Tech/Ops Sevcon Form 10-K September 30, 2006
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
DC 20549
FORM
10-K
(Mark
One)
x ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES
EXCHANGE ACT OF 1934
For
the fiscal year ended September 30, 2006 or
o TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
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
|
(State
or other jurisdiction of incorporation or
organization)
|
(I.R.S.
Employer Identification No.)
|
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)
|
COMMON
STOCK, PAR VALUE $.10 PER SHARE
|
AMERICAN
STOCK EXCHANGE
|
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. o
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer or a non-accelerated filer. See definition of “accelerated
filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check
one):
Large
accelerated filer o Accelerated
Filer o Non
accelerated filer x
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
April 1, 2006, 3,209,051 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 $15,450,000. As of December 14,
2006,
3,211,051 common shares were outstanding.
Documents
incorporated by reference: Portions of the Proxy Statement for Annual Meeting
of
Stockholders to be held January 23, 2007 are incorporated by reference into
Part
III of this report.
INDEX
ITEM
PART
I
|
PAGE
|
1. BUSINESS
|
|
General
description
|
3
|
Marketing
and sales
|
3
|
Patents
|
3
|
Backlog
|
3
|
Raw
materials
|
3
|
Competition
|
3
|
Research
and development
|
4
|
Environmental
regulations
|
4
|
Employees
and labor relations
|
4
|
1A. RISK
FACTORS
|
4
|
1B. UNRESOLVED
STAFF COMMENTS
|
4
|
2. PROPERTIES
|
5
|
3. LEGAL
PROCEEDINGS
|
5
|
4. SUBMISSION
OF MATTERS TO A VOTE OF SECURITY HOLDERS
|
5
|
EXECUTIVE
OFFICERS OF THE REGISTRANT
|
5
|
PART
II
|
|
5. MARKET
FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER
PURCHASES OF EQUITY SECURITIES
|
5
|
6. SELECTED
FINANCIAL DATA
|
6
|
7. MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
|
6
|
7A. QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
|
12
|
8. FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA
|
|
Consolidated
Balance Sheets September 30, 2006 and 2005
|
13
|
Consolidated
Statements of Income for the Years ended September 30, 2006, 2005
and
2004
|
14
|
Consolidated
Statements of Comprehensive Income for the Years ended September
30, 2006,
2005 and 2004
|
14
|
Consolidated
Statements of Stockholders’ Equity for the Years ended September 30, 2006,
2005 and 2004
|
15
|
Consolidated
Statements of Cash Flows for the Years ended September 30, 2006,
2005 and
2004
|
16
|
Notes
to Consolidated Financial Statements
|
17
|
Reports
of Independent Registered Public Accounting Firms
|
29
|
9. CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
|
30
|
9A. CONTROLS
AND PROCEDURES
|
30
|
9B. OTHER
INFORMATION
|
30
|
PART
III
|
|
10. DIRECTORS
AND EXECUTIVE OFFICERS OF THE REGISTRANT
|
30
|
11. EXECUTIVE
COMPENSATION
|
31
|
12. SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
|
31
|
13. CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS
|
31
|
14. PRINCIPAL
ACCOUNTING FEES AND SERVICES
|
31
|
PART
IV
|
|
15. EXHIBITS,
FINANCIAL STATEMENT SCHEDULES
|
|
Exhibits
|
32
|
Financial
statements and schedules
|
32
|
Signatures
of registrant and directors
|
33
|
SCHEDULES
|
|
II RESERVES
|
34
|
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
ITEM
1 BUSINESS
·
General
Description
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.
Through another subsidiary located in the United Kingdom, Tech/Ops Sevcon
manufactures special metallized 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 are derived
from the controls business, with the remainder derived from the capacitor
business. The largest customer accounted for 17% of sales in fiscal 2006
compared to 16% in fiscal 2005 and 11% in fiscal 2004.
In
fiscal
2006 sales were $34,630,000, an increase of $2,955,000, or 9%, compared to
the
previous year. Foreign currency fluctuations accounted for a decrease of
$500,000, or 2%, in reported sales. Excluding the foreign currency impact,
volumes grew by 11% compared to fiscal 2005. Most of the markets for the
Company’s products are cyclical and, although several of the markets served by
the Company grew in fiscal 2006, performance in the fork lift truck market
declined. Operating income in fiscal 2006 was $1,844,000, compared to $999,000
in the previous year, an increase of 85%. Net income was $1,114,000, or $.35
per
diluted share, compared to $641,000, or $.20 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 2006 performance.
·
Marketing and sales
Sales
are
made primarily through a small full-time marketing staff. Sales in the United
States were $14,643,000, $12,893,000 and $10,577,000, in fiscal years 2006,
2005
and 2004, respectively, which accounted for approximately 42%, 41% and 36%,
respectively, of total sales. Approximately 64% of sales are made to 10
manufacturers of electric vehicles in the United States, Europe and the Far
East. Approximately 89% of the Company’s sales are direct to end customers, with
11% 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.
·
Patents
Although
the Company has international patent protection for some of its product ranges,
the Company believes that its business is not significantly dependent on patent
protection. The Company is primarily dependent upon technical competence, the
quality of its products, and its prompt and responsive service performance.
·
Backlog
Tech/Ops
Sevcon's backlog at September 30, 2006 was $4,923,000, compared to $4,957,000
at
September 2005 and $3,601,000 at September 2004.
·
Raw
materials
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 and produces
certain of these items internally. However, the Company relies on certain
suppliers and subcontractors for all of its requirements for certain components,
subassemblies, and finished products.
·
Competition
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.
·
Research
and development
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 $3,582,000 in 2006,
compared to $3,499,000 in 2005 and $3,952,000 in 2004. The increase in research
and development spending of $83,000, or 2%, in fiscal 2006 was principally
due
to costs on a new product development for a specific customer partially offset
by the effect of currency fluctuations.
·
Environmental regulations
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.
·
Employees and labor relations
As
of
September 30, 2006, the Company employed 159 full-time employees, of whom 16
were in the United States, 130 were in the United Kingdom, 10 were in France,
and 3 were in the Far East. Tech/Ops Sevcon believes its relations with its
employees are good.
ITEM
1A RISK FACTORS
In
addition to the market risk factors relating to foreign currency and interest
rate risk set out in Item 7A on page 12, the Company believes that the following
represent the most significant risk factors for the Company:
Capital
goods markets are cyclical
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 are currently showing modest growth, but demand in these markets could
decrease or customers could decide to purchase alternative products. In this
event the Company’s sales could decrease below its current break-even point and
there is no certainty that the Company would be able to decrease overhead
expenses to enable it to operate profitably.
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 product is produced in a single plant in
England and uses sub-assemblies sourced from a sub-contractor with
two
plants in Poland. 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.
ITEM
1B UNRESOLVED STAFF COMMENTS
None.
Item
2 Properties
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 are held on ground leases expiring in 2068 and 2121 respectively. During
fiscal 2006 the UK subsidiary sub-let 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 1,000 square feet of office
space
in Inchon City, near Seoul, under a lease due to expire in 2007. The Japanese
subsidiary leases approximately 600 square feet of office space in Tokyo, Japan
under a lease due to expire in 2007. The properties and equipment of the Company
are in good condition and, in the opinion of the management, are suitable and
adequate for the Company's operations.
ITEM
3 LEGAL PROCEEDINGS
The
Company is involved in various legal proceedings arising in the ordinary course
of business, but believes that these matters will be resolved without a material
effect on its financial position.
ITEM
4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
EXECUTIVE
OFFICERS OF THE REGISTRANT
Name
of Officer
|
Age
|
Position
|
Matthew
Boyle
|
44
|
President
& Chief Executive Officer
|
Paul
A. McPartlin
|
61
|
Vice
President, Treasurer & Chief Financial
Officer
|
There
are
no family relationships between any director or executive officer and any other
director or executive officer of the Company.
All
officers serve until the next annual meeting and until their successors are
elected and qualified. Mr. Boyle has been President and Chief Executive Officer
since 1997 and was Vice President and Chief Operating Officer of the Company
from 1996 to 1997. Mr. McPartlin has been Vice President and Chief Financial
Officer of the Company since 1990 and Treasurer since 2000.
PART
II
ITEM
5 MARKET FOR THE REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES
The
Common Stock of the Company is traded on the American Stock Exchange 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 14, 2006, there were
approximately 210 shareholders of record.
|
|
|
Quarter
1
|
|
|
Quarter
2
|
|
|
Quarter
3
|
|
|
Quarter
4
|
|
|
Year
|
|
2006
Quarters
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
dividends per share
|
|
$
|
.03
|
|
$
|
.03
|
|
$
|
.03
|
|
$
|
.03
|
|
$
|
.12
|
|
Common
stock price per share - High
- Low
|
|
$
|
6.10
4.95
|
|
$
|
6.55
5.36
|
|
$
|
7.36
5.95
|
|
$
|
7.09
6.20
|
|
$
|
7.36
4.95
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
Quarters
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
dividends per share
|
|
$
|
.03
|
|
$
|
.03
|
|
$
|
.03
|
|
$
|
.03
|
|
$
|
.12
|
|
Common
stock price per share - High
- Low
|
|
$
|
6.60
5.65
|
|
$
|
7.15
6.20
|
|
$
|
6.30
5.10
|
|
$
|
6.10
5.70
|
|
$
|
7.15
5.10
|
|
Item
6 Selected Financial Data
A
summary
of selected financial data for the last five years is set out
below:
As
of
September 30 (in
thousands except per share data)
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
2002
|
|
Net
sales
|
|
$
|
34,630
|
|
$
|
31,675
|
|
$
|
29,150
|
|
$
|
23,113
|
|
$
|
21,872
|
|
Operating
income
|
|
|
1,844
|
|
|
999
|
|
|
972
|
|
|
151
|
|
|
45
|
|
Net
income
|
|
|
1,114
|
|
|
641
|
|
|
611
|
|
|
83
|
|
|
57
|
|
Basic
income per share
|
|
$
|
.35
|
|
$
|
.21
|
|
$
|
.20
|
|
$
|
.03
|
|
$
|
.02
|
|
Cash
dividends per share
|
|
$
|
.12
|
|
$
|
.12
|
|
$
|
.12
|
|
$
|
.12
|
|
$
|
.30
|
|
Average
shares outstanding
|
|
|
3,139
|
|
|
3,125
|
|
|
3,125
|
|
|
3,125
|
|
|
3,117
|
|
Stockholders’
equity
|
|
|
10,037
|
|
|
10,589
|
|
|
10,464
|
|
|
9,648
|
|
|
9,453
|
|
Total
assets
|
|
$
|
18,652
|
|
$
|
16,446
|
|
$
|
16,608
|
|
$
|
13,784
|
|
$
|
13,521
|
|
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’.
NEW
ACCOUNTING PRONOUNCEMENTS
The
Company adopted the following new accounting pronouncements in fiscal 2006.
See
Note (1)P. to Consolidated Financial Statements for a more detailed description
of these new accounting pronouncements.
The
Company adopted the provisions of SFAS #123R “Share-Based Payment” effective at
the beginning of fiscal 2006 using the modified prospective application
transition method. Under this method the Company incurred expense relating
to
previously issued stock options of approximately $46,000 in fiscal 2006. There
was no similar expense recorded in fiscal 2005 because, during that period,
the
Company accounted for options under APB #25. The accounting for restricted
stock
issued in fiscal 2005 was substantially unchanged by the application of SFAS
#123R.
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 overfunded or underfunded 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 #158 effective on September 30, 2006.
