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 90% of the Company's revenues are derived from the controls business, with the remainder derived from the capacitor business. The largest customer accounted for 10% of sales in fiscal 2003 compared to 11% in fiscal 2002 and 15% in fiscal 2001.
In fiscal 2003 sales were $23,113,000, an increase of $1,241,000, or 6%, compared to the previous year. Foreign currency fluctuations, principally the strength of the Euro and the British pound compared to the US dollar, accounted for an increase of $1,885,000, or 9%, in reported sales. Most of the markets for the Company's products are cyclical and are currently depressed compared to the levels of the five year period up to fiscal 2001. Research and development expense increased by $561,000, or 23%, in fiscal 2003 to $2,976,000. The increase in research and development expense was mainly due to the Company's advanced new product development program using consultants to speed up the development process and supplement the Company's own engineering resources. Due to the depressed state of the Company's markets and the high levels of engineering expense profitability was low. Operating income in fiscal 2003 was $151,000, compared to $45,000 in the previous year. Net income was $83,000, or $.03 per share, compared to $57,000, or $.02 per share, last year. See Management's Discussion and Analysis of Financial Condition and Results of Operations for a more detailed analysis of fiscal 2003 performance.
- - Marketing and sales
Sales are made primarily through a small full-time marketing staff. Sales in the United States were $8,141,000, $9,054,000 and $12,130,000, in fiscal years 2003, 2002 and 2001, respectively, which accounted for approximately 35%, 41% and 45%, respectively, of total sales. Approximately 54% of sales are made to 10 manufacturers of electric vehicles in the United States, Europe and the Far East. Approximately 81% of the Company's sales are direct to end customers, with 19% 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, 2003 was $2,682,000 compared to $2,460,000 at September 2002, and $2,631,000 at September 2001.
- - Raw materials
Tech/Ops Sevcon's products require a wide variety of components and materials. The Company has many sources for most of such components and materials and produces certain of these items internally. However, the Company relies on certain suppliers and subcontractors for all of its requirements for certain components, subassemblies, and finished products.
- - Competition
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 $2,976,000 in 2003 compared to $2,415,000 in 2002 and $1,778,000 in 2001. The increase in research and development spending of $561,000, or 23%, in fiscal 2003 was principally due to consultancy costs on advanced new product development.
- - 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, 2003, the Company employed 166 full-time employees, of whom 17 were in the United States, 138 were in the United Kingdom, 8 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 33, or 17%, during fiscal 2003, principally due to the Company's program to outsource certain manufacturing and engineering activities.
ITEM 2
ITEM 2 PROPERTIES
The US subsidiary of the Company moved from Burlington, Mass., to Southborough, Mass., during 2003. This subsidiary leases approximately 13,500 square feet in Southborough, Mass., under a lease expiring in 2013. 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 2004. 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 41 President & Chief Executive Officer Paul A. McPartlin 58 Vice President, Treasurer & Chief Financial Officer - ------------------------------------------------------------------------------
There are no family relationships between any director or executive officer and any other director or executive officer of the Company.
All officers serve until the next annual meeting and until their successors are elected and qualified. Mr. Boyle has been President and Chief Executive Officer for more than five years. 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 12, 2003, there were approximately 263 shareholders of record.
- ----------------------------------------------------------------------------- Quarter 1 Quarter 2 Quarter 3 Quarter 4 Year - ----------------------------------------------------------------------------- 2003 Quarters Cash dividends per share $ .03 $ .03 $ .03 $ .03 $ .12 - ----------------------------------------------------------------------------- Common stock price per share - High $ 5.20 $ 5.25 $ 5.95 $ 7.15 $ 7.15 - Low 4.25 4.40 4.00 5.20 4.00 - ----------------------------------------------------------------------------- 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 - -----------------------------------------------------------------------------
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) - ------------------------------------------------------------------------------ 2003 2002 2001 2000 1999 - ------------------------------------------------------------------------------ Net sales $23,113 $21,872 $27,002 $30,360 $29,654 Operating income 151 45 1,652 4,108 4,640 Net income 83 57 1,101 2,805 3,125 Basic income per share $ .03 $ .02 $ .35 $ .90 $ 1.00 Cash dividends per share $ .12 $ .30 $ .72 $ .72 $ .72 Average shares outstanding 3,125 3,117 3,110 3,115 3,110 Stockholders' investment 9,648 9,453 9,959 11,272 11,411 Total assets $13,734 $13,521 $15,750 $17,209 $18,119 - ------------------------------------------------------------------------------
ITEM 7
ITEM 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FORWARD LOOKING STATEMENTS
Statements in this discussion and analysis about the Company's anticipated financial results and growth, as well as those about the development of its products and markets, are forward-looking statements that involve risks and uncertainties that could cause actual results to differ materially from those projected. These include the risks discussed under 'Risk Factors' below and throughout this Item 7.
NEW ACCOUNTING PRONOUNCEMENTS
The Company has adopted the following new accounting pronouncements in fiscal 2003. See Notes to Consolidated Financial Statements (1) P. for a more detailed description of these new accounting pronouncements.
SFAS #143, "Accounting for Asset Retirement Obligations" - Adoption did not have a material effect on consolidated financial statements.
SFAS #144, "Accounting for the Impairment or Disposal of Long-Lived Assets" - Adoption did not have a material effect on consolidated financial statements.
