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 and South Korea 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 92% of the Company's revenues are derived from the controls business, with the remainder derived from the capacitor business. The largest customer accounted for 11% of sales in fiscal 2002 compared to 15% in fiscal 2001 and 12% in fiscal 2000.
- - Marketing and sales
Sales are made primarily through a small full-time marketing staff. Sales in the United States were $9,054,000, $12,130,000 and $12,715,000, in fiscal years 2002, 2001 and 2000, respectively, which accounted for approximately 41%, 45% and 42%, respectively, of total sales. Approximately 51% of sales are made to 10 manufacturers of electric vehicles in the United States, Europe and the Far East. Approximately 87% of the Company's sales are direct to end customers, with 13% made to the Company's international dealer network. See Note 7 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 its new 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, 2002 was $2,460,000 compared to $2,631,000 at September 2001, and $3,039,000 at September 2000. The decrease in backlog at September 30, 2002 was mainly due to lower demand, across most markets served by the Company.
- - 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. During both fiscal 2001 and fiscal 2000 there was a world-wide shortage of certain electronic components. These shortages did not prevent shipments to customers but did adversely impact manufacturing costs in fiscal years 2001 and 2002. The Company believes that its sources and availability of its raw materials are adequate.
- - Competition
In the United States, the Company competes primarily with a division of the General Electric Company, which has a significant share of the market and with Curtis Instruments, Inc., a privately held company. Overseas, Tech/Ops Sevcon has several international competitors, including General Electric Company and Curtis Instruments, as well as a number of smaller competitors that operate only in local markets. In addition, several large manufacturers of fork lift trucks make their own controls, although their product is generally for internal use only. The Company differentiates itself from its competitors principally by technical innovation and its willingness to customize products for specific applications. The Company believes that it is one of the largest independent suppliers of such devices outside of the United States.
- - 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 expenditure amounted to $1,971,000 in 2002 compared to $1,778,000 in 2001 and $1,946,000 in 2000.
- - 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, 2002, the Company employed 199 full-time employees, of whom 18 were in the United States, 169 were in the United Kingdom, 9 were in France, and 3 were in the Far East. Tech/Ops Sevcon believes its relations with its employees are good. The number of employees decreased by 6% during fiscal 2002, principally due to the continuation of the Company's program to outsource certain manufacturing activities.
ITEM 2
ITEM 2 PROPERTIES
A subsidiary of the Company leases approximately 12,000 square feet in Burlington, Massachusetts, under a lease for which notice to terminate in April 2003 has been received. The building is used for the development, distribution and service of electronic controls, together with sales and corporate offices. The Company is actively seeking to lease space at another location in Massachusetts to house both the corporate office and the Sevcon, Inc. business. The Company expects that there will be no significant disruption to its operations caused by this relocation, although rental costs are expected to increase. The United Kingdom 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 leases expiring in 2068 and 2121 respectively. 5,000 square feet of space is also rented 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 Bucheon City, near Seoul, under a lease due to expire in 2003.
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
ITEM 3 LEGAL PROCEEDINGS
The Company is involved in various legal proceedings, but believes that these matters will be resolved without a material effect on its financial position.
ITEM 4
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
EXECUTIVE OFFICERS OF THE REGISTRANT
Name of Officer Age Position - ----------------------------------------------------------------------------- Matthew Boyle 40 President & Chief Executive Officer
Paul A. McPartlin 57 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 was appointed Vice President and Chief Operating Officer on November 5, 1996 and President and Chief Executive Officer on November 13, 1997. Mr. McPartlin has been Vice President and Chief Financial Officer of the Company for more than five years and was elected Treasurer in January 2000.
PART II
ITEM 5
ITEM 5 MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
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 16, 2002, there were approximately 283 shareholders of record.
- ------------------------------------------------------------------------------ Quarter 1 Quarter 2 Quarter 3 Quarter 4 Year - ------------------------------------------------------------------------------ 2002 Quarters Cash dividends per share $ .09 $ .09 $ .09 $ .03 $ .30 - ------------------------------------------------------------------------------ Common stock price per share - High $ 9.95 $10.30 $10.15 $ 8.20 $10.30 - Low 7.16 6.45 7.99 4.02 4.02 - ------------------------------------------------------------------------------ 2001 Quarters Cash dividends per share $ .18 $ .18 $ .18 $ .18 $ .72 - ------------------------------------------------------------------------------ Common stock price per share - High $11.13 $10.38 $10.00 $10.75 $11.13 - Low 8.94 7.00 7.00 8.30 7.00 - ------------------------------------------------------------------------------
ITEM 6
ITEM 6 SELECTED FINANCIAL DATA
A summary of selected financial data for the last five years is set out below:
For the Years ended September 30 (in thousands except per share data) - ----------------------------------------------------------------------------- 2002 2001 2000 1999 1998 - ----------------------------------------------------------------------------- Net sales $21,872 $27,002 $30,360 $29,654 $31,519 Operating income 45 1,652 4,108 4,640 5,002 Net income 57 1,101 2,805 3,125 3,269 Basic income per share $ .02 $ .35 $ .90 $ 1.00 $ 1.05 Cash dividends per share $ .30 $ .72 $ .72 $ .72 $ .63 Average shares outstanding 3,117 3,110 3,115 3,110 3,099 Stockholders' investment $ 9,453 $ 9,959 $11,272 $11,411 $10,793 Total assets $13,521 $15,750 $17,209 $18,119 $17,784 - -----------------------------------------------------------------------------
ITEM 7
ITEM 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FORWARD LOOKING STATEMENTS
This discussion and analysis contains forward-looking statements that involve risks and uncertainties that could cause actual results to differ materially from those projected, including the following: ability of outsource subcontractors to meet the Company's cost and quality targets and to deliver products in a timely manner; ability to produce products meeting technical requirements of customers and acceptance of those products by customers; level of demand for controls; impact of the variability of foreign exchange rates on sales and earnings; availability of electronic components at reasonable prices; ability of the Company to meet customers quality objectives; availability of earnings and capital resources to permit continuation of dividend payments; the outcome of litigation.
CRITICAL ACCOUNTING POLICIES
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, the Company views certain of these policies as critical. Policies determined to be critical are those policies that have the most significant impact on the Company's financial statements and require management to use a greater degree of judgement and/or estimates. Actual results may differ from those estimates.
The Company believes the following represent its critical accounting policies:
Revenue Recognition
The Company recognizes revenue when title transfers in accordance with its normal trading terms, which is usually upon shipment of its products. Over 98% of the Company's revenues are derived from product shipments. The Company's only post shipment obligation relates to warranty in the normal course of business for which reserves are maintained, which management believes are adequate.
Foreign Currencies and Hedging
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' investment in the balance sheet. Foreign currency transaction gains and losses are included in costs and expenses.
The Company sells to customers throughout the industrialized world. The majority of the Company's products are manufactured in the United Kingdom. In fiscal 2002 approximately 41% of the Company's sales were made in US dollars, 23% were made in British pounds and 36% were made in Euros. Over 80% 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.
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. 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.
Bad Debts
The Company estimates an allowance for doubtful accounts based on factors related to the credit risk of each customer. 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. Ten customers account for approximately 51% of the Company's sales. If the financial condition of the Company's customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required.
Inventories
Inventories are priced 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. If actual future demand or market conditions are less favorable than those projected by management, additional inventory write-downs may be required.
Warranty Costs
The Company provides for the estimated cost of product warranties at the time revenue is recognized based upon estimated costs and anticipated in-warranty failure rates. 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. Should actual product failure rates and repair or replacement costs differ from estimates, revisions to the estimated warranty liability may be required. 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. There were no significant safety related product recalls during the past three fiscal years.
A) Results of Operations
The table below compares summarized results for the last 3 fiscal years. To enable a better comparison, the fiscal 2001 results are stated both as reported and excluding charges incurred in that year of $1,695,000 before tax, equivalent to $.35 per share.
