM
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PAGE
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1. BUSINESS
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3
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3
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3
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3
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4
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4
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4
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4
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4
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1A. RISK FACTORS
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4
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2. PROPERTIES
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5
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5
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5
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6
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12
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18
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31
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32
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9A(T). CONTROLS AND PROCEDURES
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32
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32
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33
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33
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33
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33
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34
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34
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35
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II Reserves
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39
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Schedules
other than the one referred to above have been omitted as inapplicable or not
required, or the information is included elsewhere in financial statements or
the notes thereto.
Unless
explicitly stated otherwise, each reference to “year” in this Annual Report is
to the fiscal year ending on the respective September 30.
- 2
-
ITEM 1 BUSINESS
Tech/Ops
Sevcon, Inc. (“Tech/Ops Sevcon” or the “Company”) is a Delaware corporation
organized on December 22, 1987 to carry on the electronic controls business
previously performed by Tech/Ops, Inc. (Tech/Ops). Through wholly-owned
subsidiaries located in the United States, England, France, South Korea and
Japan, the Company designs and sells, under the Sevcon name, microprocessor
based controls for zero emission and hybrid electric vehicles. The controls are
used to vary the speed and movement of vehicles, to integrate specialized
functions and to prolong the shift life of vehicles’ power source. The Company’s
customers are manufacturers of on-road, off-road and industrial vehicles
including automobiles, buses, fork lift trucks, aerial lifts, mining vehicles,
airport ground support vehicles, utility vehicles, sweepers and other battery
powered vehicles. In fiscal 2009, the Company became increasingly involved in
developing products for the on-road electric vehicle market. Over the past three
years, the Company has outsourced the manufacturing of its controllers to
independent subcontractors headquartered in Poland and the U.S.; the U.S.
subcontractor has plants in Mexico and China in which the Company’s product is
manufactured. Through another subsidiary located in the United Kingdom, Tech/Ops
Sevcon manufactures special metalized film capacitors for electronics
applications. These capacitors are used as components in the power electronics,
signaling and audio equipment markets. Approximately 92% of the Company’s
revenues in 2009 were derived from the controls business and 8% from the
capacitor business. The largest customer accounted for 14% of sales in fiscal
2009 compared to 13% in fiscal 2008.
In fiscal
2009, sales totaled $20,339,000 compared to $39,219,000 in the previous year.
Foreign currency fluctuations accounted for a decrease of $2,175,000 in reported
sales. Excluding the foreign currency impact, sales volumes decreased by 43%
compared to fiscal 2008. There was an operating loss of $1,866,000 in fiscal
2009 compared to an operating income of $1,174,000 in the previous year. There
was a net loss for the year after income taxes of $1,475,000, or $.46 per
diluted share, compared to net income after income taxes of $804,000, or $.25
per diluted share, last year. See Management’s Discussion and Analysis of
Financial Condition and Results of Operations for a more detailed analysis of
fiscal 2009 performance.
Sales are
made primarily through a full-time marketing staff. Sales in the United States
were $10,787,000 and $15,953,000 or 53% and 41% of total sales respectively in
fiscal years 2009 and 2008. Approximately 53% of sales are made to 10
manufacturers of electric vehicles in the United States, Europe and the Far
East. See Note 8 to the Consolidated Financial Statements (Segment Information)
in this Annual Report for an analysis of sales by segment, geographic location
and major customers, and the risk factors on page 4 regarding sales and
operations outside the United States, which are incorporated by reference
herein.
· Patents
Although
the Company has international patent protection for some of its product ranges,
the Company believes that its business is not significantly dependent on patent
protection. The Company is primarily dependent upon technical competence, the
quality of its products, and its prompt and responsive service
performance.
· Backlog
Tech/Ops
Sevcon's backlog at September 30, 2009 was $3,691,000 and $5,349,000 at
September 30, 2008, a reduction of 31%.
Tech/Ops
Sevcon's products require a wide variety of components and materials. The
Company has many sources for most of such components and materials. However, the
Company relies principally on two main suppliers for all of its requirements for
certain components, sub-assemblies, and finished products: Fideltronik in Poland
and Keytronic in the U.S. In respect of Keytronic, the Company’s components are
manufactured at two separate plants, in Mexico and China. The Company is taking
steps to reduce its reliance on any single subcontractor and, as a consequence,
to diversify its risk.
The
Company has global competitors which are divisions of larger public companies,
including Danaher’s Motion division, Sauer Danfoss, Hitachi and the motors
division of General Electric. It also competes on a worldwide basis with Curtis
Instruments Inc., Zapi SpA. and Iskra, private companies based in U.S., Italy
and Slovenia, respectively, that have international operations. In addition,
some large fork lift truck manufacturers make their own controls and system
products. The Company differentiates itself by providing highly reliable,
technically innovative products, which the Company is prepared to customize for
a specific customer or application. The Company believes that it is one of the
largest independent suppliers of controls for electrically powered and hybrid
vehicles.
Tech/Ops
Sevcon's technological expertise is an important factor in its business. The
Company regularly pursues product improvements to maintain its technical
position. Research and development expenditures amounted to $2,643,000 in 2009,
compared to $3,802,000 in 2008. Of the reduction in reported research and
development expense of $1,159,000 in fiscal 2009, $530,000 was due to favorable
foreign currency fluctuations and $629,000 was due to reduced expenditure
overall as a result of the adverse global economic situation.
The
Company complies, to the best of its knowledge, with federal, state and local
provisions which have been enacted or adopted regulating the discharge of
materials into the environment or otherwise protecting the environment. This
compliance has not had, nor is it expected to have, a material effect on the
capital expenditures, earnings, or competitive position of Tech/Ops Sevcon. In
fiscal 2009 the Company achieved accreditation to ISO14001 the international
standard for Environmental Management Systems.
Information
about our executive officers is incorporated by reference from Part III,
Item 10 of this report.
As of
September 30, 2009, the Company employed 96 full-time employees, of whom 13 were
in the United States, 72 were in the United Kingdom (of which 25 were employed
by the capacitor business), 8 were in France, and 3 were in the Far East.
Tech/Ops Sevcon believes its relations with its employees are good.
In
addition to the market risk factors relating to foreign currency and interest
rate risk set out in Item 7A on page 12, the Company believes that the following
represent the most significant risk factors for the Company:
Capital
markets are cyclical and weakness in the United States and international
economies will harm our business
The
Company’s customers are mainly manufacturers of capital goods such as
automobiles, buses, fork lift trucks, aerial lifts and railway signaling
equipment. These markets are cyclical and depend heavily on worldwide
transportation, shipping and other economic activity. They are currently
experiencing a significant decline in demand. Further, as our business has
expanded globally, we have become increasingly subject to the risks arising from
adverse changes in global economic conditions. Economic growth in the United
States and other principal economies has slowed and macroeconomic conditions
have deteriorated worldwide, causing a general tightening in the credit markets,
lower levels of liquidity, increases in the rates of default and bankruptcy, and
extreme volatility in credit and equity markets. These developments have already
had an adverse impact on the Company’s business and may materially negatively
affect the Company’s business, operating results or financial condition in a
number of additional ways. For example, current or potential customers may be
unable to fund purchases or manufacturing of products, which could cause them to
delay, decrease or cancel purchases of our products or not to pay the Company or
to delay paying for previously purchased products. In addition, the effect of
the crisis on the Company’s banks and other banks may cause the Company to lose
its current overdraft facilities and be unable otherwise to obtain financing for
operations as needed.
The
Company relies on a small number of key customers for a substantial portion of
its revenues
Ten
customers accounted for 53% of the Company’s revenues in fiscal 2009 and the
largest customer accounted for 14% of revenues. Although we have had business
relationships with these customers for many years, there are no long-term
contractual supply agreements in place. Accordingly our performance could be
adversely affected by the loss of one or more of these key
customers.
The
Company has substantial sales and operations outside the United States that
could be adversely affected by changes in international markets
A
significant portion of our operations and business are outside the United
States. Accordingly, our performance could be adversely affected by economic
downturns in Europe or the Far East as well as in the United States. A
consequence of significant international business is that a large percentage of
our revenues and expenses are denominated in foreign currencies that fluctuate
in value versus the U.S. Dollar. Significant fluctuations in foreign exchange
rates can and do have a material impact on our financial results, which are
reported in U.S. Dollars. Other risks associated with international business
include: changing regulatory practices and tariffs; staffing and managing
international operations, including complying with local employment laws; longer
collection cycles in certain areas; and changes in tax and other
laws.
Single
source materials and sub-contractors may not meet the Company’s
needs
The
Company relies on certain suppliers and sub-contractors for its requirements for
most components, sub-assemblies and finished products. In the event that such
suppliers and sub-contractors are unable or unwilling to continue supplying the
Company, or to meet the Company’s cost and quality targets or needs for timely
delivery, there is no certainty that the Company would be able to establish
alternative sources of supply in time to meet customer demand.
Damage
to the Company’s or sub-contractors’ buildings would hurt results
In the
electronic controls segment the majority of the Company’s finished product is
produced in three separate plants in Poland, Mexico and China; these plants are
owned by sub-contractors. The capacitor business is located in a single plant in
Wales. In the event that any of these plants was to be damaged or destroyed,
there is no certainty that the Company would be able to establish alternative
facilities in time to meet customer demand. The Company does carry property
damage and business interruption insurance but this may not cover certain lost
business due to the long-term nature of the relationships with many
customers.
Product
liability claims may have a material adverse effect
The
Company’s products are technically complex and are installed and used by third
parties. Defects in their design, installation, use or manufacturing may result
in product liability claims against the Company. Such claims may result in
significant damage awards, and the cost of any such litigation could be
material.
The U.S.
subsidiary of the Company leases approximately 13,500 square feet in
Southborough, Mass., under a lease expiring in 2013. The United Kingdom (U.K.)
electronic controls business of Tech/Ops Sevcon is carried on in two adjacent
buildings owned by it located in Gateshead, England, containing 40,000 and
20,000 square feet of space, respectively. The land on which these buildings
stand is held on ground leases expiring in 2068 and 2121, respectively. The U.K.
subsidiary sub-lets approximately 11,000 square feet of unused space in one of
its buildings for a five-year term expiring in 2011. The capacitor subsidiary of
the Company owns a 9,000 square foot building, built in 1981, in Wrexham, Wales.
The properties and equipment of the Company are in good condition and, in the
opinion of the management, are suitable and adequate for the Company's
operations.
ITEM 3 LEGAL PROCEEDINGS
None.
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS
None.
ITEM 5 MARKET FOR THE REGISTRANT'S COMMON EQUITY, RELATED
STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
On
October 1, 2008, the Company moved its listing from the American Stock Exchange
to the NASDAQ Capital Market. The Company’s Common Stock trades under the symbol
TO. A summary of the market prices of, and dividends paid on, the Company’s
Common Stock is shown below. At December 2, 2009, there were approximately 183
shareholders of record.
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Quarter
1
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Quarter
2
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Quarter
3
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Quarter
4
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Year
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||||||||||||||||
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2009
Quarters
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||||||||||||||||||||
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Cash
dividends per share
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$ | - | $ | - | $ | - | $ | - | $ | - | ||||||||||
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Common
stock price per share-High
-Low
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$ |
5.08
1.93
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$ |
3.99
1.33
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$ |
2.73
1.11
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$ |
3.81
2.03
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$ |
5.08
1.11
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||||||||||
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2008
Quarters
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||||||||||||||||||||
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Cash
dividends per share
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$ | .03 | $ | .03 | $ | .03 | $ | .03 | $ | .12 | ||||||||||
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Common
stock price per
share -
High
-
Low
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$ |
9.07
6.30
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$ |
8.43
5.75
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$ |
8.55
6.30
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$ |
6.75
4.00
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$ |
9.07
4.00
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||||||||||
While the
Company has paid regular quarterly dividends in the past, due to the uncertain
economic outlook, the Board of Directors suspended the payment of dividends
beginning in the first quarter of 2009 and will consider whether to resume
paying dividends on a quarter by quarter basis.
ITEM 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
FORWARD
LOOKING STATEMENTS
Statements
in this discussion and analysis about the Company’s anticipated financial
results and growth, as well as those about the development of its products and
markets, are forward-looking statements that involve risks and uncertainties
that could cause actual results to differ materially from those projected. These
include the risks discussed in Item 1A to this Annual Report, entitled ‘Risk
Factors’, and others discussed in this report.
CRITICAL
ACCOUNTING ESTIMATES
The
Company's significant accounting policies are summarized in Note 1 of its
Consolidated Financial Statements in this Annual Report. While these significant
accounting policies impact the Company’s financial condition and results of
operations, certain of these policies require management to use a significant
degree of judgment and/or make estimates, consistently with generally accepted
accounting principles, that affect the reported amounts of assets and
liabilities and disclosures of contingent assets and liabilities as of the date
of the financial statements and the reported amounts of income and expenses
during the reporting periods. Since these are judgments and estimates, they are
sensitive to changes in business and economic realities, and events may cause
actual operating results to differ materially from the amounts derived from
management’s estimates and judgments.
The
Company believes the following represent the most critical accounting judgments
and estimates affecting its reported financial condition and results of
operations:
Bad
Debts
The
Company estimates an allowance for doubtful accounts based on known factors
related to the credit risk of each customer and management’s judgment about the
customer’s business. Ten customers account for approximately 53% of the
Company’s sales. At September 30, 2009, the allowance for bad debts amounted to
$92,000, which represented 3% of receivables.