SFAS #146 "Accounting for Costs Associated with Exit or Disposal Activities" - Adoption did not have a material effect on consolidated financial statements.
SFAS #148 "Accounting for Stock-Based Compensation - Transition and Disclosure" - Currently evaluating impact on consolidated financial statements of transition provisions; disclosure provisions have been adopted.
SFAS #149 "Amendment of Statement 133 on Derivative Instruments and Hedging Activities" - Adoption did not have a material effect on consolidated financial statements.
SFAS # 150 "Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity" - Adoption did not have a material effect on consolidated financial statements.
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 as described below.
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 2003 approximately 35% of the Company's sales were made in US dollars, 26% were made in British pounds and 39% were made in Euros. Over 85% 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. The length of the hedging period and the percentage of future transactions covered are based on estimates of future transactions, which take into account all of the estimates and judgments involved in projecting future sales, and external advice on foreign currency trends.
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 54% of the Company's sales. If the financial condition of any of the Company's customers is worse than estimated or were to deteriorate, resulting in an impairment of their ability to make payments, the Company's results may be adversely affected and 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. The Company provides for estimated slow-moving and obsolete inventory based on a comparison of inventory levels with forecast future demand. If actual future demand or market conditions are less favorable than those projected by management, or if product designs change, 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. Such costs are affected by varying component and labor costs which management takes into account in estimating warranty liability. Should actual product failure rates and repair or replacement costs differ from estimates, the Company's results may be adversely affected and 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.
RISK FACTORS
In addition to the market risk factors relating to foreign currency and interest rate risk set out in 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, 2003 and 2002 (in thousands of dollars except per share data) - ------------------------------------------------------------------------------ ASSETS 2003 2002 - ------------------------------------------------------------------------------ Current assets: Cash and cash equivalents $ 524 $ 695 Receivables, net of allowances for doubtful accounts of $295 in 2003 and $356 in 2002 4,088 3,938 Inventories 3,999 4,137 Prepaid expenses and other current assets 762 539 - ------------------------------------------------------------------------------ Total current assets 9,373 9,309 - ------------------------------------------------------------------------------ Property, plant and equipment, at cost: Land and improvements 23 22 Buildings and improvements 2,008 1,950 Equipment 6,069 5,941 - ------------------------------------------------------------------------------ 8,100 7,913 Less: accumulated depreciation and amortization 5,174 5,136 - ------------------------------------------------------------------------------ Net property, plant and equipment 2,926 2,777 - ------------------------------------------------------------------------------ Goodwill 1,435 1,435 - ------------------------------------------------------------------------------ Total assets $13,734 $13,521 - ------------------------------------------------------------------------------ - ------------------------------------------------------------------------------ LIABILITIES AND STOCKHOLDERS' INVESTMENT - ------------------------------------------------------------------------------ Current liabilities: Accounts payable $ 1,490 $ 1,406 Dividend payable 94 94 Accrued compensation and related costs 792 720 Other accrued expenses 1,481 1,595 Accrued and deferred taxes on income 152 160 - ------------------------------------------------------------------------------ Total current liabilities 4,009 3,975 - ------------------------------------------------------------------------------ Deferred taxes on income 77 93 - ------------------------------------------------------------------------------ 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 2003 and 2002 313 313 Premium paid in on common stock 4,047 4,047 Retained earnings 5,897 6,189 Cumulative other comprehensive loss (609) (1,096) - ------------------------------------------------------------------------------ Total stockholders' investment 9,648 9,453 - ------------------------------------------------------------------------------ Total liabilities and stockholders' investment $13,734 $13,521 - ------------------------------------------------------------------------------
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, 2003, 2002 and 2001 (in thousands except per share data) - ------------------------------------------------------------------------------ 2003 2002 2001 - ------------------------------------------------------------------------------ Net sales $23,113 $21,872 $27,002 - ------------------------------------------------------------------------------ Costs and expenses: Cost of sales 14,308 13,909 17,491 Selling, research and administrative 8,654 7,918 7,859 - ------------------------------------------------------------------------------ 22,962 21,827 25,350 - ------------------------------------------------------------------------------ Operating income 151 45 1,652 Interest expense (57) (39) (13) Interest income 2 9 26 Other income, net 32 73 49 - ------------------------------------------------------------------------------ Income before income taxes 128 88 1,714 Income taxes (45) (31) (613) - ------------------------------------------------------------------------------ Net income $ 83 $ 57 $ 1,101 - ------------------------------------------------------------------------------ Basic income per share $ .03 $ .02 $ .35 - ------------------------------------------------------------------------------ Diluted income per share $ .03 $ .02 $ .35 - ------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME Tech/Ops Sevcon, Inc. and Subsidiaries
For the Years ended September 30, 2003, 2002 and 2001 (in thousands of dollars) - ------------------------------------------------------------------------------ 2003 2002 2001 - ------------------------------------------------------------------------------ Net income $ 83 $ 57 $ 1,101 Foreign currency translation adjustment 481 473 (41) Changes in fair market value of cash flow hedges 6 (104) (85) - ------------------------------------------------------------------------------ Comprehensive income $ 570 $ 426 $ 975 - ------------------------------------------------------------------------------
