form10_k.htm
SECURITIES AND
EXCHANGE COMMISSION
Washington,
DC 20549
FORM
10-K
(Mark
One)
SECURITIES
EXCHANGE ACT OF 1934
For
the fiscal year ended September 30, 2008 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)
Delaware
|
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:
(Title
of Each Class)
|
(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 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
|
Accelerated
filer o
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Non-accelerated
filer o
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Smaller
reporting company x
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|
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(Do
not check if a smaller reporting company)
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|
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 29, 2008, 3,271,322 common shares were outstanding, and the aggregate
market value of the common shares (based upon the closing price on the American
Stock Exchange) held by non-affiliates was $16,980,000. As of December 12, 2008,
3,276,322 common shares were outstanding.
Documents
incorporated by reference: Portions of the Proxy Statement for Annual Meeting of
Stockholders to be held January 27, 2009 are incorporated by reference into Part
III of this report.
ITEM
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PAGE
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PART
I
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3
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3
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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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5
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5
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5
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PART
II
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5
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6
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10
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12
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13
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13
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14
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15
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16
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27
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28
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28
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28
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PART
III
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29
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29
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29
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30
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30
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PART
IV
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30
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30
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31
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II Reserves
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35
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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.
PART
I
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, manufactures, sells, and services, under the Sevcon
name, solid-state products which control motor speed and acceleration for
battery powered electric vehicles in a number of applications, primarily
electric fork lift trucks, aerial lifts and underground coal-mining equipment.
Over the past two years, the Company has outsourced the manufacturing of most of
its controllers to independent subcontractors 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 95% of the Company’s
revenues in 2008 were derived from the controls business, with the remainder
derived from the capacitor business. The largest customer accounted for 13% of
sales in fiscal 2008 compared to 14% in fiscal 2006.
In fiscal
2008, sales totaled $39,219,000 and were flat compared to the previous year.
Foreign currency fluctuations accounted for an increase of $1,420,000, or 4%, in
reported sales. Excluding the foreign currency impact, sales volume decreased by
4% compared to fiscal 2007. Operating income in fiscal 2008 was $1,174,000,
compared to $2,063,000 in the previous year, a decrease of 43%. Net income was
$804,000, or $.25 per diluted share, compared to $1,303,000, or $.41 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 2008
performance.
Sales are
made primarily through a small full-time marketing staff. Sales in the United
States were $15,953,000 and $14,832,000, in fiscal years 2008 and 2007,
respectively, which accounted for approximately 41% and 38%, respectively, of
total sales. Approximately 46% of sales are made to 10 manufacturers of electric
vehicles in the United States, Europe and the Far East. Approximately 91% of the
Company’s sales are direct to end customers, with 9% made to the Company’s
international dealer network. 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.
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.
Tech/Ops
Sevcon's backlog at September 30, 2008 was $5,349,000 and $5,566,000 at
September 30, 2007.
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 battery operated 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 $3,802,000 in 2008,
compared to $3,790,000 in 2007. The increase in reported research and
development expense of $12,000, or 0.3%, in fiscal 2008 was due to the effect of
adverse exchange rate changes which were not offset by a 1% decrease in
spending.
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.
As of
September 30, 2008, the Company employed 122 full-time employees, of whom 16
were in the United States, 94 were in the United Kingdom (of which 28 were
employed by the capacitor business), 7 were in France, and 5 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 10, 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 may harm our business
The
Company’s customers are mainly manufacturers of capital goods such as 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 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 slowed in 2008 and macroeconomic conditions deteriorated
worldwide in the second half of calendar 2008. If economic growth continues to
slow, customers may continue to delay, reduce or forego purchases. This could
result in further reductions in sales of our products, longer sales cycles and
increased price competition. Additionally, deteriorating economic conditions
could adversely affect our customers and their ability to pay amounts owed to
us. Our customers may also decide to purchase alternative products. Any of these
events would likely harm our business, results of operations and financial
condition such that our business may not operate profitably.
The
Company relies on a small number of key customers for a substantial portion of
its revenues
Ten
customers accounted for 46% of the Company’s revenues in fiscal 2008 and the
largest customer accounted for 13% 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 is located, and a significant portion of
our business comes from, 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 all of its
requirements for certain 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-contractor’s buildings would hurt results
In the
controller business the majority of 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 US
subsidiary of the Company leases approximately 13,500 square feet in
Southborough, Mass., under a lease expiring in 2013. The United Kingdom (UK)
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 UK
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 French subsidiary
leases 5,000 square feet of space near Paris, France under a lease expiring in
December 2009. The capacitor subsidiary of the Company owns a 9,000 square foot
building, built in 1981, in Wrexham, Wales. The South Korean subsidiary of the
Company leases approximately 600 square feet of office space in Bucheon City,
near Seoul, under a lease due to expire in 2009. The Japanese subsidiary leases
approximately 600 square feet of office space in Tokyo, Japan under a lease due
to expire in 2009. 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.
None.
ITEM
4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS
None.
PART
II
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 12, 2008, there were approximately 201
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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2008
Quarters
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Cash
dividends per share
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$ |
.03 |
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$ |
.03 |
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$ |
.03 |
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$ |
.03 |
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$ |
.12 |
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Common
stock price per share -High
- Low
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$
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9.07
6.30
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$
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8.43
5.75
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$
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8.55
6.30
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$
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6.75
4.00
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$
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9.07
4.00
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2007
Quarters
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Cash
dividends per share
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$ |
.03 |
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$ |
.03 |
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$ |
.03 |
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$ |
.03 |
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$ |
.12 |
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Common
stock price per share -High
-Low
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$
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7.85
6.61
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$
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7.94
6.40
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$
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11.25
6.88
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$
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11.93
7.80
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$
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11.93
6.40
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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 has suspended the payment of dividends
for 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.
NEW
ACCOUNTING PRONOUNCEMENTS
In
February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for
Financial Assets and Financial Liabilities” (SFAS 159), 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. SFAS No. 159
will be effective for the Company on October 1, 2008. The Company is currently
evaluating the impact, if any, of adopting SFAS No. 159 on its financial
position and results of operations.
In
December 2007, the FASB issued SFAS No. 141R, Business Combinations (SFAS No.
141R). SFAS No. 141R addresses financial accounting and reporting for business
combinations, and supersedes APB Opinion No. 16, Business Combinations and FASB
Statement No. 38, Accounting for Preacquisition Contingencies of Purchased
Enterprises. 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 is 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 SFAS No. 160, Noncontrolling Interests in
Consolidated Financial Statements (SFAS No. 160). SFAS No. 160 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 Statement is
effective for fiscal years, and interim periods within those fiscal years,
beginning on or after December 15, 2008. The Company is currently evaluating the
impact, if any, of adopting SFAS No. 160 on its financial position and results
of operations.
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 46% of the
Company’s sales. At September 30, 2008, the allowance for bad debts amounted to
$86,000, which represented 1.2% 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 US 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,
direct labor and manufacturing 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, 2008 was $582,000, or 10% of the original
cost of gross inventory. At September 30, 2007, the reserve was $860,000, or 14%
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
The
Company carries out an annual assessment to determine if the goodwill relating
to the controls business amounting to $1,435,000 has been impaired, in
accordance with the requirements of Financial Accounting Standards Board
Statement No.142 “Goodwill and Other Intangible Assets” (SFAS No. 142). In
fiscal 2004 the Company retained an investment banking firm specializing in
valuations to assist the Company in performing this impairment assessment. The
assessment was 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 that the goodwill had not been impaired.
Management updated the analysis in 2008, 2007, 2006 and 2005 using similar
methodologies and again concluded 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. The company adopted Financial Accounting Standards Board Statement
No. 158 “Employers’ Accounting for Defined Benefit Pension and Other
Postretirement Plans - An Amendment of FASB Statements No. 87, 88, 106, and
132(R)” (SFAS No. 158) in September 2006. At September 30, 2008 there was a
pension liability in the Company’s balance sheet of $378,000. The Company’s
pension plans are significant relative to the size of the Company. At September
30, 2008, pension plan assets were $18,162,000, plan liabilities were
$18,540,000, and the total assets of the Company were $19,755,000. Under SFAS
No. 158, 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.