Because
of the Company’s long term relationships with the majority of its customers, in
most cases, the principal bad debt risk to the Company arises from the
insolvency of a customer rather than its unwillingness to pay. In addition, in
certain cases the Company maintains credit insurance covering up to 90% of the
amount outstanding from specific customers. The Company also carries out some of
its foreign trade, particularly in the Far East, using letters of
credit.
The
Company reviews all accounts receivable balances on a regular basis,
concentrating on any balances that are more than 30 days overdue, or where there
is an identified credit risk with a specific customer. A decision is taken on a
customer-by-customer basis as to whether a bad debt reserve is considered
necessary based on the specific facts and circumstances of each account. In
general, the Company would reserve 100% of the receivable, net of any
recoverable value added taxes or insurance coverages, for a customer that
becomes insolvent or files for bankruptcy, and lesser amounts for less imminent
defaults. To a lesser degree, the Company maintains a small bad debt reserve to
cover the remaining balances based on historical default
percentages.
If the
financial condition of any of the Company's customers is worse than estimated or
were to deteriorate, resulting in an impairment of its ability to make payments,
the Company’s results may be adversely affected and additional allowances may be
required. With the exception of a significant loss of $562,000 in fiscal 2001
relating to one U.S. customer, credit losses have not been significant in the
past ten years.
Inventories
Inventories
are valued at the lower of cost or market. Inventory costs include materials and
overhead, and are relieved from inventory on a first-in, first-out basis. The
Company carries out a significant amount of customization of standard products
and also designs and manufactures special products to meet the unique
requirements of its customers. This results in a significant proportion of the
Company’s inventory being customer specific. The Company’s reported financial
condition includes a provision for estimated slow-moving and obsolete inventory
that is based on a comparison of inventory levels with forecast future demand.
Such demand is estimated based on many factors, including management judgments,
relating to each customer’s business and to economic conditions. The Company
reviews in detail all significant inventory items with holdings in excess of
estimated normal requirements. It also considers the likely impact of changing
technology. It makes an estimate of the provision for slow moving and obsolete
stock on an item-by-item basis based on a combination of likely usage based on
forecast customer demand, potential sale or scrap value and possible alternative
use. This provision represents the difference between original cost and market
value at the end of the financial period. In cases where there is no estimated
future use for the inventory item and there is no estimated scrap or resale
value, a 100% provision is recorded. Where the Company estimates that only part
of the total holding of an inventory item will not be used, or there is an
estimated scrap, resale or alternate use value, then a proportionate provision
is recorded. Once an item has been written down, it is not subsequently revalued
upwards. The provision for slow moving and obsolete inventories at September 30,
2009 was $600,000, or 11% of the original cost of gross inventory. If actual
future demand or market conditions are less favorable than those projected by
management, or if product designs change more quickly than forecast, additional
inventory write-downs may be required, which may have a material adverse impact
on reported results.
Warranty
Costs
The
Company provides for the estimated cost of product warranties at the time
revenue is recognized. While the Company engages in product quality programs and
processes, the Company's warranty obligation is affected by product failure
rates and repair or replacement costs incurred in correcting a product failure.
Accordingly, the provision for warranty costs is based upon anticipated
in-warranty failure rates and estimated costs of repair or replacement.
Anticipating product failure rates involves making difficult judgments about the
likelihood of defects in materials, design and manufacturing errors, and other
factors that are based in part on historical failure rates and trends, but also
on management’s expertise in engineering and manufacturing. Estimated repair and
replacement costs are affected by varying component and labor costs. Should
actual product failure rates and repair or replacement costs differ from
estimates, revisions to the estimated warranty liability may be required and the
Company’s results may be materially adversely affected. In the event that the
Company discovers a product defect that impacts the safety of its products, then
a product recall may be necessary, which could involve the Company in
substantial unanticipated expense significantly in excess of the reserve. There
were no significant safety related product recalls during the past three fiscal
years.
Goodwill
Impairment
At
September 30, 2009, the Company’s balance sheet reflected $1,435,000 of goodwill
relating to the controls business. The Company carries out an annual assessment
to determine if its goodwill has been impaired. The assessment is based on three
separate methods of valuing the controls business based on expected free cash
flows, the market price of the Company’s stock and an analysis of precedent
transactions. These valuation methods require estimates of future revenues,
profits, capital expenditures and working capital requirements which are based
on evaluation of historical trends, current budgets, operating plans and
industry data. Based on all of these valuation methods, management concluded in
2009 that the goodwill had not been impaired. If, in future periods, the
Company’s results of operations, cash flows or the market price of the Company’s
stock were to decrease significantly, then it may be necessary to record an
impairment charge relating to goodwill of up to $1,435,000.
Pension
Plan Assumptions
The
Company makes a number of assumptions relating to its pension plans in order to
measure the financial position of the plans and the net periodic benefit cost.
The most significant assumptions relate to the discount rate, the expected long
term return on plan assets and the rate of future compensation increase. If
these assumptions prove to be incorrect then the Company may need to record
additional expense or liabilities relating to the pension plans, which could
have a material effect on the Company’s financial position and results of
operations. At September 30, 2009 there was a pension liability on the Company’s
balance sheet of $7,166,000. The Company’s pension plans are significant
relative to the size of the Company. At September 30, 2009, pension plan assets
were $14,375,000, plan liabilities were $21,541,000, and the total assets of the
Company were $16,810,000. In accordance with FASB guidance, changes in the
funded status of the pension plans (plan assets less plan liabilities) are
recorded in the Company’s balance sheet and could have a material effect on the
Company’s financial position.
In common
with most other defined benefit pension plans in the U.S. and U.K, there has
been a significant deterioration during the fiscal year in the funded status of
the Company’s pension plans. The funded status of the Company’s defined benefit
pension plans deteriorated from a deficit of $378,000 at September 30, 2008 to a
deficit of $7,166,000 at September 30, 2009. The increase in this liability was
due to several factors, including, a reduction in the weighted average discount
rate from 6.89% at September 30, 2008 to 5.65% at September 30, 2009 and, in
addition, a reduction in the value of pension plan assets due to the current
economic climate.
The table
below sets out the approximate impact on the funded status of the Company’s
pension plans at September 30, 2009 that the Company estimates would arise from
the following respective changes in significant plan assumptions:
|
Plan
Assumption
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Change
in Assumption
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Impact
on Funded Status
(in
thousands of dollars)
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Change
in funded status
|
|
Assumptions
impacting accumulated benefit obligation:
|
|||
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Discount
rate
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0.1%
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$ 509
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7%
|
|
Inflation
rate
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0.1%
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369
|
5%
|
|
Salary
Increase
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0.5%
|
652
|
9%
|
|
Mortality
rate
|
1
year
|
479
|
7%
|
· A) Results of
Operations
2009
compared to 2008
The
following table compares the fiscal 2009 results, for both the controls and
capacitor segments, with the prior year, showing separately the percentage
variances due to currency exchange rate changes and volume.
|
(in
thousands of dollars except percentages)
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||||||||||||||||||||
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%
change due to:
|
||||||||||||||||||||
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2009
|
2008
|
Total
|
Currency
|
Volume
|
||||||||||||||||
|
Sales
|
||||||||||||||||||||
|
Controls - to external
customers
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$ | 18,783 | $ | 37,280 | -50 | % | -5 | % | -45 | % | ||||||||||
|
Capacitors- to external
customers
|
1,556 | 1,939 | -20 | % | -23 | % | 3 | % | ||||||||||||
|
Capacitors -
inter-segment
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37 | 45 | -18 | % | -23 | % | 5 | % | ||||||||||||
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Capacitors – total
|
1,593 | 1,984 | -20 | % | -23 | % | 3 | % | ||||||||||||
|
Total sales to external
customers
|
20,339 | 39,219 | -48 | % | -5 | % | -43 | % | ||||||||||||
|
Gross
Profit
|
||||||||||||||||||||
|
Controls
|
6,321 | 13,074 | -52 | % | -5 | % | -47 | % | ||||||||||||
|
Capacitors
|
701 | 700 | 0 | % | -29 | % | 29 | % | ||||||||||||
|
Total
|
7,022 | 13,774 | -49 | % | -6 | % | -43 | % | ||||||||||||
|
Selling
research and administrative expenses and restructuring
charge
|
||||||||||||||||||||
|
Controls
|
7,531 | 10,556 | -29 | % | -10 | % | -19 | % | ||||||||||||
|
Capacitors
|
637 | 884 | -28 | % | -10 | % | -18 | % | ||||||||||||
|
Restructuring
charge
|
356 | 700 | -49 | % | -8 | % | -41 | % | ||||||||||||
|
Unallocated corporate
expense
|
364 | 460 | -21 | % | 0 | % | -21 | % | ||||||||||||
|
Total
|
8,888 | 12,600 | -29 | % | -12 | % | -17 | % | ||||||||||||
|
Operating
income (loss)
|
||||||||||||||||||||
|
Controls
|
(1,528 | ) | 1,818 | -184 | % | 38 | % | -222 | % | |||||||||||
|
Capacitors
|
26 | (184 | ) | -114 | % | 3 | % | -117 | % | |||||||||||
|
Unallocated corporate
expense
|
(364 | ) | (460 | ) | -21 | % | 0 | % | -21 | % | ||||||||||
|
Total
|
(1,866 | ) | 1,174 | -259 | % | 58 | % | -317 | % | |||||||||||
|
Other
income and expense
|
(201 | ) | 63 | -419 | % | -508 | % | 89 | % | |||||||||||
|
Income
(loss) before income taxes
|
(2,067 | ) | 1,237 | -267 | % | 30 | % | -297 | % | |||||||||||
|
Provision
(benefit) for income taxes
|
592 | (433 | ) | -237 | % | 24 | % | -261 | % | |||||||||||
|
Net
income (loss)
|
$ | (1,475 | ) | $ | 804 | -283 | % | 33 | % | -316 | % | |||||||||
The
Company’s products in the controls segment are used in electric vehicles to
efficiently convert the electrical energy from the power source and control its
use by the electric motors. The Company’s main customers in this segment
manufacture electric vehicles for on-road, off-road and industrial applications
including, construction, distribution, mining, airport ground support and
utility applications. As a result of reduced activity in these sectors due to
the global economic environment during the year, some of the Company’s customers
saw between 60% and 85% reduction in demand for new vehicles. This led to the
substantial reduction in output by these vehicle manufacturers and a
corresponding weakness in demand for the Company’s products that was both broad
and deep in several application areas.
In fiscal
2009 sales revenues were $20,339,000, a decrease of $18,880,000, or 48%,
compared to fiscal 2008. In fiscal 2009 approximately 47% of the Company’s sales
were made outside the United States and were denominated in currencies other
than the U.S. Dollar, principally the Euro and the British Pound; accordingly,
those revenues are subject to fluctuation when translated into U.S. Dollars. In
fiscal 2009, the average U.S. Dollar exchange rate was 22% and 10% lower
compared to the British Pound and the Euro, respectively, than in fiscal 2008.
As a result, foreign currency sales denominated in British Pounds and Euros
translated into fewer U.S. Dollars. The overall impact to fiscal 2009 was that
reported sales decreased by $2,175,000, or 5%, due to currency rate changes.
Excluding the currency impact, volumes shipped in the controls business segment
were 45% lower than in fiscal 2008, with lower shipment volumes in all
geographic areas in which the Company operates. Volumes shipped in the United
States were lower in the aerial lift, fork lift truck, airport ground support
and other electric vehicle markets although shipments to the mining sector were
in line with last year. Volumes shipped in Europe and the Far East decreased
significantly due to lower demand across all sectors, geographic locations and
applications.
In the
capacitor business, reported sales to external customers decreased by $383,000,
or 20%, compared to fiscal 2008. Capacitor volumes shipped were $63,000, or 3%,
higher than last year due to higher demand in the railway signaling market;
however, this was more than offset by a $446,000, or 23% decrease, in revenues
due to currency exchange rate changes.
Management
believes that the worldwide activity in the construction and transportation
sectors is stabilizing at its present low levels and, therefore, does not
anticipate further significant deterioration in demand for the Company’s
products from its traditional customer base. In some sectors of the controls
business demand for the Company’s products increased in the fourth fiscal
quarter. These areas tended to be in new applications with new products and new
customers. It is too early in the development of these opportunities to say
whether they will have a material effect on future results.
Cost of
sales was $13,317,000 compared to $25,445,000 in fiscal 2008, a decrease of
$12,128,000. The reduction in cost of sales was due to the significant reduction
in volumes shipped in 2009 compared to the prior year.