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, 2003, 2002 and 2001 (in thousands of dollars except per share data) - ------------------------------------------------------------------------------ Premium paid Cumulative Total in on other stock- Common Treasury common Retained comprehensive holders' stock stock stock earnings income (loss) investment - ------------------------------------------------------------------------------ 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 trans- lation 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 ($.30 per share) - - - (935) - (935) Currency trans- lation adjustment - - - - 473 473 Exercise of stock options 2 49 136 (170) - 17 Tax effect of exercise of stock options - - (14) - - (14) Change in fair market value of cash flow hedge - - - - (104) (104) - ------------------------------------------------------------------------------ Balance September 30, 2002 313 - 4,047 6,189 (1,096) 9,453 Net income - - - 83 - 83 Dividends ($.12 per share) - - - (375) - (375) Currency translation adjustment - - - - 481 481 Change in fair market value of cash flow hedge - - - - 6 6 - ------------------------------------------------------------------------------ Balance September 30, 2003 $ 313 $ - $4,047 $5,897 $(609) $9,648 - ------------------------------------------------------------------------------
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, 2003, 2002 and 2001 (in thousands of dollars) - ------------------------------------------------------------------------------ 2003 2002 2001 - ------------------------------------------------------------------------------ Cash flow from operating activities: Net income $ 83 $ 57 $ 1,101 Adjustments to reconcile net income to net cash from operating activities: Depreciation and amortization 575 544 518 Deferred tax provision / benefit (201) (124) (25) Increase (decrease) in cash resulting from changes in operating assets and liabilities: Receivables (150) 1,207 987 Inventories 138 705 (1,158) Prepaid expenses and other current assets (32) 122 173 Accounts payable 84 (1,205) 226 Accrued compensation and expenses (42) 243 (275) Accrued and deferred taxes on income (8) (142) (71) - ------------------------------------------------------------------------------ Net cash generated from operating activities 447 1,407 	1,476 - ------------------------------------------------------------------------------ Cash flow (used by) generated from investing activities: Acquisition of property, plant and equipment (564) (287) (431) Acquisition and disposal of short-term investments - - 591 - ------------------------------------------------------------------------------ Net cash (used by) generated from investing activities (564) (287) 160 - ------------------------------------------------------------------------------ Cash flow used by financing activities: Purchase of common stock - (170) (49) Exercise of stock options - 187 - Dividends paid (375) (1,401) (2,240) - ------------------------------------------------------------------------------ Net cash used by financing activities (375) (1,384) (2,289) - ------------------------------------------------------------------------------ Effect of exchange rate changes on cash 321 147 (77) - ------------------------------------------------------------------------------ Net decrease in cash (171) (117) (730) Beginning balance - cash and cash equivalents 695 812 1,542 - ------------------------------------------------------------------------------ Ending balance - cash and cash equivalents $ 524 $ 695 $ 812 - ------------------------------------------------------------------------------ Supplemental disclosure of cash flow information: Cash paid for income taxes $ 237 $ 238 $ 590 Cash paid for interest $ 57 $ 39 $ 13 - ------------------------------------------------------------------------------ Supplemental disclosure of non-cash financing activity: Dividend declared $ 94 $ 94 $ 560 - ------------------------------------------------------------------------------
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 reclassified 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 $2,976,000 in 2003, $2,415,000 in 2002 and $1,778,000 in 2001. This expense is included in selling, research and administrative expense in the income statement. Research and development expense was 12.9% of sales in 2003 compared to 11.0% in 2002 and 6.6% in 2001.
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. Stock based compensation plans
SFAS # 123 "Accounting for Stock-Based Compensation" as amended by SFAS #148 "Accounting for Stock-Based Compensation - Transition and Disclosure" 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 prescribed by APB #25 "Accounting for Stock Issued to Employees". The Company is evaluating the transition options under SFAS #148 and continues 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) - ------------------------------------------------------------------------------ 2003 2002 2001 - ------------------------------------------------------------------------------ Net income As reported $ 83 $ 57 $ 1,101 Pro forma 17 4 1,037
Basic net income per share As reported $ .03 $ .02 $ .35 Pro forma $ .01 $ .00 $ .33
Diluted net income per share As reported $ .03 $ .02 $ .35 Pro forma $ .01 $ .00 $ .33 - ------------------------------------------------------------------------------
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 2003: risk-free interest rate of 3%; expected dividend yield of 2.7%; expected life of 7 years; expected volatility of 47%.
F. Income taxes
Tech/Ops Sevcon files tax returns in the respective countries in which it operates. The financial statements reflect the current and deferred tax consequences of all events recognized in the financial statements or tax returns.
G. 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) - ------------------------------------------------------------------------------ 2003 2002 - ------------------------------------------------------------------------------ Raw materials $ 1,963 $ 2,096 Work-in-process 207 594 Finished goods 1,829 1,447 - ------------------------------------------------------------------------------ $ 3,999 $ 4,137 - ------------------------------------------------------------------------------
H. Accounts receivable
In the normal course of business, the Company provides credit to customers, performs credit evaluations of these customers, monitors payment performance, and maintains reserves for potential credit losses in the allowance for doubtful accounts which, when realized, have historically been within the range of the Company's reserves. The only exception to this was a loss in fiscal 2001 of $562,000 relating to the Chapter 11 filing of a major customer.