CRITICAL
ACCOUNTING ESTIMATES
The
Company's significant accounting policies are summarized in Note 1 of its
Consolidated Financial Statements in this Annual Report. While all these
significant accounting policies impact its 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 64% of the
Company’s sales. At September 30, 2006, the allowance for bad debts amounted to
$141,000, which represented 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, 2006 was $923,000, or 16% of the original
cost of gross inventory. At September 30, 2005, the provision was $803,000,
or
18% 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 SFAS #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
2005
and 2006 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 libiliities relating to the pension plans, which
could have a material effect on the Company’s financial position and
results
of operations. The company adopted SFAS #158 in September 2006 and recorded
a
liability for pension benefits of $2,886,000 on its balance sheet and a charge
to comprehensive income of $1,923,000, net of tax. The Company’s pension plans
are significant relative to the size of the Company. At September 30, 2006,
pension plan assets were $17,590,000, plan liabilities were $20,476,000, and
the
total assets of the Company were $18,652,000. Under SFAS #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. At September 30, 2006, a decrease in the assumed
discount rate of 0.1% would have resulted in an increase in the liability for
pension benefits of approximately $440,000.
·
A) Results of Operations
2006
compared to 2005
The
following table compares results, for both the controls and capacitor segments,
for fiscal 2006 with the prior year, showing separately the percentage variances
due to currency and volume / other.
|
|
|
|
|
|
|
|
|
%
change due to:
|
|
|
|
|
2006
|
|
|
2005
|
|
|
Total
|
|
|
Currency
|
|
|
Volume
/ other
|
|
Sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Controls
- to external customers
|
|
$
|
32,808
|
|
$
|
30,009
|
|
|
9%
|
|
|
-2%
|
|
|
11%
|
|
Capacitors-
to external customers
|
|
|
1,822
|
|
|
1,666
|
|
|
9%
|
|
|
-3%
|
|
|
12%
|
|
Capacitors
- inter-segment
|
|
|
64
|
|
|
199
|
|
|
-68%
|
|
|
-2%
|
|
|
-66%
|
|
Capacitors
- total
|
|
|
1,886
|
|
|
1,865
|
|
|
1%
|
|
|
-3%
|
|
|
4%
|
|
Total
sales to external customers
|
|
|
34,630
|
|
|
31,675
|
|
|
9%
|
|
|
-2%
|
|
|
11%
|
|
Gross
Profit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Controls
|
|
|
12,268
|
|
|
11,259
|
|
|
9%
|
|
|
0%
|
|
|
9%
|
|
Capacitors
|
|
|
838
|
|
|
777
|
|
|
8%
|
|
|
-2%
|
|
|
10%
|
|
Total
|
|
|
13,106
|
|
|
12,036
|
|
|
9%
|
|
|
0%
|
|
|
9%
|
|
Selling
research and administrative expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Controls
|
|
|
10,094
|
|
|
9,916
|
|
|
2%
|
|
|
-2%
|
|
|
4%
|
|
Capacitors
|
|
|
770
|
|
|
745
|
|
|
3%
|
|
|
-2%
|
|
|
5%
|
|
Unallocated
corporate expense
|
|
|
398
|
|
|
376
|
|
|
6%
|
|
|
0%
|
|
|
6%
|
|
Total
|
|
|
11,262
|
|
|
11,037
|
|
|
2%
|
|
|
-2%
|
|
|
4%
|
|
Operating
income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Controls
|
|
|
2,174
|
|
|
1,343
|
|
|
62%
|
|
|
11%
|
|
|
51%
|
|
Capacitors
|
|
|
68
|
|
|
32
|
|
|
113%
|
|
|
-3%
|
|
|
116%
|
|
Unallocated
corporate expense
|
|
|
(398
|
)
|
|
(376
|
)
|
|
6%
|
|
|
0%
|
|
|
6%
|
|
Total
|
|
|
1,844
|
|
|
999
|
|
|
85%
|
|
|
15%
|
|
|
70%
|
|
Other
income and expense
|
|
|
(110
|
)
|
|
(48
|
)
|
|
129%
|
|
|
117%
|
|
|
12%
|
|
Income
before income taxes
|
|
|
1,734
|
|
|
951
|
|
|
82%
|
|
|
10%
|
|
|
72%
|
|
Income
taxes
|
|
|
(620
|
)
|
|
(310
|
)
|
|
100%
|
|
|
12%
|
|
|
88%
|
|
Net
Income
|
|
$
|
1,114
|
|
$
|
641
|
|
|
74%
|
|
|
9%
|
|
|
65%
|
|
In
fiscal
2006 sales revenues increased by $2,525,000, or 9%, to $34,630,000. In fiscal
2006 approximately 58% 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 2006 the
average dollar exchange rate strengthened compared to the British Pound by
2%
and by 3% compared to the Euro. As a result, foreign currency sales translated
into fewer dollars. Foreign currency fluctuations accounted for a 2% decrease
in
reported sales, even though volumes were 11% higher than the previous
year.
In
the
controls business segment revenues were 9% higher than in fiscal 2005,
reflecting a 2% decrease due to foreign currency fluctuations and an 11%
increase in volumes shipped. In the United States controller business, sales
were $14,643,000 compared to $12,893,000 in 2005, an increase of 14%. Non-U.S.
sales volumes in the controller businesses improved by 9% compared to last
year.
In the aerial lift market volumes were 20% ahead of the prior year and volumes
also increased in the other electric vehicle, mining and airport ground support
markets. Volumes in the fork lift truck market declined by 8% compared to fiscal
2005.
In
the
capacitor business segment, revenues increased by $156,000, or 9%. Capacitor
volumes increased by 12% compared to last year, but were partially offset by
adverse foreign currency fluctuations. This volume increase was mainly due
to
stronger conditions in the railway signaling market for capacitors.
Cost
of
sales was $21,524,000 compared to $19,639,000 in fiscal 2005, an increase of
$1,885,000, or 10%. Approximately 75% of this cost of sales was denominated
in
British Pounds. As a result foreign currency fluctuations decreased cost of
sales by $450,000, or 2%. The remaining 12% increase in cost of sales was mainly
due to higher volumes. Sales mix was marginally adverse, with volume gains
concentrated in the lower than average margin aerial lift market.
Gross
profit was $13,106,000, or 37.8% of sales, compared to $12,036,000, or 38.0%
of
sales, in fiscal 2005. Foreign currency fluctuations adversely impacted the
gross profit percentage by $50,000, or 0.1%, with adverse sales mix the main
cause of the remaining 0.1% decrease in the gross profit percentage. In the
controls segment, gross profit of $12,268,000 was 9% ahead of last year; this
compared to an increase in volumes of 11%. In the capacitor segment gross profit
was $838,000, an increase of $61,000, or 8% compared to fiscal 2005. Capacitor
business gross profit was 44.4% of sales in the current year compared to 41.7%
of sales in fiscal 2005. The increase in capacitor business gross profit was
mainly due to increased volumes.
Selling,
research and administrative expenses (operating expenses) were $11,262,000,
an
increase of $225,000, or 2%, compared to fiscal 2005. Foreign currency
fluctuations reduced reported operating expenses by $200,000, or 2%. Excluding
the currency impact, operating expenses increased by $455,000, or 4%. In fiscal
2006, expenditure on new product engineering increased by $156,000, before
the
impact of currency fluctuations. Spending on sales and marketing resources
in
fiscal 2006, mainly to support the introduction of new products, increased
by
$264,000, before the impact of currency fluctuations. In fiscal 2006 the Company
set up a subsidiary in Tokyo, Japan to improve service to customers in the
Japanese market. Included in administrative expense was a charge of $175,000
in
2006 compared to $87,000 in fiscal 2005, relating to equity compensation
expense. This included restricted stock granted to employees and directors
and
expensing options under SFAS #123R in 2006, which were previously accounted
for
under APB #25, under which no expense was recorded. 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 2006
|
|
$
|
11,262
|
|
Reported
expense in fiscal 2005
|
|
|
11,037
|
|
Increase
in expense
|
|
|
225
|
|
Increase
(decrease) due to:
|
|
|
|
|
Effect
of exchange rate changes
|
|
|
(200
|
)
|
Additional
engineering expense, net of currency effect
|
|
|
156
|
|
Additional
sales and marketing expense, net of currency effect
|
|
|
264
|
|
Increased
cost of equity compensation in 2006
|
|
|
88
|
|
Net
other operating expense decreases
|
|
|
(108
|
)
|
Total
increase in selling research and administrative expenses in fiscal
2006
|
|
|
225
|
|
Operating
income was $1,844,000 compared to $999,000 in fiscal 2005, an increase of
$845,000, or 85%. Foreign currency fluctuations increased operating income
by
$150,000 in fiscal 2006. Excluding the currency effect, operating income
increased by 70% compared to fiscal 2005, mainly due to increased volumes.
In
the controller business, and excluding the currency impact, operating income
was
51% ahead of the prior year. Capacitor business operating income increased
by
113% to $68,000 compared to $32,000 in fiscal 2005, mainly due to higher
volumes.
Other
expense was $110,000 in fiscal 2006 compared to $48,000 in the previous year.
Interest expense increased by $8,000 to $64,000 and interest income in 2006
was
$2,000 higher at $6,000. There was a foreign currency loss of $52,000 in 2006
compared to a foreign currency gain of $4,000 in 2005.
Income
before income taxes was $1,734,000 compared to $951,000 in 2005, an increase
of
$783,000, or 82%. Foreign currency fluctuations increased pre tax income by
$94,000 in fiscal 2006. Pre-tax income, before the effect of currency
fluctuations, was 72% ahead of the prior year. Income taxes were 35.8% of
pre-tax income compared to 32.6% in fiscal 2005. The higher tax rate was mainly
due to a change in the deferred tax valuation allowance relating to foreign
tax
credits. Net income was $1,114,000, an increase of $473,000, or 74%, compared
to
$641,000 last year. Basic income per share was $.35 per share in 2006 compared
to $.21 in fiscal 2005, an increase of 67%. Diluted income per share was $.35
per share in fiscal 2006, an increase of $.15 per share compared to last
year.