The table
below sets out the approximate impact on the funded status of the Company’s
pension plans at September 30, 2008 that the Company estimates would arise from
the following respective changes in significant plan assumptions:
Plan
Assumption
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|
Change
in Assumption
|
|
|
Impact
on Funded Status (in thousands of dollars)
|
|
|
Change
in funded status
|
|
Assumptions
impacting accumulated benefit obligation:
|
|
|
|
|
|
|
|
|
|
Discount
rate
|
|
|
0.1%
|
|
|
$ |
450 |
|
|
|
119% |
|
Inflation
rate
|
|
|
0.1%
|
|
|
|
300 |
|
|
|
79% |
|
Salary
Increase
|
|
|
0.5% |
|
|
|
775 |
|
|
|
205% |
|
Mortality
rate
|
|
1
year
|
|
|
|
375 |
|
|
|
99% |
|
· A) Results of
Operations
2008
compared to 2007
The
following table compares results, for both the controls and capacitor segments,
for fiscal 2008 with the prior year, showing separately the percentage variances
due to currency and volume / other.
|
|
|
|
|
|
|
|
(in
thousands of dollars except percentages)
|
|
|
|
|
|
|
|
|
|
|
|
|
%
change due to:
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
Total
|
|
|
Currency
|
|
|
Volume
/ other
|
|
Sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Controls - to external
customers
|
|
$ |
37,280 |
|
|
$ |
37,009 |
|
|
|
1 |
% |
|
|
4 |
% |
|
|
-3 |
% |
Capacitors- to external
customers
|
|
|
1,939 |
|
|
|
2,204 |
|
|
|
-12 |
% |
|
|
0 |
% |
|
|
-12 |
% |
Capacitors -
inter-segment
|
|
|
45 |
|
|
|
52 |
|
|
|
-13 |
% |
|
|
-1 |
% |
|
|
-12 |
% |
Capacitors – total
|
|
|
1,984 |
|
|
|
2,256 |
|
|
|
-12 |
% |
|
|
0 |
% |
|
|
-12 |
% |
Total sales to external
customers
|
|
|
39,219 |
|
|
|
39,213 |
|
|
|
0 |
% |
|
|
4 |
% |
|
|
-4 |
% |
Gross
Profit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Controls
|
|
|
13,074 |
|
|
|
13,479 |
|
|
|
3 |
% |
|
|
4 |
% |
|
|
-7 |
% |
Capacitors
|
|
|
700 |
|
|
|
869 |
|
|
|
-19 |
% |
|
|
-1 |
% |
|
|
-18 |
% |
Total
|
|
|
13,774 |
|
|
|
14,348 |
|
|
|
4 |
% |
|
|
4 |
% |
|
|
-8 |
% |
Selling
research and administrative expenses and restructuring
charge
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Controls
|
|
|
10,556 |
|
|
|
10,810 |
|
|
|
-2 |
% |
|
|
1 |
% |
|
|
-3 |
% |
Capacitors
|
|
|
884 |
|
|
|
1,158 |
|
|
|
-24 |
% |
|
|
-1 |
% |
|
|
-23 |
% |
Restructuring
charge
|
|
|
700 |
|
|
|
- |
|
|
|
100 |
% |
|
|
0 |
% |
|
|
100 |
% |
Unallocated corporate
expense
|
|
|
460 |
|
|
|
317 |
|
|
|
45 |
% |
|
|
0 |
% |
|
|
45 |
% |
Total
|
|
|
12,600 |
|
|
|
12,285 |
|
|
|
3 |
% |
|
|
2 |
% |
|
|
1 |
% |
Operating
income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Controls
|
|
|
1,818 |
|
|
|
2,669 |
|
|
|
-32 |
% |
|
|
14 |
% |
|
|
-46 |
% |
Capacitors
|
|
|
(184 |
) |
|
|
(289 |
) |
|
|
36 |
% |
|
|
0 |
% |
|
|
36 |
% |
Unallocated corporate
expense
|
|
|
(460 |
) |
|
|
(317 |
) |
|
|
45 |
% |
|
|
0 |
% |
|
|
45 |
% |
Total
|
|
|
1,174 |
|
|
|
2,063 |
|
|
|
-43 |
% |
|
|
18 |
% |
|
|
-61 |
% |
Other
income and expense
|
|
|
63 |
|
|
|
(75 |
) |
|
|
184 |
% |
|
|
270 |
% |
|
|
-86 |
% |
Income
before income taxes
|
|
|
1,237 |
|
|
|
1,988 |
|
|
|
-38 |
% |
|
|
29 |
% |
|
|
-67 |
% |
Income
taxes
|
|
|
(433 |
) |
|
|
(685 |
) |
|
|
-37 |
% |
|
|
29 |
% |
|
|
-66 |
% |
Net
Income
|
|
$ |
804 |
|
|
$ |
1,303 |
|
|
|
-38 |
% |
|
|
28 |
% |
|
|
-66 |
% |
In fiscal
2008 sales revenues were flat compared to fiscal 2007 at $39,219,000. In fiscal
2008 approximately 59% of the Company’s sales were made outside the United
States. As the majority of foreign sales were denominated in currencies other
than the US Dollar, principally the Euro and the British Pound, they were
subject to fluctuation when translated into US Dollars. In Fiscal 2008 the
average dollar exchange rate strengthened compared to the British Pound by 1%
although it weakened by 13% compared to the Euro. As a result, foreign currency
sales denominated in British Pounds translated into fewer dollars and foreign
sales denominated in Euros translated into more dollars; the overall impact to
fiscal 2008 was that reported sales increased by $1,420,000, or 4%. Sales
volume, net of foreign currency fluctuations, was 4% lower than the previous
year, with the decrease due to lower volumes shipped in Europe and
Asia.
In the
controls business segment revenues were 1% higher than in fiscal 2007,
reflecting a 4% increase due to foreign currency fluctuations and a reduction of
3% in volumes shipped. In the United States controller business, sales were
$15,953,000 compared to $14,832,000 in 2007, an increase of 8%. Slightly lower
volumes shipped in the United States in the fork lift truck and airport ground
support markets were more than offset by higher volumes shipped to the aerial
lift, mining and other electric vehicle markets. In the controller businesses,
foreign sales decreased by 4% compared to last year, reflecting a 10% decrease
in volumes shipped and a 6% increase due to foreign currency fluctuations.
Volumes shipped in Europe and the Far East decreased largely due to lower demand
in the European and Japanese aerial lift markets.
In the
capacitor business segment, revenues decreased by $265,000, or 12%, which was
almost entirely due to lower volumes shipped. This volume decrease was mainly
due to lower demand in the signaling market.
Management
anticipates that worsening worldwide economic conditions will continue to affect
results, both by reducing orders and by affecting customers’ ability to pay. In
particular, management currently anticipates that European and Far East results
will continue to suffer for the foreseeable future.
Cost of
sales was $25,445,000 compared to $24,865,000 in fiscal 2007, an increase of
$580,000, or 2%. This increase was caused by adverse currency fluctuations and
higher warranty costs which were partially offset by lower cost of sales due to
lower volumes shipped as compared to the prior year. Largely as a result of the
weaker US Dollar compared with the Euro, foreign currency fluctuations caused
material price increases for products manufactured by one of our subcontractors
which increased cost of sales by $882,000, or 4% and warranty costs of $300,000
were incurred in fiscal 2008 to settle two separate and isolated issues during
the year. A reduction in cost of sales of $602,000 was mainly due to the
$1,414,000, or 4%, reduction in volumes shipped in 2008 compared to the prior
year.
Gross
profit was $13,774,000, or 35.1% of sales, compared to $14,348,000, or 36.6% of
sales, in fiscal 2007. Foreign currency fluctuations had a favorable impact on
gross profit of $88,000, but the currency impact on sales and cost of sales
decreased the gross profit percentage by 0.2%. Excluding the foreign currency
impact, there was a year-to-year decrease in the gross profit percentage of 1.3%
of sales. In the controls segment, gross profit of $13,074,000 was 3% behind
last year; this compared to a decrease in volumes shipped of 4.0%. In the
capacitor segment gross profit was $700,000, a reduction of $169,000, or 19%,
compared to fiscal 2007. Capacitor business gross profit was 35.3% of sales in
fiscal 2008 compared to 38.5% of sales in fiscal 2007. The decline in the
capacitor business gross profit percentage was mainly due to a decrease in sales
to higher margin customers, offset by some sales growth at lower than average
margins. The table below analyses 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 2007
|
|
$ |
39,213 |
|
|
$ |
24,865 |
|
|
$ |
14,348 |
|
|
|
36.6% |
|
Change
in fiscal 2008 due to:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign Currency
fluctuations
|
|
|
1,420 |
|
|
|
960 |
|
|
|
460 |
|
|
|
(0.2%) |
|
Decreased volume, assuming 2007
gross profit percentage
|
|
|
(1,414 |
) |
|
|
(896 |
) |
|
|
(518 |
) |
|
|
|
|
Other cost of sales changes,
net
|
|
|
- |
|
|
|
516 |
|
|
|
(516 |
) |
|
|
(1.3%) |
|
Actual
Fiscal 2008
|
|
$ |
39,219 |
|
|
$ |
25,445 |
|
|
$ |
13,774 |
|
|
|
35.1% |
|
Selling,
research and administrative expenses before the restructuring charge (operating
expenses) were $11,900,000, a decrease of $385,000, or 3%, compared to fiscal
2007. Adverse foreign currency fluctuations increased reported operating
expenses by $170,000, or 1%. In fiscal 2008, expenditure on new product
engineering and selling expenses were reduced by $23,000 and $198,000,
respectively, before the impact of currency fluctuations. Administrative
expenses, including corporate expense, increased by $54,000 before the impact of
currency fluctuations. Included in administrative expense in 2007 in the
capacitor business segment was a charge of $297,000 for management changes and
in addition in 2007 there was a charge of $91,000 in respect of the retirement
of the general manager of the controls business in France. An analysis of the
year-to-year change in selling, research and administrative expenses is set out
below:
Selling,
research and administrative expenses
|
|
(in
thousands of dollars)
|
|
Reported
expense in fiscal 2008
|
|
$ |
11,900 |
|
Reported
expense in fiscal 2007
|
|
|
12,285 |
|
Decrease
in expense
|
|
|
(385 |
) |
Increase
(decrease) due to:
|
|
|
|
|
Effect of exchange rate
changes
|
|
|
170 |
|
Lower research and sales and
marketing expense, net of currency effect
|
|
|
(221 |
) |
Increase in administrative
expense, net of currency effect
|
|
|
54 |
|
Management changes in the
capacitor business and controls business in fiscal 2007
|
|
|
(388 |
) |
Total
decrease in selling research and administrative expenses in fiscal
2008
|
|
$ |
(385 |
) |
The
Company incurred a restructuring charge of $700,000 in 2008 associated with the
closure of the residual manufacturing operations in the UK 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.