Gross
profit was $7,022,000, or 34.5% of sales, compared to $13,774,000, or 35.1% of
sales, in fiscal 2008. Foreign currency fluctuations had a net adverse impact on
gross profit of $796,000. This was due to the strength of the U.S. Dollar
compared with the British Pound and the Euro, which had an adverse impact on
sales of $2,175,000 but which was partially offset by a favorable currency
impact on cost of sales of $1,379,000. In the controls segment, gross profit of
$6,321,000 was 52% behind last year; this compared to a decrease in volumes
shipped of 50%. In the capacitor segment gross profit was flat compared to
fiscal 2008 at $701,000, despite a reduction in reported sales of $383,000,
which was caused by foreign currency movements. Capacitor business gross profit
was 44.0% of sales in fiscal 2009 compared to 35.3% of sales in fiscal 2008. The
increase in the capacitor business gross profit percentage was mainly due to a
substantial increase in the proportion of sales to higher margin customers. The
table below analyzes the year-to-year change in sales, cost of sales and gross
profit.
|
(in
thousands of dollars except percentages)
|
||||||||||||||||
|
Sales
|
Cost
of sales
|
Gross
Profit
|
Gross
Profit
%
|
|||||||||||||
|
Actual
Fiscal 2008
|
$ | 39,219 | $ | 25,445 | $ | 13,774 | 35.1 | % | ||||||||
|
Change
in fiscal 2009 due to:
|
||||||||||||||||
|
Foreign currency
fluctuations
|
(2,175 | ) | (1,379 | ) | (796 | ) | (0.4 | %) | ||||||||
|
Decreased volume, assuming 2008
gross profit percentage
|
(16,705 | ) | (10,842 | ) | (5,863 | ) | - | |||||||||
|
Other cost of sales changes,
net
|
- | 93 | (93 | ) | (0.2 | %) | ||||||||||
|
Actual
Fiscal 2009
|
$ | 20,339 | $ | 13,317 | $ | 7,022 | 34.5 | % | ||||||||
Selling,
research and administrative expenses before the restructuring charge (operating
expenses) were $8,532,000, a decrease of $3,368,000, or 28%, compared to fiscal
2008. Favorable foreign currency fluctuations decreased reported operating
expenses by $1,440,000, or 12%. In fiscal 2009, expenditure on new product
engineering and selling expenses reduced by $629,000 and $585,000, respectively,
before the impact of currency fluctuations. However, management anticipates that
expenditure on new product engineering will increase in 2010 as a result of the
increase in activity. Administrative expenses, including corporate expense,
decreased by $714,000 before the impact of currency fluctuations. In April 2009,
to preserve cash and lower the costs of the business, the Company implemented a
10% salary and fee sacrifice for its employees and directors. This sacrifice was
still in place at the end of the fiscal year. This sacrifice lowered operating
costs by $310,000. The Company has restored salaries and fees to previous levels
in December 2009.
An
analysis of the year-to-year change in selling, research and administrative
expenses, before restructuring charges, is set out below:
|
Selling,
research and administrative expenses, before restructuring
charges
|
(in thousands of dollars) | |||
|
Reported
expense in fiscal 2009
|
$ | 8,532 | ||
|
Reported
expense in fiscal 2008
|
11,900 | |||
|
Decrease
in expense
|
(3,368 | ) | ||
|
Decrease
due to:
|
||||
|
Effect of exchange rate
changes
|
(1,440 | ) | ||
|
Lower research and sales and
marketing expense, net of currency effect
|
(1,214 | ) | ||
|
Lower administrative expense,
net of currency effect
|
(714 | ) | ||
|
Total
decrease in selling, research and administrative expenses, before
restructuring charges in fiscal 2009
|
$ | (3,368 | ) | |
The
Company incurred a restructuring charge of $356,000 in 2009 to reduce operating
expense in both the controls and the capacitor segments in response to the
severe economic downturn and the resultant lower demand for the Company’s
products. The program resulted in the termination of 23 employees across the
Company’s operations in the U.S., the U.K., France and Japan. The restructuring
charge comprised one-time employee severance costs, associated professional fees
and other costs relating to this program. In 2008, the Company incurred a
restructuring charge of $700,000 associated with the closure of the residual
manufacturing operations in the U.K. controls business and a reduction in staff
in the capacitor business segment. The restructuring charge, taken in the third
quarter of fiscal 2008, comprised employee severance costs and associated
professional fees relating to this program. These actions followed a review of
the controls business segment which identified an opportunity to significantly
reduce ongoing manufacturing costs through further reliance on subcontractors to
manufacture the Company’s products. The program, which was completed in June
2008, resulted in the termination of 36 employees in the controls business and 5
employees in the capacitor business.
There was
an operating loss of $1,866,000 in fiscal 2009 compared to operating income of
$1,174,000 in fiscal 2008, a decrease of $3,040,000. Foreign currency
fluctuations helped reduce the reported operating loss by $687,000 in fiscal
2009. Excluding the currency effect, operating income decreased by $3,727,000
compared to fiscal 2008, mainly due to the significant reduction in sales
volumes shipped partly offset by lower operating expenses. The controls business
reported an operating loss of $1,528,000 compared to an operating income in 2008
of $1,818,000. Foreign currency fluctuations helped reduce the reported
operating loss by $692,000 in fiscal 2009. Operating income in the capacitor
business was $26,000 compared with an operating loss of $184,000 in fiscal 2008.
The operating loss in fiscal 2008 in the capacitor business was due to a
reduction in volumes shipped to high margin customers.
Other
income and expense was a net expense of $201,000 in fiscal 2009 compared to a
net income of $63,000 in the previous year. There was a foreign currency
exchange loss of $174,000, compared to a foreign currency exchange gain of
$163,000 in 2008.
Interest
expense was $81,000 which was $27,000 lower than the prior year. Interest income
in 2009 was $46,000 higher at $54,000 compared to $8,000 in fiscal
2008.
The loss
before income taxes in fiscal 2009 was $2,067,000 compared to income before
income taxes of $1,237,000 in 2008, a decrease of $3,304,000. Foreign currency
fluctuations reduced the pretax loss by $367,000 in fiscal 2009. The pre-tax
result, before the effect of currency fluctuations, was $3,671,000, lower than
the prior year. Income tax benefits were 28.6% of the pre-tax loss compared to
provisions of 35.0% of pretax income in fiscal 2008. The lower tax rate in
fiscal 2009 was mainly due to a valuation allowance of $379,000 against a
domestic deferred tax asset partly offset by $300,000 of foreign taxes recovered
as a result of additional tax relief from research and development expenditure
and the carry back of trading losses from prior years.
There was
a net loss after income taxes of $1,475,000 compared to net income of $804,000
last year, a reduction of $2,279,000. There was a basic and diluted loss per
share of $.46 in 2009 compared to income per share of $.25 in fiscal
2008.
· B) Liquidity and
Capital Resources
The
Company’s operating activities used $536,000 of cash during fiscal 2009 compared
with cash flow generated by operating activities for fiscal 2008 of $2,333,000.
Acquisitions of property, plant and equipment amounted to $243,000 compared to
$931,000 in fiscal 2008.
The
Company has, since January 1990, maintained a program of regular cash dividends
but, in December 2008, in order to preserve cash due to the uncertain economic
outlook, the Board of Directors suspended the payment of dividends and will
consider whether to resume paying dividends on a quarter by quarter basis. The
only dividend payment during fiscal 2009 was $98,000, or $.03 per share, which
was in respect of the dividend for the fourth quarter of fiscal 2008. In 2008,
quarterly dividend payments of $.03 per share amounted to $392,000.
Exchange
rate changes decreased cash by $121,000 in fiscal 2009 compared to a decrease of
$439,000 last year. As a result, in fiscal 2009, reported cash balances
decreased by $998,000, compared to an increase of $616,000 in 2008. At September
30, 2009 the Company’s cash balances were $632,000.
The main
changes in operating assets and liabilities in fiscal 2009 were a decrease in
accounts receivable of $3,230,000 and a decrease in accounts payable of
$1,567,000; both movements being due to the significant reduction in the
operating activity of the business in 2009 compared with 2008. Accrued expenses
decreased by $561,000 largely due to a reduction in operating expenses compared
to 2008 and accrued and deferred taxes on income reduced by $589,000, largely
due to the payment of income taxes from prior years in 2009.
The
Company has no short-term or long-term debt. It has overdraft facilities in the
United Kingdom amounting to $1,600,000 and in France of $146,000, which were
unused at September 30, 2009 and September 30, 2008. The overdraft facility of
the U.K. capacitor subsidiary company is secured by a legal charge over the
facility owned and occupied by that company. The overdraft facility of the U.K.
controls business is secured by a legal charge over a facility owned by that
company which is partly occupied by it and partly sub-let. Both facilities are
due for renewal in November 2010 but, in line with normal practice in Europe,
can be withdrawn on demand by the bank. The French overdraft facilities are
unsecured and are due for renewal in September 2010 but can also be withdrawn on
demand by the bank. Management believes that, if these facilities were
withdrawn, adequate alternative credit resources would be available. However,
this would depend on the Company’s situation and the economic environment at the
time. The Company owns real estate property in the U.K. that could be used as
collateral for raising additional borrowings, if appropriate.
There were no significant capital
expenditure commitments at September 30, 2009. The Company’s capital
expenditures are not expected, on average over a two to three year period, to
significantly exceed the depreciation charge, which averaged $667,000 over the
last three fiscal years. It is estimated that the Company will make
contributions to its U.K. and U.S. defined benefit pension plans of
approximately $634,000 in fiscal 2010; should the Company suffer a material
reduction in revenues in 2010 this commitment could adversely impact the
Company’s financial position. In the opinion of management, the Company’s
requirements for working capital to meet projected operational and capital
spending needs in both the short and long-term can be met by a combination of
existing cash resources, future earnings and existing borrowing facilities in
Europe. However, the outlook is uncertain, given the worldwide economic
deterioration. Any material reduction in revenues will have a materially adverse
impact on the Company’s financial position, which would be exacerbated if any of
the Company’s lenders withdraws or reduces available credit. If the Company is
unable to generate sufficient cash from operations and if the bank overdraft
facilities are withdrawn, the Company would need to raise additional debt or
equity capital from other sources to avoid significantly curtailing its business
and materially adversely affecting its results.
· C) Off balance
sheet arrangements
The
Company does not have any off balance sheet financing or
arrangements.
ITEM 7A QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
The
Company’s operations are sensitive to a number of market factors, any one of
which could materially adversely affect its results of operations in any given
year.
Foreign
currency risk
The
Company sells to customers throughout the industrialized world. In fiscal 2009
approximately 54% of the Company’s sales were made in U.S. Dollars, 22% were
made in British Pounds and 24% were made in Euros. In the controller business
the majority of the product is produced in three separate plants in Poland,
Mexico and China and cost of sales is incurred in a combination of British
Pounds, Euros and U.S. Dollars. This resulted in the Company’s sales and margins
being exposed to fluctuations due to the change in the exchange rates of the
U.S. Dollar, the British Pound and the Euro.
In
addition, the translation of the sales and income of foreign subsidiaries into
U.S. Dollars is subject to fluctuations in foreign currency exchange
rates.
Where
appropriate, the Company previously engaged in hedging activities to manage the
foreign exchange exposures related to forecast purchases and sales in foreign
currency and the associated foreign currency denominated receivables and
payables. The Company changed its policy during fiscal 2008 and ceased using
such hedges. The Company had no foreign currency derivative financial
instruments outstanding as of September 30, 2009.
The
following table provides information about the Company’s foreign currency
accounts receivable, accounts payable and firmly committed sales contracts as of
September 30, 2009. The information is provided in U.S. Dollar amounts, as
presented in the Company’s consolidated financial statements.
|
(in
thousands of dollars, except average contract rates)
|
||||||||
|
Expected
maturity or transaction date
|
||||||||
|
FY2010
|
Fair
Value
|
|||||||
|
On
balance sheet financial instruments:
|
||||||||
|
In $ U.S. Functional
Currency
|
||||||||
|
Accounts receivable in British
Pounds
|
381 | 381 | ||||||
|
Accounts receivable in
Euros
|
961 | 961 | ||||||
|
Accounts payable in British
Pounds
|
279 | 279 | ||||||
|
Accounts payable in
Euros
|
1,094 | 1,094 | ||||||
|
Anticipated
Transactions
|
||||||||
|
In $ U.S. Functional
Currency
|
||||||||
|
Firmly committed sales
contracts
|
||||||||
|
In British
Pounds
|
799 | 799 | ||||||
|
In Euros
|
456 | 456 | ||||||
Interest
Rate Risk
The
Company does not currently have any interest bearing debt. The Company does
invest surplus funds in instruments with maturities of less than 12 months at
both fixed and floating interest rates. The Company incurs short-term borrowings
from time-to-time on its overdraft facilities in Europe at variable interest
rates. Due to the short-term nature of the Company’s investments at September
30, 2009 the risk arising from changes in interest rates was not
material.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Tech/Ops
Sevcon, Inc. and Subsidiaries
September
30, 2009 and 2008
(in
thousands of dollars)
|
ASSETS
|
2009
|
2008
|
||||||
|
Current
assets:
|
||||||||
|
Cash and cash
equivalents
|
$ | 632 | $ | 1,630 | ||||
|
Receivables, net of allowances
for doubtful accounts of $92 in 2009 and $86 in 2008
|
3,383 | 7,087 | ||||||
|
Inventories
|
4,723 | 4,970 | ||||||
|
Prepaid expenses and other
current assets
|
1,398 | 862 | ||||||
|
Total
current assets
|
10,136 | 14,549 | ||||||
|
Property,
plant and equipment, at cost:
|
||||||||
|
Land and
improvements
|
22 | 25 | ||||||
|
Buildings and
improvements
|
1,955 | 2,166 | ||||||
|
Equipment
|
8,768 | 9,409 | ||||||
| 10,745 | 11,600 | |||||||
|
Less: accumulated depreciation
and amortization
|
7,874 | 8,053 | ||||||
|
Net
property, plant and equipment
|
2,871 | 3,547 | ||||||
|
Long-term
deferred tax assets
|
2,357 | 202 | ||||||
|
Goodwill
|
1,435 | 1,435 | ||||||
|
Other
long-term assets
|
11 | 22 | ||||||
|
Total
assets
|
$ | 16,810 | $ | 19,755 | ||||
|
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
||||||||
|
Current
liabilities:
|
||||||||
|
Accounts
payable
|
$ | 1,730 | $ | 3,713 | ||||
|
Dividend
payable
|
- | 98 | ||||||
|
Accrued
expenses
|
1,611 | 2,410 | ||||||
|
Accrued taxes on
income
|
- | 56 | ||||||
|
Total
current liabilities
|
3,341 | 6,277 | ||||||
|
Liability
for pension benefits
|
7,166 | 378 | ||||||
|
Other
long term liabilities
|
48 | 54 | ||||||
|
Total
liabilities
|
10,555 | 6,709 | ||||||
|
Commitments
and contingencies (note 6)
|
- | - | ||||||
|
Stockholders’
equity
|
||||||||
|
Preferred stock, par value $.10
per share - authorized - 1,000,000 shares; outstanding –
none
|
- | - | ||||||
|
Common stock, par value $.10
per share - authorized - 8,000,000 shares; outstanding
|
||||||||
|
3,326,322 shares in 2009 and
3,276,322 shares in 2008
|
333 | 328 | ||||||
|
Premium paid in on common
stock
|
5,033 | 4,881 | ||||||
|
Retained
earnings
|
6,889 | 8,364 | ||||||
|
Accumulated other comprehensive
loss
|
(6,000 | ) | (527 | ) | ||||
|
Total
stockholders’ equity
|
6,255 | 13,046 | ||||||
|
Total
liabilities and stockholders’ equity
|
$ | 16,810 | $ | 19,755 | ||||
The
accompanying notes are an integral part of these consolidated financial
statements.