2005
compared to 2004
The
following table compares results, for both the controls and capacitor segments,
for fiscal 2005 with the prior year, showing separately the percentage variances
due to currency and volume / other.
|
|
|
|
|
|
|
|
|
%
change due to:
|
|
|
|
2005
|
|
|
2004
|
|
|
Total
|
|
|
Currency
|
|
|
Volume
/ other
|
|
Sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Controls
- to external customers
|
|
$
|
30,009
|
|
$
|
27,101
|
|
|
11%
|
|
|
2%
|
|
|
9%
|
|
Capacitors-
to external customers
|
|
|
1,666
|
|
|
2,049
|
|
|
-19%
|
|
|
2%
|
|
|
-21%
|
|
Capacitors
- inter-segment
|
|
|
199
|
|
|
218
|
|
|
-9%
|
|
|
2%
|
|
|
-11%
|
|
Capacitors
- total
|
|
|
1,865
|
|
|
2,267
|
|
|
-18%
|
|
|
2%
|
|
|
-20%
|
|
Total
sales to external customers
|
|
|
31,675
|
|
|
29,150
|
|
|
9%
|
|
|
2%
|
|
|
7%
|
|
Gross
Profit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Controls
|
|
|
11,259
|
|
|
10,546
|
|
|
7%
|
|
|
-1%
|
|
|
8%
|
|
Capacitors
|
|
|
777
|
|
|
999
|
|
|
-22%
|
|
|
2%
|
|
|
-24%
|
|
Total
|
|
|
12,036
|
|
|
11,545
|
|
|
4%
|
|
|
-1%
|
|
|
5%
|
|
Selling
research and administrative expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Controls
|
|
|
9,916
|
|
|
9,572
|
|
|
4%
|
|
|
1%
|
|
|
3%
|
|
Capacitors
|
|
|
745
|
|
|
704
|
|
|
6%
|
|
|
2%
|
|
|
4%
|
|
Unallocated
corporate expense
|
|
|
376
|
|
|
297
|
|
|
27%
|
|
|
0%
|
|
|
27%
|
|
Total
|
|
|
11,037
|
|
|
10,573
|
|
|
4%
|
|
|
2%
|
|
|
2%
|
|
Operating
income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Controls
|
|
|
1,343
|
|
|
974
|
|
|
38%
|
|
|
-25%
|
|
|
63%
|
|
Capacitors
|
|
|
32
|
|
|
295
|
|
|
-89%
|
|
|
1%
|
|
|
-90%
|
|
Unallocated
corporate expense
|
|
|
(376
|
)
|
|
(297
|
)
|
|
27%
|
|
|
0%
|
|
|
27%
|
|
Total
|
|
|
999
|
|
|
972
|
|
|
3%
|
|
|
-24%
|
|
|
27%
|
|
Other
income and expense
|
|
|
(48
|
)
|
|
(54
|
)
|
|
-11%
|
|
|
-56%
|
|
|
45%
|
|
Income
before income taxes
|
|
|
951
|
|
|
918
|
|
|
4%
|
|
|
-23%
|
|
|
27%
|
|
Income
taxes
|
|
|
(310
|
)
|
|
(307
|
)
|
|
1%
|
|
|
-22%
|
|
|
23%
|
|
Net
Income
|
|
$
|
641
|
|
$
|
611
|
|
|
5%
|
|
|
-23%
|
|
|
28%
|
|
In
fiscal
2005 sales increased by $2,525,000, or 9%, to $31,675,000. Approximately 59%
of
the Company’s sales were made outside of the United States. Because these
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. The Dollar weakened compared to the British
Pound in 2005 and the net effect of these changes in average foreign currency
exchange rates was devaluation in the average exchange rate of the Dollar
compared to the British pound of 3%. As a result, foreign currency fluctuations
accounted for a 2% increase in reported sales, while volumes were 7% higher
than
the previous year.
In
the
controls business segment revenues were 11% higher than in fiscal 2004,
including a 2% increase due to foreign currency fluctuations and a 9% increase
in volumes shipped. In the United States controller business, sales were
$12,893,000 compared to $10,577,000 in 2004, an increase of 22%. Sales volumes
in the foreign controller businesses improved by 4% compared to the previous
year. In the aerial lift market volumes were 45% ahead of the prior year and
volumes also increased in the mining and other electric vehicle markets. Volumes
in the fork lift truck and airport ground support markets declined compared
to
fiscal 2004.
In
the
capacitor business segment sales were down by $383,000, or 19%. Due to difficult
market conditions, particularly in specialist audio and railway signaling
markets for capacitors, volumes were down by 21% compared to fiscal 2004, but
were partially offset by positive foreign currency fluctuations.
Cost
of
sales was $19,639,000 compared to $17,605,000 in fiscal 2004, an increase of
$2,034,000, or 12%. Approximately 80% of this cost of sales was denominated
in
British pounds. As a result foreign currency fluctuations increased cost of
sales by $720,000, or 4%. The remaining 8% increase in cost of sales was mainly
due to higher volumes. Sales mix was adverse; with volume gains concentrated
in
the lower than average margin aerial lift market and sales decreases in some
of
the more profitable market segments. Within each major market segment a
year-to-year comparison revealed improved percentage margins.
Gross
profit was $12,036,000, or 38.0% of sales, compared to $11,545,000, or 39.6%
of
sales in fiscal 2004. Foreign currency fluctuations adversely impacted the
gross
profit percentage by 0.5% with adverse sales mix the main cause of the remaining
1.1% decrease in the gross profit percentage. This was offset slightly by the
positive margin impact of a refined calculation of overheads in inventory in
connection with the implementation of a new ERP computer system. In the controls
segment gross profit of $11,259,000 was 7% ahead of the prior year, and after
adjusting for currency fluctuations increased by 8% compared to an increase
in
volumes of 9%. In the capacitor segment gross profit was $777,000, a decrease
of
$222,000, or 22% compared to fiscal 2004. Capacitor business gross profit was
41.7% of sales in fiscal 2005 compared to 44.1% of sales in the prior year.
Lower volumes, foreign exchange fluctuations and sales mix all contributed
to
decrease the capacitor segment gross profit percentage.
Selling,
research and administrative expenses (operating expenses) were $11,037,000,
an
increase of $464,000, or 4%, compared to fiscal 2004. Foreign currency
fluctuations increased reported operating expenses by $210,000, or 2%. Excluding
the currency impact, operating expenses increased by $254,000. In fiscal 2005
the Company reduced its spending on engineering consultancy by $915,000, as
development of advanced new products was completed and these products moved
into
the testing and customer prototyping phases. To support these new product
activities internal engineering resources were increased resulting in higher
spending on in-house engineering of $379,000, excluding the impact of currency
fluctuations. Spending on sales and marketing resources in fiscal 2005, mainly
to support the introduction of these new products, increased by $450,000, before
the impact of currency fluctuations. Included in administrative expense was
a
charge of $87,000 relating to restricted stock granted to employees and
directors in fiscal 2005. 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 2005
|
|
$
|
11,037
|
|
Reported
expense in fiscal 2004
|
|
|
10,573
|
|
Increase
in expense
|
|
|
464
|
|
Increase
(decrease) due to:
|
|
|
|
|
Effect
of exchange rate changes
|
|
|
210
|
|
Lower
engineering consultancy costs in fiscal 2005, net of currency
effect
|
|
|
(915
|
)
|
Additional
internal engineering expense, net of currency effect
|
|
|
379
|
|
Additional
sales and marketing expense, net of currency effect
|
|
|
450
|
|
Charge
for restricted stock grants in fiscal 2005
|
|
|
87
|
|
Other
increases in operating expense - net,
|
|
|
253
|
|
Total
increase in selling research and administrative expenses in fiscal
2005
|
|
|
464
|
|
Operating
income was $999,000 compared to $972,000 in fiscal 2004, an increase of $27,000.
Foreign currency fluctuations adversely impacted operating income by $240,000
in
fiscal 2005. Excluding the currency effect, operating income increased by 27%
compared to fiscal 2004. In the controller business, and excluding the currency
impact, operating income was 63% ahead of fiscal 2004. Capacitor business
operating income declined from $295,000 to $32,000, mainly due to a 20% decrease
in volumes.
Other
expense was $48,000 in fiscal 2005 compared to $54,000 in the previous year.
Interest expense increased by $27,000 to $56,000 and there was a foreign
currency gain of $4,000 compared to a foreign currency loss of $26,000 in
2004.
Income
before income taxes was $ 951,000 compared to $918,000 in 2004. Foreign currency
fluctuations adversely impacted pre tax income by $240,000 in fiscal 2005.
Before the effect of currency fluctuations pre-tax income was 26% ahead of
the
prior year. Income taxes were 32.6% of pre-tax income compared to 33.4% in
fiscal 2004. The lower average tax rate was mainly due to a reduction in the
corporate tax rate in France. Net income was $641,000, an increase of $30,000
compared to last year. Basic income per share was $.21 per share and diluted
income per share was $.20 per share. Both basic and diluted income per share
were $.01 per share ahead of fiscal 2004.
·
B)
Liquidity and Capital Resources
The
Company’s cash flow from operating activities for fiscal 2006 was $950,000
compared to $1,324,000 in the prior fiscal year. Acquisitions of property,
plant
and equipment amounted to $706,000 compared to $571,000 in fiscal 2005.
Quarterly dividend payments were at the rate of $.03
per
share throughout both fiscal 2006 and 2005. In fiscal 2006 dividend payments
amounted to $384,000 compared to $379,000 in 2005 Exchange rate changes
increased cash by $292,000 in fiscal 2006 compared to a decrease of $149,000
last year. In fiscal 2006 cash balances increased by $160,000, compared to
an
increase of $225,000 in 2005. The main changes in operating assets and
liabilities in fiscal 2006 were an increase in inventories of $980,000, and
lower accounts payable of $202,000. Accounts receivable decreased by $6,000,
accrued expenses increased by $16,000 and accrued income taxes were $34,000
higher than last year.
In
September 2006 the Company adopted the provisions of SFAS #158, "Employers’
Accounting for Defined Benefit Pension and Other Postretirement Plans”. This did
not impact on liquidity but did result in a decrease in stockholders’ equity of
$1,923,000 as the funded status of the Company’s pension plans was recorded in
the balance sheet.
The
Company has no long-term debt and has overdraft facilities in the United Kingdom
(UK) amounting to $2,055,000 and in France of $127,000. These facilities were
unused at September 30, 2006 and September 30, 2005. The UK overdraft facilities
are secured by all of the Company’s assets in the UK and are due for renewal in
September 2007 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 2007 but, in line with normal practice in Europe,
can
be withdrawn on demand by the bank.
At
September 30, 2006 the Company’s cash balances were $1,290,000 and there was no
short-term or long-term debt. The Company has, since January 1990, maintained
a
program of regular cash dividends. The dividends amounted to $96,000 per quarter
in fiscal 2006. In the opinion of management, the Company’s requirements for
working capital to meet future business growth 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 exceed the depreciation charge which over the
last
three fiscal years averaged $649,000. There were no significant capital
expenditure commitments at September 30, 2006. Tech/Ops Sevcon's resources,
in
the opinion of management, are adequate for projected operations and capital
spending programs, as well as continuation of cash dividends.
·
C) Off
balance sheet arrangements
The
Company does not have any off balance sheet financing or arrangements.
·
D)
Contractual Obligations
Set
out
below are the Company’s contractual obligations at September 30,
2006:
|
|
|
(in
thousands of dollars)
|
|
|
|
Total
|
|
|
Less
than 1 year
|
|
|
1
- 3 years
|
|
|
3
- 5 years
|
|
|
More
than 5 years
|
|
Long-term
debt obligations
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
Capital
lease obligations
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Operating
lease obligations
|
|
|
2,583
|
|
|
224
|
|
|
412
|
|
|
412
|
|
|
1,535
|
|
Purchase
Obligations
|
|
|
2,633
|
|
|
2,633
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Other
long term liabilities
|
|
|
56
|
|
|
-
|
|
|
-
|
|
|
56
|
|
|
-
|
|
Total
|
|
$
|
5,272
|
|
$
|
2,857
|
|
$
|
412
|
|
$
|
468
|
|
$
|
1,535
|
|
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. Other risks dealing with contingencies are described in Notes (1)J and
(5)
to the Company’s Consolidated Financial Statements included under Item 8 and
other risks are described under the caption Risk Factors in Item 1A above.
Foreign
currency risk
The
Company sells to customers throughout the industrialized world. In fiscal 2006
approximately 42% of the Company’s sales were made in US Dollars, 15% were made
in British Pounds and 43% were made in Euros. The majority of the Company’s
products are assembled in the United Kingdom and approximately 75% of the
Company’s cost of sales was incurred in British Pounds. 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 undertakes 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 does not engage in speculative foreign exchange transactions. Details
of
this hedging activity and the underlying exposures are contained in Note (1)
J.
to the Company’s consolidated financial statements included under Item 8.
Because
the difference between the spot and hedged foreign exchange rates at September
30, 2006 was 8%, and amounted to $19,000, the risk of default by counterparties
is not material to the Company.
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, 2006 the risk arising from changes in interest rates was not
material.