Operating
income was $1,174,000 compared to $2,063,000 in fiscal 2007, a decrease of
$889,000, or 43%. Foreign currency fluctuations increased reported operating
income by $367,000 in fiscal 2008. Excluding the currency effect, operating
income decreased by $1,256,000, or 60% compared to fiscal 2007, mainly due to
the restructuring charge, warranty costs and lower volumes shipped. In the
controller business, and excluding the favorable currency impact of $367,000,
operating income was $1,218,000, or 46% lower than the prior year. The capacitor
business incurred an operating loss of $184,000 in fiscal 2008 compared to an
operating loss of $289,000 in fiscal 2007 when there was a charge of $297,000
for management changes in the year. 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 income of $63,000 in fiscal 2008 compared to an
expense of $75,000 in the previous year. Interest expense was higher by $63,000
at $108,000 and interest income in 2008 was $8,000 compared to $10,000 in fiscal
2007. The net interest expense of $100,000 in fiscal 2008 was offset by a
foreign currency exchange gain of $163,000, compared to a foreign currency
exchange loss of $40,000 in 2007.
Income
before income taxes was $1,237,000 compared to $1,988,000 in 2007, a decrease of
$751,000, or 38%. Foreign currency fluctuations increased pretax income by
$570,000 in fiscal 2008. Pre-tax income, before the effect of currency
fluctuations, was $1,321,000, or 66% lower than the prior year. Income taxes
were 35% of pre-tax income compared to 34.5% in fiscal 2007. The higher tax rate
was mainly due to permanent timing differences arising from the tax treatment of
inter-group dividends received in the US.
Net
income was $804,000, a reduction of $499,000, or 38%, compared to $1,303,000
last year. Basic income per share was $.25 per share in 2008 compared to $.41 in
fiscal 2007, a decrease of 39%. Diluted income per share was $.25 per share in
fiscal 2008, a decrease of $.16 per share compared to last year.
· B) Liquidity and Capital
Resources
The
Company’s cash flow from operating activities for fiscal 2008 was $2,333,000
compared to $849,000 in the prior fiscal year. Acquisitions of property, plant
and equipment amounted to $931,000 compared to $909,000 in fiscal 2007.
Quarterly dividend payments were at the rate of $.03 per share throughout both
fiscal 2008 and 2007. In fiscal 2008 dividend payments amounted to $391,000
compared to $386,000 in 2007. Exchange rate changes decreased cash by $440,000
in fiscal 2008 compared to an increase of $164,000 last year. As a result, in
fiscal 2008, reported cash balances increased by $616,000, compared to a
decrease of $276,000 in 2007. The main changes in operating assets and
liabilities in fiscal 2008 were a decrease in accounts receivable of $1,459,000
and higher accounts payable of $778,000 due to improvements in working capital
management during the year. Inventories decreased by $26,000, accrued expenses
decreased by $742,000, principally due to lower accrued bonus provisions at
September 30, 2008 compared to the prior year, and prepaid expenses and other
current assets were $75,000 lower than last year.
The
Company has no short-term or long-term debt and has overdraft facilities in the
United Kingdom (UK) amounting to $1,961,000 and in France of $141,000. These
facilities were unused at September 30, 2008 and September 30, 2007. The
overdraft facility of the UK capacitor subsidiary company is secured by a legal
charge over the facility owned and occupied by that company. The overdraft
facility of the UK 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 2009 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 2009
but, in line with normal practice in Europe, can be withdrawn on demand by the
bank.
At
September 30, 2008 the Company’s cash balances were $1,630,000. The Company has,
since January 1990, maintained a program of regular cash dividends, but, due to
the uncertain economic outlook, the Board of Directors has suspended the payment
of dividends for the first quarter of 2009 and will consider whether to resume
paying dividends on a quarter by quarter basis. In the opinion of management,
the Company’s requirements for working capital to meet future business needs can
be met by a combination of existing cash resources, future earnings and existing
borrowing facilities in Europe. The Company’s capital expenditures are not
expected, on average over a two to three year period, to significantly exceed
the depreciation charge, which over the last three fiscal years averaged
$694,000. It is estimated that the Company will make contributions to its U.K.
and U.S. defined benefit pension plans of $644,000 in fiscal 2009; should the
Company suffer a material reduction in revenues in 2009 this commitment could
adversely impact the Company’s financial position. There were no significant
capital expenditure commitments at September 30, 2008. Tech/Ops Sevcon's
resources, in the opinion of management, are adequate for projected operations
and capital spending programs. 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.
· 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 2008
approximately 41% of the Company’s sales were made in US Dollars, 25% were made
in British Pounds and 34% 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 US dollars. This resulted in the Company’s sales and margins being
exposed to fluctuations due to the change in the exchange rates of the US
Dollar, the British Pound and the Euro.
In
addition, the translation of the sales and income of foreign subsidiaries into
US 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, 2008.
The
following table provides information about the Company’s foreign currency
accounts receivable, accounts payable and firmly committed sales contracts as of
September 30, 2008. The information is provided in US Dollar amounts, as
presented in the Company’s consolidated financial statements.
|
|
(in
thousands of dollars, except average contract rates)
|
|
|
|
Expected
maturity or transaction date
|
|
|
|
|
|
|
FY2009
|
|
|
FY2010
|
|
|
Total
|
|
|
Fair
Value
|
|
On
balance sheet financial instruments:
|
|
|
|
|
|
|
|
|
|
|
|
|
In $ US Functional
Currency
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable in British
Pounds
|
|
|
1,182 |
|
|
|
- |
|
|
|
1,182 |
|
|
|
1,182 |
|
Accounts receivable in
Euros
|
|
|
2,108 |
|
|
|
- |
|
|
|
2,108 |
|
|
|
2,108 |
|
Accounts payable in British
Pounds
|
|
|
509 |
|
|
|
- |
|
|
|
509 |
|
|
|
509 |
|
Accounts payable in
Euros
|
|
|
1,838 |
|
|
|
- |
|
|
|
1,838 |
|
|
|
1,838 |
|
Anticipated
Transactions
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In $ US Functional
Currency
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Firmly committed sales
contracts
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In British
Pounds
|
|
|
1,431 |
|
|
|
- |
|
|
|
1,431 |
|
|
|
1,431 |
|
In Euros
|
|
|
1,157 |
|
|
|
- |
|
|
|
1,157 |
|
|
|
1,157 |
|
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, 2008 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, 2008 and 2007
(in
thousands of dollars)
ASSETS
|
|
2008
|
|
|
2007
|
|
Current
assets:
|
|
|
|
|
|
|
Cash and cash
equivalents
|
|
$ |
1,630 |
|
|
$ |
1,014 |
|
Receivables, net of allowances
for doubtful accounts of $86 in 2008 and $180 in 2007
|
|
|
7,087 |
|
|
|
8,714 |
|
Inventories
|
|
|
4,970 |
|
|
|
5,422 |
|
Prepaid expenses and other
current assets
|
|
|
862 |
|
|
|
916 |
|
Total
current assets
|
|
|
14,549 |
|
|
|
16,066 |
|
Property,
plant and equipment, at cost:
|
|
|
|
|
|
|
|
|
Land and
improvements
|
|
|
25 |
|
|
|
29 |
|
Buildings and
improvements
|
|
|
2,166 |
|
|
|
2,462 |
|
Equipment
|
|
|
9,409 |
|
|
|
9,774 |
|
|
|
|
11,600 |
|
|
|
12,265 |
|
Less: accumulated depreciation
and amortization
|
|
|
8,053 |
|
|
|
8,497 |
|
Net
property, plant and equipment
|
|
|
3,547 |
|
|
|
3,768 |
|
Long-term
deferred tax asset
|
|
|
202 |
|
|
|
657 |
|
Goodwill
|
|
|
1,435 |
|
|
|
1,435 |
|
Other
long-term assets
|
|
|
22 |
|
|
|
- |
|
Total
assets
|
|
$ |
19,755 |
|
|
$ |
21,926 |
|
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$ |
3,713 |
|
|
$ |
3,398 |
|
Dividend
payable
|
|
|
98 |
|
|
|
97 |
|
Accrued
expenses
|
|
|
2,410 |
|
|
|
3,162 |
|
Accrued taxes on
income
|
|
|
56 |
|
|
|
530 |
|
Total
current liabilities
|
|
|
6,277 |
|
|
|
7,187 |
|
Liability
for pension benefits
|
|
|
378 |
|
|
|
2,244 |
|
Other
long term liabilities
|
|
|
54 |
|
|
|
61 |
|
Total
liabilities
|
|
|
6,709 |
|
|
|
9,492 |
|
Commitments
and contingencies (note 5)
|
|
|
|
|
|
|
|
|
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
|
|
|
|
|
|
|
|
|
3,276,322 shares in 2008 and
3,238,702 shares in 2007
|
|
|
328 |
|
|
|
324 |
|
Premium paid in on common
stock
|
|
|
4,881 |
|
|
|
4,623 |
|
Retained
earnings
|
|
|
8,364 |
|
|
|
7,961 |
|
Accumulated other comprehensive
loss
|
|
|
(527 |
) |
|
|
(474 |
) |
Total
stockholders’ equity
|
|
|
13,046 |
|
|
|
12,434 |
|
Total
liabilities and stockholders’ equity
|
|
$ |
19,755 |
|
|
$ |
21,926 |
|
The
accompanying notes are an integral part of these consolidated financial
statements.