I. Translation of foreign currencies
Tech/Ops Sevcon translates the assets and liabilities of its foreign subsidiaries at the current rate of exchange, and income statement accounts at the average exchange rates in effect during the period. Gains or losses from foreign currency translation are credited or charged to cumulative translation adjustment included in the statement of comprehensive income and as a component of cumulative other comprehensive income in stockholders' investment in the balance sheet. Foreign currency transaction gains and losses are included in costs and expenses.
J. Derivative instruments and hedging
The Company accounts for derivative instruments and hedging under SFAS #133 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 35% of the Company's sales are made in US dollars, 26% are made in British pounds and 39% 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, 2003, the Company had effectively hedged approximately 8% 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, 2003 and 2002. 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) - ------------------------------------------------------------------------------ 2003 2002 - ------------------------------------------------------------------------------ Notional Average Notional Average Amount Contract Rate Amount Contract Rate - ------------------------------------------------------------------------------ Sell Euros for British Pounds $ 699 1.43Euro = 1GBP $ - $ - Sell US Dollars for British Pounds $ 450 $1.60 = 1GBP $ 550 $1.56 =1GBP - ------------------------------------------------------------------------------ Total $1,149 $ 550 - ------------------------------------------------------------------------------ Estimated fair value * $ 9 $ 4 - ------------------------------------------------------------------------------ Amount recorded as other comprehensive income $ 5 $ (104) - ------------------------------------------------------------------------------
* The estimated fair value is based on the estimated amount at which the contracts could be settled based on forward exchange rates.
K. Cash equivalents and short-term investments
The Company considers all highly liquid investments with a maturity of 90 days or less to be cash equivalents. Highly liquid investments with maturities greater than 90 days and less than one year are classified as short-term investments.
Such investments are generally money market funds, bank certificates of deposit, US Treasury bills and short-term bank deposits in Europe.
L. Earnings per share
Basic and diluted net income per common share for the three years ended September 30, 2003 are calculated as follows:
- ------------------------------------------------------------------------------ (in thousands except per share data) - ------------------------------------------------------------------------------ 2003 2002 2001 - ------------------------------------------------------------------------------ Net income $ 83 $ 57 $ 1,101 Weighted average shares outstanding 3,125 3,117 3,110 Basic income per share $ .03 $ .02 $ .35 - ------------------------------------------------------------------------------ Options outstanding - common stock equivalents 4 7 16 Average common and common equivalent shares outstanding 3,129 3,124 3,126 Diluted income per share $ .03 $ .02 $ .35 - ------------------------------------------------------------------------------
M. Use of estimates in the preparation of financial statements
The presentation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities as of the date of the financial statements and the reported amounts of income and expenses during the reporting periods. Operating results in the future could vary from the amounts derived from management's estimates and assumptions.
N. Fair value of financial instruments
The Company's financial instruments consist mainly of cash and cash equivalents, short-term investments, accounts receivable and accounts payable. The carrying amount of these financial instruments as of September 30, 2003, approximates fair value due to the short-term nature of these instruments.
O. Goodwill
The amount by which the cost of purchased businesses included in the accompanying financial statements exceeded the fair value of net assets at the date of acquisition has been recorded as "goodwill". The Company assesses the carrying value of this asset whenever events or changes in circumstances indicate that this value has diminished. The Company considers the future profitability of the business in assessing the value of this asset. 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.
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.
P. New Accounting Pronouncements [U1]
In August 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations". SFAS No. 143 requires entities to record the fair value of a liability for an asset retirement obligation in the period in which it is incurred. When the liability is initially recorded, an entity capitalizes a cost by increasing the carrying amount of the long-lived asset. Over time, the liability is accreted to its present value each period and the capitalized cost is depreciated over the useful life of the related asset. Upon settlement of the liability, an entity either settles the obligation for its recorded amount or incurs a gain or loss upon settlement. The standard is effective for fiscal years beginning after June 15, 2002. The adoption of SFAS No. 143 did not have a material effect on the financial position or results of operations of the Company.
In October 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets". SFAS No. 144 addresses the financial accounting and reporting for the impairment or disposal of long-lived assets. It replaces SFAS No. 121. The accounting model for long-lived assets to be disposed of by sale applies to all long-lived assets, including discontinued operations. SFAS No. 144 requires that those long-lived assets be measured at the lower of carrying amount or fair value less cost to sell, whether reported in continuing operations or in discontinued operations. Therefore, discontinued operations will no longer be measured at net realizable value or include amounts for operating losses that have not yet occurred. SFAS No. 144 also broadens the reporting of discontinued operations to include all components of an entity with operations that can be distinguished from the rest of the entity and that will be eliminated from the ongoing operations of the entity in a disposal transaction. The provisions of this Statement are effective for financial statements issued for fiscal years beginning after December 15, 2001, and interim periods within those fiscal years. The adoption of SFAS No. 144 did not have a material effect on the financial position or results of operations of the Company.
In July 2002, the FASB issued SFAS No. 146 'Accounting for Costs Associated with Exit or Disposal Activities', which became effective January 2003. SFAS No. 146 requires companies to recognize costs associated with exit or disposal activities when they are incurred rather than at the date of commitment. The adoption of SFAS No. 146 did not have a material effect on the financial position or results of operations of the Company.