Tech/Ops
Sevcon, Inc. and Subsidiaries
For the
Years ended September 30, 2009 and 2008
(in
thousands of dollars except per share data)
|
2009
|
2008
|
|||||||
|
Net
sales
|
$ | 20,339 | $ | 39,219 | ||||
|
Cost
of sales
|
13,317 | 25,445 | ||||||
|
Gross
profit
|
7,022 | 13,774 | ||||||
|
Selling,
research and administrative expenses
|
8,532 | 11,900 | ||||||
|
Restructuring
charge
|
356 | 700 | ||||||
|
Operating
income (loss)
|
(1,866 | ) | 1,174 | |||||
|
Interest
expense
|
(81 | ) | (108 | ) | ||||
|
Interest
income
|
54 | 8 | ||||||
|
Foreign
currency gain (loss)
|
(174 | ) | 163 | |||||
|
Income
(loss) before income taxes
|
(2,067 | ) | 1,237 | |||||
|
Provision
(benefit) for income taxes
|
(592 | ) | 433 | |||||
|
Net
income (loss)
|
$ | (1,475 | ) | $ | 804 | |||
|
Basic
income (loss) per share
|
$ | (.46 | ) | $ | .25 | |||
|
Diluted
income (loss) per share
|
$ | (.46 | ) | $ | .25 | |||
Tech/Ops
Sevcon, Inc. and Subsidiaries
For the
Years ended September 30, 2009 and 2008
(in
thousands of dollars)
|
2009
|
2008
|
|||||||
|
Net
income (loss)
|
$ | (1,475 | ) | $ | 804 | |||
|
Foreign
currency translation adjustment
|
(769 | ) | (1,001 | ) | ||||
|
Changes
in fair market value of cash flow hedges
|
- | (3 | ) | |||||
|
Pension
liability adjustment, net of tax
|
(4,704 | ) | 951 | |||||
|
Comprehensive
income (loss)
|
$ | (6,948 | ) | $ | 751 | |||
The
accompanying notes are an integral part of these consolidated financial
statements.
Tech/Ops
Sevcon, Inc. and Subsidiaries
For the
Years ended September 30, 2009 and 2008
(in
thousands of dollars except per share data)
|
Common
stock
|
Premium
paid
in on
common
stock
|
Retained
earnings
|
Unearned
compensation on restricted stock
|
Cumulative
other comprehensive income (loss)
|
Total
stockholders’ equity
|
|||||||||||||||||||
|
Balance
September 30, 2007
|
$ | 324 | $ | 4,623 | $ | 7,961 | $ | - | $ | (474 | ) | $ | 12,434 | |||||||||||
|
Net
income
|
804 | 804 | ||||||||||||||||||||||
|
Dividends
($.12 per share)
|
(392 | ) | (392 | ) | ||||||||||||||||||||
|
Currency
translation adjustment
|
(1,001 | ) | (1,001 | ) | ||||||||||||||||||||
|
Change
in fair market value of cash flow hedge
|
(3 | ) | (3 | ) | ||||||||||||||||||||
|
Issuance
of restricted stock
|
3 | (3 | ) | - | ||||||||||||||||||||
|
Exercise
of stock options
|
1 | 53 | 54 | |||||||||||||||||||||
|
Purchase
and retirement of common stock in connection with stock option
exercise
|
(9 | ) | (9 | ) | ||||||||||||||||||||
|
Equity
compensation expense
|
208 | 208 | ||||||||||||||||||||||
|
Pension
liability adjustment, net of tax charge of $437
|
951 | 951 | ||||||||||||||||||||||
|
Balance
September 30, 2008
|
$ | 328 | $ | 4,881 | $ | 8,364 | $ | - | $ | (527 | ) | $ | 13,046 | |||||||||||
|
Net
loss
|
(1,475 | ) | (1,475 | ) | ||||||||||||||||||||
|
Currency
translation adjustment
|
(769 | ) | (769 | ) | ||||||||||||||||||||
|
Issuance
of restricted stock
|
5 | (5 | ) | - | ||||||||||||||||||||
|
Equity
compensation expense
|
157 | 157 | ||||||||||||||||||||||
|
Pension
liability adjustment, net of tax benefit of $1,877
|
(4,704 | ) | (4,704 | ) | ||||||||||||||||||||
|
Balance
September 30, 2009
|
$ | 333 | $ | 5,033 | $ | 6,889 | $ | - | $ | (6,000 | ) | $ | 6,255 | |||||||||||
The
accompanying notes are an integral part of these consolidated financial
statements.
CONSOLIDATED
STATEMENTS OF CASH FLOWS
Tech/Ops
Sevcon, Inc. and Subsidiaries
For the
Years ended September 30, 2009 and 2008
(in
thousands of dollars)
|
2009
|
2008
|
|||||||
|
Cash
flow from operating activities:
|
||||||||
|
Net
income (loss)
|
$ | (1,475 | ) | $ | 804 | |||
|
Adjustments
to reconcile net income (loss) to net cash from operating
activities:
|
||||||||
|
Depreciation and
amortization
|
578 | 685 | ||||||
|
Stock-based
compensation
|
157 | 208 | ||||||
|
Pension contributions in excess
of pension expenses
|
(66 | ) | (367 | ) | ||||
|
Deferred tax
benefit
|
(162 | ) | (27 | ) | ||||
|
Increase (decrease) in cash
resulting from changes in operating assets and
liabilities:
|
||||||||
|
Receivables
|
3,230 | 1,459 | ||||||
|
Inventories
|
(86 | ) | 26 | |||||
|
Prepaid expenses and other
current assets
|
5 | (75 | ) | |||||
|
Accounts
payable
|
(1,567 | ) | 778 | |||||
|
Accrued
expenses
|
(561 | ) | (742 | ) | ||||
|
Accrued taxes on
income
|
(589 | ) | (416 | ) | ||||
|
Net
cash generated from (used by) operating activities
|
(536 | ) | 2,333 | |||||
|
Cash
flow used by investing activities:
|
||||||||
|
Acquisition of property, plant
and equipment
|
(243 | ) | (931 | ) | ||||
|
Net
cash used by investing activities
|
(243 | ) | (931 | ) | ||||
|
Cash
flow used by financing activities:
|
||||||||
|
Dividends paid
|
(98 | ) | (392 | ) | ||||
|
Exercise of stock
options
|
- | 45 | ||||||
|
Net cash used by financing
activities
|
(98 | ) | (347 | ) | ||||
|
Effect
of exchange rate changes on cash
|
(121 | ) | (439 | ) | ||||
|
Net
increase (decrease) in cash
|
(998 | ) | 616 | |||||
|
Beginning
balance - cash and cash equivalents
|
1,630 | 1,014 | ||||||
|
Ending
balance - cash and cash equivalents
|
$ | 632 | $ | 1,630 | ||||
|
Supplemental
disclosure of cash flow information:
|
||||||||
|
Cash paid for income
taxes
|
$ | 307 | $ | 832 | ||||
|
Cash paid for
interest
|
$ | 81 | $ | 108 | ||||
|
Supplemental
disclosure of non-cash financing activity:
|
||||||||
|
Dividend
declared
|
$ | - | $ | 98 | ||||
The
accompanying notes are an integral part of these consolidated financial
statements.
Tech/Ops
Sevcon, Inc. and Subsidiaries
(1)
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A.
Basis of presentation
Tech/Ops
Sevcon is a Delaware corporation organized on December 22, 1987 to carry on the
electronic controls business previously performed by Tech/Ops, Inc. (Tech/Ops).
Through wholly-owned subsidiaries located in the United States, England, France,
South Korea and Japan, the Company designs and sells, under the Sevcon name,
microprocessor based controls for zero emission and hybrid electric vehicles.
The controls are used to vary the speed and movement of vehicles, to integrate
specialized functions and to prolong the shift life of vehicles’ power source.
The Company’s customers are manufacturers of on-road, off-road and industrial
vehicles including automobiles, buses, fork lift trucks, aerial lifts, mining
vehicles, airport ground support vehicles, utility vehicles, sweepers and other
battery powered vehicles
The
accompanying consolidated financial statements include the accounts of Tech/Ops
Sevcon, Inc. (Tech/Ops Sevcon), Sevcon, Inc., Sevcon Limited and subsidiaries,
Sevcon SAS, Sevcon Asia Limited and Sevcon Japan KK. All material intercompany
transactions have been eliminated. Certain prior year amounts have been
reclassified to conform to the current year presentation.
B.
Revenue recognition
The
Company recognizes revenue upon shipment of its products. The Company’s only
post shipment obligation relates to warranty in the normal course of business
for which ongoing reserves, which management believes to be adequate, are
maintained. The movement in warranty reserves was as follows:
(in
thousands of dollars)
|
2009
|
2008
|
|||||||
|
Warranty
reserves at beginning of year
|
$ | 362 | $ | 458 | ||||
|
Decrease
in beginning balance for warranty obligations settled during the
year
|
(318 | ) | (178 | ) | ||||
|
Other
changes to pre-existing warranties
|
98 | - | ||||||
|
Foreign
currency translation adjustment
|
(29 | ) | - | |||||
|
Net
increase in warranty reserves for products sold during the
year
|
104 | 82 | ||||||
|
Warranty
reserves at end of year
|
$ | 217 | $ | 362 | ||||
C.
Research and development
The cost
of research and development programs is charged against income as incurred and
amounted to approximately $2,643,000 in 2009 and $3,802,000 in 2008. This
expense is included in selling, research and administrative expense in the
accompanying consolidated statements of operations. Research and development
expense was 13% of sales in 2009 and 9.7% of sales in 2008.
D.
Depreciation and maintenance
Plant and
equipment are depreciated on a straight-line basis over their estimated useful
lives, which are primarily fifty years for buildings, seven years for equipment
and four years for computer equipment and software. Maintenance and repairs are
charged to expense and renewals and betterments are capitalized.
E.
Stock based compensation plans
The
Company administers its 1996 Equity Incentive Plan (the “Equity Plan”) which
provides for the granting of stock options and restricted stock to officers, key
employees, consultants and non-employee directors of the Company. Stock based
compensation expense in fiscal 2009 was $157,000 and in fiscal 2008 was
$208,000.
As of
September 30, 2009 there were options to purchase 63,500 shares of the Company's
common stock outstanding under the Equity Plan, with a weighted average exercise
price of $7.03 per share. There were no stock option grants in fiscal 2009.
There have been no stock option grants under the Equity Plan since fiscal 2003.
Stock based compensation expense related to previously granted stock options was
$22,000 in fiscal 2009 and $25,000 in fiscal 2008. The fair value of each option
grant is estimated on the date of grant using the Black-Scholes option pricing
model. In 2003, when options were last granted, the following weighted average
assumptions were used: risk-free interest rate of 3%; expected dividend yield of
2.7%; expected life of 7 years and expected volatility of 47%. When options are
exercised the Company normally issues new shares.