CONSOLIDATED
STATEMENTS OF INCOME
Tech/Ops
Sevcon, Inc. and Subsidiaries
For the
Years ended September 30, 2008 and 2007
(in
thousands of dollars except per share data)
|
|
2008
|
|
|
2007
|
|
Net
sales
|
|
$ |
39,219 |
|
|
$ |
39,213 |
|
Cost
of sales
|
|
|
25,445 |
|
|
|
24,865 |
|
Gross
profit
|
|
|
13,774 |
|
|
|
14,348 |
|
Selling,
research and administrative expenses
|
|
|
11,900 |
|
|
|
12,285 |
|
Restructuring
charge
|
|
|
700 |
|
|
|
- |
|
Operating
income
|
|
|
1,174 |
|
|
|
2,063 |
|
Interest
expense
|
|
|
(108 |
) |
|
|
(45 |
) |
Interest
income
|
|
|
8 |
|
|
|
10 |
|
Foreign
currency gain (loss)
|
|
|
163 |
|
|
|
(40 |
) |
Income
before income taxes
|
|
|
1,237 |
|
|
|
1,988 |
|
Income
taxes
|
|
|
(433 |
) |
|
|
(685 |
) |
Net
income
|
|
$ |
804 |
|
|
$ |
1,303 |
|
Basic
income per share
|
|
$ |
.25 |
|
|
$ |
.41 |
|
Diluted
income per share
|
|
$ |
.25 |
|
|
$ |
.41 |
|
Tech/Ops
Sevcon, Inc. and Subsidiaries
For the
Years ended September 30, 2008 and 2007
(in
thousands of dollars)
|
|
2008
|
|
|
2007
|
|
Net
income
|
|
$ |
804 |
|
|
$ |
1,303 |
|
Foreign
currency translation adjustment
|
|
|
(1,001 |
) |
|
|
732 |
|
Changes
in fair market value of cash flow hedges
|
|
|
(3 |
) |
|
|
3 |
|
Pension
liability adjustment, net of tax
|
|
|
951 |
|
|
|
507 |
|
Comprehensive
income
|
|
$ |
751 |
|
|
$ |
2,545 |
|
The
accompanying notes are an integral part of these consolidated financial
statements.
Tech/Ops
Sevcon, Inc. and Subsidiaries
For the
Years ended September 30, 2008 and 2007
(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, 2006
|
|
|
321 |
|
|
|
4,309 |
|
|
|
7,123 |
|
|
|
- |
|
|
|
(1,716 |
) |
|
|
10,037 |
|
Net
income
|
|
|
- |
|
|
|
- |
|
|
|
1,303 |
|
|
|
- |
|
|
|
- |
|
|
|
1,303 |
|
Dividends
($.12 per share)
|
|
|
- |
|
|
|
- |
|
|
|
(387 |
) |
|
|
- |
|
|
|
- |
|
|
|
(387 |
) |
Currency
translation adjustment
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
732 |
|
|
|
732 |
|
Change
in fair market value of cash flow hedge
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
3 |
|
|
|
3 |
|
Issuance
of restricted stock
|
|
|
2 |
|
|
|
(2 |
) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Exercise
of stock options
|
|
|
2 |
|
|
|
94 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
96 |
|
Purchase
and retirement of common stock in connection with stock option
exercise
|
|
|
(1 |
) |
|
|
(11 |
) |
|
|
(78 |
) |
|
|
- |
|
|
|
- |
|
|
|
(90 |
) |
Tax
benefit on exercise of stock options
|
|
|
- |
|
|
|
40 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
40 |
|
Equity
compensation expense
|
|
|
|
|
|
|
193 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
193 |
|
Pension
liability adjustment, net of taxcharge of $239
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
507 |
|
|
|
507 |
|
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 taxcharge of $437
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
951 |
|
|
|
951 |
|
Balance
September 30, 2008
|
|
$ |
328 |
|
|
$ |
4,881 |
|
|
$ |
8,364 |
|
|
$ |
- |
|
|
$ |
(527 |
) |
|
$ |
13,046 |
|
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, 2008 and 2007
(in
thousands of dollars)
|
|
2008
|
|
|
2007
|
|
Cash
flow from operating activities:
|
|
|
|
|
|
|
Net
income
|
|
$ |
804 |
|
|
$ |
1,303 |
|
Adjustments
to reconcile net income to net cash from operating
activities:
|
|
|
|
|
|
|
|
|
Depreciation and
amortization
|
|
|
685 |
|
|
|
739 |
|
Stock-based
compensation
|
|
|
208 |
|
|
|
193 |
|
Pension contributions in excess
of pension expenses
|
|
|
(367 |
) |
|
|
(45 |
) |
Deferred tax (benefit)
provision
|
|
|
(6 |
) |
|
|
61 |
|
Increase (decrease) in cash
resulting from changes in operating assets and
liabilities:
|
|
|
|
|
|
|
|
|
Receivables
|
|
|
1,459 |
|
|
|
(2,058 |
) |
Inventories
|
|
|
26 |
|
|
|
(372 |
) |
Prepaid expenses and other
current assets
|
|
|
(75 |
) |
|
|
(45 |
) |
Accounts
payable
|
|
|
778 |
|
|
|
815 |
|
Accrued
expenses
|
|
|
(742 |
) |
|
|
259 |
|
Accrued taxes on
income
|
|
|
(437 |
) |
|
|
(1 |
) |
Net
cash generated from operating activities
|
|
|
2,333 |
|
|
|
849 |
|
Cash
flow used by investing activities:
|
|
|
|
|
|
|
|
|
Acquisition of property, plant
and equipment
|
|
|
(931 |
) |
|
|
(909 |
) |
Net
cash used by investing activities
|
|
|
(931 |
) |
|
|
(909 |
) |
Cash
flow used by financing activities:
|
|
|
|
|
|
|
|
|
Dividends paid
|
|
|
(392 |
) |
|
|
(386 |
) |
Exercise of stock
options
|
|
|
45 |
|
|
|
6 |
|
Net cash used by financing
activities
|
|
|
(347 |
) |
|
|
(380 |
) |
Effect
of exchange rate changes on cash
|
|
|
(439 |
) |
|
|
164 |
|
Net
increase (decrease) in cash
|
|
|
616 |
|
|
|
(276 |
) |
Beginning
balance - cash and cash equivalents
|
|
|
1,014 |
|
|
|
1,290 |
|
Ending
balance - cash and cash equivalents
|
|
$ |
1,630 |
|
|
$ |
1,014 |
|
Supplemental
disclosure of cash flow information:
|
|
|
|
|
|
|
|
|
Cash paid for income
taxes
|
|
$ |
832 |
|
|
$ |
677 |
|
Cash paid for
interest
|
|
$ |
108 |
|
|
$ |
45 |
|
Supplemental
disclosure of non-cash financing activity:
|
|
|
|
|
|
|
|
|
Dividend
declared
|
|
$ |
98 |
|
|
$ |
97 |
|
The
accompanying notes are an integral part of these consolidated financial
statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Tech/Ops
Sevcon, Inc. and Subsidiaries
(1)
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A.
Basis of presentation
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)
|
|
2008
|
|
|
2007
|
|
Warranty
reserves at beginning of year
|
|
$ |
458 |
|
|
$ |
364 |
|
Decrease
in beginning balance for warranty obligations settled during the
year
|
|
|
(178 |
) |
|
|
(308 |
) |
Other
changes to pre-existing warranties
|
|
|
- |
|
|
|
16 |
|
Net
increase in warranty reserves for products sold during the
year
|
|
|
82 |
|
|
|
386 |
|
Warranty
reserves at end of year
|
|
$ |
362 |
|
|
$ |
458 |
|
C.