On December 31, 2002, the FASB issued SFAS No. 148, 'Accounting for Stock- Based Compensation - Transition and Disclosure', amending FASB Statement No. 123 (SFAS No. 123), Accounting for Stock-Based Compensation. This Statement amends SFAS No. 123 to provide alternative methods of transition for an entity that voluntarily changes to the fair value based method of accounting for stock-based employee compensation. It also amends the disclosure provisions of that Statement to require prominent disclosure about the effects on reported net income of an entity's accounting policy decisions with respect to stock- based employee compensation. Finally, SFAS No. 148 amends APB Opinion No. 28, Interim Financial Reporting, to require disclosure about those effects in interim financial information. For entities that voluntarily change to the fair value based method of accounting for stock-based employee compensation, the transition provisions are effective for fiscal years ending after December 15, 2002. For all other companies, the disclosure provisions and the amendment to APB No. 28 are effective for interim periods beginning after December 15, 2002. The Company continues to account for stock option plans under APB No. 25 "Accounting for Stock Issued to Employees" and related interpretations while evaluating the transition options under SFAS No. 148. The Company has adopted the disclosure requirements of SFAS No. 148.[U2]
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on Derivative Instruments and Hedging Activities". SFAS No. 149 amends Statement 133 for decisions made (1) as part of the Derivatives Implementation Group process that effectively required amendments to Statement 133, (2) in connection with other Board projects dealing with financial instruments, and (3) in connection with implementation issues raised in relation to the application of the definition of a derivative. The Statement clarifies under what circumstances a contract with an initial net investment meets the characteristics of a derivative discussed in paragraph 6(b) of Statement 133, clarifies when a derivative contains a financing component, amends the definition of underlying to conform it to language used in FASB Interpretation No. 45, Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others, and amends certain other existing pronouncements. Those changes will result in more consistent reporting of contracts as either derivatives or hybrid instruments. This statement is effective for contracts entered into or modified after June 30, 2003 and for hedging relationships designated after June 30, 2003. The adoption of SFAS No. 149 did not have a material effect on the financial position or results of operations of the Company.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity". SFAS No. 150 establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. In addition, the Statement requires an issuer to classify certain instruments with specific characteristics described in it as liabilities. This Statement is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. The adoption of SFAS No. 150 did not have a material effect on the financial position or results of operations of the Company.
(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 18,569 'mature' shares from employees in fiscal 2002.
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 2003 or 2002. These shares were issued to satisfy options exercised by employees in fiscal 2002.
(3) STOCK-BASED COMPENSATION PLANS
There were 116,000 shares reserved under the Company's 1996 Equity Incentive Plan at September 30, 2003. In January 2003 shareholders approved an additional 150,000 shares under the 1996 Equity Incentive Plan. Options for 77,000 shares were granted in fiscal 2003 and options for 10,000 shares were granted in fiscal 2002. 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 non- competition 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 5,000 shares were granted to a new director in July 2003 and are outstanding. Options for a total of 25,000 shares granted to 5 directors in 1998 are also outstanding.
Option transactions under the plans for the three years ended September 30, 2003 were as follows:
- ---------------------------------------------------------------------------- Shares under Weighted average option exercise price - ---------------------------------------------------------------------------- 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 Granted in 2003 82,000 4.47 Cancelled in 2003 (3,500) 10.91 - ------------------------------------------------------------------------------ Outstanding at September 30, 2003 193,000 $ 9.29 - ------------------------------------------------------------------------------ Exercisable at September 30, 2003 52,700 $ 13.19 - ------------------------------------------------------------------------------
Details of options outstanding at September 30, 2003 were as follows:
- ---------------------------------------------------------------------------- Shares Weighted average Price range under option remaining contractual life - ---------------------------------------------------------------------------- $ 4.37 - $ 6.56 82,000 10 years $ 6.57 - $ 9.85 10,000 8 years $ 9.86 - $14.79 76,000 5 years $14.80 - $22.20 25,000 4 years - ------------------------------------------------------------------------------ 193,000 6 years - ------------------------------------------------------------------------------
(4) INCOME TAXES
The domestic and foreign components of income before income taxes are as follows:
- ------------------------------------------------------------------------------ (in thousands of dollars) - ------------------------------------------------------------------------------ 2003 2002 2001 - ------------------------------------------------------------------------------ Domestic $ (497) $ 215 $ 815 Foreign 625 (127) 899 - ------------------------------------------------------------------------------ $ 128 $ 88 $ 1,714 - -----------------------------------------------------------------------------
The components of the provision / (benefit) for income taxes for the years ended September 30, 2003, 2002 and 2001 are as follows:
- ------------------------------------------------------------------------------ (in thousands of dollars) - ------------------------------------------------------------------------------ - ------------------------------------------------------------------------------ Current Deferred Total Federal $ 0 $ (151) $ (151) State 5 (31) (26) Foreign 241 (19) 222 - ------------------------------------------------------------------------------ $ 246 $ (201) $ 45 - ------------------------------------------------------------------------------ - ------------------------------------------------------------------------------ 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 - ------------------------------------------------------------------------------
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) - ------------------------------------------------------------------------------ 2003 2002 2001 - ------------------------------------------------------------------------------ Statutory Federal income tax rate 34% 34% 34% Computed tax provision at statutory rate $ 44 $ 30 $ 583 Increases (decreases) resulting from: Foreign tax rate differentials (23) (5) (25) State taxes net of federal tax benefit (17) 19 48 Foreign tax credits and other 41 (23) 7 - ------------------------------------------------------------------------------ Income tax provision in the Statement of Income $ 45 $ 31 $ 613 - ------------------------------------------------------------------------------
Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. A valuation allowance is provide for deferred tax assets if it is more likely than not that these items will either expire before the Company is able to realize the benefit, or that future deductibility is uncertain. The significant items comprising the domestic and foreign deferred tax accounts at September 30, 2003 and 2002 are as follows:
- ------------------------------------------------------------------------------ (in thousands of dollars) - ------------------------------------------------------------------------------ - ------------------------------------------------------------------------------ Domestic Foreign Foreign current current long-term - ------------------------------------------------------------------------------ Assets: Pension accruals (prepaid) $ 257 $ (2) $ - Inventory basis differences 107 37 - Warranty reserves 62 - - Foreign tax credit carry forwards 123 - - Other (net) 124 22 - - ------------------------------------------------------------------------------ 673 57 - Liabilities: Property basis differences - - (77) - ------------------------------------------------------------------------------ Net asset (liability) 673 57 (77) Valuation allowance (220) - - - ------------------------------------------------------------------------------ Net deferred tax asset (liability) $ 453 $ 57 $ (77) - ------------------------------------------------------------------------------ - ------------------------------------------------------------------------------ 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) - ------------------------------------------------------------------------------
(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 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 and 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, 2003 was $205,000.