- ------------------------------------------------------------------------------ (in thousands of dollars except per share data) - ------------------------------------------------------------------------------ Fiscal 2002 Fiscal 2001 Fiscal 2000 - ------------------------------------------------------------------------------ As As Before 	As Reported Reported Charges charges reported - ------------------------------------------------------------------------------ Net Sales $21,872 $27,002 $ - $27,002 $30,360 Cost of Sales 13,909 17,491 743 16,748 18,427 - ------------------------------------------------------------------------------ Gross Profit 7,963 9,511 (743) 10,254 11,933 Selling, research and administrative expenses 7,918 7,859 952 6,907 7,825 - ------------------------------------------------------------------------------ Operating income 45 1,652 (1,695) 3,347 4,108 Net income 57 1,101 (1,102) 2,203 2,805 Diluted income per share $ 0.02 $ 0.35 $ (0.35) $ 0.70 $ 0.90 - ------------------------------------------------------------------------------
2002 compared to 2001
Sales in fiscal 2002 were $21,872,000 a decrease of $5,130,000, or 19%, compared to last year. Revenues in the United States were $9,054,000 compared to $12,132,000 in fiscal 2001, a decrease in volumes of 25%. In Europe and the Far East revenues of $12,818,000 compared to $14,870,000 last year, a decrease of $2,052,000, or 14%. 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. Both the Euro and the British pound strengthened compared to the dollar in 2002 and the net effect of these changes in average foreign currency exchange rates was to increase fiscal 2002 sales when measured in dollars by $500,000, or 2%. Therefore shipment volumes in foreign markets decreased by $2,552,000, or 17%, compared to last year.
In the controls business segment sales were $20,100,000, a decrease of $4,736,000, or 19%, compared to the prior year when sales were $24,836,000. In the fork lift truck market, the largest end user market for the controls business, sales decreased by 18% compared to last year. Aerial lift sales were down by 38% compared to fiscal 2001. In both of these end user markets the world-wide slowdown in capital spending was the main cause of the decrease. Sales into the mining equipment end user market in the USA decreased by 11% due to lower demand for coal. Sales into the airport ground support market, principally for baggage handling vehicles, decreased sharply following the tragic events of September 11, 2001, when airlines cut back sharply on spending, and were down by 41% compared to the prior year. Sales into other electric vehicle markets, such as neighborhood electric vehicles, burden carriers and sweepers, increased by over 90%, mainly due to increased sales of accessory products.
In the capacitor business segment sales were $1,772,000 compared to $2,166,000 in fiscal 2001, a decrease of 18%, mainly due to lower demand in most markets served by ICW. Foreign currency fluctuations increased sales measured in dollars by $50,000, or 2% compared to the previous year. Capacitor shipment volumes were 20% lower than last year. Both the railway signaling and professional high-end audio equipment end markets were depressed compared to last year.
Cost of sales in fiscal 2002 was $13,909,000, a decrease of $3,582,000, or 20% compared to last year. Gross profit in fiscal 2002 was $7,963,000, or 36.4% of sales, compared to $9,511,000, or 35.2% of sales, in 2001. In fiscal 2001 the Company recorded charges which reduced gross profit by $743,000 relating to product rectification and the bankruptcy of a major customer. Before these charges, gross profit in fiscal 2001 was 38.0% of sales. Thus the gross profit percentage in fiscal 2002 was 1.6% of sales lower than gross profit before charges in the prior year. Foreign currency fluctuations reduced reported gross profit in fiscal 2002 by 0.4% of sales compared to the prior year. The remaining year-to year decrease in gross profit percentage was mainly due to adverse sales mix.
Selling, research and administrative expenses were $7,918,000 in 2002 compared to $7,859,000 last year, an increase of $59,000, or 1%. In fiscal 2001 charges of $952,000 relating to the bankruptcy of a major customer and the cost of a 20% workforce reduction were included in selling, research and administrative expenses. Before these charges in fiscal 2001, selling, research and administrative expenses amounted to $6,907,000. In fiscal 2002 the Company incurred additional consultancy costs of $543,000 principally due to accelerated new product engineering and new computer systems. Foreign currency fluctuations resulted in a $150,000 increase in reported expense. In fiscal 2002 the Company incurred an additional expense of $209,000 relating to its UK pension plan. An analysis of the year-to-year change in selling, research and administrative expenses is set out below:
Selling, research and administrative expenses $'000 Reported expense in fiscal 2002 7,918 Reported expense in 2001 7,859 - ------------------------------------------------------------------------------ Increase in expense 59 - ------------------------------------------------------------------------------ Increase (decrease) due to: Charges in fiscal 2001 for customer bankruptcy and workforce reduction (952) Additional consultancy costs in fiscal 2002 543 Effect of exchange rate changes 150 Additional pension expense in the UK 209 - ------------------------------------------------------------------------------ Other increases in operating expense (net), 109 - ------------------------------------------------------------------------------ Total increase in selling research and administrative expenses in fiscal 2002 59 - ------------------------------------------------------------------------------
Operating income in fiscal 2002 was $45,000 compared to $1,652,000 in fiscal 2001, a decrease of $1,607,000. This decrease was mainly due to lower volumes which decreased income by approximately $2,750,000, the decrease in income in 2002 of $543,000 due to additional consultancy expense which was partially offset by the net impact of charges of $1,695,000 in fiscal 2001. Operating income was 0.2% of sales in 2002 compared to 6.1% of sales in the prior year.
Interest expense in fiscal 2002 was $39,000 compared to $13,000 in the prior year due to increased short-term borrowing in Europe. Interest income was $9,000 compared to $26,000 in the prior year due to lower cash balances. Other income, mainly due to foreign currency gains, was $73,000 compared to $49,000 in the previous year.
Income before income taxes was $88,000 in fiscal 2002, a decrease of $1,626,000 compared to last year. Income taxes were 35.2% of pre-tax income compared to 35.8% in fiscal 2001. The decrease in the average tax rate was mainly due to higher foreign tax credits in fiscal 2002. Net income was $57,000, or $.02 per share, both basic and diluted. In fiscal 2001 net income was $1,101,000, or $.35 per share, both basic and diluted. Net income per share decreased by $.33 per share compared to last year.
2001 compared to 2000
In fiscal 2001 sales were $27,002,000, a decrease of $3,358,000, or 11%, compared to fiscal 2000. The strength of the dollar compared to the Euro and the British Pound, accounted for a $1,000,000, or 3%, decrease in reported sales. Shipment volumes decreased by 8% compared to the prior year. This was principally due to a 38% decrease in shipments to the aerial lift market, partially offset by strong growth in the mining market.
Sales in the controls business segment decreased by $3,510,000, or 12%. US controls sales were $12,132,000, a decrease of 5% compared to fiscal 2000. Foreign controls sales were $12,704,000 compared to $15,631,000 in the prior year, a decrease of 19%. Foreign currency fluctuations, compared with the US dollar, accounted for 5% of this decrease and the remaining 14% decrease was due to lower volumes. These lower volumes were principally due to declines in shipments to the European aerial lift market and the counterbalance sector of the fork lift truck market. Sales in the capacitor business were $2,166,000, an increase of $152,000, or 8%, compared to fiscal 2000. This was principally due to higher volumes in the railway signaling and audio capacitor markets.
In fiscal 2001 the Company recorded three non-recurring charges, as follows:-
- - In June 2001 UpRight, Inc., a manufacturer of aerial lifts that was a significant customer of the Company, filed for protection under Chapter 11 of the bankruptcy code. The Company recorded a charge of $855,000, equivalent to $.18 per share, to cover the outstanding receivable from UpRight of $562,000 and an estimated write-down of inventory unique to this customer of $293,000. Shipments to UpRight, Inc. accounted for 5% of total revenues in fiscal 2001 compared to 6% in fiscal 2000.
- - The Company incurred a charge of $390,000 relating to a 20% reduction in its world-wide workforce in the second quarter of fiscal 2001.
- - In the quarter ended December 2000 there was a technical problem with a product line which impacted one major fork lift truck customer. This resulted in the Company incurring a charge for product rectification costs of $450,000.
In total the impact of the above charges in fiscal 2001 was $1,695,000, which was equivalent to $.35 per share. A comparison of results before and after these charges is set out at the start of this Results of Operations discussion and analysis.
Gross profit in fiscal 2001 was $9,511,000, or 35.2% of sales, after the $293,000 charge relating to the write-down of inventory relating to UpRight and the $450,000 charge relating to product rectification costs. Prior to these charges, which total $743,000, gross profit was $10,254,000, or 38.0% of sales, compared to $11,933,000, or 39.3% of sales in the prior year. The decrease in gross profit percentage was mainly due to difficult material supply conditions, caused by a world-wide shortage of electronic components, start-up costs associated with the Company's outsourcing program and lower labor efficiency during the period of workforce reduction.
Selling, research and administrative expenses were $7,859,000 in fiscal 2001, including $562,000 relating to the increase in reserves for the UpRight account receivable and $390,000 for the costs relating to workforce reductions. Prior to these charges of $952,000, operating expenses were $6,907,000, a decrease of $918,000, or 12%, compared to fiscal 2000. This decrease was due to both foreign currency fluctuations and the savings resulting from the workforce reduction.
During fiscal 2001 there was significant progress in outsourcing non-core activities with a consequent reduction in the number of employees and operating expenses.