Research and development
The cost
of research and development programs is charged against income as incurred and
amounted to approximately $3,802,000 in 2008 and $3,790,000 in 2007. This
expense is included in selling, research and administrative expense in the
accompanying consolidated income statements. Research and development expense
was 9.7% of sales in both 2007 and 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
SFAS No. 123 “Accounting for
Stock-Based Compensation”, as amended by SFAS No. 148 “Accounting for
Stock-Based Compensation – Transition and Disclosure” and replaced by SFAS
No.123R “Share-Based Payment”, defined a fair value based method of accounting
for employee stock options or similar equity instruments and encouraged all
entities to adopt that method of accounting. However, it also allowed an entity
to continue to measure compensation costs using the method of accounting
prescribed by APB No. 25 “Accounting for Stock Issued to Employees”, until SFAS
No. 123R became effective in fiscal 2006. Prior to fiscal 2006, the Company
accounted for its stock-based compensation plans under APB No. 25, under which
no compensation cost was recognized.
The
application of SFAS No. 123R reduced net income in fiscal 2008 by $25,000 and in
fiscal 2007 by $33,000 ($.01 per basic and diluted share in each year). The
adoption of this statement had no effect on the statement of cash flows for
fiscal 2008 and fiscal 2007. The restricted stock expense was $183,000 in fiscal
2008 and $160,000 in fiscal 2007.
The fair
value of each option grant is estimated on the date of grant using the
Black-Scholes option pricing model. There were no option grants in fiscal 2008
or 2007 and therefore no assumptions were made as to risk-free interest rate,
expected dividend yield, expected life or expected volatility. When options are
exercised the Company normally issues new shares.
F.
Income taxes
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 manufacturing 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,
2008 was $582,000, or 10% of the original cost of gross inventory. At September
30, 2007 the reserve was $860,000, or 14% of gross inventory. Inventories were
comprised of:
(in
thousands of dollars)
|
|
2008
|
|
|
2007
|
|
Raw
materials
|
|
$ |
930 |
|
|
$ |
2,517 |
|
Work-in-process
|
|
|
96 |
|
|
|
134 |
|
Finished
goods
|
|
|
3944 |
|
|
|
2,771 |
|
|
|
$ |
4,970 |
|
|
$ |
5,422 |
|
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 statement of income.
J.
Derivative instruments and hedging
The
Company has accounted for derivative instruments and hedging under SFAS No. 133,
“Accounting for Derivative Instruments and Hedging Activities”, which requires
that all derivatives, including foreign currency exchange contracts, be
recognized on the balance sheet at fair value. Derivatives that are not hedges
must be recorded at fair value through earnings. If a derivative is a hedge,
depending on the nature of the hedge, changes in the fair value of the
derivative are either offset against the change in fair value of assets,
liabilities or firm commitments through earnings or recognized in other
comprehensive income until the hedged item is recognized in earnings. The
ineffective portion of a derivative’s change in fair value is immediately
recognized in earnings.
The
Company sells to customers throughout the industrialized world. In the
controller business the majority of the Company’s product is produced in three
separate plants in Poland, Mexico and China. Approximately 41% of the Company’s
sales are made in US Dollars, 25% are made in British Pounds and 34% are made in
Euros. Approximately 71% of the Company’s cost of sales is incurred in British
Pounds and 13% 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
US Dollar, the British Pound and the Euro.
The
Company previously used forward foreign exchange contracts to hedge the
operational (“cash-flow” hedges) exposures resulting from changes in foreign
currency exchange rates described above. The Company changed its policy during
fiscal 2008 and ceased using such hedges. At September 30, 2008, the Company had
not hedged any of its foreign currency exposures. The Company does not hold or
transact in financial instruments for purposes other than risk
management.
Under
hedge accounting, the Company recorded its foreign currency exchange contracts
at fair value in its consolidated balance sheet as other current assets and a
portion of the related gains or losses on these hedge contracts related to
anticipated transactions are deferred as a component of accumulated other
comprehensive loss. These deferred gains and losses were recognized in income in
the period in which the underlying anticipated transaction
occurred.
The
following table provides information about the Company’s foreign currency
derivative financial instruments outstanding as of September 30, 2008 and 2007.
The information is provided in US Dollar amounts, as presented in the Company’s
consolidated financial statements. The table presents the notional amount (at
contract exchange rates) and the weighted average contractual foreign currency
exchange rates. All contracts mature within twelve months.
Foreign
currency spot/forward contracts:
(in
thousands of dollars, except average contract rates)
|
|
2008
|
|
2007
|
|
Notional
Amount
|
Average
Contract
Rate
|
Notional
Amount
|
Average
Contract
Rate
|
Sell
Euros for British Pounds
Sell
US Dollars for British Pounds
|
$ -
$ -
|
N/A
N/A
|
$2,942
$2,700
|
€1.45
= £1
$1.99
= £1
|
Total
|
$ -
|
|
$5,642
|
|
Estimated
fair value *
|
$ -
|
|
$
43
|
|
Amount
recorded as other comprehensive income
|
$ -
|
|
$ 3
|
|
*The
estimated fair value is based on the estimated amount at which the contracts
could be settled based on forward exchange rates.
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, US
Treasury bills and short-term bank deposits in Europe.
L.
Earnings per share
Basic and
diluted net income per common share for the two years ended September 30, 2008
are calculated as follows:
(in
thousands except per share data)
|
|
2008
|
|
|
2007
|
|
Net
income
|
|
$ |
804 |
|
|
$ |
1,303 |
|
Weighted
average shares outstanding
|
|
|
3,210 |
|
|
|
3,167 |
|
Basic
income per share
|
|
$ |
.25 |
|
|
$ |
.41 |
|
Common
stock equivalents
|
|
|
29 |
|
|
|
47 |
|
Average
common and common equivalent shares outstanding
|
|
|
3,239 |
|
|
|
3,214 |
|
Diluted
income per share
|
|
$ |
.25 |
|
|
$ |
.41 |
|
For the
years ended 2008 and 2007, approximately 63,500 and 80,000 shares attributable
to the exercise of outstanding options 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, 2008, 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 diminished. The Company considers the future profitability of the
business in assessing the value of this asset.
In
accordance with SFAS No. 142 “Goodwill and Other Intangible Assets” the Company
performs an annual assessment of goodwill impairment and has determined that
goodwill has not been impaired.
P.
New Accounting Pronouncements
In June
2006 the Financial Accounting Standards Board (FASB) issued Interpretation No.
48 “Accounting for Uncertainty in Income Taxes” (“FIN 48”) which is effective
for fiscal years beginning after December 15, 2006. FIN 48 prescribes detailed
guidance for the financial statement recognition, measurement and disclosure of
uncertain tax positions recognized in an enterprise’s financial statements in
accordance with Statement of Financial Accounting Standard (SFAS)
No. 109. Tax positions must meet a more-likely-than-not recognition threshold at
the effective date to be recognized upon the adoption of FIN 48, and in
subsequent periods. Adoption of FIN 48 did not have a material effect on the
Company’s financial statements.
In
September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements”, which
defines fair value, establishes a framework for measuring fair value in
generally accepted accounting principles, and expands disclosures about fair
value measurements. SFAS No. 157 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. This
statement is effective for the Company beginning October 1, 2008. The Company
does not expect that the adoption of SFAS No. 157 will have a material impact on
its financial statements.
In
February 2008, the FASB issued FASB Staff Position (“FSP”) FAS 157-2. This FSP
defers the effective date in FASB Statement No. 157, Fair Value Measurements,
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). The Company does
not expect that the adoption of FAS 157-2 will have a material impact on its
financial statements.
In
February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for
Financial Assets and Financial Liabilities” (SFAS 159), 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. SFAS No. 159
will be effective for the Company on October 1, 2008. The Company is currently
evaluating the impact, if any, of adopting SFAS No. 159 on its financial
position and results of operations.
In
December 2007, the FASB issued SFAS No. 141R, Business Combinations (SFAS No.
141R). SFAS No. 141R addresses financial accounting and reporting for business
combinations, and supersedes APB Opinion No. 16, Business Combinations and FASB
Statement No. 38, Accounting for Preacquisition Contingencies of Purchased
Enterprises. 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 is 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 SFAS No. 160, Noncontrolling Interests in
Consolidated Financial Statements (SFAS No. 160). SFAS No. 160
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 Statement is effective for fiscal years, and interim periods
within those fiscal years, beginning on or after December 15, 2008. The Company
is currently evaluating the impact, if any, of adopting SFAS No. 160 on its
financial position and results of operations.
In March
2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and
Hedging Activities (SFAS No. 161). SFAS No. 161 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 SFAS No. 133, Accounting 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 Statement is effective for fiscal
years, and interim periods within those fiscal years, beginning after November
15, 2008. The Company does not expect that the adoption of SFAS No. 161 will
have a material impact on its financial statements.
The FASB
has issued FASB Statement No. 162, The Hierarchy of Generally Accepted
Accounting Principles. Statement 162 is intended to improve financial reporting
by identifying a consistent framework, or hierarchy, for selecting accounting
principles to be used in preparing financial statements that are presented in
conformity with U.S. generally accepted accounting principles for
nongovernmental entities. The Company does not expect that the adoption of SFAS
No. 162 will have a material impact on its financial statements.
(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 27,000 shares of restricted common stock to employees and
directors in fiscal 2008 and a further 14,000 shares of restricted common stock
in fiscal 2007.