Since
fiscal 2004 the Company has granted restricted stock on an annual basis to
certain officers, key employees and non-employee directors in exchange for
services provided to the Company over the vesting period of the stock. The
vesting period of the restricted stock (i.e. when the restrictions lapse) is
normally five years in respect of officers and key employees and one year in
respect of non-employee directors. For officers and key employees, the Company
recognizes compensation expense in respect of restricted stock grants on a
straight line basis over the vesting period of the restricted stock based on the
closing stock price on the grant date and an expected forfeiture rate of awards
of 4%. For non-employee directors, the Company recognizes compensation expense
in respect of restricted stock grants on a straight line basis over the vesting
period of the restricted stock based on the closing stock price on the grant
date. The restricted stock compensation expense was $135,000 in fiscal 2009 and
$183,000 in fiscal 2008.
F.
Income taxes
The
Company uses the liability method of accounting for income taxes. Under
the liability method, deferred tax assets and liabilities reflect the impact of
temporary differences between amounts of assets and liabilities for financial
reporting purposes and such amounts as measured under enacted tax laws. A
valuation allowance is required to offset any net deferred tax assets if, based
upon the available evidence, it is more likely than not that some or all of the
deferred tax asset will not be realized.
Tech/Ops
Sevcon files tax returns in the respective countries in which it operates. The
financial statements reflect the current and deferred tax consequences of all
events recognized in the financial statements or tax returns. See Note
4.
G.
Inventories
Inventories
are valued at the lower of cost or market. Inventory costs include materials,
direct labor and overhead, and are relieved from inventory on a first-in,
first-out basis. The Company’s reported financial condition includes a provision
for estimated slow-moving and obsolete inventory that is based on a comparison
of inventory levels with forecast future demand. Such demand is estimated based
on many factors, including management judgments, relating to each customer’s
business and to economic conditions. The Company reviews in detail all
significant inventory items with holdings in excess of estimated normal
requirements. It also considers the likely impact of changing technology. It
makes an estimate of the provision for slow moving and obsolete stock on an
item-by-item basis based on a combination of likely usage based on forecast
customer demand, potential sale or scrap value and possible alternative use.
This provision represents the difference between original cost and market value
at the end of the financial period. In cases where there is no estimated future
use for the inventory item and there is no estimated scrap or resale value, a
100% provision is recorded. Where the Company estimates that only part of the
total holding of an inventory item will not be used, or there is an estimated
scrap, resale or alternate use value, then a proportionate provision is
recorded. Once an item has been written down, it is not subsequently revalued
upwards. The reserve for slow moving and obsolete inventories at September 30,
2009 was $600,000, or 11% of gross inventory. At September 30, 2008 the reserve
was $582,000, or 10% of gross inventory. Inventories were comprised
of:
(in
thousands of dollars)
|
2009
|
2008
|
|||||||
|
Raw
materials
|
$ | 676 | $ | 930 | ||||
|
Work-in-process
|
141 | 96 | ||||||
|
Finished
goods
|
3,906 | 3,944 | ||||||
| $ | 4,723 | $ | 4,970 | |||||
H.
Accounts receivable
In the
normal course of business, the Company provides credit to customers, performs
credit evaluations of these customers, monitors payment performance, and
maintains reserves for potential credit losses in the allowance for doubtful
accounts which, when realized, have historically been within the range of the
Company’s reserves.
I.
Translation of foreign currencies
Tech/Ops
Sevcon translates the assets and liabilities of its foreign subsidiaries at the
current rate of exchange, and income statement accounts at the average exchange
rates in effect during the period. Gains or losses from foreign currency
translation are credited or charged to cumulative translation adjustment
included in the statement of comprehensive income and as a component of
accumulated other comprehensive loss in stockholders' equity in the consolidated
balance sheet. Foreign currency transaction gains and losses are shown in the
consolidated statements of operations.
J.
Derivative instruments and hedging
The
Company sells to customers throughout the industrialized world. In the controls
segment the majority of the Company’s product is produced in three separate
plants in Poland, Mexico and China. Approximately 54% of the Company’s sales are
made in U.S. Dollars, 22% are made in British Pounds and 24% are made in Euros.
Approximately 31% of the Company’s cost of sales is incurred in British Pounds
and 47% is incurred in Euros. This results in the Company’s sales and margins
being exposed to fluctuations due to the change in the exchange rates of U.S.
Dollar, the British Pound and the Euro.
Where
appropriate, the Company previously engaged in hedging activities to manage the
foreign exchange exposures related to forecast purchases and sales in foreign
currency and the associated foreign currency denominated receivables and
payables. The Company changed its policy during fiscal 2008 and ceased using
such hedges. The Company had no foreign currency derivative financial
instruments outstanding as of September 30, 2009.
K.
Cash equivalents and short-term investments
The
Company considers all highly liquid investments with a maturity of 90 days or
less to be cash equivalents. Highly liquid investments with maturities greater
than 90 days and less than one year are classified as short-term
investments.
Such
investments are generally money market funds, bank certificates of deposit, U.S.
Treasury bills and short-term bank deposits in Europe.
L.
Earnings (loss) per share
Basic and
diluted net income (loss) per common share for the two years ended September 30,
2009 are calculated as follows:
(in
thousands except per share data)
|
2009
|
2008
|
|||||||
|
Net
income (loss)
|
$ | (1,475 | ) | $ | 804 | |||
|
Weighted
average shares outstanding
|
3,241 | 3,210 | ||||||
|
Basic
income (loss) per share
|
$ | (.46 | ) | $ | .25 | |||
|
Common
stock equivalents
|
- | 29 | ||||||
|
Average
common and common equivalent shares outstanding
|
3,241 | 3,239 | ||||||
|
Diluted
income (loss) per share
|
$ | (.46 | ) | $ | .25 | |||
For 2009,
approximately 63,500 options to purchase common shares and 79,000 shares of
unvested restricted stock were excluded from the calculation of diluted earnings
per share as their inclusion would have been anti-dilutive because of the
Company’s reported net loss. For the 2008 year, approximately 63,500 options to
purchase common shares and 54,000 shares of unvested restricted stock were
excluded from the calculation of diluted earnings per share because the effect
was antidilutive.
M.
Use of estimates in the preparation of financial statements
The
presentation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosures of
contingent assets and liabilities as of the date of the financial statements and
the reported amounts of income and expenses during the reporting periods. The
most significant estimates and assumptions made by management include bad debt,
inventory and warranty reserves, goodwill impairment assessment, pension plan
assumptions and income tax assumptions. Operating results in the future could
vary from the amounts derived from management's estimates and
assumptions.
N.
Fair value of financial instruments
The
Company's financial instruments consist mainly of cash and cash equivalents,
short-term investments, accounts receivable and accounts payable. The carrying
amount of these financial instruments as of September 30, 2009, approximates
fair value due to the short-term nature of these instruments.
O.
Goodwill
The
amount by which the cost of purchased businesses included in the accompanying
financial statements exceeded the fair value of net assets at the date of
acquisition has been recorded as "goodwill". The Company assesses the carrying
value of this asset whenever events or changes in circumstances indicate that
this value has been impaired.
In
accordance with FASB accounting guidance regarding goodwill and other intangible
assets, the Company performs an annual assessment of goodwill impairment. The
Company has designated September 30 as the date it performs the annual review of
goodwill impairment; however, quarterly impairment tests have been completed at
each fiscal quarter end in fiscal 2009 starting with December 27 given the
adverse changes in the business climate and the resultant impact on our results
from operations. Goodwill impairment testing is performed at the segment (or
“reporting unit”) level. At September 30, 2009 and 2008, there was $1,435,000 of
goodwill on the balance sheet of the Company which related wholly to one
business segment, the controls segment.
In
evaluating our goodwill for impairment, we first compare the reporting unit’s
fair value to its carrying value. We estimate the fair value of the reporting
unit by considering (1) our market capitalization, (2) market multiple and
recent transaction values of similar companies and (3) projected discounted
future cash flows, if reasonably estimable. Key assumptions in the estimation of
projected discounted future cash flows include the use of an appropriate
discount rate, estimated future cash flows and estimated run rates of sales,
gross profit and operating expenses. In estimating future cash flows, the
Company incorporates expected growth rates, as well as other factors into its
revenue and expense forecasts. If the reporting unit’s fair value exceeds its
carrying value, no further testing is required. If, however, the reporting
unit’s carrying value exceeds its fair value, we then determine the amount of
the impairment charge, if any. We recognize an impairment charge if the carrying
value of the reporting unit’s goodwill exceeds its implied fair value. At
September 30, 2009, the estimated fair value of the reporting unit significantly
exceeded its carrying value under each method of calculation
performed.
P.
New Accounting Pronouncements
In June
2009, the FASB established the FASB Accounting Standards Codification (the
“Codification”) as the single source of authoritative U.S. GAAP recognized by
the FASB to be applied by nongovernmental entities. Rules and interpretive
releases of the SEC under authority of federal securities laws are also sources
of authoritative U.S. GAAP for SEC registrants. The Codification did not have an
impact on the Company’s financial position, results of operations or cash flows.
Accordingly, the Company’s notes to consolidated financial statements will
explain accounting concepts rather than cite the topics of specific U.S.
GAAP.
In
September 2006, the FASB issued authoritative guidance, which defines fair
value, establishes a framework for measuring fair value in generally accepted
accounting principles, and expands disclosures about fair value measurements.
This guidance does not require any new fair value measurements, but provides
guidance on how to measure fair value by providing a fair value hierarchy used
to classify the source of the information. In accordance with this guidance, we
have categorized our financial assets and liabilities, based on the priority of
the inputs to the valuation technique, into a three-level fair value hierarchy
as set forth below. If the inputs used to measure the financial instruments fall
within different levels of the hierarchy, the categorization is based on the
lowest level input that is significant to the fair value measurement of the
instrument. The three levels of the hierarchy are defined as
follows:
Level 1 -
Unadjusted quoted prices in active markets for identical assets or liabilities.
We currently do not have any Level 1 financial assets or
liabilities.
Level 2 -
Observable inputs other than quoted prices included in Level 1. Level 2 inputs
include quoted prices for identical assets or liabilities in non-active markets,
quoted prices for similar assets or liabilities in active markets and inputs
other than quoted prices that are observable for substantially the full term of
the asset or liability. We currently do not have any Level 2 financial assets or
liabilities.
Level 3 -
Unobservable inputs reflecting management’s own assumptions about the input used
in pricing the asset or liability. We currently do not have any Level 3
financial assets or liabilities.
At
September 30, 2009, the company did not have any financial assets or liabilities
that were measured at fair value by level within the above fair value hierarchy;
the adoption of the FASB guidance did not have a material impact on either the
Company’s consolidated results from operations or its financial
position.
In
February 2008, the FASB issued guidance through a FASB Staff Position (“FSP”)
which defers the effective date of their earlier guidance concerning a fair
value measurement framework for one year for certain nonfinancial assets and
nonfinancial liabilities, except those that are recognized or disclosed at fair
value in the financial statements on a recurring basis (at least annually). This
FSP becomes effective for the Company on November 1, 2009. The Company does not
expect that the adoption of this guidance will have a material impact on its
financial statements.
In
February 2007, the FASB issued authoritative guidance which permits entities to
choose to measure many financial instruments and certain other items at fair
value that are not currently required to be measured at fair value. This
guidance was effective for the Company beginning October 1, 2008; its adoption
did not have a material impact on either the Company’s consolidated results from
operations or its financial position.
In
December 2007, the FASB issued authoritative guidance which addresses financial
accounting and reporting for business combinations, and supersedes the previous
accounting guidance. The objective is to provide consistency to the accounting
and financial reporting of business combinations by using only one method, the
purchase method. This statement was effective for fiscal years, and interim
periods within those fiscal years, beginning on or after December 15, 2008. Any
potential impact on the Company’s financial position and results of operations
will be dependent upon the terms and conditions of any acquisition.
In
December 2007, the FASB issued new accounting guidance which addresses
consolidation rules for noncontrolling interests. The objective is to improve
the relevance, comparability, and transparency of the financial information that
a reporting entity provides in its consolidated financial statements by
establishing accounting and reporting standards for the noncontrolling interest
in a subsidiary and for the deconsolidation of a subsidiary. This guidance was
effective for fiscal years, and interim periods within those fiscal years,
beginning on or after December 15, 2008. The Company does not have any
noncontrolling interests and accordingly any potential impact on the Company’s
financial position and results of operations will be dependent upon the terms
and conditions of any future noncontrolling interest.
In March
2008, the FASB issued new accounting guidance which enhances the disclosure
requirements for derivative instruments and hedging activities. Entities are
required to provide enhanced disclosures about (a) how and why an entity uses
derivative instruments, (b) how derivative instruments and related hedged items
are accounted for under the previously issued guidance for derivative
instruments and hedging activities, and its related interpretations, and (c) how
derivative instruments and related hedged items affect an entity’s financial
position, financial performance and cash flows. This guidance was effective for
fiscal years, and interim periods within those fiscal years, beginning after
November 15, 2008. The Company does not currently have any derivative financial
instruments; accordingly, any potential impact of the adoption of this guidance
on the Company’s financial statements will be dependent upon the future use of
derivative financial instruments.
Effective
June 27, 2009 the Company adopted new accounting guidance on subsequent events.
The new accounting guidance establishes general standards of accounting for and
disclosures of events that occur after the balance sheet date but before
financial statements are issued or are available to be issued. The guidance also
requires entities to disclose the date through which subsequent events were
evaluated as well as the rationale for why that date was selected. This
disclosure should alert all users of financial statements that an entity has not
evaluated subsequent events after that date in the set of financial statements
being presented. The guidance requires additional disclosures only, and
therefore did not have an impact on our financial position, results of
operations, or cash flows. We have evaluated subsequent events through December
17, 2009, the date we have issued this Annual Report on Form 10-K. No material
recognized or non-recognizable subsequent events were identified.