ITEM
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
CONSOLIDATED
BALANCE SHEETS
Tech/Ops
Sevcon, Inc. and Subsidiaries
September
30, 2006 and 2005
(in
thousands of dollars except per share data)
ASSETS
|
|
|
2006
|
|
|
2005
|
|
Current
assets:
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
1,290
|
|
$
|
1,130
|
|
Receivables,
net of allowances for doubtful accounts of $141 in 2006 and $144
in
2005
|
|
|
6,187
|
|
|
6,193
|
|
Inventories
|
|
|
4,717
|
|
|
3,737
|
|
Prepaid
expenses and other current assets
|
|
|
847
|
|
|
915
|
|
Total
current assets
|
|
|
13,041
|
|
|
11,975
|
|
Property,
plant and equipment, at cost:
|
|
|
|
|
|
|
|
Land
and improvements
|
|
|
26
|
|
|
25
|
|
Buildings
and improvements
|
|
|
2,256
|
|
|
2,139
|
|
Equipment
|
|
|
8,215
|
|
|
7,429
|
|
|
|
|
10,497
|
|
|
9,593
|
|
Less:
accumulated depreciation and amortization
|
|
|
7,202
|
|
|
6,557
|
|
Net
property, plant and equipment
|
|
|
3,295
|
|
|
3,036
|
|
Long-term
deferred tax asset
|
|
|
881
|
|
|
-
|
|
Goodwill
|
|
|
1,435
|
|
|
1,435
|
|
Total
assets
|
|
$
|
18,652
|
|
$
|
16,446
|
|
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$
|
2,397
|
|
$
|
2,599
|
|
Dividend
payable
|
|
|
96
|
|
|
95
|
|
Accrued
expenses
|
|
|
2,701
|
|
|
2,685
|
|
Accrued
taxes on income
|
|
|
479
|
|
|
445
|
|
Total
current liabilities
|
|
|
5,673
|
|
|
5,824
|
|
Deferred
taxes on income
|
|
|
-
|
|
|
33
|
|
Liability
for pension benefits
|
|
|
2,886
|
|
|
-
|
|
Other
long term liabilities
|
|
|
56
|
|
|
-
|
|
Total
liabilities
|
|
|
8,615
|
|
|
5,857
|
|
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
|
|
|
|
|
|
|
|
3,211,051
shares in 2006 and 3,172,051 shares in 2005
|
|
|
321
|
|
|
317
|
|
Premium
paid in on common stock
|
|
|
4,309
|
|
|
4,310
|
|
Retained
earnings
|
|
|
7,123
|
|
|
6,394
|
|
Unearned
compensation on restricted stock
|
|
|
-
|
|
|
(180
|
)
|
Cumulative
other comprehensive loss
|
|
|
(1,716
|
)
|
|
(252
|
)
|
Total
stockholders’ equity
|
|
|
10,037
|
|
|
10,589
|
|
Total
liabilities and stockholders’ equity
|
|
$
|
18,652
|
|
$
|
16,446
|
|
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, 2006, 2005 and 2004
(in
thousands except per share data)
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
Net
sales
|
|
$
|
34,630
|
|
$
|
31,675
|
|
$
|
29,150
|
|
Cost
of sales
|
|
|
21,524
|
|
|
19,639
|
|
|
17,605
|
|
Gross
profit
|
|
|
13,106
|
|
|
12,036
|
|
|
11,545
|
|
Selling,
research and administrative expenses
|
|
|
11,262
|
|
|
11,037
|
|
|
10,573
|
|
Operating
income
|
|
|
1,844
|
|
|
999
|
|
|
972
|
|
Interest
expense
|
|
|
(64
|
)
|
|
(56
|
)
|
|
(29
|
)
|
Interest
income
|
|
|
6
|
|
|
4
|
|
|
1
|
|
Foreign
currency gain or (loss)
|
|
|
(52
|
)
|
|
4
|
|
|
(26
|
)
|
Income
before income taxes
|
|
|
1,734
|
|
|
951
|
|
|
918
|
|
Income
taxes
|
|
|
(620
|
)
|
|
(310
|
)
|
|
(307
|
)
|
Net
income
|
|
$
|
1,114
|
|
$
|
641
|
|
$
|
611
|
|
Basic
income per share
|
|
$
|
.35
|
|
$
|
.21
|
|
$
|
.20
|
|
Diluted
income per share
|
|
$
|
.35
|
|
$
|
.20
|
|
$
|
.19
|
|
CONSOLIDATED
STATEMENTS OF COMPREHENSIVE INCOME
Tech/Ops
Sevcon, Inc. and Subsidiaries
For
the
Years ended September 30, 2006, 2005 and 2004
(in
thousands of dollars)
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
Net
income
|
|
$
|
1,114
|
|
$
|
641
|
|
$
|
611
|
|
Foreign
currency translation adjustment
|
|
|
459
|
|
|
(208
|
)
|
|
574
|
|
Changes
in fair market value of cash flow hedges
|
|
|
-
|
|
|
(15
|
)
|
|
6
|
|
Comprehensive
income
|
|
$
|
1,573
|
|
$
|
418
|
|
$
|
1,191
|
|
The
accompanying notes are an integral part of these consolidated financial
statements.
CONSOLIDATED
STATEMENTS OF STOCKHOLDERS’ EQUITY
Tech/Ops
Sevcon, Inc. and Subsidiaries
For
the
Years ended September 30, 2006, 2005 and 2004
(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, 2003
|
|
$
|
313
|
|
$
|
4,047
|
|
$
|
5,897
|
|
$
|
-
|
|
$
|
(609
|
)
|
$
|
9,648
|
|
Net
income
|
|
|
-
|
|
|
-
|
|
|
611
|
|
|
-
|
|
|
-
|
|
|
611
|
|
Dividends
($.12 per share)
|
|
|
-
|
|
|
-
|
|
|
(375
|
)
|
|
-
|
|
|
-
|
|
|
(375
|
)
|
Currency
translation adjustment
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
574
|
|
|
574
|
|
Change
in fair market value of cash flow hedge
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
6
|
|
|
6
|
|
Balance
September 30, 2004
|
|
|
313
|
|
|
4,047
|
|
|
6,133
|
|
|
-
|
|
|
(29
|
)
|
|
10,464
|
|
Net
income
|
|
|
-
|
|
|
-
|
|
|
641
|
|
|
-
|
|
|
-
|
|
|
641
|
|
Dividends
($.12 per share)
|
|
|
-
|
|
|
-
|
|
|
(380
|
)
|
|
-
|
|
|
-
|
|
|
(380
|
)
|
Currency
translation adjustment
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(208
|
)
|
|
(208
|
)
|
Change
in fair market value of cash flow hedge
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(15
|
)
|
|
(15
|
)
|
Issuance
of restricted stock
|
|
|
4
|
|
|
263
|
|
|
-
|
|
|
(267
|
)
|
|
-
|
|
|
-
|
|
Restricted
stock expense
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
87
|
|
|
-
|
|
|
87
|
|
Balance
September 30, 2005
|
|
|
317
|
|
|
4,310
|
|
|
6,394
|
|
|
(180
|
)
|
|
(252
|
)
|
|
10,589
|
|
Net
income
|
|
|
-
|
|
|
-
|
|
|
1,114
|
|
|
-
|
|
|
-
|
|
|
1,114
|
|
Dividends
($.12 per share)
|
|
|
-
|
|
|
-
|
|
|
(385
|
)
|
|
-
|
|
|
-
|
|
|
(385
|
)
|
Currency
translation adjustment
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
459
|
|
|
459
|
|
Reclassification
of unearned compensation on adoption of
SFAS
#123R
|
|
|
-
|
|
|
(180
|
)
|
|
-
|
|
|
180
|
|
|
-
|
|
|
-
|
|
Issuance
of restricted stock
|
|
|
4
|
|
|
(4
|
)
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Exercise
of stock options
|
|
|
-
|
|
|
8
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
8
|
|
Equity
compensation expense
|
|
|
-
|
|
|
175
|
|
|
-
|
|
|
|
|
|
-
|
|
|
175
|
|
Pension
liability adjustment to initially apply SFAS #158, net of tax benefit
of
$849
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(1,923
|
)
|
|
(1,923
|
)
|
Balance
September 30, 2006
|
|
$
|
321
|
|
$
|
4,309
|
|
$
|
7,123
|
|
$
|
-
|
|
$
|
(1,716
|
)
|
$
|
10,037
|
|
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, 2006, 2005 and 2004
(in
thousands of dollars)
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
Cash
flow from operating activities:
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
1,114
|
|
$
|
641
|
|
$
|
611
|
|
Adjustments
to reconcile net income to net cash from operating
activities:
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
657
|
|
|
661
|
|
|
630
|
|
Stock-based compensation
|
|
|
175
|
|
|
87
|
|
|
-
|
|
Deferred tax provision (benefit)
|
|
|
64
|
|
|
(6
|
)
|
|
(41
|
)
|
Increase (decrease) in cash resulting from changes in operating assets
and
liabilities:
|
|
|
|
|
|
|
|
|
|
|
Receivables
|
|
|
6
|
|
|
(84
|
)
|
|
(1,971
|
)
|
Inventories
|
|
|
(980
|
)
|
|
306
|
|
|
(44
|
)
|
Prepaid expenses and other current assets
|
|
|
10
|
|
|
(21
|
)
|
|
(138
|
)
|
Accounts payable
|
|
|
(202
|
)
|
|
(401
|
)
|
|
1,511
|
|
Accrued expenses
|
|
|
16
|
|
|
144
|
|
|
218
|
|
Accrued taxes on income
|
|
|
34
|
|
|
(2
|
)
|
|
295
|
|
Proceeds of rental deposit
|
|
|
56
|
|
|
-
|
|
|
-
|
|
Net
cash generated from operating activities
|
|
|
950
|
|
|
1,324
|
|
|
1,071
|
|
Cash
flow used by investing activities:
|
|
|
|
|
|
|
|
|
|
|
Acquisition of property, plant and equipment
|
|
|
(706
|
)
|
|
(571
|
)
|
|
(628
|
)
|
Net
cash used by investing activities
|
|
|
(706
|
)
|
|
(571
|
)
|
|
(628
|
)
|
Cash
flow used by financing activities:
|
|
|
|
|
|
|
|
|
|
|
Dividends paid
|
|
|
(384
|
)
|
|
(379
|
)
|
|
(375
|
)
|
Exercise of stock options
|
|
|
8
|
|
|
-
|
|
|
-
|
|
Net cash used by financing activities
|
|
|
(376
|
)
|
|
(379
|
)
|
|
(375
|
)
|
Effect
of exchange rate changes on cash
|
|
|
292
|
|
|
(149
|
)
|
|
313
|
|
Net
increase in cash
|
|
|
160
|
|
|
225
|
|
|
381
|
|
Beginning
balance - cash and cash equivalents
|
|
|
1,130
|
|
|
905
|
|
|
524
|
|
Ending
balance - cash and cash equivalents
|
|
$
|
1,290
|
|
$
|
1,130
|
|
$
|
905
|
|
Supplemental
disclosure of cash flow information:
|
|
|
|
|
|
|
|
|
|
|
Cash paid for income taxes
|
|
$
|
650
|
|
$
|
354
|
|
$
|
44
|
|
Cash paid for interest
|
|
$
|
64
|
|
$
|
56
|
|
$
|
29
|
|
Supplemental
disclosure of non-cash financing activity:
|
|
|
|
|
|
|
|
|
|
|
Dividend declared
|
|
$
|
96
|
|
$
|
95
|
|
$
|
94
|
|
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 SA and Sevcon Asia Limited. 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)
|
|
|
2006
|
|
|
2005
|
|
Warranty
reserves at beginning of year
|
|
$
|
364
|
|
$
|
386
|
|
Decrease
in beginning balance for warranty obligations settled during the
year
|
|
|
(329
|
)
|
|
(338
|
)
|
Other
changes to pre-existing warranties
|
|
|
4
|
|
|
5
|
|
Net
increase in warranty reserves for products sold during the
year
|
|
|
325
|
|
|
311
|
|
Warranty
reserves at end of year
|
|
$
|
364
|
|
$
|
364
|
|
C.