(3)
STOCK-BASED COMPENSATION PLANS
Under the
Company’s 1996 Equity Incentive Plan there were 104,500 shares reserved and
available for grant at September 30, 2008. No options were granted in fiscal
2008 or 2007. In fiscal 2008 options for 12,000 shares were exercised by four
employees. In fiscal 2007 four employees exercised options for 22,000
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 three years ended September 30, 2008 were
as follows:
|
|
Shares
under option
|
|
|
Weighted
average
exercise
price
|
|
Weighted
average remaining contractual life (years)
|
|
Aggregate
Intrinsic value
|
|
Outstanding
at September 30, 2005
|
|
|
182,000 |
|
|
$ |
9.26 |
|
|
|
|
|
Exercised
in 2006
|
|
|
(2,000 |
) |
|
$ |
4.37 |
|
|
|
|
|
Cancelled
in 2006
|
|
|
(8,000 |
) |
|
$ |
8.46 |
|
|
|
|
|
Outstanding
at September 30, 2006
|
|
|
172,000 |
|
|
$ |
9.35 |
|
3
years
|
|
$ |
175,000 |
|
Exercised
in 2007
|
|
|
(22,000 |
) |
|
$ |
4.37 |
|
|
|
|
|
|
Cancelled
in 2007
|
|
|
(21,000 |
) |
|
$ |
13.84 |
|
|
|
|
|
|
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
|
|
$ |
- |
|
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
$4.30 market price of the Company’s common stock at September 30, 2008. As the
option price of all shares under option is higher than the $4.30 market price of
the Company’s common stock at September 30, 2008, the aggregate intrinsic value
of all outstanding share options is nil. Options for 12,000 shares were
exercised by four employees in fiscal 2008. The total intrinsic value of options
exercised in 2008 was $39,000 and the proceeds received on the exercise of these
options were $54,000. In connection with the exercise of options in fiscal 2008
the company repurchased 1,380 shares at market for a total cost of $9,000. In
fiscal 2007 options for 22,000 shares were exercised with a total intrinsic
value of $137,000 and the proceeds received on the exercise of these options
were $96,000. At September 30, 2008 there was $34,000 of total unrecognized
compensation expense related to options granted under all equity compensation
plans. The Company expects to recognize that cost over a weighted average period
of two years.
Details
of options outstanding at September 30, 2008 were as follows:
Price
range
|
Shares
under option
|
Weighted
average remaining contractual life
|
$ 4.37
- $ 6.56
|
36,000
|
5 years
|
$ 6.57
- $ 9.85
|
10,000
|
3 years
|
$ 9.86
- $14.79
|
17,500
|
1 year
|
|
63,500
|
3
years
|
In
December 2007, the Company granted 15,000 shares of restricted stock to one
employee that vest in five equal annual installments. The estimated fair value
of the stock on the date of grant was $117,000 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 this employee restricted stock grant
in 2008 was $18,000, and the remaining $99,000 will be charged to income over
the remaining period during which the forfeiture conditions lapse.
In
January 2008, the Company granted 12,000 shares of restricted stock to six
non-employee directors which will vest on the day before the 2009 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 $79,000 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 2008
was $53,000 and the remaining $26,000 will be charged to income in fiscal
2009.
In fiscal
2007 the Company granted 2,000 shares of restricted stock to a new employee
which had an eight-month vesting period and 12,000 shares of restricted stock to
six non-employee directors which vested on the day before the 2008 annual
meeting.
During
the restriction period, generally five years for employees (except for a grant
to a new employee in fiscal 2007 which had an eight month restriction period)
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, 2008
were as follows:
(in
thousands of shares)
|
|
2008
|
|
|
2007
|
|
Beginning
Balance – Non-vested
|
|
|
55 |
|
|
|
65 |
|
Granted
to employee – 5 year vesting
|
|
|
15 |
|
|
|
- |
|
Granted
to employees – 8 month vesting
|
|
|
- |
|
|
|
2 |
|
Granted
to non-employee directors – 1 year vesting
|
|
|
12 |
|
|
|
12 |
|
Vested
|
|
|
(28 |
) |
|
|
(24 |
) |
Forfeited
|
|
|
- |
|
|
|
- |
|
Ending
Balance – Non-vested
|
|
|
54 |
|
|
|
55 |
|
Weighted-average
fair value for shares granted during the year
|
|
$ |
7.27 |
|
|
$ |
7.77 |
|
Weighted-average
fair value for shares vested during the year
|
|
$ |
6.76 |
|
|
$ |
5.72 |
|
Weighted-average
fair value for ending balance - non-vested
|
|
$ |
6.47 |
|
|
$ |
6.22 |
|
As of
September 30, 2008, there was $219,000 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 2.8 years.
The
stock-based compensation expense in the last two fiscal years was as
follows:
(in
thousands of dollars)
|
|
2008
|
|
|
2007
|
|
Stock option expense under SFAS
No. 123R
|
|
$ |
25 |
|
|
$ |
33 |
|
Restricted stock
grants:
|
|
|
|
|
|
|
|
|
Employees
|
|
$ |
100 |
|
|
$ |
84 |
|
Non-employee
directors
|
|
$ |
83 |
|
|
$ |
76 |
|
Total stock based compensation
expense
|
|
$ |
208 |
|
|
$ |
193 |
|
(4)
INCOME TAXES
The
domestic and foreign components of income before income taxes are as
follows:
(in
thousands of dollars)
|
|
2008
|
|
|
2007
|
|
Domestic
|
|
$ |
(411 |
) |
|
$ |
(53 |
) |
Foreign
|
|
|
1,648 |
|
|
|
2,041 |
|
|
|
$ |
1,237 |
|
|
$ |
1,988 |
|
The
components of the provision / (benefit) for income taxes for the years ended
September 30, 2008 and 2007 are as follows:
((in
thousands of dollars)
|
|
2008
|
|
|
|
Current
|
|
|
Deferred
|
|
Federal
|
|
$ |
- |
|
|
$ |
(57 |
) |
State
|
|
|
- |
|
|
|
(37 |
) |
Foreign
|
|
|
460 |
|
|
|
67 |
|
|
|
$ |
460 |
|
|
$ |
(27 |
) |
|
|
2007
|
|
|
|
Current
|
|
|
Deferred
|
|
Federal
|
|
$ |
60 |
|
|
$ |
(45 |
) |
State
|
|
|
1 |
|
|
|
(16 |
) |
Foreign
|
|
|
660 |
|
|
|
25 |
|
|
|
$ |
721 |
|
|
$ |
(36 |
) |
The
provision for income taxes in each period differs from that which would be
computed by applying the statutory US Federal income tax rate to the income
before income taxes. The following is a summary of the major items affecting the
provision:
(in
thousands of dollars)
|
|
2008
|
|
|
2007
|
|
Statutory
Federal income tax rate
|
|
|
34% |
|
|
|
34% |
|
Computed
tax provision at statutory rate
|
|
$ |
420 |
|
|
$ |
676 |
|
Increases
(decreases) resulting from:
|
|
|
|
|
|
|
|
|
Foreign tax rate
differentials
|
|
|
(37 |
) |
|
|
(64 |
) |
State taxes net of federal tax
benefit
|
|
|
(24 |
) |
|
|
7 |
|
Change in deferred tax valuation
allowance
|
|
|
(66 |
) |
|
|
(18 |
) |
Foreign dividends, net of
foreign tax credit
|
|
|
66 |
|
|
|
118 |
|
Other
|
|
|
74 |
|
|
|
(34 |
) |
Income
tax provision in the Consolidated Statement of Income
|
|
$ |
433 |
|
|
$ |
685 |
|
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, 2008 and 2007 are as follows:
(in
thousands of dollars)
|
|
|
|
|
2008
|
|
|
|
|
|
|
Domestic
current
|
|
|
Domestic
long-term
|
|
|
Foreign
current
|
|
|
Foreign
long-term
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension accruals
(prepaid)
|
|
$ |
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 (liability)
|
|
|
543 |
|
|
|
297 |
|
|
|
48 |
|
|
|
10 |
|
Valuation
allowance
|
|
|
- |
|
|
|
(105 |
) |
|
|
- |
|
|
|
- |
|
Net
deferred tax asset (liability)
|
|
$ |
543 |
|
|
$ |
192 |
|
|
$ |
48 |
|
|
$ |
10 |
|
|
|
|
|
|
2007
|
|
|
|
|
|
|
Domestic
current
|
|
|
Domestic
long-term
|
|
|
Foreign
current
|
|
|
Foreign
long-term
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension accruals
(prepaid)
|
|
$ |
78 |
|
|
$ |
160 |
|
|
$ |
- |
|
|
$ |
514 |
|
Inventory basis
differences
|
|
|
61 |
|
|
|
- |
|
|
|
62 |
|
|
|
- |
|
Warranty reserves
|
|
|
48 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Foreign tax credit carry
forwards
|
|
|
224 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Accrued compensation
expense
|
|
|
209 |
|
|
|
- |
|
|
|
62 |
|
|
|
- |
|
Other (net)
|
|
|
12 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
|
632 |
|
|
|
160 |
|
|
|
124 |
|
|
|
514 |
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property basis
differences
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(17 |
) |
Net
asset (liability)
|
|
|
632 |
|
|
|
160 |
|
|
|
124 |
|
|
|
497 |
|
Valuation
allowance
|
|
|
(171 |
) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
Net
deferred tax asset (liability)
|
|
$ |
461 |
|
|
$ |
160 |
|
|
$ |
124 |
|
|
$ |
497 |
|
The
Company has generated domestic federal and state net operating losses of
$353,000 which will expire in fiscal year 2028 and fiscal year 2013,
respectively.