(2)
CAPITAL STOCK
Tech/Ops
Sevcon, Inc. has two classes of capital stock, preferred and common. There are
authorized 1,000,000 shares of preferred stock, $.10 par value and 8,000,000
shares of common stock, $.10 par value.
The
company issued 52,000 shares of restricted common stock to employees and
directors in fiscal 2009 and a further 27,000 shares of restricted common stock
in fiscal 2008.
(3)
STOCK-BASED COMPENSATION PLANS
Under the
Company’s 1996 Equity Incentive Plan there were 54,500 shares reserved and
available for grant at September 30, 2009. No options were granted in fiscal
2009 or 2008. There were no options exercised in fiscal 2009; in fiscal 2008
four employees exercised options for 12,000 shares.
Recipients
of grants or options must execute a standard form of non-competition agreement.
The plan provides for the grant of Restricted Stock, Restricted Stock Units,
Options, and Stock Appreciation Rights (SARs). Stock Appreciation Rights may be
awarded either separately, or in relation to options granted, and for the grant
of bonus shares. Options granted are exercisable at a price not less than fair
market value on the date of grant.
Option
transactions under the plans for the two years ended September 30, 2009 were as
follows:
|
Shares
under option
|
Weighted
average
exercise
price
|
Weighted
average remaining contractual life (years)
|
Aggregate
Intrinsic value
|
|||||||||||||
|
Outstanding
at September 30, 2007
|
129,000 | $ | 9.47 |
2
years
|
$ | 204,000 | ||||||||||
|
Exercised
in 2008
|
(12,000 | ) | $ | 4.63 | ||||||||||||
|
Cancelled
in 2008
|
(53,500 | ) | $ | 13.66 | ||||||||||||
|
Outstanding
at September 30, 2008
|
63,500 | $ | 7.03 |
3
years
|
$ | - | ||||||||||
|
Exercisable
at September 30, 2008
|
44,600 | $ | 7.29 |
3
years
|
$ | - | ||||||||||
|
Exercised
in 2009
|
- | $ | - | - | - | |||||||||||
|
Cancelled
in 2009
|
- | $ | - | - | - | |||||||||||
|
Outstanding
at September 30, 2009
|
63,500 | $ | 7.03 |
2
years
|
$ | - | ||||||||||
|
Exercisable
at September 30, 2009
|
50,300 | $ | 7.35 |
2
years
|
$ | - | ||||||||||
The
aggregate intrinsic value included in the table above represents the difference
between the exercise price of the options and the market price of the Company’s
common stock for the options that had exercise prices that were lower than the
$3.28 market price of the Company’s common stock at September 30, 2009. As the
option price of all shares under option is higher than the $3.28 market price of
the Company’s common stock at September 30, 2009, the aggregate intrinsic value
of all outstanding share options is nil. In fiscal 2008 options for 12,000
shares were exercised with a total intrinsic value of $39,000 and the proceeds
received on the exercise of these options were $54,000. At September 30, 2009
there was $192,000 of unrecognized compensation expense related to share options
and restricted stock granted under the Company’s equity incentive
plan.
Details
of options outstanding at September 30, 2009 were as follows:
|
Price
range
|
Shares
under option
|
Weighted
average
remaining
contractual life
|
|
$ 4.37
- $ 6.56
|
36,000
|
4
years
|
|
$ 6.57
- $ 9.85
|
10,000
|
2
years
|
|
$ 9.86
- $14.79
|
17,500
|
1
year
|
|
63,500
|
2
years
|
In
January 2009, the Company granted 40,000 shares of restricted stock to five
employees that vest in five equal annual installments. The estimated fair value
of the stock on the date of grant was $83,000 based on the fair market value of
the stock on the date of issue. Unearned compensation is being charged to income
on a straight line basis over the five year period during which the forfeiture
conditions lapse. The charge to income for these employees’ restricted stock
grant in 2009 was $11,000, and the remaining $72,000 will be charged to income
over the remaining period during which the forfeiture conditions
lapse.
In
January 2009, the Company granted 12,000 shares of restricted stock to six
non-employee directors which will vest on the day before the 2010 annual meeting
providing that the grantee remains a director of the Company, or as determined
by the Compensation Committee. The estimated fair value of the stock on the date
of grant was $28,000 based on the fair market value of the stock on date of
issue. This unearned compensation is being charged to income on a straight line
basis over the twelve month period during which the forfeiture conditions lapse.
The charge to income for these director restricted stock grants in fiscal 2009
was $19,000 and the remaining $9,000 will be charged to income in fiscal
2010.
During
the restriction period, generally five years for employees and one year for
non-employee directors, ownership of unvested shares cannot be transferred.
Restricted stock has the same cash dividend and voting rights as other common
stock and is considered to be currently issued and outstanding. For the purposes
of calculating average issued shares for earnings per share these shares are
only considered to be outstanding when the forfeiture conditions lapse and the
shares vest.
Restricted
stock transactions under the plans for the two years ended September 30, 2009
were as follows:
(in
thousands of shares)
|
2009
|
2008
|
|||||||
|
Beginning
Balance – Non-vested
|
54 | 55 | ||||||
|
Granted
to employees – 5 year vesting
|
40 | 15 | ||||||
|
Granted
to non-employee directors – 1 year vesting
|
12 | 12 | ||||||
|
Vested
|
(25 | ) | (28 | ) | ||||
|
Forfeited
|
(2 | ) | - | |||||
|
Ending
Balance – Non-vested
|
79 | 54 | ||||||
|
Weighted-average
fair value for shares granted during the year
|
$ | 2.13 | $ | 7.27 | ||||
|
Weighted-average
fair value for shares vested during the year
|
$ | 6.50 | $ | 6.76 | ||||
|
Weighted-average
fair value for ending balance - non-vested
|
$ | 3.62 | $ | 6.47 | ||||
As of
September 30, 2009, there was $192,000 of total restricted stock compensation
expense related to non-vested awards not yet recognized, which is expected to be
recognized over a weighted average period of 3.1 years.
The
stock-based compensation expense in the last two fiscal years was as
follows:
(in
thousands of dollars)
|
2009
|
2008
|
|||||||
|
Stock option
expense
|
$ | 22 | $ | 25 | ||||
|
Restricted stock
grants:
|
||||||||
|
Employees
|
$ | 90 | $ | 100 | ||||
|
Non-employee
directors
|
$ | 45 | $ | 83 | ||||
|
Total stock based compensation
expense
|
$ | 157 | $ | 208 | ||||
(4)
INCOME TAXES
The
domestic and foreign components of income (loss) before income taxes are as
follows:
(in
thousands of dollars)
|
2009
|
2008
|
|||||||
|
Domestic
|
$ | (752 | ) | $ | (411 | ) | ||
|
Foreign
|
(1,315 | ) | 1,648 | |||||
| $ | (2,067 | ) | $ | 1,237 | ||||
The
components of the provision / (benefit) for income taxes and deferred taxes for
the years ended September 30, 2009 and 2008 are as follows:
(in
thousands of dollars)
|
2009
|
||||||||
|
Current
|
Deferred
|
|||||||
|
Federal
|
$ | - | $ | 56 | ||||
|
State
|
- | 19 | ||||||
|
Foreign
|
(430 | ) | (237 | ) | ||||
| $ | (430 | ) | $ | (162 | ) | |||
|
2008
|
||||||||
|
Current
|
Deferred
|
|||||||
|
Federal
|
$ | - | $ | (57 | ) | |||
|
State
|
- | (37 | ) | |||||
|
Foreign
|
460 | 67 | ||||||
| $ | 460 | $ | (27 | ) | ||||
The
provision (benefit) for income taxes in each period differs from that which
would be computed by applying the statutory U.S. Federal income tax rate to the
income (loss) before income taxes. The following is a summary of the major items
affecting the provision:
(in
thousands of dollars)
|
2009
|
2008
|
|||||||
|
Statutory
Federal income tax rate
|
(34 | %) | 34 | % | ||||
|
Computed
tax provision (benefit) at statutory rate
|
$ | (703 | ) | $ | 420 | |||
|
Increases
(decreases) resulting from:
|
||||||||
|
Foreign tax rate
differentials
|
60 | (37 | ) | |||||
|
State taxes net of federal tax
benefit
|
- | (24 | ) | |||||
|
Change in deferred tax valuation
allowance
|
331 | (66 | ) | |||||
|
Foreign dividends, net of
foreign tax credit
|
- | 66 | ||||||
|
Foreign research
incentives
|
(315 | ) | - | |||||
|
Other
|
35 | 74 | ||||||
|
Income
tax provision (benefit) in the consolidated statements of
operations
|
$ | (592 | ) | $ | 433 | |||
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. 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. A valuation allowance is provided for deferred tax assets if it
is more likely than not that these items will either expire before the Company
is able to realize the benefit, or that future deductibility is uncertain. The
significant items comprising the domestic and foreign deferred tax accounts at
September 30, 2009 and 2008 are as follows:
(in
thousands of dollars)
|
2009
|
||||||||||||||||
|
Domestic
current
|
Domestic
long-term
|
Foreign
current
|
Foreign
long-term
|
|||||||||||||
|
Assets:
|
||||||||||||||||
|
Pension accruals
|
$ | - | $ | 351 | $ | - | $ | 1,808 | ||||||||
|
Inventory basis
differences
|
38 | - | - | - | ||||||||||||
|
Warranty reserves
|
23 | - | - | - | ||||||||||||
|
Foreign tax credit carry
forwards
|
- | 142 | - | - | ||||||||||||
|
Accrued compensation
expense
|
31 | - | - | 34 | ||||||||||||
|
Net operating
losses
|
199 | 190 | 359 | - | ||||||||||||
|
Other (net)
|
8 | 228 | - | - | ||||||||||||
| 299 | 911 | 359 | 1,842 | |||||||||||||
|
Liabilities:
|
||||||||||||||||
|
Property basis
differences
|
- | 40 | - | (54 | ) | |||||||||||
|
Net
asset
|
299 | 951 | 359 | 1,788 | ||||||||||||
|
Valuation
allowance
|
(102 | ) | (382 | ) | - | - | ||||||||||
|
Net
deferred tax asset
|
$ | 197 | $ | 569 | $ | 359 | $ | 1,788 | ||||||||
|
2008
|
||||||||||||||||
|
Domestic
current
|
Domestic
long-term
|
Foreign
current
|
Foreign
long-term
|
|||||||||||||
|
Assets:
|
||||||||||||||||
|
Pension accruals
|
$ | 76 | $ | 132 | $ | - | $ | 14 | ||||||||
|
Inventory basis
differences
|
77 | - | - | - | ||||||||||||
|
Warranty reserves
|
32 | - | - | - | ||||||||||||
|
Foreign tax credit carry
forwards
|
- | 130 | - | - | ||||||||||||
|
Accrued compensation
expense
|
59 | - | - | 32 | ||||||||||||
|
Net operating
losses
|
154 | - | - | - | ||||||||||||
|
Other (net)
|
145 | - | 44 | - | ||||||||||||
| 543 | 262 | 44 | 46 | |||||||||||||
|
Liabilities:
|
||||||||||||||||
|
Property basis
differences
|
35 | 4 | (36 | ) | ||||||||||||
|
Net
asset
|
543 | 297 | 48 | 10 | ||||||||||||
|
Valuation
allowance
|
- | (105 | ) | - | - | |||||||||||
|
Net
deferred tax asset
|
$ | 543 | $ | 192 | $ | 48 | $ | 10 | ||||||||
During
the fourth quarter, the Company evaluated the realizability of its deferred tax
assets as a result of recent economic conditions, the Company's recent operating
results, and the Company's revised estimate of pre-tax income in the near-term.
Based on this review, the Company recognized in 2009 a $379,000 addition to its
beginning of the year valuation allowance. This increase in valuation allowance
relates primarily to deferred tax assets in the U.S. The beginning of the year
valuation allowance relates to U.S. foreign tax credit carryforwards, which may
only be utilized against U.S. foreign source income.
In
assessing the need for a valuation the Company has assessed the available means
of recovering its deferred tax assets, including the ability to carryback net
operating losses, the existence of reversing temporary differences, the
availability of tax planning strategies, and available sources of future taxable
income, including a revised estimate of future sources of pre-tax
income.
The
Company has generated domestic federal and state net operating losses of
$957,000 which will expire in fiscal year 2028 and fiscal year 2013,
respectively. The Company has generated foreign net operating losses of
approximately $1,837,000 which have an indefinite carry forward
period.
Uncertain
tax positions
Effective
October 1, 2007, the Company adopted FASB authoritative guidance regarding the
recognition and measurement of all tax positions taken or to be taken by the
Company and its subsidiaries. The adoption of this guidance followed a review by
the Company of all potential uncertain tax positions. As a consequence of that
review, it was concluded that no provision was required in respect of the
adoption of this guidance and consequently the Company has not recorded a
liability for uncertain tax positions and the Company has recorded no cumulative
effect to retained earnings pursuant to the adoption of this
guidance.