Minimum rental commitments under all non-cancelable leases are as follows for the years ended September 30: 2004 - $202,000; 2005 - $192,000; 2006 - $192,000; 2007 - $192,000; 2008 - $192,000 and $1,894,000 thereafter. Net rentals of certain land, buildings and equipment charged to expense were $195,000 in 2003, $178,000 in 2002, and $177,000 in 2001.
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 $1,827,000.
(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) - ------------------------------------------------------------------------------ 2003 2002 - ------------------------------------------------------------------------------ Change in benefit obligation: Benefit obligation at beginning of year $11,010 $ 8,951 Service cost 432 394 Interest cost 773 667 Plan participants contributions 194 171 Actuarial (gain) loss (373) 396 Benefits paid (109) (190) Foreign currency exchange rate changes 559 621 - ------------------------------------------------------------------------------ Benefit obligation at end of year 12,486 11,010 - ------------------------------------------------------------------------------ Change in plan assets: Fair value of plan assets at beginning of year 9,828 7,024 Return on plan assets (a) (57) 1,770 Employer contributions 452 491 Plan participants contributions 201 171 Benefits paid (112) (190) Foreign currency exchange rate changes 485 562 - ------------------------------------------------------------------------------ Fair value of plan assets at end of year 10,797 9,828 - ------------------------------------------------------------------------------ Funded status (1,689) (1,182) Unrecognized transition obligation (asset) (6) (8) Unrecognized prior service cost 656 669 Unrecognized net actuarial (gain) loss 613 136 - ------------------------------------------------------------------------------ Prepaid (accrued) benefit cost $ (426) $ (385) - ------------------------------------------------------------------------------
(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) - ------------------------------------------------------------------------------ 2003 2002 2001 - ------------------------------------------------------------------------------ Components of net periodic benefit cost: Service cost $ 432 $ 394 $ 437 Interest cost 773 667 632 Expected return on plan assets (775) (563) (576) Amortization of transition obligation (2) (35) (53) Amortization of prior service cost 49 44 - Recognized net actuarial gain (loss) - 17 18 - ------------------------------------------------------------------------------ Net periodic benefit cost (b) $ 477 $ 524 $ 458 - ------------------------------------------------------------------------------ Net cost of defined contribution plans $ 27 $ 24 $ 24 - ------------------------------------------------------------------------------
(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 was 6.26% in 2003 and 6.75% in 2002. The rate of increase in future compensation levels used in determining the actuarial present value of the projected benefit obligation was 4.25% in 2003 and 4.75% in 2002. The expected long-term rate of return on assets was 7.0% in 2003 and 8% in 2002. The reductions in these assumptions reflect actuarial advice and changing market conditions and experience.
(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 $20,730 $ 2,383 $ - $23,113 Inter-segment revenues - 326 - 326 Operating income (53) 476 (272) 151 Depreciation and amortization 488 87 - 575 Identifiable assets 11,989 1,238 507 13,734 Capital expenditures 549 15 - 564 - ------------------------------------------------------------------------------ - ------------------------------------------------------------------------------ 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 - ------------------------------------------------------------------------------
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) - ------------------------------------------------------------------------------ 2003 2002 2001 - ------------------------------------------------------------------------------ Sales:- US sales $ 8,141 $ 9,054 $12,132 Foreign sales: United Kingdom 11,687 9,560 10,950 France 3,274 3,252 3,910 Korea 11 6 10 - ------------------------------------------------------------------------------ Total Foreign 14,972 12,818 14,870 - ------------------------------------------------------------------------------ Total sales $23,113 $21,872 $27,002 - ------------------------------------------------------------------------------ Long-lived assets: USA $ 1,571 $ 1,514 $ 1,563 United Kingdom 2,740 2,624 2,623 France 46 68 94 Korea 4 6 13 - ------------------------------------------------------------------------------ Total $ 4,361 $4,212 $ 4,293 - ------------------------------------------------------------------------------
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 2003 Tech/Ops Sevcon's largest customer accounted for 10% of sales and for 5% of receivables. In 2002 the largest customer accounted for 11% of sales and 9% of receivables. In 2001 the largest customers accounted for 15% of sales and 12% of receivables.