FIN
48
Effective
October 1, 2007, the Company adopted FIN 48. The adoption of FIN 48 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 FIN 48 and consequently the Company has not recorded a FIN 48
liability for uncertain tax positions and the Company has recorded no cumulative
effect to retained earnings pursuant to the adoption of FIN 48.
(5)
ACCRUED EXPENSES
The
analysis of accrued expenses at September 30, 2008 and 2007, showing separately
any items in excess of 5% of total current liabilities, was as
follows:
(in
thousands of dollars)
|
|
2008
|
|
|
2007
|
|
Accrued
compensation and related costs
|
|
$ |
603 |
|
|
$ |
1,118 |
|
Warranty
reserves
|
|
|
362 |
|
|
|
458 |
|
Other
accrued expenses
|
|
|
1,445 |
|
|
|
1,586 |
|
|
|
$ |
2,410 |
|
|
$ |
3,162 |
|
(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, 2008 was $187,000.
Minimum
rental commitments under all non-cancelable leases are as follows for the years
ended September 30: 2009 - $285,000; 2010 - $190,000; 2011 - $149,000; 2012 -
$149,000; 2013 - $97,000 and $1,632,000 thereafter. Net rentals of certain land,
buildings and equipment charged to expense were $294,000 in 2008 and $236,000 in
2007.
The UK
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
$1,961,000. There were no amounts outstanding on the overdraft facilities at
September 30, 2008 or 2007.
(7)
EMPLOYEE BENEFIT PLANS
Tech/Ops
Sevcon has defined benefit plans covering the majority of its US and UK
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 SFAS No. 158, "Employers’ Accounting for Defined
Benefit Pension and Other Postretirement Plans – an amendment of FASB Statements
No. 87, 88, 106, and 132(R)." SFAS No. 158 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 SFAS No. 158 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)
|
|
2008
|
|
|
2007
|
|
Change
in benefit obligation:
|
|
|
|
|
|
|
Benefit
obligation at beginning of year
|
|
$ |
24,524 |
|
|
$ |
20,476 |
|
Service
cost
|
|
|
565 |
|
|
|
592 |
|
Interest
cost
|
|
|
1,383 |
|
|
|
1,159 |
|
Plan
participants contributions
|
|
|
264 |
|
|
|
289 |
|
Actuarial
(gain) loss
|
|
|
(3,372 |
) |
|
|
510 |
|
Losses
(gains) on curtailments
|
|
|
(271 |
) |
|
|
- |
|
Benefits
paid
|
|
|
(2,078 |
) |
|
|
(234 |
) |
Foreign
currency exchange rate changes
|
|
|
(2,475 |
) |
|
|
1,732 |
|
Benefit
obligation at end of year
|
|
|
18,540 |
|
|
|
24,524 |
|
Change
in plan assets:
|
|
|
|
|
|
|
|
|
Fair
value of plan assets at beginning of year
|
|
|
22,280 |
|
|
|
17,590 |
|
Return
on plan assets
|
|
|
(622 |
) |
|
|
2,333 |
|
Employer
contributions
|
|
|
727 |
|
|
|
758 |
|
Plan
participants contributions
|
|
|
264 |
|
|
|
289 |
|
Benefits
paid
|
|
|
(2,078 |
) |
|
|
(234 |
) |
Foreign
currency exchange rate changes
|
|
|
(2,409 |
) |
|
|
1,544 |
|
Fair
value of plan assets at end of year
|
|
|
18,162 |
|
|
|
22,280 |
|
Funded
status
|
|
|
(378 |
) |
|
|
(2,244 |
) |
Unrecognized
transition obligation (asset)
|
|
|
n/a |
|
|
|
n/a |
|
Unrecognized
prior service cost
|
|
|
n/a |
|
|
|
n/a |
|
Unrecognized
net actuarial (gain) loss
|
|
|
n/a |
|
|
|
n/a |
|
Accrued
benefit cost
|
|
|
n/a |
|
|
|
n/a |
|
Liability
for pension benefits recorded in the balance sheet
|
|
$ |
(378 |
) |
|
$ |
(2,244 |
) |
The
improvement in the funded status of the pension plans during fiscal 2008 was
mainly due to an increase from 5.7% to 6.85% in the discount rate for the UK
plan, better than estimated investment returns and a one-time curtailment gain
associated with the closure of the UK manufacturing operations; this was
partially offset by changes in mortality assumptions.
The
Tech/Ops Sevcon net pension cost included the following components as defined by
SFAS #132.
(in
thousands of dollars)
|
|
2008
|
|
|
2007
|
|
Components
of net periodic benefit cost:
|
|
|
|
|
|
|
Service cost
|
|
$ |
565 |
|
|
$ |
592 |
|
Interest cost
|
|
|
1,383 |
|
|
|
1,159 |
|
Expected return on plan
assets
|
|
|
(1,421 |
) |
|
|
(1,148 |
) |
Losses (gains) on
curtailments
|
|
|
(272 |
) |
|
|
- |
|
Amortization of transition
obligation
|
|
|
- |
|
|
|
(1 |
) |
Amortization of prior service
cost
|
|
|
60 |
|
|
|
59 |
|
Recognized net actuarial gain
(loss)
|
|
|
- |
|
|
|
14 |
|
Net periodic benefit
cost
|
|
$ |
315 |
|
|
$ |
675 |
|
Net cost of defined
contribution plans
|
|
$ |
46 |
|
|
$ |
147 |
|
The
weighted average assumptions used to determine plan obligations and net periodic
benefit cost for the years ended September 30, 2008 and 2007 were as set out
below:
|
|
2008
|
|
|
2007
|
|
Plan
obligations:
|
|
|
|
|
|
|
Discount rate
|
|
|
6.89% |
|
|
|
5.76 |
% |
Rate of compensation
increase
|
|
|
4.47% |
|
|
|
4.25 |
% |
Net
periodic benefit cost:
|
|
|
|
|
|
|
|
|
Discount rate
|
|
|
6.89% |
|
|
|
5.76 |
% |
Expected long term return on
plan assets
|
|
|
6.78% |
|
|
|
6.50 |
% |
Rate of compensation
increase
|
|
|
4.47% |
|
|
|
4.25 |
% |
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 UK and US plans:
(percentage
of total assets)
|
|
|
|
|
2008
|
|
|
|
|
|
|
|
|
2007
|
|
|
|
|
|
|
US
Plan
|
|
|
UK
Plan
|
|
|
Total
|
|
|
US
Plan
|
|
|
UK
Plan
|
|
|
Total
|
|
Equity
securities
|
|
|
34% |
|
|
|
55% |
|
|
|
53% |
|
|
|
40% |
|
|
|
53% |
|
|
|
52% |
|
Debt
securities
|
|
|
57% |
|
|
|
26% |
|
|
|
29% |
|
|
|
54% |
|
|
|
26% |
|
|
|
28% |
|
Real
estate
|
|
|
- |
|
|
|
16% |
|
|
|
15% |
|
|
|
- |
|
|
|
17% |
|
|
|
16% |
|
Other
|
|
|
9% |
|
|
|
3% |
|
|
|
3% |
|
|
|
6% |
|
|
|
4% |
|
|
|
4% |
|
Total
|
|
|
100% |
|
|
|
100% |
|
|
|
100% |
|
|
|
100% |
|
|
|
100% |
|
|
|
100% |
|
For the
US plan the target asset allocations are 40% - 45% equity securities and 55% -
60% debt securities. The UK 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)
2009
|
$143
|
2010
|
182
|
2011
|
277
|
2012
|
396
|
2013
|
431
|
2014
– 2018
|
4,247
|
In fiscal
2009 it is estimated that the Company will make contributions to the plans of
$644,000, and that there will be employee contributions to the UK plan of
$239,000.