(5)
ACCRUED EXPENSES
The
analysis of accrued expenses at September 30, 2009 and 2008, showing separately
any items in excess of 5% of total current liabilities, was as
follows:
(in
thousands of dollars)
|
2009
|
2008
|
|||||||
|
Accrued
compensation and related costs
|
$ | 497 | $ | 603 | ||||
|
Warranty
reserves
|
217 | 362 | ||||||
|
Other
accrued expenses
|
897 | 1,445 | ||||||
| $ | 1,611 | $ | 2,410 | |||||
(6)
COMMITMENTS AND CONTINGENCIES
Tech/Ops
Sevcon is involved in various legal proceedings in the ordinary course of
business but believes that it is remote that the outcome will be material to
operations.
The
Company maintains a directors' retirement plan which provides for certain
retirement benefits to non-employee directors. Effective January 1997 the plan
was frozen and no further benefits are being accrued. While the cost of the plan
has been fully charged to expense, the plan is not separately funded. The
estimated maximum liability which has been recorded based on the cost of buying
deferred annuities at September 30, 2009 was $169,000.
Minimum
rental commitments under all non-cancelable leases are as follows for the years
ended September 30: 2010 - $218,000; 2011 - $157,000; 2012 - $155,000; 2013 -
$84,000; 2014 - $20,000 and $1,304,000 thereafter. Net rentals of certain land,
buildings and equipment charged to expense were $289,000 in 2009 and $294,000 in
2008.
The U.K.
subsidiaries of the Company have given to a bank a security interest in certain
leasehold and freehold property assets as security for overdraft facilities of
$1,746,000. There were no amounts outstanding on the overdraft facilities at
September 30, 2009 or 2008.
(7)
EMPLOYEE BENEFIT PLANS
Tech/Ops
Sevcon has defined benefit plans covering the majority of its U.S. and U.K.
employees. There is also a small defined contribution plan covering senior
managers in the capacitor business. The Company uses a September 30 measurement
date for its pension plans.
In
September 2006, the FASB issued authoritative guidance in respect of accounting
for defined benefit pension and other post-retirement plans which requires an
employer to recognize a plan’s over-funded or under-funded status in its balance
sheets and recognize the changes in a plan’s funded status in comprehensive
income in the year which the changes occur. The Company adopted this guidance
effective on September 30, 2006. The following table sets forth the estimated
funded status of these defined benefit plans and the amounts recognized by
Tech/Ops Sevcon:
(in
thousands of dollars)
|
2009
|
2008
|
|||||||
|
Change
in benefit obligation:
|
||||||||
|
Benefit
obligation at beginning of year
|
$ | 18,540 | $ | 24,524 | ||||
|
Service
cost
|
280 | 565 | ||||||
|
Interest
cost
|
1,127 | 1,383 | ||||||
|
Plan
participants contributions
|
159 | 264 | ||||||
|
Actuarial
loss (gain)
|
3,344 | (3,372 | ) | |||||
|
Gains
on curtailments
|
- | (271 | ) | |||||
|
Benefits
paid
|
(391 | ) | (2,078 | ) | ||||
|
Foreign
currency exchange rate changes
|
(1,518 | ) | (2,475 | ) | ||||
|
Benefit
obligation at end of year
|
21,541 | 18,540 | ||||||
|
Change
in plan assets:
|
||||||||
|
Fair
value of plan assets at beginning of year
|
18,162 | 22,280 | ||||||
|
Return
on plan assets
|
(2,199 | ) | (622 | ) | ||||
|
Employer
contributions
|
436 | 727 | ||||||
|
Plan
participants contributions
|
159 | 264 | ||||||
|
Benefits
paid
|
(391 | ) | (2,078 | ) | ||||
|
Foreign
currency exchange rate changes
|
(1,792 | ) | (2,409 | ) | ||||
|
Fair
value of plan assets at end of year
|
14,375 | 18,162 | ||||||
|
Funded
status
|
(7,166 | ) | (378 | ) | ||||
|
Liability
for pension benefits recorded in the balance sheet
|
$ | (7,166 | ) | $ | (378 | ) | ||
In common
with most other defined benefit pension plans in the U.S. and U.K., during the
fiscal year ended September 30, 2009, there has been a significant deterioration
in the funded status of the Company’s pension plans. The funded status of the
Company’s defined benefit pension plans deteriorated from a deficit of $378,000
at September 30, 2008 to a deficit of $7,166,000 at September 30, 2009. The
increase in this liability was due to several factors, including, a reduction in
the weighted average discount rate from 6.89% at September 30, 2008 to 5.65% at
September 30, 2009 and, in addition, a reduction in the value of pension plan
assets due to the current economic climate.
The
Tech/Ops Sevcon net pension cost included the following components:
(in
thousands of dollars)
|
2009
|
2008
|
|||||||
|
Components
of net periodic benefit cost:
|
||||||||
|
Service cost
|
$ | 280 | $ | 565 | ||||
|
Interest cost
|
1,127 | 1,383 | ||||||
|
Expected return on plan
assets
|
(1,084 | ) | (1,421 | ) | ||||
|
Gains on
curtailments
|
- | (271 | ) | |||||
|
Amortization of prior service
cost
|
47 | 59 | ||||||
|
Net periodic benefit
cost
|
$ | 370 | $ | 315 | ||||
|
Net cost of defined
contribution plans
|
$ | 30 | $ | 46 | ||||
The
weighted average assumptions used to determine plan obligations and net periodic
benefit cost for the years ended September 30, 2009 and 2008 were as set out
below:
|
2009
|
2008
|
|
|
Plan
obligations:
|
||
|
Discount rate
|
5.65%
|
6.89%
|
|
Rate of compensation
increase
|
3.21%
|
4.47%
|
|
Net
periodic benefit cost:
|
||
|
Discount rate
|
5.65%
|
6.89%
|
|
Expected long term return on
plan assets
|
6.41%
|
6.78%
|
|
Rate of compensation
increase
|
3.21%
|
4.47%
|
The
changes in these assumptions reflect actuarial advice and changing market
conditions and experience.
The
weighted average asset allocations by asset category are set out below for both
the U.K. and U.S. plans:
(percentage
of total assets)
|
2009
|
2008
|
|||||||||||||||||||||||
|
U.S.
Plan
|
U.K.
Plan
|
Total
|
U.S.
Plan
|
U.K.
Plan
|
Total
|
|||||||||||||||||||
|
Equity
securities
|
36% | 30% | 31% | 34% | 55% | 53% | ||||||||||||||||||
|
Debt
securities
|
63% | 48% | 50% | 57% | 26% | 29% | ||||||||||||||||||
|
Real
estate
|
- | 15% | 14% | - | 16% | 15% | ||||||||||||||||||
|
Other
|
1% | 7% | 6% | 9% | 3% | 3% | ||||||||||||||||||
|
Total
|
100% | 100% | 100% | 100% | 100% | 100% | ||||||||||||||||||
For the
U.S. plan the target asset allocations are 30% - 50% equity securities and 50% -
70% debt securities. The U.K. plan is invested in an insurance company
with-profits unit fund which holds various investments as decided by the
insurance company’s fund manager, who is responsible for the asset allocation
within the fund. The asset allocations of the insurance company with-profits
units are included in the table above.
The
overall expected long-term rate of return on plan assets has been based on the
expected returns on equities, bonds and real estate based broadly on the current
asset allocation, with a small reduction in the expected rate to reflect the
conservative nature of the distributions from the insurance company with profits
unit fund.
The
following estimated benefit payments, which reflect future service, as
appropriate, are expected to be paid:
(in
thousands of dollars)
|
2010
|
$ | 420 | ||
|
2011
|
350 | |||
|
2012
|
435 | |||
|
2013
|
439 | |||
|
2014
|
616 | |||
|
2015
– 2019
|
4,456 |
In fiscal
2010 it is estimated that the Company will make contributions to the plans of
$634,000, and that there will be employee contributions to the U.K. plan of
$166,000. Actual payment obligations with respect to the pension plan liability
come due over an extended period of time and will depend on changes in the same
factors described above which caused the significant deterioration in the funded
status during the fiscal year ended September 30, 2009.
(8)
SEGMENT INFORMATION
The
Company has two reportable segments: electronic controls and capacitors. The
electronic controls segment produces microprocessor based control systems for
zero emission and hybrid electric vehicles. The capacitor segment produces
special metalized film capacitors for sale to electronic equipment
manufacturers. Each segment has its own management team, manufacturing
facilities and sales force.
The
accounting policies of the segments are the same as those described in Note 1.
Intersegment sales are accounted for at current market prices. The Company
evaluates the performance of each segment principally based on operating income.
The Company does not allocate income taxes, interest income and expense or
foreign currency translation gains and losses to segments. Information
concerning operations of these businesses is as follows:
(in
thousands of dollars)
|
2009
|
||||||||||||||||
|
Controls
|
Capacitors
|
Corporate
|
Total
|
|||||||||||||
|
Sales
to external customers
|
$ | 18,783 | $ | 1,556 | $ | - | $ | 20,339 | ||||||||
|
Inter-segment
revenues
|
- | 37 | - | 37 | ||||||||||||
|
Operating
income (loss)
|
(1,528 | ) | 26 | (364 | ) | (1,866 | ) | |||||||||
|
Depreciation
and amortization
|
545 | 33 | - | 578 | ||||||||||||
|
Identifiable
assets
|
15,478 | 752 | 580 | 16,810 | ||||||||||||
|
Capital
expenditures
|
237 | 6 | - | 243 | ||||||||||||
| 2008 | ||||||||||||||||
|
Controls
|
Capacitors
|
Corporate
|
Total
|
|||||||||||||
|
Sales
to external customers
|
$ | 37,280 | $ | 1,939 | $ | - | $ | 39,219 | ||||||||
|
Inter-segment
revenues
|
- | 45 | - | 45 | ||||||||||||
|
Operating
income (loss)
|
1,818 | (184 | ) | (460 | ) | 1,174 | ||||||||||
|
Depreciation
and amortization
|
637 | 48 | - | 685 | ||||||||||||
|
Identifiable
assets
|
18,511 | 722 | 522 | 19,755 | ||||||||||||
|
Capital
expenditures
|
890 | 41 | - | 931 | ||||||||||||
The
Company has businesses located in the United States, the United Kingdom, France,
Korea and Japan. The analysis of revenues set out below is by the location of
the business selling the products rather than by destination of the
products.
(in
thousands of dollars)
|
2009
|
2008
|
|||||||
|
Sales:-
|
||||||||
|
U.S.
sales
|
$ | 10,787 | $ | 15,953 | ||||
|
Foreign
sales:
|
||||||||
|
United Kingdom
|
5,685 | 11,766 | ||||||
|
France
|
3,867 | 11,500 | ||||||
|
Total
Foreign
|
9,552 | 23,266 | ||||||
|
Total
sales
|
$ | 20,339 | $ | 39,219 | ||||
|
Long-lived
assets:
|
||||||||
|
U.S.A.
|
$ | 2,061 | $ | 1,699 | ||||
|
Foreign:
|
||||||||
|
United Kingdom
|
4,485 | 3,363 | ||||||
|
France
|
110 | 113 | ||||||
|
Korea and Japan
|
18 | 31 | ||||||
|
Total
Foreign
|
4,613 | 3,507 | ||||||
|
Total
|
$ | 6,674 | $ | 5,206 | ||||
In the
controls business segment the revenues were derived from the following products
and services:
(in
thousands of dollars)
|
2009
|
2008
|
|||||||
|
Electronic
controls for zero emission and hybrid electric vehicles
|
$ | 10,612 | $ | 25,818 | ||||
|
Accessory
and aftermarket products and services
|
8,171 | 11,462 | ||||||
|
Total
controls segment revenues
|
$ | 18,783 | $ | 37,280 | ||||
The
business located in the United States services customers in North and South
America. The business located in France services customers in France, Spain,
Portugal, Belgium, Germany, Netherlands and North Africa. The businesses located
in Korea and Japan support customers in Asia, however, sales to these customers
are made from the United Kingdom. The businesses located in the United Kingdom
service customers in the rest of the world, principally Europe and the Far
East.
In fiscal
2009 Tech/Ops Sevcon's largest customer accounted for 14% of sales and for 4% of
receivables. In 2008 the largest customer accounted for 13% of sales and 12% of
receivables.
(9) RESTRUCTURING
CHARGE
The
Company incurred a restructuring charge of $356,000 in 2009 to reduce operating
expense in both the controls segment and the capacitor segment in response to
the global economic downturn and the resultant lower demand for the Company’s
products. The program resulted in the termination of 23 employees across the
Company’s operations in the U.S., the U.K., France and Japan. The restructuring
charge comprised one-time employee severance costs, associated professional fees
and other costs relating to this program.