Operating income for fiscal 2001 was $1,652,000. Charges totaling $1,695,000 impacting operating income included $855,000 relating to UpRight, $390,000 for workforce reductions and $450,000 for product rectification. All of these charges impacted the controller business segment. Prior to these charges operating income was $3,347,000, or 12.4% of sales, compared to $4,108,000, or 13.5% of sales, in the prior year. This decrease in operating income was principally due to lower volumes, partially offset by the savings in operating expenses arising from the workforce reductions. Operating income in the capacitor business segment was $442,000 compared to $463,000 in the prior year. This decrease was principally due to foreign currency fluctuations. In the controller business segment, and before the charges mentioned above which totaled $1,695,000, operating income was $3,139,000. This was a decrease of 19% compared to the prior year when operating income for the controls segment was $3,862,000. This decrease in operating income, after the impact of charges, was principally due to lower volumes. Income before income taxes was $1,714,000 compared to $4,196,000 in the same period in fiscal 2000 year.
Income taxes were 35.8% of pre-tax income in fiscal 2001 compared to 33.1% in fiscal 2000. The increase in the average tax rate was mainly due to a lower proportion of the Company's fiscal 2001 profits that were earned in lower tax rate foreign operations.
Net income was $1,101,000, or $.35 per share, compared to $2,805,000, or $.90 per share, in fiscal 2000. The charges in fiscal 2001 reduced net income by $1,102,000, or $.35 per share. Prior to these charges net income would have been $2,203,000, or $.70 per share, a decrease of 21% compared to the prior year.
B) Liquidity and Capital Resources
The Company's cash flow from operating activities for fiscal 2002 was $1,407,000 compared to $1,476,000 last year. Acquisitions of property, plant and equipment amounted to $287,000 compared to $431,000 in fiscal 2001. Quarterly dividend payments were reduced twice during fiscal 2002, from $.18 per share to $.09 per share in the first quarter and then to $.03 per share in the fourth quarter. In fiscal 2002 dividend payments amounted to $1,401,000 compared to $2,240,000 in 2001. Exchange rate changes increased cash by $147,000 in fiscal 2002 compared to a decrease of $77,000 last year. In fiscal 2002 cash balances decreased by $117,000. The main working capital changes in fiscal 2002 which totaled $930,000 were a decrease in receivables of $1,207,000 due to lower shipments, and decreased inventories of $705,000, mainly due to both lower volumes and working down some of the unique inventory that increased last year due to the bankruptcy of UpRight. Accounts payable decreased by $1,205,000, mainly due to lower volumes and inventory reductions.
The Company has no long-term debt and has overdraft facilities in the United Kingdom (UK) amounting to $1,730,000 and in France of $325,000. These facilities were unused at September 30, 2002 and September 30, 2001. During fiscal 2002 the peak borrowing under these facilities was $900,000 and the average level of borrowing was $260,000. The UK overdraft facilities are secured by all of the Company's assets in the UK and are due for renewal in September 2003 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 2003 but, in line with normal practice in Europe, can be withdrawn on demand by the bank.
At September 20, 2002 the Company's cash balances were $695,000 and there was no short-term or long-term debt. The Company does not have any off balance sheet financing. The Company has, since January 1990, maintained a program of regular cash dividends, which amounted to $94,000 per quarter in the last quarter of fiscal 2002. During fiscal 2002 the Company reduced its quarterly cash dividends from $.18 per share to $.03 per share, in response to lower earnings and cash balances. 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, which amounted to $2,055,000 at September 30, 2002. 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 $534,000. There were no significant capital expenditure commitments at September 30, 2002. 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.
ITEM 7A
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 Note 5 to the Company's Consolidated Financial Statements included under Item 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
CONSOLIDATED BALANCE SHEETS Tech/Ops Sevcon, Inc. and Subsidiaries
September 30, 2002 and 2001 (in thousands of dollars) - ------------------------------------------------------------------------------ ASSETS 2002 2001 - ------------------------------------------------------------------------------ Current assets: Cash and cash equivalents $ 695 $ 812 Receivables, net of allowances for doubtful accounts of $356,000 in 2002 and $809,000 in 2001 3,938 5,145 Inventories 4,137 4,842 Prepaid expenses and other current assets 539 658 - ------------------------------------------------------------------------------ Total current assets 9,309 11,457 - ------------------------------------------------------------------------------ Property, plant and equipment, at cost: Land and improvements 22 21 Buildings and improvements 1,950 1,827 Equipment 5,941 5,353 - ------------------------------------------------------------------------------ 7,913 7,201 Less: accumulated depreciation and amortization 5,136 4,343 - ------------------------------------------------------------------------------ Net property, plant and equipment 2,777 2,858 - ------------------------------------------------------------------------------ Goodwill 1,435 1,435 - ------------------------------------------------------------------------------ Total assets $13,521 $15,750
- ------------------------------------------------------------------------------ LIABILITIES AND STOCKHOLDERS' INVESTMENT - ------------------------------------------------------------------------------ Current liabilities: Accounts payable $ 1,406 $ 2,611 Dividend payable 94 560 Accrued compensation and related costs 720 565 Other accrued expenses 1,595 1,507 Accrued and deferred taxes on income 160 438 - ------------------------------------------------------------------------------ Total current liabilities 3,975 5,681 - ------------------------------------------------------------------------------ Deferred taxes on income 93 110 - ------------------------------------------------------------------------------ Commitments and contingencies (note 5) - ------------------------------------------------------------------------------
Stockholders' investment 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 3,125,051 shares in 2002 and 3,114,820 shares in 2001 313 311 Treasury stock, none in 2002 and 5,200 shares in 2001, at cost - (49) Premium paid in on common stock 4,047 3,925 Retained earnings 6,189 7,237 Cumulative other comprehensive income (loss) (1,096) (1,465) - ------------------------------------------------------------------------------ Total stockholders' investment 9,453 9,959 - ------------------------------------------------------------------------------ Total liabilities and stockholders' investment $13,521 $15,750 - ------------------------------------------------------------------------------
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, 2002, 2001 and 2000 (in thousands except per share data) - ------------------------------------------------------------------------------ 2002 2001 2000 - ------------------------------------------------------------------------------ Net sales $21,872 $27,002 $30,360 Costs and expenses: Cost of sales 13,909 17,491 18,427 Selling, research and administrative 7,918 7,859 7,825 - ------------------------------------------------------------------------------ 21,827 25,350 26,252 - ------------------------------------------------------------------------------ Operating income 45 1,652 4,108 Interest expense (39) (13) (1) Interest income 9 26 71 Other income, net 73 49 18 - ------------------------------------------------------------------------------ Income before income taxes 88 1,714 4,196 Income taxes (31) (613) (1,391) - ------------------------------------------------------------------------------ Net income $ 57 $ 1,101 $ 2,805 - ------------------------------------------------------------------------------ Basic income per share $ .02 $ .35 $ .90 - ------------------------------------------------------------------------------ Diluted income per share $ .02 $ .35 $ .90 - ------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME Tech/Ops Sevcon, Inc. and Subsidiaries
For the Years ended September 30, 2002, 2001 and 2000 (in thousands of dollars) - ------------------------------------------------------------------------------ 2002 2001 2000 - ------------------------------------------------------------------------------ Net income $ 57 $ 1,101 $ 2,805 Foreign currency translation adjustment 473 (41) (895) Changes in fair market value of cash flow hedges (104) (85) 192 - ------------------------------------------------------------------------------ Comprehensive income $ 426 $ 975 $ 2,102 - ------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial statements.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' INVESTMENT Tech/Ops Sevcon, Inc. and Subsidiaries
For the Years ended September 30, 2000, 2001 and 2002 (in thousands of dollars) - ------------------------------------------------------------------------------ Premium paid Cumulative Total in on other stock- Common Treasury common Retained comprehensive holders' stock stock stock earnings income (loss) investment - ------------------------------------------------------------------------------ Balance September 30, 1999 $ 312 $ - $ 3,924 $ 7,811 $ (636) $11,411 Net income - - - 2,805 - 2,805 Dividends ($.72 per share) - - - (2,243) - (2,243) Currency translation adjustment - - - - (895) (895) Change in fair market value of cash flow hedge - - - - 192 192 Cancellation of unclaimed shares (1) - 1 2 - 2 - ------------------------------------------------------------------------------ Balance September 30, 2000 311 - 3,925 8,375 (1,339) 11,272 Net income - - - 1,101 - 1,101 Dividends ($.72 per share) - - - (2,239) - (2,239) Purchase of treasury stock - (49) - - - (49) Currency translation adjustment - - - - (41) (41) Change in fair market value of cash flow hedge - - - - (85) (85) - ------------------------------------------------------------------------------ Balance September 30, 2001 311 (49) 3,925 7,237 (1,465) 9,959 Net income - - - 57 - 57 Dividends ($.30 per share) - - - (935) - (935) Currency translation adjustment - - - - 473 473 Exercise of stock options 2 49 136 (170) - 17 Tax effect of exercise of stock options - - (14) - - (14) Change in fair market value of cash flow hedge - - - - (104) (104) - ------------------------------------------------------------------------------ Balance September 30, 2002 $ 313 $ - $ 4,047 $ 6,189 $(1,096) $ 9,453 - ------------------------------------------------------------------------------