(8) QUARTERLY FINANCIAL DATA (UNAUDITED)
Selected quarterly financial data for fiscal years 2003 and 2002 is set out below: (in thousands except per share data) - ------------------------------------------------------------------------------ First Second Third Fourth Total Quarter Quarter Quarter Quarter Year - ------------------------------------------------------------------------------ 2003 Quarters Net sales $ 5,645 $ 6,138 $ 5,961 $ 5,369 $23,113 Gross profit * 2,127 2,416 2,347 1,915* 8,805 Operating income * 14 303 161 (327)* 151 Net income 6 211 98 (232) 83 - ------------------------------------------------------------------------------ Basic income per share $ .00 $ .07 $ .03 $ (.07) $ .03 - ------------------------------------------------------------------------------ Diluted income per share $ .00 $ .07 $ .03 $ (.07) $ .03 - ------------------------------------------------------------------------------ 2002 Quarter - ------------------------------------------------------------------------------ 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 - ------------------------------------------------------------------------------
* Includes additional inventory obsolescence expense in the fourth quarter of fiscal 2003 of $205,000. * * 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 sheets of Tech/Ops Sevcon, Inc. and subsidiaries as of September 30, 2003 and 2002 and the related consolidated statements of income, comprehensive income, stockholders' investment and cash flows for the years then ended. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. The accompanying consolidated statements of income, comprehensive income, stockholders' investment and cash flows for the year 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 audits 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 audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Tech/Ops Sevcon, Inc. and subsidiaries as of September 30, 2003 and 2002 and the results of their consolidated operations and their consolidated cash flows for the years 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 years ended September 30, 2003 and 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 6, 2003
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, which was reported in the Company's Form 8-K filed with the Securities and Exchange Commission on June 5, 2002, Item 4 of which is incorporated herein by reference.
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, which was reported in the Company's Form 8-K filed with the Securities and Exchange Commission on July 2, 2002, Item 4 of which is incorporated herein by reference.
ITEM 9 A
ITEM 9 A CONTROLS AND PROCEDURES
(a) Evaluation of disclosure controls and procedures. The Company's principal executive officer and principal financial officer, after evaluating the effectiveness of the Company's 'disclosure controls and procedures' (as defined in Securities Exchange Act of 1934 Rule 13a-15(e)) have concluded that, as of September 30, 2003, 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 control over financial reporting. The Company's principal executive officer and principal financial officer have identified no change in the Company's "internal control over financial reporting" (as defined in Securities Exchange Act of 1934 Rule 13a-15(f)) that occurred during the fourth quarter of fiscal 2003 that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting.
PART III
ITEM 10
ITEM 10 DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The requisite information regarding the Company's directors, executive officers and audit committee members is contained in part under the caption "Executive Officers of the Registrant" in Part I hereof and the remainder is incorporated by reference from the discussion responsive thereto under the captions "Election of Directors" and "Section 16(a) Beneficial Ownership Reporting and Compliance" in the Company's Proxy Statement for the 2004 Annual Meeting of Stockholders.
We have adopted a Code of Ethics for Senior Officers that applies to our chief executive officer, chief financial officer, and controllers. A copy of this Code of Ethics is available without charge upon request from the Chief Financial Officer at Tech/Ops Sevcon, Inc., 155 Northboro Road, Southborough, MA 01772. If we make any substantive amendments to this Code of Ethics or grant any waiver from a provision of the Code, we will disclose the nature of such amendment or waiver on our website at www.techopssevcon.com or in a report on Form 8-K.
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 2004 Annual Meeting of Stockholders.
ITEM 12
ITEM 12 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The requisite information concerning security ownership is incorporated by reference from the information responsive thereto under the captions "Beneficial Ownership of Common Stock" and "Election of Directors" in the Company's Proxy Statement for the 2004 Annual Meeting of Stockholders.
The following table sets out the status of Securities authorized for issuance under equity compensation plans at September 30, 2003.
- ------------------------------------------------------------------------------ Plan Category Number of Weighted- Number of Number of securities average securities securities to be exercise remaining remaining issued upon price of available available exercise of outstanding for future for future outstanding options, issuance issuance options warrants under equity under equity warrants and rights compensation compensation and rights plans plans (excluding (excluding securities securities reflected in reflected in column (a) at column (a) at end of year beginning of year - ------------------------------------------------------------------------------ (a) (b) (c) (d) - ------------------------------------------------------------------------------ Equity compensation plans approved by security holders: 1996 Equity Incentive Plan 163,000 $8.51 116,000 39,500 1998 Director Stock Option Plan 30,000 $13.56 20,000 25,000 - ------------------------------------------------------------------------------ Sub Total 193,000 $9.29 136,000 64,500 - ------------------------------------------------------------------------------ Equity compensation plans not approved by security holders - - - - - ------------------------------------------------------------------------------ Total 193,000 $9.29 136,000 64,500 - ------------------------------------------------------------------------------
ITEM 13
ITEM 13 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
This information (if any) is incorporated by reference from the discussion responsive thereto under the caption "Election of Directors" in the Company's Proxy Statement relating to the 2004 Annual Meeting of Stockholders.