Research and development
The
cost
of research and development programs is charged against income as incurred
and
amounted to approximately $3,582,000 in 2006, $3,499,000 in 2005 and $3,952,000
in 2004. This expense is included in selling, research and administrative
expense in the income statement. Research and development expense was 10% of
sales in 2006 compared to 11.0% in 2005 and 13.6% in 2004.
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
#123
“Accounting for Stock-Based Compensation”, as amended by SFAS #148 “Accounting
for Stock-Based Compensation - Transition and Disclosure” and replaced by SFAS
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 #25 “Accounting for Stock Issued to Employees”, until SFAS #123R became
effective in fiscal 2006. Prior to fiscal 2006, the Company accounted for its
stock-based compensation plans under APB #25, under which no compensation cost
was recognized. The Company has not restated prior periods to reflect this
change in accounting. Had compensation cost for these plans been determined
consistent with SFAS #123, the Company’s net income and earnings per share would
have equaled the following pro forma amounts for the prior two fiscal
years:
(in
thousands of dollars except
per share data)
|
|
|
2005
|
|
|
2004
|
|
Net
income - As reported
|
|
$
|
641
|
|
$
|
611
|
|
Pro-forma
effect of expensing stock options (net of tax)
|
|
$
|
(52
|
)
|
$
|
(66
|
)
|
Net
income - Pro forma
|
|
$
|
589
|
|
$
|
545
|
|
Basic
net income per share - As reported
|
|
$
|
.21
|
|
$
|
.20
|
|
Basic
net income per share - Pro forma
|
|
$
|
.19
|
|
$
|
.17
|
|
Diluted
net income per share - As reported
|
|
$
|
.20
|
|
$
|
.19
|
|
Diluted
net income per share - Pro forma
|
|
$
|
.19
|
|
$
|
.17
|
|
The
adoption of SFAS #123R reduced net income in fiscal 2006 by $46,000 ($.01 per
basic and diluted share). The adoption of this statement had no effect on the
statement of cash flows for fiscal 2006.
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 2006,
2005 or 2004 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.
A
summary
of option activity for all plans for the fiscal 2006 is as follows:
|
|
|
Options
#
of shares
|
|
|
Weighted
average Exercise Price
|
|
|
Weighted
average remaining contractual life (years
|
)
|
|
Aggregate
Intrinsic Value
|
|
Outstanding
at September 30, 2005
|
|
|
182,000
|
|
$
|
9.26
|
|
|
|
|
|
|
|
Granted
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(2,000
|
)
|
$
|
4.37
|
|
|
|
|
|
|
|
Cancelled
|
|
|
(8,000
|
)
|
$
|
8.46
|
|
|
|
|
|
|
|
Outstanding
at September 30, 2006
|
|
|
172,000
|
|
$
|
9.35
|
|
|
3
years
|
|
$
|
175,000
|
|
Exercisable
at September 30, 2006
|
|
|
118,900
|
|
$
|
10.39
|
|
|
3
years
|
|
$
|
88,000
|
|
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
$6.92 market price of the Company’s common stock at September 30, 2006. Options
for 2,000 shares were exercised during fiscal 2006. The total intrinsic value
of
options exercised in fiscal 2006 was $3,000 and the proceeds received on the
exercise of these options were $8,000. No options were exercised in last fiscal
year. At September 30, 2006 there was $67,000 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 3
years.
In
December 2005, the Company granted 25,000 shares of restricted stock to three
employees which will vest in five equal annual installments providing that
the
grantee remains an employee of the Company, or as determined by the Compensation
Committee. The estimated fair value of the stock on the date of grant was
$122,000 based on the fair market value of the stock on date of issue and
estimated forfeitures of 4% per year. The estimated forfeitures are based on
the
historical rate of turnover of the relevant group of employees. This amount
was
credited to common stock and paid in surplus and the $122,000 was netted off
paid in surplus in stockholders’ equity. This unearned compensation is being
charged to income on a straight line basis over the five year period during
which the forfeiture conditions lapse. The charge to income for these employee
restricted stock grants in fiscal 2006 was $18,000, and the subsequent charge
will be approximately $24,000 per year.
In
January 2006, the Company granted 12,000 shares of restricted stock to six
non-employee directors which will vest on the day before the 2007 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 $69,000 based on the fair market value of the stock on date of
issue. This amount was credited to common stock and paid in surplus and the
$69,000 was netted off paid in surplus in stockholders’ equity. 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 2006 was $46,000 and the
remaining $23,000 will be charged to income in next fiscal year.
In
fiscal
2005 the Company granted 35,000 shares of restricted stock to five employees
which will vest in five equal annual installments and 12,000 shares of
restricted stock to six non-employee directors which vested on the day before
the 2006 annual meeting. The charge to income in fiscal 2006 relating to these
grants was $66,000 and the subsequent charge will be approximately $38,000
per
year.
During
the restriction period, five years for employees and one year for non-employee
directors, ownership of unvested shares cannot be transferred. Restricted stock
has the same cash dividend and voting rights as other common stock and is
considered to be currently issued and outstanding. For the purposes of
calculating average issued shares for earnings per share these shares are only
considered to be outstanding when the forfeiture conditions lapse and the shares
vest.
Restricted
stock activity for fiscal 2006 was as follows:
|
|
|
Number
of shares of Restricted Stock
|
|
|
Weighted
Average Grant-Date Fair Value
|
|
Non-vested
balance as of September 30, 2005
|
|
|
47,000
|
|
$
|
6.18
|
|
Granted
|
|
|
37,000
|
|
$
|
5.58
|
|
Vested
|
|
|
(19,000
|
)
|
$
|
6.64
|
|
Forfeited
|
|
|
-
|
|
|
N/A
|
|
Non-vested
balance as of September 30, 2006
|
|
|
65,000
|
|
$
|
5.70
|
|
As
of
September 30, 2006, there was $241,000 of total restricted stock compensation
expense related to non-vested awards not yet recognized, which is expected
to be
recognized over a weighted average period of 3.6 years.
The
stock-based compensation expense in the last three fiscal years was as
follows:
(in
thousands of dollars)
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
Stock
option expense under SFAS # 123R *
|
|
$
|
46
|
|
$
|
-
|
|
$
|
-
|
|
Restricted
stock grants:
|
|
|
|
|
|
|
|
|
|
|
Employees
|
|
$
|
55
|
|
$
|
30
|
|
$
|
-
|
|
Non-employee
directors
|
|
$
|
74
|
|
$
|
57
|
|
$
|
-
|
|
Total
stock based compensation expense
|
|
$
|
175
|
|
$
|
87
|
|
$
|
-
|
|
*
Pro-forma expense disclosed for options accounted for under
APB#25
|
|
$
|
N/A
|
|
$
|
52
|
|
$
|
66
|
|
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 provision for slow moving and obsolete inventories at September
30,
2006 was $923,000, or 16% of the original cost of gross inventory. At September
30, 2005 the provision was $803,000, or 18% of gross inventory. Inventories
were
comprised of:
(in
thousands of dollars)
|
|
|
2006
|
|
|
2005
|
|
Raw
materials
|
|
$
|
2,195
|
|
$
|
1,596
|
|
Work-in-process
|
|
|
119
|
|
|
174
|
|
Finished
goods
|
|
|
2,403
|
|
|
1,967
|
|
|
|
$
|
4,717
|
|
$
|
3,737
|
|
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
cumulative other comprehensive income in stockholders' equity in the balance
sheet. Foreign currency transaction gains and losses are included in costs
and
expenses.
J.
Derivative instruments and hedging
The
Company accounts for derivative instruments and hedging under SFAS #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. The majority
of
the Company’s products are manufactured in the United Kingdom. Approximately 42%
of the Company’s sales are made in US Dollars, 15% are made in British Pounds
and 43% are made in Euros. Approximately 75% of the Company’s cost of sales is
incurred in British Pounds. 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.
Forward
foreign exchange contracts are used primarily by the Company to hedge the
operational (“cash-flow” hedges) and balance sheet (“fair value” hedges)
exposures resulting from changes in foreign currency exchange rates described
above. These foreign exchange contracts are entered into to hedge anticipated
intercompany product purchases and third party sales and the associated accounts
payable and receivable made in the normal course of business. Accordingly,
these
forward foreign exchange contracts are not speculative in nature. As part of
its
overall strategy to manage the level of exposure to the risk of foreign currency
exchange rate fluctuations, the Company hedges a portion of its foreign currency
exposures anticipated over the ensuing 9-month period. At September 30, 2006,
the Company had effectively hedged approximately 2% of its estimated foreign
currency exposures that principally relate to anticipated cash flows to be
remitted to the UK over the next year, using foreign exchange contracts that
have maturities of twelve months or less. The Company does not hold or transact
in financial instruments for purposes other than risk management.
Under
hedge accounting, the Company records 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 other comprehensive
income. These deferred gains and losses will be recognized in income in the
period in which the underlying anticipated transaction occurs.
Unrealized
gains and losses resulting from the impact of currency exchange rate movements
on forward foreign exchange contracts designated to offset certain functional
currency denominated assets are recognized as other income or expense in the
period in which the exchange rates change and offset the foreign currency losses
and gains on the underlying exposures being hedged.
The
Company discontinues hedge accounting prospectively when (1) it is determined
that the derivative is no longer effective in offsetting changes in fair value
or cash flows of a hedged item (including forecasted transactions); (2) the
derivative is sold or terminated; (3) the derivative is de-designated as a
hedge
instrument, because it is unlikely that a forecasted transaction will occur
or a
balance sheet exposure ceases to exist; or (4) management determines that
designation of the derivative as a hedge instrument is no longer
appropriate.
The
following table provides information about the Company’s foreign currency
derivative financial instruments outstanding as of September 30, 2006 and 2005.
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, except average contract rates)
|
|
|
2006
|
|
|
2005
|
|
|
|
|
Notional
Amount
|
|
|
Average
Contract
Rate
|
|
|
Notional
Amount
|
|
|
Average
Contract
Rate
|
|
Sell
Euros for British Pounds
Sell
US Dollars for British Pounds
|
|
$
$
|
-
250
|
|
|
-
$1.73
= £1
|
|
$
$
|
-
1,050
|
|
|
-
$1.80
= £1
|
|
Total
|
|
$
|
250
|
|
|
|
|
$
|
1,050
|
|
|
|
|
Estimated
fair value *
|
|
$
|
19
|
|
|
|
|
$
|
(21
|
)
|
|
|
|
Amount
recorded as other comprehensive income
|
|
$
|
-
|
|
|
|
|
$
|
-
|
|
|
|
|
*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 three years ended September 30,
2006
are calculated as follows:
(in
thousands except per share data)
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
Net
income
|
|
$
|
1,114
|
|
$
|
641
|
|
$
|
611
|
|
Weighted
average shares outstanding
|
|
|
3,139
|
|
|
3,125
|
|
|
3,125
|
|
Basic
income per share
|
|
$
|
.35
|
|
$
|
.21
|
|
$
|
.20
|
|
Common
stock equivalents
|
|
|
27
|
|
|
27
|
|
|
22
|
|
Average
common and common equivalent shares outstanding
|
|
|
3,166
|
|
|
3,152
|
|
|
3,147
|
|
Diluted
income per share
|
|
$
|
.35
|
|
$
|
.20
|
|
$
|
.19
|
|
For
the
years ended 2006, 2005 and 2004 respectively, approximately 100,000, 105,000
and
106,000 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, 2006, 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 #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
The
Company adopted the provisions of SFAS #123R “Share-Based Payment” effective at
the beginning of fiscal 2006 using the modified prospective application
transition method. Under this method the Company incurred expense relating
to
previously issued stock options of approximately $46,000 in fiscal 2006. There
was no similar expense recorded in fiscal 2005 as, during that period, the
Company accounted for options under APB #25. The accounting for restricted
stock
issued in fiscal 2005 will be substantially unchanged by the application of
SFAS
#123R
In
July
2006 the Financial Accounting Standards Board (FASB) issued Interpretation
#48
“Accounting for Uncertain Tax Positions” which will be effective for fiscal
years beginning after December 15, 2006. The Company is currently evaluating
the
impact of this interpretation on its financial statements.