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, 2002, 2001 and 2000 (in thousands of dollars)
- ------------------------------------------------------------------------------ 2002 2001 2000 - ------------------------------------------------------------------------------ Cash flow from operating activities: Net income $ 57 $ 1,101 $ 2,805 Adjustments to reconcile net income to net cash from operating activities: Depreciation and amortization 544 518 541 Deferred tax provision / benefit (124) (25) (3) Increase (decrease) in cash resulting from changes in operating assets and liabilities: Receivables 1,207 987 (1,040) Inventories 705 (1,158) 528 Prepaid expenses and other current assets 122 173 (357) Accounts payable (1,205) 226 (265) Accrued compensation and expenses 243 (275) (603) Accrued and deferred taxes on income (142) (71) 101 - ------------------------------------------------------------------------------ Net cash generated from operating activities 1,407 1,476 1,707 - ------------------------------------------------------------------------------ Cash flow (used by) generated from investing activities: Acquisition of property, plant and equipment (287) (431) (678) Acquisition and disposal of short-term investments - 591 (591) - ------------------------------------------------------------------------------ Net cash (used by) generated from investing activities (287) 160 (1,269) - ------------------------------------------------------------------------------ Cash flow used by financing activities: Purchase of common stock (170) (49) - Exercise of stock options 187 - - Dividends paid (1,401) (2,240) (2,243) - ------------------------------------------------------------------------------ Net cash used by financing activities (1,384) (2,289) (2,243) - ------------------------------------------------------------------------------ Effect of exchange rate changes on cash 147 (77) (328) - ------------------------------------------------------------------------------ Net decrease in cash (117) (730) (2,133) Beginning balance - cash and cash equivalents 812 1,542 3,675 - ------------------------------------------------------------------------------ Ending balance - cash and cash equivalents $ 695 $ 812 $ 1,542 - ------------------------------------------------------------------------------ Supplemental disclosure of cash flow information: Cash paid for income taxes $ 238 $ 590 $ 1,530 Cash paid for interest $ 39 $ 13 $ 1 - ------------------------------------------------------------------------------ Supplemental disclosure of non-cash financing activity: Dividend declared $ 94 $ 560 $ 561 - ------------------------------------------------------------------------------
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 income statement amounts have been restated to conform to the current classification of expenses.
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 adequate ongoing reserves are maintained.
C. Research and development
The cost of research and development programs is charged against income as incurred and amounted to approximately $1,971,000 in 2002, $1,778,000 in 2001 and $1,946,000 in 2000. This expense is included in selling, research and administrative expense in the income statement. Research and development expense was 9.0% of sales in 2002 compared to 6.6% in 2001 and 6.4% in 2000.
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 and seven years for equipment. Maintenance and repairs are charged to expense and renewals and betterments are capitalized.
E. 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.
F. Inventories
Inventories are priced at the lower of cost or market. Inventory costs include materials, direct labor and manufacturing overhead, are relieved from inventory on a first-in, first-out basis and are comprised of:
- ------------------------------------------------------------------------------ (in thousands of dollars) - ------------------------------------------------------------------------------ 2002 2001 - ------------------------------------------------------------------------------ Raw materials $ 2,096 $ 2,508 Work-in-process 594 1,194 Finished goods 1,447 1,140 - ------------------------------------------------------------------------------ $ 4,137 $ 4,842 - ------------------------------------------------------------------------------
G. 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' investment in the balance sheet. Foreign currency transaction gains and losses are included in costs and expenses.
H. Derivative instruments and hedging
The Company accounts for derivative instruments and hedging under SFAS #133 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 41% of the Company's sales are made in US dollars, 23% are made in British pounds and 36% are made in Euros. Over 80% 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, 2002, the Company had effectively hedged approximately 5% 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, 2002 and 2001. 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) - ---------------------------------------------------------------------------- Notional Average Amount Contract Rate - ---------------------------------------------------------------------------- At September 30, 2002: Sell US Dollars for British Pounds $ 550 $1.56 = 1BPS - ---------------------------------------------------------------------------- Total $ 550 - ---------------------------------------------------------------------------- Estimated fair value * $ 4 - ---------------------------------------------------------------------------- Amount recorded as other comprehensive income $ (104) - ----------------------------------------------------------------------------
At September 30, 2001: Sell Euros for British Pounds $ 1,958 EURO 1.59 = 1BPS Sell US Dollars for British Pounds $ 2,710 $1.41 =1BPS - ---------------------------------------------------------------------------- Total $ 4,668 - ---------------------------------------------------------------------------- Estimated fair value * $ 125 - ---------------------------------------------------------------------------- Amount recorded as other comprehensive income $ (85) - ----------------------------------------------------------------------------
*The estimated fair value is based on the estimated amount at which the contracts could be settled based on forward exchange rates.
I. 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.
J. Earnings per share
Basic and diluted net income per common share for the three years ended September 30, 2002 are calculated as follows:
- ---------------------------------------------------------------------------- (in thousands except per share data) - ---------------------------------------------------------------------------- 2002 2001 2000 - ---------------------------------------------------------------------------- Net income $ 57 $ 1,101 $ 2,805 Weighted average shares outstanding 3,117 3,110 3,115 Basic income per share $ .02 $ .35 $ .90 - ---------------------------------------------------------------------------- Options outstanding - common stock equivalents 7 16 18 Average common and common equivalent shares outstanding 3,124 3,126 3,133 Diluted income per share $ .02 $ .35 $ .90 - ----------------------------------------------------------------------------
K. 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. Operating results in the future could vary from the amounts derived from management's estimates and assumptions.
L. 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, 2002, approximates fair value due to the short-term nature of these instruments.
M. 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 charged to "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. The excess related to acquisitions initiated prior to November 1, 1970 ($1,435,000) is not being amortized, since in the opinion of management there has been no diminution in the value of the excess related to these acquisitions. The excess related to subsequent acquisitions has been fully amortized.
In June 2001, the FASB issued SFAS #142, Goodwill and Other Intangible Assets, which establishes new accounting and reporting standards for goodwill. Under SFAS #142 goodwill is no longer amortized however companies are required to assess the impairment of the goodwill at least annually based on a fair-value analysis. The Company previously did not amortize its goodwill since it relates to acquisitions initiated prior to November 1, 1970. The Company adopted SFAS #142 effective October 1, 2001. The adoption of SFAS #142 did not have a material impact on the Company's financial condition or results of operations.
(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.
In connection with the exercise of employee stock options, the Company repurchased the following number of mature shares from employees 2000 - 0; 2001 - 0; 2002 -18,569.
In fiscal 2001 the Company purchased 5,200 shares of its common stock for treasury stock at a total cost of $49,000. No such shares were purchased in fiscal years 2002 or 2000. These shares were issued to satisfy options exercised by employees in fiscal 2002.
(3) STOCK-BASED COMPENSATION PLANS
There were 39,500 shares reserved under the Company's 1996 Equity Incentive Plan at September 30, 2002. Options for 10,000 shares were granted in November 2001. Options for 34,000 shares were exercised in fiscal 2002 and in connection with the exercise of these options the Company repurchased 18,569 mature shares from employees resulting in a net increase in issued shares of 15,431. No options were granted or exercised in fiscal 2001.
Recipients of grants or options must execute a standard form of noncompetition agreement. Options granted are exercisable at a price not less than fair market value on the date of grant. This plan also provides for the grant of Stock Appreciation Rights (SARs), either separately, or in relation to options granted, and for the grant of bonus shares. No SARs or bonus shares have been granted.
In January 1998 the stockholders approved the 1998 Directors Option Plan reserving 50,000 shares for issue under the plan. Options for a total of 25,000 shares granted to 5 directors in 1998 are outstanding.