(8)
SEGMENT INFORMATION
The
Company has two reportable segments: electronic controls and capacitors. The
electronic controls segment produces control systems for battery powered
vehicles. The capacitor segment produces electronic components 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)
|
|
|
|
|
|
|
|
2008
|
|
|
|
|
|
|
Controls
|
|
|
Capacitors
|
|
|
Corporate
|
|
|
Total
|
|
Sales
to external customers
|
|
$ |
37,280 |
|
|
$ |
1,939 |
|
|
$ |
- |
|
|
$ |
39,219 |
|
Inter-segment
revenues
|
|
|
- |
|
|
|
45 |
|
|
|
- |
|
|
|
45 |
|
Operating
income
|
|
|
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 |
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
|
|
|
|
|
Controls
|
|
|
Capacitors
|
|
|
Corporate
|
|
|
Total
|
|
Sales
to external customers
|
|
$ |
37,009 |
|
|
$ |
2,204 |
|
|
$ |
- |
|
|
$ |
39,213 |
|
Inter-segment
revenues
|
|
|
- |
|
|
|
52 |
|
|
|
- |
|
|
|
52 |
|
Operating
income
|
|
|
2,669 |
|
|
|
(289 |
) |
|
|
(317 |
) |
|
|
2,063 |
|
Depreciation
and amortization
|
|
|
683 |
|
|
|
56 |
|
|
|
- |
|
|
|
739 |
|
Identifiable
assets
|
|
|
20,338 |
|
|
|
1,090 |
|
|
|
498 |
|
|
|
21,296 |
|
Capital
expenditures
|
|
|
823 |
|
|
|
87 |
|
|
|
- |
|
|
|
910 |
|
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)
|
|
2008
|
|
|
2007
|
|
Sales:-
|
|
|
|
|
|
|
US
sales
|
|
$ |
15,953 |
|
|
$ |
14,832 |
|
Foreign
sales:
|
|
|
|
|
|
|
|
|
United Kingdom
|
|
|
11,766 |
|
|
|
12,338 |
|
France
|
|
|
11,500 |
|
|
|
12,043 |
|
Total
Foreign
|
|
|
23,266 |
|
|
|
24,381 |
|
Total
sales
|
|
$ |
39,219 |
|
|
$ |
39,213 |
|
Long-lived
assets:
|
|
|
|
|
|
|
|
|
USA
|
|
$ |
1,660 |
|
|
$ |
1,516 |
|
Foreign:
|
|
|
|
|
|
|
|
|
United Kingdom
|
|
|
3,363 |
|
|
|
3,530 |
|
France
|
|
|
113 |
|
|
|
142 |
|
Korea and Japan
|
|
|
31 |
|
|
|
8 |
|
Total
Foreign
|
|
|
3,507 |
|
|
|
3,680 |
|
Total
|
|
$ |
5,167 |
|
|
$ |
5,196 |
|
In the
controls business segment the revenues were derived from the following products
and services:
(in
thousands of dollars)
|
|
2008
|
|
|
2007
|
|
Electronic
controllers for battery driven vehicles
|
|
$ |
25,818 |
|
|
$ |
25,308 |
|
Accessory
and aftermarket products and services
|
|
|
11,462 |
|
|
|
11,701 |
|
Total
controls segment revenues
|
|
$ |
37,280 |
|
|
$ |
37,009 |
|
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
2008 Tech/Ops Sevcon's largest customer accounted for 13% of sales and for 12%
of receivables. In 2007 the largest customer accounted for 14% of sales and 17%
of receivables. In 2006 the largest customer accounted for 17% of sales and 16%
of receivables.
(9) RESTRUCTURING
CHARGE
In May
2008, the Company announced a limited restructuring program associated with the
closure of the residual manufacturing operations in the UK controls business and
a reduction in staff in the capacitor business segment. These plans 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 thirty six employees in
the controls business and five employees in the capacitor business. There was a
restructuring charge in the third quarter of fiscal 2008 of $700,000, which
comprised employee severance costs and associated professional fees relating to
this program.
The
following table summarizes the components of the restructuring charge in fiscal
2008:
(in thousands of
dollars)
Severance
and other related costs
|
|
$ |
685 |
|
Professional
fees
|
|
|
15 |
|
Total
restructuring charge
|
|
$ |
700 |
|
Of the
total restructuring charge of $700,000 in the year, severance costs and
professional fees in the controls business segment amounted to $673,000 and
severance costs of $27,000 were incurred in the capacitor business
segment.
The
following table summarizes the liability related to the 2008 restructuring
program:
(in
thousands of dollars)
|
|
Balance
at
October
1,
2007
|
|
|
Charges
|
|
|
Payments
|
|
|
Balance
at
September
30,
2008
|
|
Severance
and other related costs
|
|
$ |
- |
|
|
$ |
685 |
|
|
$ |
617 |
|
|
$ |
68 |
|
Professional
fees
|
|
|
- |
|
|
|
15 |
|
|
|
15 |
|
|
|
- |
|
Total
|
|
$ |
- |
|
|
$ |
700 |
|
|
$ |
632 |
|
|
$ |
68 |
|
The
Company also accelerated depreciation expense on plant and equipment in the
controls business segment in the amount of $4,000 relating to this
program.
Report of
Independent Registered Public Accounting Firm
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, 2008 and 2007 and the related consolidated
statements of income, comprehensive income, 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, 2008 and 2007 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, 2008 and 2007. 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/
Vitale, Caturano & Company, Ltd.
Boston,
Massachusetts
December
29, 2008
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, 2008, 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, 2008 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, 2008, 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 2008 that has materially affected, or is reasonably
likely to materially affect, our internal control over financial
reporting.
ITEM
9B OTHER INFORMATION
None.
PART
III
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 “Election of Directors” and “Section 16(a)
Beneficial Ownership Reporting Compliance” in the Company’s Proxy Statement for
the 2009 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
controller, 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.
Name
of Officer
|
Age
|
Position
|
Matthew
Boyle
|
46
|
President
& Chief Executive Officer
|
Paul
N. Farquhar
|
46
|
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. On January 22, 2008 we appointed Mr. Farquhar as Chief
Financial Officer, replacing Paul A. McPartlin, who retired from the Company on
the same day. 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.
This
information is incorporated by reference from the information under the captions
“Election of Directors - Director Compensation,” and “Executive Compensation” in
the Company’s Proxy Statement for the 2009 Annual Meeting of
Stockholders.
ITEM
12 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The
requisite information concerning security ownership is incorporated by reference
from the information responsive thereto under the captions “Beneficial Ownership
of Common Stock” and “Election of Directors” in the Company’s Proxy Statement
for the 2009 Annual Meeting of Stockholders.
The
following table sets out the status of shares authorized for issuance under
equity compensation plans at September 30, 2008.
Plan
Category
|
|
Number
of securities to be issued upon exercise of outstanding options warrants
and rights
|
|
|
Weighted-average
exercise price of outstanding options, warrants and rights
|
|
|
Number
of securities remaining available for future issuance under equity
compensation plans (excluding securities reflected in column (a)) at end
of year
|
|
|
|
(a)
|
|
|
(b)
|
|
|
(c)
|
|
Equity
compensation plans approved by security holders:
1996 Equity Incentive
Plan
1998 Director Stock Option
Plan
|
|
|
58,500
5,000
|
|
|
$ |
7.17
$5.40
|
|
|
|
104,500
-
|
|
Sub Total
|
|
|
63,500 |
|
|
$ |
7.03 |
|
|
|
104,500 |
|
Equity
compensation plans not approved by security holders
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Total
|
|
|
63,500 |
|
|
$ |
7.03 |
|
|
|
104,500 |
|
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 “Election of
Directors - Director Independence” in the Company’s Proxy Statement for the 2009
Annual Meeting of Stockholders.
This
information is incorporated by reference from the discussion responsive thereto
under the caption “Auditors” in the Company’s Proxy Statement relating to the
2009 Annual Meeting of Stockholders.
PART
IV
ITEM
15 EXHIBITS, FINANCIAL STATEMENT SCHEDULES
(a)
|
Financial
statements and schedule
|
|
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 (filed
herewith).
|
*(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 Vitale Caturano & Company, Ltd. (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
29, 2008
|
|
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
29, 2008
|
Matthew Boyle
|
Officer
and Director
|
|
|
(Principal
Executive Officer)
|
|
|
|
|
/s/ Paul N.
Farquhar
|
Vice
President, Chief Financial Officer and Treasurer
|
December
29, 2008
|
Paul N. Farquhar
|
(Principal
Accounting Officer)
|
|
|
|
|
/s/ Maarten D.
Hemsley
|
Director
|
December
29, 2008
|
Maarten D.
Hemsley
|
|
|
|
|
|
/s/ Paul B.
Rosenberg
|
Director
|
December
29, 2008
|
Paul B. Rosenberg
|
|
|
|
|
|
/s/ Marvin G.
Schorr
|
Director
|
December
29, 2008
|
Marvin G. Schorr
|
|
|
|
|
|
/s/ Bernard F.
Start
|
Director
|
December
29, 2008
|
Bernard F. Start
|
|
|
|
|
|
/s/ David R. A.
Steadman
|
Director
|
December
29, 2008
|
David R. A.
Steadman
|
|
|
|
|
|
/s/ Paul O.
Stump
|
Director
|
December
29, 2008
|
Paul O. Stump
|
|
|
|
|
|
TECH/OPS
SEVCON, INC. AND SUBSIDIARIES
Reserves
for the years ended September 30, 2008 and 2007 (in thousands of
dollars)
Allowance
for doubtful accounts
|
|
2008
|
|
|
2007
|
|
Balance
at beginning of year
|
|
|
180 |
|
|
|
141 |
|
Additions
charged to costs and expenses
|
|
|
- |
|
|
|
38 |
|
Deductions
from reserves:
|
|
|
|
|
|
|
|
|
Accounts
collected
|
|
|
(1 |
) |
|
|
(11 |
) |
Reduction in
reserve
|
|
|
(97 |
) |
|
|
- |
|
Write off of uncollectible
accounts
|
|
|
4 |
|
|
|
(1 |
) |
Foreign
currency translation adjustment
|
|
|
- |
|
|
|
13 |
|
Balance
at end of year
|
|
|
86 |
|
|
|
180 |
|