In
September 2006, the Securities and Exchange Commission issued Staff Accounting
Bulletin (“SAB”) No. 108, “Considering the Effects of Prior Year
Misstatements when Quantifying Current Year Misstatements”. SAB No. 108
requires analysis of misstatements using both an income statement (rollover)
approach and a balance sheet (iron curtain) approach in assessing materiality
and provides for a one-time cumulative effect transition adjustment. SAB
No. 108 is effective for our fiscal year 2007 annual financial statements.
The Company is currently evaluating the impact of this pronouncement on its
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
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 overfunded or underfunded 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. Implementation of these provisions of SFAS #158 are required
for
fiscal years ending after December 15 2006 and early adoption is encouraged.
The
Company has decided to adopt SFAS #158 effective on September 30, 2006. In
addition, SFAS No. 158 requires an employer to measure plan assets and
obligations that determine its funded status as of the end of its fiscal year.
See note 7 to these consolidated financial statements for details of the impact
of this on the Company’s 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 47,000 shares of restricted common stock to employees and
directors in fiscal 2005 and a further 37,000 shares of restricted common stock
in fiscal 2006.
(3)
STOCK-BASED COMPENSATION PLANS
Under
the
Company’s 1996 Equity Incentive Plan there were 71,000 shares reserved and
available for grant at September 30, 2006. No options were granted or exercised
in fiscal 2006, 2005 or 2004.
Recipients
of grants or options must execute a standard form of non-competition agreement.
This 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, 2006 were
as follows:
|
|
|
Shares
under option
|
|
|
Weighted
average
exercise
price
|
|
Outstanding
at September 30, 2003
|
|
|
193,000
|
|
$
|
9.29
|
|
Cancelled
in 2004
|
|
|
(5,000
|
)
|
$
|
4.37
|
|
Outstanding
at September 30, 2004
|
|
|
188,000
|
|
$
|
9.42
|
|
Cancelled
in 2005
|
|
|
(6,000
|
)
|
$
|
14.48
|
|
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
|
|
Exercisable
at September 30, 2006
|
|
|
118,900
|
|
$
|
10.39
|
|
Details
of options outstanding at September 30, 2006 were as follows:
Price
range
|
|
|
Shares
under option
|
|
|
Weighted
average remaining contractual life
|
|
$
4.37 - $ 6.56
|
|
|
72,000
|
|
|
6
years
|
|
$
6.57 - $ 9.85
|
|
|
10,000
|
|
|
5
years
|
|
$
9.86 - $14.79
|
|
|
70,000
|
|
|
2
years
|
|
$
14.80 - $22.20
|
|
|
20,000
|
|
|
1
years
|
|
|
|
|
172,000
|
|
|
3
years
|
|
In
December 2005, the Company granted 25,000 shares of restricted stock to three
employees that will vest in five equal annual installments providing that the
grantee remains an employee of the Company, or as determined by the Compensation
Committee. The estimated fair value of the stock on the date of grant was
$122,000 based on the fair market value of the stock on date of issue and
estimated forfeitures of 4% per year. The estimated forfeitures are based on
the
historical rate of turnover of the relevant group of employees. This amount
was
credited to common stock and paid in surplus and the $122,000 was netted off
paid in surplus in stockholders’ equity. This unearned compensation is being
charged to income on a straight line basis over the five year period during
which the forfeiture conditions lapse. The charge to income for these employee
restricted stock grants in 2006 was $18,000.
In
January 2006, the Company granted 12,000 shares of restricted stock to six
non-employee directors which will vest on the day before the 2007 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 $69,000 based on the fair market value of the stock on date of
issue. This amount was credited to common stock and paid in surplus and the
$69,000 was netted off paid in surplus in stockholders’ equity. 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 2006 was
$46,000.
In
fiscal
2005 the Company granted 35,000 shares of restricted stock to five employees
which will vest in five equal annual installments and 12,000 shares of
restricted stock to six non-employee directors which vested on the day before
the 2006 annual meeting.
During
the restriction period, five years for employees and one year for non-employee
directors, ownership of unvested shares cannot be transferred. Restricted stock
has the same cash dividend and voting rights as other common stock and is
considered to be currently issued and outstanding. For the purposes of
calculating average issued shares for earnings per share these shares are only
considered to be outstanding when the forfeiture conditions lapse and the shares
vest.
Restricted
stock transactions under the plans for the three years ended September 30,
2006
were as follows:
(in
thousands of shares)
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
Beginning
Balance - Non-vested
|
|
|
47
|
|
|
-
|
|
|
-
|
|
Granted
to employees - 5 year vesting
|
|
|
25
|
|
|
35
|
|
|
-
|
|
Granted
to non-employee directors - 1 year vesting
|
|
|
12
|
|
|
12
|
|
|
-
|
|
Vested
|
|
|
(19
|
)
|
|
-
|
|
|
-
|
|
Forfeited
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Ending
Balance - Non-vested
|
|
|
65
|
|
|
47
|
|
|
-
|
|
Weighted-average
fair value for shares granted during the year
|
|
$
|
5.58
|
|
$
|
6.18
|
|
$
|
-
|
|
(4)
INCOME TAXES
The
domestic and foreign components of income before income taxes are as
follows:
(in
thousands of dollars)
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
Domestic
|
|
$
|
(87
|
)
|
$
|
1
|
|
$
|
5
|
|
Foreign
|
|
|
1,821
|
|
|
950
|
|
|
913
|
|
|
|
$
|
1,734
|
|
$
|
951
|
|
$
|
918
|
|
The
components of the provision / (benefit) for income taxes for the years ended
September 30, 2006, 2005 and 2004 are as follows:
(in
thousands of dollars)
|
|
|
|
|
|
2006
|
|
|
|
|
|
|
|
Current
|
|
|
Deferred
|
|
|
Total
|
|
Federal
|
|
$
|
77
|
|
$
|
(45
|
)
|
$
|
32
|
|
State
|
|
|
21
|
|
|
(1
|
)
|
|
20
|
|
Foreign
|
|
|
504
|
|
|
65
|
|
|
569
|
|
|
|
$
|
601
|
|
$
|
19
|
|
$
|
620
|
|
|
|
|
|
|
|
2005
|
|
|
|
|
|
|
|
Current
|
|
|
Deferred
|
|
|
Total
|
|
Federal
|
|
$
|
24
|
|
$
|
(32
|
)
|
$
|
(8
|
)
|
State
|
|
|
7
|
|
|
8
|
|
|
15
|
|
Foreign
|
|
|
338
|
|
|
(35
|
)
|
|
303
|
|
|
|
$
|
369
|
|
$
|
(59
|
)
|
$
|
310
|
|
|
|
|
Current
|
|
|
2004
|
|
|
|
|
|
|
|
|
|
|
Deferred
|
|
|
Total
|
|
Federal
|
|
$
|
26
|
|
$
|
(25
|
)
|
$
|
1
|
|
State
|
|
|
21
|
|
|
(5
|
)
|
|
16
|
|
Foreign
|
|
|
299
|
|
|
(9
|
)
|
|
290
|
|
|
|
$
|
346
|
|
$
|
(39
|
)
|
$
|
307
|
|
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)
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
Statutory
Federal income tax rate
|
|
|
34%
|
|
|
34%
|
|
|
34%
|
|
Computed
tax provision at statutory rate
|
|
$
|
590
|
|
$
|
323
|
|
$
|
312
|
|
Increases
(decreases) resulting from:
|
|
|
|
|
|
|
|
|
|
|
Foreign
tax rate differentials
|
|
|
(53
|
)
|
|
(20
|
)
|
|
(28
|
)
|
State
taxes net of federal tax benefit
|
|
|
13
|
|
|
(7
|
)
|
|
1
|
|
Change
in deferred tax valuation allowance
|
|
|
58
|
|
|
7
|
|
|
(15
|
)
|
Foreign
tax credits and other
|
|
|
12
|
|
|
7
|
|
|
37
|
|
Income
tax provision in the Statement of Income
|
|
$
|
620
|
|
$
|
310
|
|
$
|
307
|
|
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, 2006 and 2005 are as follows:
(in
thousands of dollars)
|
|
|
|
|
2006
|
|
|
|
|
|
|
Domestic
current
|
|
|
Domestic
long-term
|
|
|
Foreign
current
|
|
|
Foreign
long-term
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension
accruals (prepaid)
|
|
$
|
83
|
|
$
|
233
|
|
$
|
28
|
|
$
|
687
|
|
Inventory
basis differences
|
|
|
58
|
|
|
-
|
|
|
58
|
|
|
-
|
|
Warranty
reserves
|
|
|
45
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Foreign
tax credit carry forwards
|
|
|
189
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Accrued
compensation expense
|
|
|
196
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Other
(net)
|
|
|
34
|
|
|
-
|
|
|
2
|
|
|
-
|
|
|
|
|
605
|
|
|
233
|
|
|
88
|
|
|
687
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property
basis differences
|
|
|
-
|
|
|
(22
|
)
|
|
-
|
|
|
(17
|
)
|
Net
asset (liability)
|
|
|
605
|
|
|
211
|
|
|
88
|
|
|
|
|
Valuation
allowance
|
|
|
(189
|
)
|
|
-
|
|
|
-
|
|
|
-
|
|
Net
deferred tax asset (liability)
|
|
$
|
416
|
|
$
|
211
|
|
$
|
88
|
|
$
|
670
|
|
|
|
|
|
|
2005
|
|
|
|
|
|
|
Domestic
current
|
|
|
Domestic
long-term
|
|
|
Foreign
current
|
|
|
Foreign
long-term
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension
accruals (prepaid)
|
|
$
|
274
|
|
$
|
-
|
|
$
|
22
|
|
$
|
-
|
|
Inventory
basis differences
|
|
|
49
|
|
|
-
|
|
|
30
|
|
|
-
|
|
Warranty
reserves
|
|
|
42
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Foreign
tax credit carry forwards
|
|
|
150
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Accrued
compensation expense
|
|
|
69
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Other
(net)
|
|
|
57
|
|
|
-
|
|
|
1
|
|
|
-
|
|
|
|
|
641
|
|
|
-
|
|
|
53
|
|
|
-
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property
basis differences
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(33
|
)
|
Net
asset (liability)
|
|
|
641
|
|
|
-
|
|
|
53
|
|
|
(33
|
)
|
Valuation
allowance
|
|
|
(131
|
)
|
|
-
|
|
|
-
|
|
|
-
|
|
Net
deferred tax asset (liability)
|
|
$
|
510
|
|
$
|
-
|
|
$
|
53
|
|
$
|
(33
|
)
|
(5)
ACCRUED EXPENSES
The
analysis of accrued expenses at September 30, 2006 and 2005, showing separately
any items in excess of 5% of total current liabilities, was as
follows:
(in
thousands of dollars)
|
|
|
2006
|
|
|
2005
|
|
Accrued
compensation and related costs
|
|
$
|
1,047
|
|
$
|
1,101
|
|
Warranty
reserves
|
|
|
364
|
|
|
364
|
|
Other
accrued expenses
|
|
|
1,290
|
|
|
1,220
|
|
|
|
$
|
2,701
|
|
$
|
2,685
|
|
(6)
COMMITMENTS AND CONTINGENCIES
In
fiscal
2002 the Company received a demand for repayment of an alleged preference
payment of $180,000 received from a customer in the 90 days prior to their
filing for protection under Chapter 11 during fiscal 2000. At the time this
customer filed for Chapter 11 protection it owed the Company $50,000 and this
amount was fully reserved in the fiscal 2000 financial statements. The Company
settled this claim in October 2005 and the cost of settlement of $90,000 was
fully reserved at September 30, 2005.