SFAS #123 Accounting for Stock-Based Compensation defines a fair value based method of accounting for employee stock options or similar equity instruments and encourages all entities to adopt that method of accounting. However, it also allows an entity to continue to measure compensation costs using the method of accounting proscribed by APB #25 Accounting for Stock Issued to Employees. The Company has elected to account for its stock based compensation plans under APB #25, under which no compensation cost has been recognized. 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:
- ---------------------------------------------------------------------------- (in thousands of dollars except per share data) - ---------------------------------------------------------------------------- 2002 2001 2000 - ---------------------------------------------------------------------------- Net income As reported $ 57 $ 1,101 $ 2,805 Pro forma 4 1,037 2,741
Basic net income per share As reported $ .02 $ .35 $ .90 Pro forma $ .00 $ .33 $ .88
Diluted net income per share As reported $ .02 $ .35 $ .90 Pro forma $ .00 $ .33 $ .87 - ----------------------------------------------------------------------------
The effects of applying SFAS #123 in this pro forma disclosure are not indicative of future amounts. SFAS #123 does not apply to awards prior to fiscal 1996 and additional awards in future years are anticipated.
Option transactions under the plans for the three years ended September 30, 2002 were as follows:
- ---------------------------------------------------------------------------- Shares under Weighted average option exercise price - ---------------------------------------------------------------------------- Outstanding at September 30, 1999 119,000 $11.61 Granted in 2000 58,500 10.86 Cancelled in 2000 (7,000) 13.96 - ---------------------------------------------------------------------------- Outstanding at September 30, 2000 170,500 11.25 Cancelled in 2001 (27,000) 11.53 - ---------------------------------------------------------------------------- Outstanding at September 30, 2001 143,500 11.20 Granted in 2002 10,000 9.60 Cancelled in 2002 (5,000) 13.97 Exercised in 2002 (34,000) 4.97 - ---------------------------------------------------------------------------- Outstanding at September 30, 2002 114,500 $12.79 - ---------------------------------------------------------------------------- Exercisable at September 30, 2002 40,400 $13.36 - ----------------------------------------------------------------------------
The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions used for the grants in 2002: risk-free interest rate of 6%; expected dividend yield of 1.25%; expected life of 7 years; expected volatility of 48%.
Details of options outstanding at September 30, 2002 were as follows:
- ---------------------------------------------------------------------------- Shares Weighted average Price range under option remaining contractual life - ---------------------------------------------------------------------------- $ 9.60 - $14.40 89,500 6 years $ 14.41 - $21.62 25,000 5 years - ---------------------------------------------------------------------------- 114,500 6 years - ----------------------------------------------------------------------------
(4) INCOME TAXES
The domestic and foreign components of income before income taxes are as follows:
- ---------------------------------------------------------------------------- (in thousands of dollars) - ---------------------------------------------------------------------------- 2002 2001 2000 - ---------------------------------------------------------------------------- Domestic $ 215 $ 815 $ 1,039 Foreign (127) 899 3,157 - ---------------------------------------------------------------------------- $ 88 $ 1,714 $ 4,196 - ----------------------------------------------------------------------------
The components of the provision / (benefit) for income taxes for the years ended September 30, 2002, 2001 and 2000 are as follows:
- ---------------------------------------------------------------------------- (in thousands of dollars) - ---------------------------------------------------------------------------- - ---------------------------------------------------------------------------- Current Deferred Total - ---------------------------------------------------------------------------- Federal $ 80 $ (31) $ 49 State 35 (6) 29 Foreign 40 (87) (47) - ---------------------------------------------------------------------------- $ 155 $ (124) $ 31 - ---------------------------------------------------------------------------- - ---------------------------------------------------------------------------- Current Deferred Total - ---------------------------------------------------------------------------- Federal $ 250 $ - $ 250 State 72 - 72 Foreign 310 (19) 291 - ---------------------------------------------------------------------------- $ 632 $ (19) $ 613 - ---------------------------------------------------------------------------- - ---------------------------------------------------------------------------- Current Deferred Total - ---------------------------------------------------------------------------- Federal $ 329 $ (35) $ 294 State 96 (6) 90 Foreign 988 19 1,007 - ---------------------------------------------------------------------------- $ 1,413 $ (22) $ 1,391 - ----------------------------------------------------------------------------
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) - ----------------------------------------------------------------------------- 2002 2001 2000 - ----------------------------------------------------------------------------- Statutory Federal income tax rate 34% 34% 34% Computed tax provision at statutory rate $ 30 $ 583 $ 1,427 Increases (decreases) resulting from: Foreign tax rate differentials 5 (25) (92) State taxes net of federal tax benefit 19 48 59 Foreign tax credits and other (23) 7 (3) - ----------------------------------------------------------------------------- Income tax provision in the Statement of Income $ 31 $ 613 $ 1,391 - -----------------------------------------------------------------------------
Deferred income taxes result from temporary differences in reporting transactions for financial reporting and tax purposes. The significant items comprising the domestic and foreign deferred tax accounts at September 30, 2002 and 2001 are as follows:
- ----------------------------------------------------------------------------- (in thousands of dollars) - ----------------------------------------------------------------------------- - ----------------------------------------------------------------------------- Domestic Foreign Foreign current current long-term - ----------------------------------------------------------------------------- Assets: Pension accruals $ 222 $ 8 $ - Inventory basis differences 114 28 - Warranty reserves 62 - - Other (net) 93 18 - - ----------------------------------------------------------------------------- 491 54 - Liabilities: Property basis differences - - (93) - ----------------------------------------------------------------------------- Net asset (liability) 491 54 (93) Valuation allowance (220) - - - ----------------------------------------------------------------------------- Net deferred tax asset (liability) $ 271 $ 54 $ (93) - ----------------------------------------------------------------------------- - ----------------------------------------------------------------------------- Domestic Foreign Foreign current current long-term - ----------------------------------------------------------------------------- Assets: Pension accruals $ 226 $ - $ - Inventory basis differences 36 46 - Warranty reserves 112 - - Other (net) 62 16 - - ----------------------------------------------------------------------------- 436 62 - Liabilities: Prepaid pension - (60) - Property basis differences - - (110) - ----------------------------------------------------------------------------- Net asset (liability) 436 2 (110) Valuation allowance (220) - - - ----------------------------------------------------------------------------- Net deferred tax asset (liability) $ 216 $ 2 $ (110) - -----------------------------------------------------------------------------
The valuation allowance is provided when it is probable that some portion of the deferred tax asset will not be realized.
(5) COMMITMENTS AND CONTINGENCIES
In fiscal 2002 the Company received a demand for repayment of an alleged preference payment of $180,000 received from a fork lift truck 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 is vigorously contesting this demand and believes that it has a good defense both for providing new value to the customer subsequent to the alleged preference payments and that the payments received were in the ordinary course of business. The Company believes that its reserves for doubtful accounts are adequate to cover its estimated exposure to this customer.
Tech/Ops Sevcon is involved in various other legal proceedings 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, 2002 was $192,000.
Minimum rental commitments under all non-cancelable leases are as follows for the years ended September 30: 2003 - $144,000; 2004 - $65,000; 2005 - $62,000; 2006 - $56,000; 2007 - $56,000 and $1,294,000 thereafter. Net rentals of certain land, buildings and equipment charged to expense were $178,000 in 2002, $177,000 in 2001, and $195,000 in 2000.
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 $1,730,000.
(6) 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 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) - ----------------------------------------------------------------------------- 2002 2001 - ----------------------------------------------------------------------------- Change in benefit obligation: Benefit obligation at beginning of year $ 8,951 $ 7,470 Effect of benefit remeasurement - 1,313 Service cost 394 438 Interest cost 667 632 Plan participants contributions 171 144 Actuarial (gain) loss 396 (36) Benefits paid (190) (485) Curtailment gain - (168) Settlement - (353) Foreign currency exchange rate changes 621 (4) - ----------------------------------------------------------------------------- Benefit obligation at end of year 11,010 8,951 - ----------------------------------------------------------------------------- Change in plan assets: Fair value of plan assets at beginning of year 7,024 7,582 Return on plan assets (a) 1,770 (202) Employer contributions 491 378 Plan participants contributions 171 144 Settlement - (348) Benefits paid (190) (484) Foreign currency exchange rate changes 562 (46) - ----------------------------------------------------------------------------- Fair value of plan assets at end of year 9,828 7,024 - ----------------------------------------------------------------------------- Funded status (1,182) (1,927) Unrecognized transition obligation (asset) (8) (44) Unrecognized prior service cost 669 - Unrecognized net actuarial (gain) loss 136 2,198 - ----------------------------------------------------------------------------- Prepaid (accrued) benefit cost $ (385) $ 227 - -----------------------------------------------------------------------------
(a) Return on plan assets includes an adjustment for changes in fair value related to prior years and an increase from the conversion of the UK plan from a conventional with profits policy to a unitized with profits policy.