The
following table summarizes the components of the restructuring charge for the
year ended September 30, 2009:
|
(in
thousands of dollars)
|
||||
|
Severance and other related
costs
|
$ | 298 | ||
|
Professional
fees and other costs
|
58 | |||
|
Total
restructuring charge
|
$ | 356 | ||
The following table summarizes the
liabilities related to the 2009 restructuring program:
|
(in
thousands of dollars)
|
||||||||||||||||
|
Balance
at
October
1,
2008
|
Charges
|
Payments
|
Balance
at
September
30,
2009
|
|||||||||||||
|
Severance
and other related costs
|
- | 298 | 298 | - | ||||||||||||
|
Professional
fees and other costs
|
- | 58 | 58 | - | ||||||||||||
|
Total
|
- | 356 | 356 | - | ||||||||||||
The Board
of Directors and Shareholders of Tech/Ops Sevcon, Inc.:
We have
audited the accompanying consolidated balance sheets of Tech/Ops Sevcon, Inc.
and subsidiaries as of September 30, 2009 and 2008 and the related consolidated
statements of operations, comprehensive income (loss), stockholders’ equity and
cash flows for each of the years then ended. These consolidated financial
statements are the responsibility of the Company’s management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement. The Company is not
required to have, nor were we engaged to perform, an audit of its internal
control over financial reporting. Our audits included consideration of internal
control over financial reporting as a basis for designing audit procedures that
are appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company’s internal control over financial
reporting. Accordingly, we express no such opinion. 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 Tech/Ops Sevcon, Inc. and
subsidiaries as of September 30, 2009 and 2008 and the results of their
operations and their cash flows for each of the years then ended, in conformity
with accounting principles generally accepted in the United States of
America.
We have
also audited Schedule II for the years ended September 30, 2009 and 2008. In our
opinion, this schedule, when considered in relation to the basic consolidated
financial statements taken as a whole, presents fairly, in all material
respects, the information therein.
/s/
Caturano and Company, P.C.
Boston,
Massachusetts
December
17, 2009
ITEM 9 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None.
Evaluation
of Disclosure Controls and Procedures
The
Company’s principal executive officer and principal financial officer, after
evaluating the effectiveness of the Company’s “disclosure controls and
procedures” (as defined in Securities Exchange Act of 1934 Rule 13a-15(e)), have
concluded that, as of September 30, 2009, the disclosure controls and procedures
were effective.
Management’s
Annual Report on Internal Control over Financial Reporting
Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting. Internal control over financial
reporting is defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act as a
process designed by, or under the supervision of, our principal executive and
principal financial officers and effected by our board of directors, management
and other personnel, to provide reasonable assurance regarding the reliability
of financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principles and
includes those policies and procedures that:
|
·
|
Pertain
to the maintenance of records that in reasonable detail accurately and
fairly reflect the transactions and dispositions of our
assets;
|
|
·
|
Provide
reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally accepted
accounting principles, and that our receipts and expenditures are being
made only in accordance with authorizations of our management and
directors; and
|
|
·
|
Provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use or disposition of our assets that could have
a material effect on the financial
statements.
|
Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Projections of any evaluation of effectiveness
to future periods are subject to the risk that controls may become inadequate
because of changes in conditions, or that the degree of compliance with the
policies or procedures may deteriorate.
Our
management assessed the effectiveness of our internal control over financial
reporting as of September 30, 2009 using the criteria set forth by the Committee
of Sponsoring Organizations of the Treadway Commission (COSO) in Internal
Control-Integrated Framework. Based on this assessment and those criteria, our
management concluded that, as of September 30, 2009, our internal control over
financial reporting was effective.
This
Annual Report on Form 10-K does not include an attestation report of the
Company’s registered public accounting firm regarding internal control over
financial reporting. Management’s report was not subject to attestation by the
Company’s registered public accounting firm pursuant to temporary rules of the
Securities and Exchange Commission that permit the Company to provide only
management’s report in this Annual Report on Form 10-K.
Changes in Internal Control over
Financial Reporting
Our
principal executive officer and principal financial officer have identified no
change in our internal control over financial reporting that occurred during the
fourth quarter of fiscal 2009 that has materially affected, or is reasonably
likely to materially affect, our internal control over financial
reporting.
None.
ITEM 10 DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE
GOVERNANCE
The
requisite information regarding the Company’s directors, executive officers and
audit committee members is incorporated by reference from the discussion
responsive thereto under the captions “Proposal 1: Election of Directors” and
“Section 16(a) Beneficial Ownership Reporting Compliance” in the Company’s Proxy
Statement for the 2010 Annual Meeting of Stockholders.
We have
adopted a Code of Ethics for Senior Officers that applies to our chief executive
officer, chief financial officer, principal accounting officer and controllers.
We have also adopted a Code of Conduct and Ethics that applies to all of our
employees, including, but not limited to, our chief executive officer, chief
financial officer, principal accounting officer, and controllers. A copy of
either Code is available without charge upon request from the Chief Financial
Officer at Tech/Ops Sevcon, Inc., 155 Northboro Road, Southborough, MA 01772. If
we make any substantive amendments to the Code of Ethics for Senior Officers or
grant any waiver from a provision of such Code, or if we make any substantive
amendment to a provision of the Code of Conduct that applies to our chief
executive officer, chief financial officer, principal accounting officer or
controllers, or if we grant any waiver from a provision of such Code for any
such persons we will disclose the nature of such amendment or waiver in a report
on Form 8-K.
EXECUTIVE
OFFICERS OF THE REGISTRANT
|
Name
of Officer
|
Age
|
Position
|
|
Matthew
Boyle
|
47
|
President
& Chief Executive Officer
|
|
Paul
N. Farquhar
|
47
|
Vice
President, Treasurer & Chief Financial
Officer
|
There are
no family relationships between any director or executive officer and any other
director or executive officer of the Company.
All
officers serve until the next annual meeting and until their successors are
elected and qualified. Mr. Boyle has been President and Chief Executive Officer
since 1997 and was Vice President and Chief Operating Officer of the Company
from 1996 to 1997. Mr. Farquhar became Chief Financial Officer in January 2008,
having served as Principal Accounting Officer since April 2007. Mr. Farquhar is
a British Chartered Accountant and from January 2005 to March 2007 was European
Financial Controller for AAF International, a global company providing products
for air filtration. From 1997 to January 2005 he was European Finance Director
of Haskel International Inc., a world leading manufacturer of hydraulic and
pneumatic driven high pressure products, systems and accessories.
ITEM 11 EXECUTIVE COMPENSATION
This
information is incorporated by reference from the information under the captions
“Director Compensation,” and “Executive Compensation” in the Company’s Proxy
Statement for the 2010 Annual Meeting of Stockholders.
ITEM 12 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The
requisite information concerning security ownership and related stockholder
matters is incorporated by reference from the information responsive thereto
under the captions “Beneficial Ownership of Common Stock”, and “Proposal 1:
Election of Directors”, and “Proposal 2: Approval of an amendment of the 1996
Equity Incentive Plan increasing the number of shares authorized for issuance”
in the Company’s Proxy Statement for the 2010 Annual Meeting of
Stockholders.
ITEM 13 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND
DIRECTOR INDEPENDENCE
This
information is incorporated by reference from the information responsive thereto
under the captions “Transactions with Related Parties” and “Director
Independence” in the Company’s Proxy Statement for the 2010 Annual Meeting of
Stockholders.
ITEM 14 PRINCIPAL ACCOUNTING FEES AND SERVICES
This
information is incorporated by reference from the discussion responsive thereto
under the caption “Proposal 3: Ratification of the Selection of the Company’s
Independent Registered Public Accounting Firm for the Fiscal Year Ending
September 30, 2010” in the Company’s Proxy Statement relating to the 2010 Annual
Meeting of Stockholders.
|
(a)
|
|
|
The
financial statements and financial statement schedule are filed as part of
this Annual Report on Form 10-K.
|
|
|
(b)
|
Exhibits
|
|
The
exhibits filed as part of this Annual Report on Form 10-K are listed on
the Exhibit Index below.
|
|
*(3)(a)
|
Certificate
of Incorporation of the registrant (incorporated by reference to Exhibit
(3) (a) to Quarterly Report on Form 10-Q for the quarter ended July 3,
2004).
|
|
*(3)(b)
|
Amended
and Restated by-laws of the registrant (incorporated by reference to
Exhibit 3.2 to Current Report on Form 8-K filed on September 19,
2008).
|
|
*(4)(a)
|
Specimen
common stock certificate of the registrant (incorporated by reference to
Exhibit (4)(a) to Annual Report for fiscal year ended September 30,
2008).
|
|
*(10)(a)
|
Tech/Ops
Sevcon, Inc. 1996 Equity Incentive Plan (incorporated by reference to the
Registrant's 2004 Proxy Statement filed on December 29,
2003).
|
|
*(10)(b)
|
Form
of Option for 1996 Equity Incentive Plan (incorporated by reference to
Exhibit (10) (b) to Annual Report for the fiscal year ended September 30,
2002).
|
|
*(10)(c)
|
Form
of Restricted Stock Agreement for employees for 1996 Equity Incentive Plan
(incorporated by reference to Exhibit (10) (c) to Annual Report for the
fiscal year ended September 30, 2004).
|
|
*(10)(d)
|
Form
of Restricted Stock Agreement for non-employee directors for 1996 Equity
Incentive Plan (incorporated by reference to Exhibit (10) (d) to Annual
Report for the fiscal year ended September 30, 2004).
|
|
*(10)(e)
|
Form
of Indemnification Agreement dated January 4, 1988 between the registrant
and each of its directors (incorporated by reference to Exhibit (10) (e)
to Annual Report for the fiscal year ended September 30,
1994).
|
|
*(10)(f)
|
Directors’
Retirement Plan (incorporated by reference to Exhibit (10) (b) to Annual
Report for the fiscal year ended September 30, 1990).
|
|
*(10)(g)
|
Board
resolution terminating Directors’ Retirement Plan (incorporated by
reference to Exhibit (10) (e) to Annual Report for the fiscal year ended
September 30, 1997).
|
|
*(10)(h)
|
Tech/Ops
Sevcon, Inc. 1998 Director Stock Option Plan (incorporated by reference to
Exhibit 10 to Quarterly Report on Form 10-Q for the quarter ended March
31, 1998).
|
| (10)(i) | Summary of Director and Executive Officer Non-Plan Compensation (filed herewith). |
|
(21)
|
Subsidiaries
of the registrant (filed herewith).
|
|
(23)
|
Consent
of Caturano and Company, P.C. (filed herewith).
|
|
(31.1)
|
Certification
of Principal Executive Officer pursuant to section 302 of the
Sarbanes-Oxley Act of 2002 (filed herewith).
|
|
(31.2)
|
Certification
of Principal Financial Officer pursuant to section 302 of the
Sarbanes-Oxley Act of 2002. (filed herewith).
|
|
(32.1)
|
Certification
of Principal Executive Officer and Principal Financial Officer pursuant to
section 906 of the Sarbanes-Oxley Act of 2002 (filed
herewith).
|
*Indicates
exhibit previously filed and incorporated by reference. Exhibits filed with
periodic reports were filed under File No. 1-9789.
Executive
Compensation Plans and Arrangements:
Exhibits
(10) (a) - (i) are management contracts or compensatory plans or arrangements in
which the executive officers or directors of the registrant
participate.
A
copy of these exhibits may be obtained on the SEC’s EDGAR database (at
www.sec.gov) or will be furnished without charge to any stockholder upon written
request to Tech/Ops Sevcon, Inc., attention Paul N. Farquhar, Treasurer, 155
Northboro Road, Southborough MA 01772, Telephone: (581)
281-5510.
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.
|
TECH/OPS
SEVCON, INC.
|
||
|
By /s/ Matthew
Boyle
|
December
17, 2009
|
|
|
Matthew
Boyle
|
||
|
President
and Chief Executive Officer
|
Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the registrant and in the
capacities and on the dates indicated:
|
SIGNATURE
|
TITLE
|
DATE
|
|
/s/
Matthew Boyle
|
President,
Chief Executive
|
December
17, 2009
|
|
Matthew Boyle
|
Officer
and Director
|
|
|
(Principal
Executive Officer)
|
||
|
/s/
Paul N. Farquhar
|
Vice
President, Chief Financial Officer and Treasurer
|
December
17, 2009
|
|
Paul N. Farquhar
|
(Principal
Accounting Officer)
|
|
|
/s/
Maarten D. Hemsley
|
Director
|
December
17, 2009
|
|
Maarten D.
Hemsley
|
||
|
/s/
Paul B. Rosenberg
|
Director
|
December
17, 2009
|
|
Paul B. Rosenberg
|
||
|
/s/
Marvin G. Schorr
|
Director
|
December
17, 2009
|
|
Marvin G. Schorr
|
||
|
/s/
Bernard F. Start
|
Director
|
December
17, 2009
|
|
Bernard F. Start
|
||
|
/s/
David R. A. Steadman
|
Director
|
December
17, 2009
|
|
David R. A.
Steadman
|
||
|
/s/
Paul O. Stump
|
Director
|
December
17, 2009
|
|
Paul O. Stump
|
||
TECH/OPS
SEVCON, INC. AND SUBSIDIARIES
Reserves for the years ended September 30, 2009 and
2008 (in thousands of dollars)
|
Allowance
for doubtful accounts
|
2009
|
2008
|
||||||
|
Balance
at beginning of year
|
86 | 180 | ||||||
|
Additions
charged to costs and expenses
|
12 | - | ||||||
|
Deductions
from reserves:
|
||||||||
|
Accounts
collected
|
- | (1 | ) | |||||
|
Reduction in
reserve
|
6 | (97 | ) | |||||
|
Write off of uncollectible
accounts
|
- | 4 | ||||||
|
Balance
at end of year
|
92 | 86 | ||||||