Tech/Ops
Sevcon is involved in various other 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, 2006 was $212,000.
Minimum
rental commitments under all non-cancelable leases are as follows for the years
ended September 30: 2007 - $224,000; 2008 - $206,000; 2009 - $206,000; 2010
-
$206,000; 2011 - $206,000 and $1,535,000 thereafter. Net rentals of certain
land, buildings and equipment charged to expense were $224,000 in 2006, $214,000
in 2005, and $207,000 in 2004.
The
UK
subsidiaries of the Company have given to a bank a security interest in all
of
their assets as security for overdraft facilities of $2,055,000. There were
no
amounts outstanding on the overdraft facilities at September 30, 2006 or 2005.
(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.. 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 overfunded or underfunded 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. Implementation of these provisions of SFAS #158 is required
for
fiscal years ending after December 15, 2006 and early adoption is encouraged.
The Company adopted SFAS #158 effective on September 30, 2006. In addition,
SFAS
No. 158 requires an employer to measure plan assets and obligations that
determine its funded status as of the end of its fiscal year. As stated above
the Company already measures plan assets and liabilities as of September 30,
therefore this provision will not impact the Company. 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)
|
|
|
2006
|
|
|
2005
|
|
Change
in benefit obligation:
|
|
|
|
|
|
|
|
Benefit
obligation at beginning of year
|
|
$
|
15,910
|
|
$
|
14,418
|
|
Service
cost
|
|
|
393
|
|
|
419
|
|
Interest
cost
|
|
|
972
|
|
|
867
|
|
Plan
participants contributions
|
|
|
269
|
|
|
234
|
|
Actuarial
(gain) loss
|
|
|
2,209
|
|
|
514
|
|
Benefits
paid
|
|
|
(58
|
)
|
|
(252
|
)
|
Foreign
currency exchange rate changes
|
|
|
781
|
|
|
(290
|
)
|
Benefit
obligation at end of year
|
|
|
20,476
|
|
|
15,910
|
|
Change
in plan assets:
|
|
|
|
|
|
|
|
Fair
value of plan assets at beginning of year
|
|
|
14,210
|
|
|
12,899
|
|
Return
on plan assets
|
|
|
1,575
|
|
|
1,148
|
|
Employer
contributions
|
|
|
871
|
|
|
444
|
|
Plan
participants contributions
|
|
|
269
|
|
|
234
|
|
Benefits
paid
|
|
|
(58
|
)
|
|
(252
|
)
|
Foreign
currency exchange rate changes
|
|
|
723
|
|
|
(263
|
)
|
Fair
value of plan assets at end of year
|
|
|
17,590
|
|
|
14,210
|
|
Funded
status
|
|
|
(2,886
|
)
|
|
(1,700
|
)
|
Unrecognized
transition obligation (asset)
|
|
|
n/a
|
|
|
(3
|
)
|
Unrecognized
prior service cost
|
|
|
n/a
|
|
|
593
|
|
Unrecognized
net actuarial (gain) loss
|
|
|
n/a
|
|
|
629
|
|
Accrued
benefit cost
|
|
|
n/a
|
|
|
(481
|
)
|
Liability
for pension benefits recorded in the balance sheet
|
|
$
|
(2,886
|
)
|
$
|
N/A
|
|
The
changes in the balance sheet at September 30, 2006 arising from the adoption
of
SFAS #158 are set out below:
(in
thousands of dollars)
|
|
|
Before
implementation of SFAS #158
|
|
|
Change
due to SFAS #158
|
|
|
After
implementation of SFAS #158
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
Prepaid
expense and other current assets
|
|
$
|
1,290
|
|
$
|
(443
|
)
|
$
|
847
|
|
Total
current assets
|
|
|
13,484
|
|
|
(443
|
)
|
|
13,041
|
|
Long-term
deferred tax asset
|
|
|
-
|
|
|
881
|
|
|
881
|
|
Total
assets
|
|
|
18,214
|
|
|
438
|
|
|
18,652
|
|
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
|
|
Accrued
expenses
|
|
|
3,102
|
|
|
(401
|
)
|
|
2,701
|
|
Total
Current liabilities
|
|
|
6,074
|
|
|
(401
|
)
|
|
5,673
|
|
Deferred
taxes on income
|
|
|
124
|
|
|
(124
|
)
|
|
-
|
|
Liability
for pension benefits
|
|
|
-
|
|
|
2,886
|
|
|
2,886
|
|
Cumulative
other comprehensive income
|
|
|
207
|
|
|
(1,923
|
)
|
|
(1,716
|
)
|
Total
Stockholders’ equity
|
|
|
11,960
|
|
|
(1,923
|
)
|
|
10,037
|
|
Total
liabilities and stockholders’ equity
|
|
|
18,214
|
|
|
438
|
|
|
18,652
|
|
The
decline in the funded status of the pension plans during fiscal 2006 was mainly
due to a decrease from 5.8% to 5.2% in the discount rate for the UK plan,
partially offset by better than assumed return on plan assets in the UK
plan.
The
Tech/Ops Sevcon net pension cost included the following components as defined
by
SFAS #132.
(in
thousands of dollars)
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
Components
of net periodic benefit cost:
|
|
|
|
|
|
|
|
|
|
|
Service
cost
|
|
$
|
382
|
|
$
|
434
|
|
$
|
443
|
|
Interest
cost
|
|
|
942
|
|
|
901
|
|
|
840
|
|
Expected
return on plan assets
|
|
|
(886
|
)
|
|
(845
|
)
|
|
(844
|
)
|
Amortization
of transition obligation
|
|
|
(2
|
)
|
|
(2
|
)
|
|
(2
|
)
|
Amortization
of prior service cost
|
|
|
54
|
|
|
55
|
|
|
54
|
|
Recognized
net actuarial gain (loss)
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Net
periodic benefit cost
|
|
$
|
490
|
|
$
|
543
|
|
$
|
491
|
|
Net
cost of defined contribution plans
|
|
$
|
35
|
|
$
|
29
|
|
$
|
28
|
|
The
weighted average assumptions used to determine plan obligations and net periodic
benefit cost for the years ended September 30, 2006 and 2005 were as set out
below:
|
|
|
2006
|
|
|
2005
|
|
Plan
obligations:
|
|
|
|
|
|
|
|
Discount
rate
|
|
|
5.27%
|
|
|
5.80%
|
|
Rate
of compensation increase
|
|
|
3.98%
|
|
|
3.93%
|
|
Net
periodic benefit cost:
|
|
|
|
|
|
|
|
Discount
rate
|
|
|
5.27%
|
|
|
6.02%
|
|
Expected
long term return on plan assets
|
|
|
6.04%
|
|
|
6.05%
|
|
Rate
of compensation increase
|
|
|
3.98%
|
|
|
4.23%
|
|
The
reductions 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)
|
|
2006
|
|
|
2005
|
|
|
US
Plan
|
UK
Plan
|
Total
|
US
Plan
|
UK
Plan
|
Total
|
Equity
securities
|
39%
|
43%
|
42%
|
40%
|
30%
|
31%
|
Debt
securities
|
56%
|
36%
|
38%
|
56%
|
49%
|
50%
|
Real
estate
|
-
|
17%
|
16%
|
-
|
18%
|
16%
|
Other
|
5%
|
4%
|
4%
|
4%
|
3%
|
3%
|
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 benefit payments, which reflect future service, as appropriate, are
expected to be paid:
(in
thousands of dollars)
2007
|
|
$
|
82
|
|
2008
|
|
|
108
|
|
2009
|
|
|
146
|
|
2010
|
|
|
187
|
|
2011
|
|
|
285
|
|
2012
- 2016
|
|
|
3,025
|
|
In
fiscal
2007 it is estimated that the Company will make contributions to the plans
of
$750,000, and that there will be employee contributions to the UK plan of
$280,000.
(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)
|
|
|
|
|
|
|
|
|
2006
|
|
|
|
|
|
|
|
Controls
|
|
|
Capacitors
|
|
|
Corporate
|
|
|
Total
|
|
Sales
to external customers
|
|
$
|
32,808
|
|
$
|
1,822
|
|
$
|
-
|
|
$
|
34,630
|
|
Inter-segment
revenues
|
|
|
-
|
|
|
64
|
|
|
-
|
|
|
64
|
|
Operating
income
|
|
|
2,174
|
|
|
68
|
|
|
(398
|
)
|
|
1,844
|
|
Depreciation
and amortization
|
|
|
586
|
|
|
71
|
|
|
-
|
|
|
657
|
|
Identifiable
assets
|
|
|
17,121
|
|
|
1,097
|
|
|
434
|
|
|
18,652
|
|
Capital
expenditures
|
|
|
664
|
|
|
42
|
|
|
-
|
|
|
706
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
|
|
|
|
|
Controls
|
|
|
Capacitors
|
|
|
Corporate
|
|
|
Total
|
|
Sales
to external customers
|
|
$
|
30,009
|
|
$
|
1,666
|
|
$
|
-
|
|
$
|
31,675
|
|
Inter-segment
revenues
|
|
|
-
|
|
|
199
|
|
|
-
|
|
|
199
|
|
Operating
income
|
|
|
1,343
|
|
|
32
|
|
|
(376
|
)
|
|
999
|
|
Depreciation
and amortization
|
|
|
611
|
|
|
50
|
|
|
-
|
|
|
661
|
|
Identifiable
assets
|
|
|
14,948
|
|
|
951
|
|
|
547
|
|
|
16,446
|
|
Capital
expenditures
|
|
|
536
|
|
|
35
|
|
|
-
|
|
|
571
|
|
|
|
|
|
|
|
|
|
|
2004
|
|
|
|
|
|
|
|
Controls
|
|
|
Capacitors
|
|
|
Corporate
|
|
|
Total
|
|
Sales
to external customers
|
|
$
|
27,101
|
|
$
|
2,049
|
|
$
|
-
|
|
$
|
29,150
|
|
Inter-segment
revenues
|
|
|
-
|
|
|
218
|
|
|
-
|
|
|
218
|
|
Operating
income
|
|
|
974
|
|
|
295
|
|
|
(297
|
)
|
|
972
|
|
Depreciation
and amortization
|
|
|
580
|
|
|
50
|
|
|
-
|
|
|
630
|
|
Identifiable
assets
|
|
|
14,938
|
|
|
1,026
|
|
|
644
|
|
|
16,608
|
|
Capital
expenditures
|
|
|
612
|
|
|
16
|
|
|
-
|
|
|
628
|
|
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)
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
Sales:-
|
|
|
|
|
|
|
|
|
|
|
US
sales
|
|
$
|
14,643
|
|
$
|
12,893
|
|
$
|
10,577
|
|
Foreign
sales:
|
|
|
|
|
|
|
|
|
|
|
United
Kingdom
|
|
|
10,702
|
|
|
9,477
|
|
|
13,529
|
|
France
|
|
|
9,285
|
|
|
9,305
|
|
|
5,044
|
|
Korea
and Japan
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Total
Foreign
|
|
|
19,987
|
|
|
18,782
|
|
|
18,573
|
|
Total
sales
|
|
$
|
34,630
|
|
$
|
31,675
|
|
$
|
29,150
|
|
Long-lived
assets:
|
|
|
|
|
|
|
|
|
|
|
USA
|
|
$
|
1,732
|
|
$
|
1,543
|
|
$
|
1,571
|
|
United
Kingdom
|
|
|
3,768
|
|
|
2,866
|
|
|
2,970
|
|
France
|
|
|
90
|
|
|
51
|
|
|
71
|
|
Korea
and Japan
|
|
|
21
|
|
|
11
|
|
|
8
|
|
Total
|
|
$
|
5,611
|
|
$
|
4,471
|
|
$
|
4,620
|
|
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 2005 the responsibility for dealing with two large customers in Europe
was transferred from the United Kingdom to the French subsidiary which accounted
for approximately 50% of the decrease in United Kingdom sales in
2005.