The Tech/Ops Sevcon net pension cost included the following components as defined by SFAS #132.
- ----------------------------------------------------------------------------- (in thousands of dollars) - ----------------------------------------------------------------------------- 2002 2001 2000 - ----------------------------------------------------------------------------- Components of net periodic benefit cost: Service cost $ 394 $ 437 $ 476 Interest cost 667 632 530 Expected return on plan assets (563) (576) (597) Amortization of transition obligation (35) (53) (46) Amortization of prior service cost 44 - - Recognized net actuarial gain (loss) 17 18 (11) - ----------------------------------------------------------------------------- Net periodic benefit cost (b) $ 524 $ 458 $ 352 - ----------------------------------------------------------------------------- Net cost of defined contribution plans $ 24 $ 24 $ 26 - -----------------------------------------------------------------------------
(b) Pension expense in the accompanying statement of income for 2002 includes the net periodic benefit cost plus an additional expense of $209,000 related to the UK pension plan.
Plan assets include marketable equity securities, corporate and government debt securities, deferred annuities (primarily insurance contracts in the UK), cash and other short-term investments. The average discount rate and rate of increase in future compensation levels used in determining the actuarial present value of the projected benefit obligation were 6.75% and 4.75%, respectively, and the expected long-term rate of return on assets was 8.0% in 2002, 2001 and 2000.
(7) 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) - ----------------------------------------------------------------------------- - ----------------------------------------------------------------------------- Controls Capacitors Corporate Total - ----------------------------------------------------------------------------- Sales to external customers $20,100 $ 1,772 $ - $21,872 Inter-segment revenues - 662 - 662 Operating income 79 199 (233) 45 Depreciation and amortization 457 87 - 544 Identifiable assets 11,789 1,406 326 13,521 Capital expenditures 279 8 - 287 - ----------------------------------------------------------------------------- - ----------------------------------------------------------------------------- Controls Capacitors Corporate Total - ----------------------------------------------------------------------------- Sales to external customers $24,836 $ 2,166 $ - $27,002 Inter-segment revenues - 342 - 342 Operating income 1,444 442 (234) 1,652 Depreciation and amortization 433 85 - 518 Identifiable assets 14,067 1,284 399 15,750 Capital expenditures 323 108 - 431 - ----------------------------------------------------------------------------- - ----------------------------------------------------------------------------- Controls Capacitors Corporate Total - ----------------------------------------------------------------------------- Sales to external customers $28,346 $ 2,014 $ - $30,360 Inter-segment revenues - 341 - 341 Operating income 3,862 463 (217) 4,108 Depreciation and amortization 451 90 - 541 Identifiable assets 15,053 1,356 800 17,209 Capital expenditures 647 31 - 678 - -----------------------------------------------------------------------------
The Company has businesses located in the United States, the United Kingdom, France and Korea. 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) - ----------------------------------------------------------------------------- 2002 2001 2000 - ----------------------------------------------------------------------------- Sales:- US sales $ 9,054 $12,132 $12,715 Foreign sales: United Kingdom 9,560 10,950 13,202 France 3,252 3,910 4,443 Korea 6 10 - - ----------------------------------------------------------------------------- Total Foreign 12,818 14,870 17,645 - ----------------------------------------------------------------------------- Total sales $21,872 $27,002 $30,360 - ----------------------------------------------------------------------------- Long-lived assets: USA $ 1,514 $ 1,563 $ 1,586 United Kingdom 2,624 2,623 2,733 France 68 94 90 Korea 6 13 20 - ----------------------------------------------------------------------------- Total $ 4,212 $ 4,293 $ 4,429 - -----------------------------------------------------------------------------
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 and North Africa. The business located in Korea supports 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 2002 Tech/Ops Sevcon's largest customer accounted for 11% of sales and for 9% of receivables. In 2001 the largest customer accounted for 15% of sales and 12% of receivables. In 2000 the largest and second largest customers accounted for 12% and 11% of sales and 10% and 15% of receivables respectively.
(8) QUARTERLY FINANCIAL DATA (UNAUDITED)
Selected quarterly financial data for fiscal years 2002 and 2001 is set out below: (in thousands except per share data)
- ----------------------------------------------------------------------------- First Second Third Fourth Total Quarter Quarter Quarter Quarter Year - ----------------------------------------------------------------------------- 2002 Quarters - ----------------------------------------------------------------------------- Net sales $ 5,402 $ 5,575 $ 5,355 $ 5,540 $21,872 Gross profit 1,981 2,147 1,935 1,900 7,963 Operating income * 92 301 (18) (330) 45 Net income 51 192 19 (205) 57 - ----------------------------------------------------------------------------- Basic income per share $ .02 $ .06 $ .01 $ (.07) $ .02 - ----------------------------------------------------------------------------- Diluted income per share $ .02 $ .06 $ .01 $ (.07) $ .02 - ----------------------------------------------------------------------------- 2001 Quarters - ----------------------------------------------------------------------------- Net sales $ 5,768 $ 7,658 $ 7,680 $ 5,896 $27,002 Gross profit 1,493 3,026 2,880 2,112 9,511 Operating income (523) 885 656 634 1,652 Net income (310) 575 408 428 1,101 - ----------------------------------------------------------------------------- Basic income per share $ (.10) $ .18 $ .13 $ .14 $ .35 - ----------------------------------------------------------------------------- Diluted income per share $ (.10) $ .18 $ .13 $ .14 $ .35 - -----------------------------------------------------------------------------
* Includes additional pension expense in the fourth quarter of fiscal 2002 of $209,000 related to the UK pension plan.
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The Board of Directors and Shareholders Tech/Ops Sevcon, Inc.
We have audited the accompanying consolidated balance sheet of Tech/Ops Sevcon, Inc. and subsidiaries as of September 30, 2002 and the related consolidated statements of income, comprehensive income, stockholders' investment and cash flows for the year then ended. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit. The accompanying consolidated balance sheet of Tech/Ops Sevcon, Inc. and subsidiaries as of September 30, 2001 and the related consolidated statements of income, comprehensive income, stockholders' investment, and cash flows for each of the years in the two-year period ended September 30, 2001 were audited by other auditors who have ceased operations. Those auditors expressed an unqualified opinion on those consolidated financial statements in their report dated November 6, 2001.
We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Tech/Ops Sevcon, Inc. and subsidiaries as of September 30, 2002 and the results of their consolidated operations and their consolidated cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America.
Our audit was made for the purpose of forming an opinion on the basic financial statements taken as a whole. Schedule II is presented for purposes of complying with the Securities and Exchange Commission's rules and is not part of the basic financial statements. The financial data in this schedule as of and for the year ended September 30, 2002 has been subjected to the auditing procedures applied in the audit of the basic financial statements and, in our opinion, fairly states, in all material respects, the financial data required to be set forth therein in relation to the basic financial statements taken as a whole.
/s/ Grant Thornton LLP
Boston, Massachusetts November 13, 2002
THE FOLLOWING REPORT OF AUTHUR ANDERSEN LLP (ANDERSEN) IS A COPY OF THE REPORT PREVIOUSLY ISSUED BY ANDERSEN ON NOVEMBER 6, 2001. THE REPORT OF ANDERSEN IS INCLUDED IN THIS ANNUAL REPORT ON FORM 10-K PURSUANT TO RULE 2- 02(E) OF REGULATION S-X. AFTER REASONABLE EFFORTS THE COMPANY HAS NOT BEEN ABLE TO OBTAIN A REISSUED REPORT FROM ANDERSEN. ANDERSEN HAS NOT CONSENTED TO THE INCLUSION OF ITS REPORT IN THIS ANNUAL REPORT ON FORM 10-K. BECAUSE ANDERSEN HAS NOT CONSENTED TO THE INCLUSION OF ITS REPORT IN THIS ANNUAL REPORT, IT MAY BE DIFFICULT TO SEEK REMEDIES AGAINST ANDERSEN AND THE ABILITY TO SEEK RELIEF AGAINST ANDERSEN MAY BE IMPAIRED.
To Tech/Ops Sevcon, Inc.:
We have audited the accompanying consolidated balance sheets of Tech/Ops Sevcon, Inc. (a Delaware Corporation) as of September 30, 2001 and 2000, and the related consolidated statements of income, comprehensive income, stockholders' investment, and cash flows for each of the three years in the period ended September 30, 2001. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based upon our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Tech/Ops Sevcon, Inc. as of September 30, 2001 and 2000, and the results of its operations and cash flows for each of the three years in the period ended September 30, 2001 in conformity with accounting principles generally accepted in the United States.