ITEM 14
ITEM 14 PRINCIPAL ACCOUNTANTS FEES AND SERVICES
This information is incorporated by reference from the discussion responsive thereto under the caption "Auditors" in the Company's Proxy Statement relating to the 2004 Annual Meeting of Stockholders.
PART IV
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 A Current Report on Form 8-K was furnished on July 23, 2003 (item12). The report contained information announcing the Company's earnings release issued on July 21, 2003. A Current Report on Form 8-K was furnished on November 13, 2003 (item 12). The report contained information announcing the Company's earnings release issued on November 13, 2003.
The descriptions of these Forms 8-K in this Item 15 is for informational purposes only, and the press releases furnished thereon shall not be deemed "filed" with the Commission.
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 (incorporated by reference to Exhibit (10)(b) to Annual Report for the fiscal year ended September 30, 2002).
*(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.
(31.1) Certification of Principal Executive Officer pursuant to section 302 of the Sarbanes-Oxley Act of 2002. (Filed herewith)
(31.2) Certification of Principal Financial Officer pursuant to section 302 of the Sarbanes-Oxley Act of 2002. (Filed herewith)
(32.1) Certification of Principal Executive Officer and Principal Financial Officer pursuant to section 906 of the Sarbanes-Oxley Act of 2002. (Furnished herewith)
*(99.1) Item 4 of Form 8-K filed on June 5, 2002 (incorporated by reference thereto).
*(99.2) Item 4 of Form 8-K filed on July 2, 2002 (incorporated by reference thereto).
* 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.
A Copy of these exhibits may be obtained on the SEC's EDGAR database (at www.sec.gov) or will be furnished without charge to any stockholder upon written request to Tech/Ops Sevcon, Inc. attention Paul A. McPartlin, Chief Financial Officer, 155 Northboro Road, Southborough MA 01772, Telephone: (581) 281 5510.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
TECH/OPS SEVCON, INC.
By /s/ Matthew Boyle December 12, 2003 -------------------- 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 12, 2003 - ----------------- Officer and Director Matthew Boyle (Principal Executive Officer)
/s/ Paul A. McPartlin Vice President, Treasurer December 12, 2003 - --------------------- and Chief Financial Officer Paul A. McPartlin (Principal Financial and Accounting Officer)
/s/ Maarten D. Hemsley Director December 12, 2003 - ---------------------- Maarten D. Hemsley
/s/ Paul B. Rosenberg Director December 12, 2003 - --------------------- Paul B. Rosenberg
s/ Marvin G. Schorr Director December 12, 2003 - ------------------- Marvin G. Schorr
/s/ Bernard F. Start Director December 12, 2003 - -------------------- Bernard F. Start
/s/ David R. A. Steadman Director December 12, 2003 - ------------------------ David R. A. Steadman
/s/ C. Vincent Vappi Director December 12, 2003 - -------------------- C. Vincent Vappi - ------------------------------------------------------------------------------
EXHIBIT 31.1
CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
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 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 report;
3. Based on my knowledge, the financial statements, and other financial information included in this 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 report;
4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, 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 report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's fourth fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.
Date: December 12, 2003 /s/ Matthew Boyle - ----------------- Matthew Boyle President and Chief Executive Officer
EXHIBIT 31.2
CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
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 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 report;
3. Based on my knowledge, the financial statements, and other financial information included in this 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 report;
4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, 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 report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's fourth fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.
Date: December 12, 2003 /s/ Paul A. McPartlin - --------------------- Paul A. McPartlin Chief Financial and Accounting Officer
EXHIBIT 32.1
Certification of Periodic Financial Report Pursuant to 18 U.S.C. Section 1350
Each of the undersigned officers of Tech/Ops Sevcon, Inc. (the "Company") certifies, under the standards set forth in and solely for the purposes of 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that the Annual Report on Form 10-K of the Company for the year ended September 30, 2003 fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and information contained in that Form 10-K fairly presents, in all material respects, the financial condition and results of operations of the Company.
Dated: December 12, 2003 /s/ Matthew Boyle - ----------------- Matthew Boyle Chief Executive Officer
Dated: December 12, 2003 /s/ Paul A. McPartlin - --------------------- Paul A. McPartlin Chief Financial Officer
SCHEDULE II TECH/OPS SEVCON, INC. AND SUBSIDIARIES
Reserves for the three years ended September 30, 2003 (in thousands of dollars) - ------------------------------------------------------------------------------ Allowance for doubtful accounts 2003 2002 2001 - ----------------------------------------------------------------------------- Balance at beginning of year 356 809 241 Additions charged to costs and expenses 24 77 607 Deductions from reserves: Accounts collected - - (6) Write off of uncollectible accounts (91) (537) (33) Foreign currency translation adjustment 6 7 - - ----------------------------------------------------------------------------- Balance at end of year 295 356 809 - -----------------------------------------------------------------------------
TECH/OPS SEVCON, INC
Consent of Independent Certified Public Accountants - ---------------------------------------------------
We have issued our report dated November 6, 2003, 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, 2003. 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, File No. 333-61229 and File No. 333-104785).
/s/ Grant Thornton LLP - ------------------------ Boston, Massachusetts December 26, 2003