In
fiscal
2006 Tech/Ops Sevcon's largest customer accounted for 17% of sales and for
16%
of receivables. In 2005 the largest customer accounted for 16% of sales and
20%
of receivables. In 2004 the largest customer accounted for 11% of sales and
13%
of receivables.
Report
of Independent Registered Public Accounting Firm
The
Board
of Directors and Shareholders
Tech/Ops
Sevcon, Inc.
We
have
audited the accompanying consolidated balance sheets of Tech/Ops Sevcon, Inc.
and subsidiaries as of September 30, 2006 and 2005 and the related consolidated
statements of income, comprehensive income, stockholders’ equity and cash flows
for each of the two years in the period ended September 30, 2006. These
consolidated financial statements are the responsibility of the Company’s
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we
plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The Company is not required to
have, nor were we engaged to perform, an audit of its internal control over
financial reporting. Our audit 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, 2006 and 2005 and the results of their
operations and their cash flows for each of the two years in the period ended
September 30, 2006 in conformity with accounting principles generally accepted
in the United States of America.
As
discussed in notes 1 and 7 to the consolidated financial statements, effective
October 1, 2005 the Company adopted the provisions of Statement of Financial
Accounting Standards (SFAS) No. 123R, “Share-Based Payment” and effective
September 30, 2006 the Company adopted the provisions of SFAS No. 158,
“Employers’ Accounting for Defined Benefit Pension and Other Postretirement
Plans”.
We
have
also audited Schedule II for each of the two years in the period ended September
30, 2006. 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
6, 2006
Report
of Independent Registered Public Accounting Firm
The
Board
of Directors and Shareholders
Tech/Ops
Sevcon, Inc.
We
have
audited the accompanying consolidated statements of income, comprehensive
income, stockholders’ equity and cash flows of Tech/Ops Sevcon, Inc. and
subsidiaries for the year ended September 30, 2004. 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 audit.
We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we
plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The Company is not required to
have, nor were we engaged to perform, an audit of its internal control over
financial reporting. Our audit 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 also includes
examining, on a test basis, evidence supporting the amounts and disclosures
in
the financial statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In
our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, and the results of operations and cash flows of
Tech/Ops Sevcon, Inc. and subsidiaries for the year ended September 30, 2004
in
conformity with accounting principles generally accepted in the United States
of
America.
We
have
also audited Schedule II for the year ended September 30, 2004. 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/
Grant
Thornton LLP
Boston,
Massachusetts
December
3, 2004
SELECTED
QUARTERLY FINANCIAL DATA (UNAUDITED)
Selected
quarterly financial data for fiscal years 2006 and 2005 is set out
below:
(in
thousands except per share data)
|
|
|
First
Quarter
|
|
|
Second
Quarter
|
|
|
Third
Quarter
|
|
|
Fourth
Quarter
|
|
|
Total
Year
|
|
2006
Quarters
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$
|
7,821
|
|
$
|
8,562
|
|
$
|
9,313
|
|
$
|
8,934
|
|
$
|
34,630
|
|
Gross
profit
|
|
|
3,047
|
|
|
3,317
|
|
|
3,552
|
|
|
3,190
|
|
|
13,106
|
|
Operating
income
|
|
|
244
|
|
|
562
|
|
|
584
|
|
|
454
|
|
|
1,844
|
|
Net
income
|
|
|
160
|
|
|
342
|
|
|
369
|
|
|
243
|
|
|
1,114
|
|
Basic
income per share *
|
|
$
|
.05
|
|
$
|
.11
|
|
$
|
.12
|
|
$
|
.08
|
|
$
|
.35
|
|
Diluted
income per share
|
|
$
|
.05
|
|
$
|
.11
|
|
$
|
.12
|
|
$
|
.08
|
|
$
|
.35
|
|
2005
Quarters
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$
|
7,542
|
|
$
|
8,094
|
|
$
|
8,453
|
|
$
|
7,586
|
|
$
|
31,675
|
|
Gross
profit
|
|
|
2,842
|
|
|
3,126
|
|
|
3,160
|
|
|
2,908
|
|
|
12,036
|
|
Operating
income
|
|
|
20
|
|
|
285
|
|
|
381
|
|
|
313
|
|
|
999
|
|
Net
income
|
|
|
20
|
|
|
172
|
|
|
216
|
|
|
233
|
|
|
641
|
|
Basic
income per share *
|
|
$
|
.01
|
|
$
|
.05
|
|
$
|
.07
|
|
$
|
.07
|
|
$
|
.21
|
|
Diluted
income per share
|
|
$
|
.01
|
|
$
|
.05
|
|
$
|
.07
|
|
$
|
.07
|
|
$
|
.20
|
|
*
The sum
of quarterly basic and diluted income per share in 2006 and quarterly basic
income per share in 2005 is $.01 different from the annual diluted income per
share due to roundings.
ITEM
9 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
None.
ITEM
9 A CONTROLS AND PROCEDURES
(a)
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, 2006, the disclosure controls and procedures were
effective.
(b)
Changes in internal control over financial reporting. The Company’s principal
executive officer and principal financial officer have identified no change
in
the Company’s “internal control over financial reporting” (as defined in
Securities Exchange Act of 1934 Rule 13a-15(f)) that occurred during the fourth
quarter of fiscal 2006 that has materially affected, or is reasonably likely
to
materially affect, the Company’s internal control over financial
reporting.
ITEM
9B OTHER INFORMATION
None.
PART
III
ITEM
10 DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The
requisite information regarding the Company’s directors, executive officers and
audit committee members is contained in part under the caption “Executive
Officers of the Registrant” in Part I hereof and the remainder 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 2007 Annual Meeting of
Stockholders.
We
have
adopted a Code of Ethics for Senior Officers that applies to our chief executive
officer, chief financial 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, 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 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.
Item
11 Executive Compensation
This
information is incorporated by reference from the information under the captions
“Election of Directors - Director Compensation,” “Executive Compensation,”
“Compensation Committee Report” and “Performance Graph” in the Company’s Proxy
Statement for the 2007 Annual Meeting of Stockholders.
ITEM
12 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
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 2007 Annual Meeting of Stockholders.
The
following table sets out the status of shares authorized for issuance under
equity compensation plans at September 30, 2006.
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
beginning of year
|
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)
|
(d)
|
Equity
compensation plans approved by security holders:
1996
Equity Incentive Plan
1998
Director Stock Option Plan
|
147,000
25,000
|
$8.69
$13.23
|
100,000
-
|
71,000
-
|
Sub
Total
|
172,000
|
$9.35
|
100,000
|
71,000
|
Equity
compensation plans not approved by security holders
|
-
|
-
|
-
|
-
|
Total
|
172,000
|
$9.35
|
100,000
|
71,000
|
ITEM
13 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None.
ITEM
14 PRINCIPAL ACCOUNTING FEES AND SERVICES
This
information is incorporated by reference from the discussion responsive thereto
under the caption “Auditors” in the Company’s Proxy Statement relating to the
2007 Annual Meeting of Stockholders.
Part
IV
ITEM
15 EXHIBITS, FINANCIAL STATEMENT SCHEDULES
(a)
|
Financial
statements and schedule
|
|
The
financial statements and financial statement schedule listed under
Item 8
in the index following the cover page 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.
|
INDEX
TO EXHIBITS
*(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)
|
By-laws
of the registrant (incorporated by reference to Exhibit (3)(b) to
Quarterly Report on Form 10-Q for the quarter ended June 30,
2000).
|
*(4)(a)
|
Specimen
common stock of registrant (incorporated by reference to Exhibit
(4)(a) to
Annual Report for the fiscal year ended September 30,
1994).
|
*(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 (incorporated by reference to exhibit (21) to Annual
Report for the fiscal year ended September 30, 2001).
|
(23)
|
Consent
of Vitale Caturano & Company, Ltd. (filed
herewith).
|
|
Consent
of Grant Thornton LLP (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.
(Furnished 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 A. McPartlin, Chief Financial Officer,
155
Northboro Road, Southborough MA 01772, Telephone: (581) 281
5510.
SIGNATURES
Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act
of
1934, the registrant has duly caused this report to be signed on its behalf
by
the undersigned, thereunto duly authorized.
|
TECH/OPS
SEVCON, INC.
|
|
|
|
|
|
By
/s/
Matthew Boyle
|
December
14, 2006
|
|
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
14, 2006
|
Matthew
Boyle
|
Officer
and Director
|
|
|
(Principal
Executive Officer)
|
|
|
|
|
/s/
Paul A. McPartlin
|
Vice
President, Treasurer
|
December
14, 2006
|
Paul
A. McPartlin
|
and
Chief Financial Officer
|
|
|
(Principal
Financial and
|
|
|
Accounting
Officer)
|
|
|
|
|
/s/
Maarten D. Hemsley
|
Director
|
December
14, 2006
|
Maarten
D. Hemsley
|
|
|
|
|
|
/s/
Paul B. Rosenberg
|
Director
|
December
14, 2006
|
Paul
B. Rosenberg
|
|
|
|
|
|
/s/
Marvin G. Schorr
|
Director
|
December
14, 2006
|
Marvin
G. Schorr
|
|
|
|
|
|
/s/
Bernard F. Start
|
Director
|
December
14, 2006
|
Bernard
F. Start
|
|
|
|
|
|
/s/
David R. A. Steadman
|
Director
|
December
14, 2006
|
David
R. A. Steadman
|
|
|
|
|
|
/s/
Paul O. Stump
|
Director
|
December
14, 2006
|
Paul
O. Stump
|
|
|
SCHEDULE
II
TECH/OPS
SEVCON, INC. AND SUBSIDIARIES
Reserves
for the three years ended September 30, 2006
(in
thousands of dollars)
Allowance
for doubtful accounts
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
Balance
at beginning of year
|
|
|
144
|
|
|
192
|
|
|
245
|
|
Additions
charged to costs and expenses
|
|
|
14
|
|
|
73
|
|
|
27
|
|
Deductions
from reserves:
|
|
|
|
|
|
|
|
|
|
|
Accounts
collected
|
|
|
(10
|
)
|
|
(8
|
)
|
|
(56
|
)
|
Write
off of uncollectible accounts
|
|
|
(13
|
)
|
|
(111
|
)
|
|
(34
|
)
|
Foreign
currency translation adjustment
|
|
|
6
|
|
|
(2
|
)
|
|
10
|
|
Balance
at end of year
|
|
|
141
|
|
|
144
|
|
|
192
|
|