Our audit was made for the purpose of forming an opinion on the basic financial statements taken as a whole. The schedule listed in the index of financial statements is presented for purposes of complying with the Securities and Exchange Commission's rules and is not part of the basic financial statements. This schedule has been subjected to the auditing procedures applied in the audit of the basic financial statements and, in our opinion, fairly states, in all material respects, the financial data required to be set forth therein in relation to the basic financial statements taken as a whole.
ARTHUR ANDERSEN LLP Boston, Massachusetts November 6, 2001
Item 9
Item 9 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
The Company dismissed Arthur Andersen LLP (Andersen) as its independent accountants on May 30, 2002. The Company's Audit Committee and Board of Directors approved this action.
Andersen's reports on financial statements of the Company for each of the years ended September 30, 2001 and September 30, 2000 did not contain an adverse opinion or disclaimer of opinion and were not qualified or modified as to uncertainty, audit scope or accounting principles.
During the two years ended September 30, 2001 and the interim period between September 30, 2001 and May 30, 2002, there were no disagreements between the Company and Andersen on any matter of accounting principles or practices, financial statement disclosure or auditing scope or procedure, which disagreements, if not resolved to the satisfaction of Andersen, would have caused it to make reference to the subject matter of the disagreements in connection with its report.
During the years ended September 30, 2000 and September 30, 2001 and the interim period between September 30, 2001 and May 30, 2002, there were no reportable events (as defined in Item 304(a)(1)(v) of Regulation S-K).
The Company has been unable, after reasonable efforts, to have Arthur Andersen review and respond to the above disclosure; however, Arthur Andersen provided a letter dated June 5, 2002 stating that it was in agreement with the disclosure included in the paragraphs of Item 4 of the Form 8-K, which disclosure is the same as the disclosure in paragraphs 2, 3 and 4 of the response to this Item 9.
On June 26, 2002, the Company engaged Grant Thornton LLP as its new independent accountant. The Company's Audit Committee and Board of Directors approved this action.
During the years ended September 30, 2000 and September 30, 2001 and the interim period between September 30, 2001 and June 26, 2002, the Company did not consult with Grant Thornton LLP regarding (i) the application of accounting principles to a specified transaction, either completed or proposed, (ii) the type of audit opinion that might be rendered on the Company's financial statements or (iii) any matter that was either the subject of a disagreement (as described above) or a reportable event.
Part III
ITEM 10
ITEM 10 DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The response to this item 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 caption Election of Directors in the Company's Proxy Statement for the 2003 Annual Meeting of Stockholders.
ITEM 11
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 2003 Annual Meeting of Stockholders.
ITEM 12
ITEM 12 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
This information is incorporated by reference from the information under the captions Beneficial Ownership of Common Stock and Election of Directors in the Company's Proxy Statement for the 2003 Annual Meeting of Stockholders.
The following table sets out the status of Securities authorized for issuance under equity compensation plans at September 30, 2002.
- ------------------------------------------------------------------------------ Plan Category Number of Weighted- Number of securities to be average securities issued upon exercise remaining exercise of price of available for future outstanding outstanding issuance under options warrants options, equity and rights warrants compensation and rights plans (excluding securities reflected in column (a) - ------------------------------------------------------------------------------ (a) (b) (c) - ------------------------------------------------------------------------------ Equity compensation plans approved by security holders: 1996 Equity Incentive Plan 89,500 $12.13 39,500 1998 Director Stock Option Plan 25,000 $15.19 25,000 - ------------------------------------------------------------------------------ Sub Total 114,500 $12.79 64,500 - ------------------------------------------------------------------------------ Equity compensation plans not approved by security holders - - - - ------------------------------------------------------------------------------ Total 114,500 $12.79 64,500 - ------------------------------------------------------------------------------
ITEM 13
ITEM 13 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
This information is incorporated by reference from the information under the caption Election of Directors in the Company's Proxy Statement relating to the 2003 Annual Meeting of Stockholders.
PART IV
ITEM 14
ITEM 14 CONTROLS AND PROCEDURES
(a) Evaluation of disclosure controls and procedures. The Company's chief executive officer and chief financial officer, after evaluating the effectiveness of the disclosure controls and procedures (as defined in the Securities Exchange Act of 1934 Rules 13a-14(c) and 15-d-14(c)) as of a date (the Evaluation Date) within 90 days before the filing date of this annual report, have concluded that, as of the Evaluation Date, the disclosure controls and procedures were adequate and designed to ensure that the information required to be disclosed in the reports filed or submitted by the Company under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the requisite time periods.
(b) Changes in internal controls. There were no significant changes in the Company's internal controls or in other factors that could significantly affect the internal controls subsequent to the Evaluation Date.
ITEM 15
ITEM 15 EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) Exhibits The exhibits filed as part of this Annual Report on Form 10-K are listed on the Exhibit Index below.
(b) 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.
(c) Form 8-K On July 2, 2002 the Company filed Form 8-K announcing the appointment of Grant Thornton LLP as Independent Public Accountants.
On August 5, 2002 the Company filed Form 8-K reporting that the Company submitted to the Securities and Exchange Commission the certification by its chief executive and chief financial officers pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 of the Company's report on Form 10-Q for the quarter ended June 30, 2002 filed on July 31, 2002
On September 18, 2002 the Company filed Form 8-K announcing a reduction in the quarterly cash dividend from $.09 per share to $.03 per share.
INDEX TO EXHIBITS
*(3)(a) Certificate of Incorporation of the registrant (incorporated by reference to Exhibit (3)(a) to Annual Report for the fiscal year ended September 30, 1994).
*(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 Exhibit 99.1 to the Registrant's Registration Statement on form S-8 File No. 333-02113).
(10)(b) Form of Option for 1996 Equity Incentive Plan (attached herewith).
*(10)(c) 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)(d) 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)(e) 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).
*(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 Grant Thornton LLP (attached herewith). Consent of Arthur Andersen LLP is not available as they have discontinued operations.
* 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), (10)(b), 10(d) and (10)(e) are management contracts or compensatory plans or arrangements in which the executive officers or directors of the registrant participate.
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 16, 2002 -------------------- 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 16, 2002 - ----------------- Officer and Director Matthew Boyle (Principal Executive Officer)
/s/ Paul A. McPartlin Vice President, Treasurer December 16, 2002 - --------------------- and Chief Financial Officer Paul A. McPartlin (Principal Financial and Accounting Officer)
/s/ Paul B. Rosenberg Director December 16, 2002 - --------------------- Paul B. Rosenberg
/s/ Marvin G. Schorr Director December 16, 2002 - -------------------- Marvin G. Schorr
/s/ Bernard F. Start Director December 16, 2002 - -------------------- Bernard F. Start
/s/ David R. A. Steadman Director December 16, 2002 - ------------------------ David R. A. Steadman
/s/ C. Vincent Vappi Director December 16, 2002 - -------------------- C. Vincent Vappi
CERTIFICATIONS
I, Matthew Boyle, certify that:
1. I have reviewed this annual report on Form 10-K of Tech/Ops Sevcon, Inc.;
2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this annual report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
Date: December 16, 2002
/s/ Matthew Boyle - ----------------- Matthew Boyle President and Chief Executive Officer
I, Paul A McPartlin, certify that:
1. I have reviewed this annual report on Form 10-K of Tech/Ops Sevcon, Inc. ;
2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this annual report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
Date: December 16, 2002
/s/ Paul A. McPartlin - --------------------- Paul A McPartlin Vice President, Chief Financial Officer and Treasurer
Schedule II TECH/OPS SEVCON, INC. AND SUBSIDIARIES
Reserves for the three years ended September 30, 2002 (in thousands of dollars) - ------------------------------------------------------------------------------ Additions Balance charged to Deductions Balance at beginning costs from at close of year & expenses reserves of year - ------------------------------------------------------------------------------ For the year ended September 30, 2002: Allowance for doubtful accounts $ 809 $ 77 $ (530)(a) $ 356 - ------------------------------------------------------------------------------ For the year ended September 30, 2001: Allowance for doubtful accounts $ 241 $ 607 $ (39)(b) $ 809 - ------------------------------------------------------------------------------ For the year ended September 30, 2000: Allowance for doubtful accounts $ 174 $ 80 $ (13)(c) $ 241 - ------------------------------------------------------------------------------
(a) Write off of uncollectible accounts $537, translation adjustment ($7) (b) Accounts collected $6, write off of uncollectible accounts $33 (c) Accounts collected $2; translation adjustment $11.
EXHIBIT (10)(b)
FORM OF OPTION
2002 NSO x,xxx Shares
TECH/OPS SEVCON, INC. 1996 EQUITY INCENTIVE PLAN
Nonstatutory Stock Option Certificate - --------------------------------------
Tech/Ops Sevcon, Inc. (the "Company"), a Delaware corporation, hereby grants to the person named below an option (the "Option") to purchase shares of Common Stock, $.10 par value of the Company (the "Common Stock") under and subject to the Company's 1996 Equity Incentive Plan (the "Plan"), a copy of which is attached hereto, exercisable on the following terms and conditions and those set forth on the reverse side of this certificate:
Name of Optionholder: Name Address: Address 1 Address 2 Address 3 Address 4
Social Security No xxxxxxxxxxxxxx
Number of Shares: x,xxx Option Price: $x.xx per share Date of Grant: Month Day, 2002
Exercisability Schedule: After Month Day, 2003, as to xxx shares After Month Day, 2004, as to xxx shares After Month Day, 2005, as to xxx shares After Month Day, 2006, as to xxx shares After Month Day, 2007, as to xxx shares After Month Day, 2008, as to xxx shares After Month Day, 2009, as to xxx shares After Month Day, 2010, as to xxx shares After Month Day, 2011, as to xxx shares After Month -2 Day, 2012, as to xxx shares
Expiration Date: Month Day, 2012
This Option shall not be treated as an Incentive Stock Option under section 422 of the Internal Revenue Code of 1986, as amended (the "Code").
By acceptance of this Option, the Optionholder agrees to the terms and conditions hereof.
TECH/OPS SEVCON, INC.
By: ----------------------------------- President & Chief Executive Officer
TECH/OPS SEVCON, INC. 1996 EQUITY INCENTIVE PLAN
Nonstatutory Stock Option Terms And Conditions
1. Plan Incorporated by Reference. This Option is issued pursuant to the terms of the Plan and may be amended as provided in the Plan. Capitalized terms used and not otherwise defined in this certificate have the meanings given to them in the Plan. This certificate does not set forth all of the terms and conditions of the Plan, which are incorporated herein by reference. The Committee administers the Plan and its determinations regarding the operation of the Plan are final and binding. Copies of the Plan may be obtained upon written request without charge from the Company.
2. Option Price. The price to be paid for each share of Common Stock issued upon exercise of the whole or any part of this Option is the Option Price set forth on the face of this certificate.
3. Exercisability Schedule. This Option may be exercised at any time and from time to time for the number of shares and in accordance with the exercisability schedule set forth on the face of this certificate, but only for the purchase of whole shares. This Option may not be exercised as to any shares after the Expiration Date.
4. Method of Exercise. To exercise this Option, the Optionholder shall deliver written notice of exercise to the Company specifying the number of shares with respect to which the Option is being exercised accompanied by payment of the Option Price for such shares in cash, by certified check or in such other form, including shares of Common Stock of the Company valued at their Fair Market Value on the date of delivery, as the Committee may approve. Promptly following such notice, the Company will deliver to the Optionholder a certificate representing the number of shares with respect to which the Option is being exercised.
5. Recapitalization, Mergers, Etc. As provided in the Plan, in the event of corporate transactions affecting the Company's outstanding Common Stock, the Committee shall equitably adjust the number and kind of shares subject to this Option and the exercise price hereunder or make provision for a cash payment. If such transaction involves a consolidation or merger of the Company with another entity, the sale or exchange of all or substantially all of the assets of the Company or a reorganization or liquidation of the Company, then in lieu of the foregoing, the Committee may upon written notice to the Optionholder provide that this Option shall terminate on a date not less than 20 days after the date of such notice unless theretofore exercised. In connection with such notice, the Committee may in its discretion accelerate or waive any deferred exercise period.
6. Exercise of Option After Termination of Employment. If the Optionholder's status as an employee or consultant of (a) the Company, (b) an Affiliate, or (c) a corporation (or parent or subsidiary corporation of such corporation) issuing or assuming a stock option in a transaction to which section 424(a) of the Code applies, is terminated for any reason other than by disability (within the meaning of section 22(e)(3) of the Code) or death, the Option- holder may exercise the rights which were available to the Optionholder at the time of such termination only within three months from the date of termination. If such status is terminated as a result of disability, such rights may be exercised within twelve months from the date of termination. Upon the death of the Optionholder, his or her Designated Beneficiary shall have the right, at any time within twelve months after the date of death, to exercise in whole or in part any rights that were available to the Option- holder at the time of death. Notwithstanding the foregoing, no rights under this Option may be exercised after the Expiration Date.
7. Early Termination of Option. In the event that the Company's Board of Directors shall at any time prior to the exercise of this Option in full by the Optionholder (and regardless of whether the Optionholder is then employed by the Company) determine that the Optionholder either before or after termination of employment with the Company (i) has committed an act of misconduct for which the Optionholder could have been discharged for cause by the Company or (ii) has participated or engaged in any business activity determined by the Board to be in any way harmful or prejudicial to the interest of the Company, this Option shall forthwith terminate, and notwithstanding any other provisions hereof, the Optionholder shall not thereafter be entitled to exercise this Option in whole or in part. Any determination made by the Board hereunder shall be conclusive and binding upon both the Company and the Optionholder.
8. Change in Control. This Option shall become exercisable without regard to any deferred exercise period in the event of a change in control of the Company. For this purpose, a change in control of the Company means a change in control of the Company, not previously approved by a resolution of the Company's Board of Directors, that would be required to be reported in response to Item 6(e) of Schedule 14A of Regulation 14A promulgated under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), including in any event the acquisition by any "person" (as such term is used Sections 13(d) and 14(d)(2) of the Exchange Act) of beneficial ownership, directly or indirectly, of securities of the Company representing 25% or more of the combined voting power of the Company's then outstanding securities.
9. Compliance with Securities Laws. It shall be a condition to the Optionholder's right to purchase shares of Common Stock hereunder that the Company may, in its discretion, require (a) that the shares of Common Stock reserved for issue upon the exercise of this Option shall have been duly listed, upon official notice of issuance, upon any national securities exchange or automated quotation system on which the Company's Common Stock may then be listed or quoted, (b) that either (i) a registration statement under the Securities Act of 1933 with respect to the shares shall be in effect, or (ii) in the opinion of counsel for the Company, the proposed purchase shall be exempt from registration under that Act and the Option- holder shall have made such undertakings and agreements with the Company as the Company may reasonably require, and (c) that such other steps, if any, as counsel for the Company shall consider necessary to comply with any law applicable to the issue of such shares by the Company shall have been taken by the Company or the Optionholder, or both. The certificates representing the shares purchased under this Option may contain such legends as counsel for the Company shall consider necessary to comply with any applicable law.
10. Payment of Taxes. The Optionholder shall pay to the Company, or make provision satisfactory to the Company for payment of, any taxes required by law to be withheld with respect to the exercise of this Option. The Committee may, in its discretion, require any other Federal or state taxes imposed on the sale of the shares to be paid by the Optionholder. In the Committee's discretion, such tax obligations may be paid in whole or in part in shares of Common Stock, including shares retained from the exercise of this Option, valued at their Fair Market Value on the date of delivery. The Company and its Affiliates may, to the extent permitted by law, deduct any such tax obligations from any payment of any kind otherwise due to the Optionholder.
11. Rights as a Stockholder or Employee. The Optionholder shall not have any rights in respect of shares as to which the Option shall not have been exercised and payment made as provided above. The Optionholder shall not have any rights to continued employment by the Company or its Affiliates by virtue of the grant of this Option.
12. Option Not Transferable. This Option is not transferable by the Optionholder otherwise than by will or the laws of descent and distribution or pursuant to a Qualified Domestic Relations Order, and is exercisable, during the Optionholder's lifetime, only by the Optionholder. The naming of a Designated Beneficiary does not constitute a transfer.
Exhibit (23)
TECH/OPS SEVCON, INC
Consent of Independent Certified Public Accountants - ---------------------------------------------------
We have issued our report dated November 13, 2002, accompanying the consolidated financial statements and schedule included in the Annual Report of Tech/Ops Sevcon, Inc. on Form 10-K for the year ended September 30, 2002. We hereby consent to the incorporation by reference of said report in the Registration Statements of Tech/Ops Sevcon, Inc. on Forms S-8 (File No. 333- 42960, File No. 333-02113, and File No. 333-61229).
/s/ Grant Thornton LLP - ------------------------ Boston, Massachusetts December 23, 2002
	Tech Ops Sevcon 2002 10K edgar.doc - 23-Dec-02