UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q /X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended July 3, 2004 ------------- / / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to ------------ ------------ Commission File Number 1-9789 ------ TECH/OPS SEVCON, INC. ------------------------------------------------------ (Exact name of registrant as specified in its charter) Delaware 04-2985631 - ------------------------------- ------------------ (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 155 Northboro Road, Southborough, Massachusetts, 01772 ------------------------------------------------------ (Address of principal executive offices and zip code) (508) 281 5510 --------------------------------------------------- (Registrant's telephone number, including area code:) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes No X --- --- Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Class Outstanding at August 16, 2004 - ---------------------------- ------------------------------ Common stock, par value $.10 3,125,051 TECH/OPS SEVCON, INC. PART I. FINANCIAL INFORMATION Item 1. Financial Statements. Consolidated Balance Sheets ASSETS (in thousands) July 3, Sept 30, 2004 2003 --------- ------------ (unaudited) (derived from audited statements) Current assets: Cash and cash equivalents $ 562 $ 524 Accounts receivable, less allowances of $328 at 6/30/2004 and $295 at 9/30/2003 5,552 4,088 Inventories: Raw materials 2,194 1,963 Work-in-process 291 207 Finished goods 1,617 1,829 ------- ------- 4,102 3,999 ------- ------- Prepaid expenses and other current assets 879 762 ------- ------- Total current assets 11,095 9,373 ------- ------- Property, plant and equipment, at cost 9,286 8,100 Less: Accumulated depreciation and amortization 6,045 5,174 ------- ------- Net property, plant and equipment 3,241 2,926 ------- ------- Goodwill 1,435 1,435 ------- ------- $15,771 $13,734 ======= ======= The accompanying notes are an integral part of these financial statements. TECH/OPS SEVCON, INC. Consolidated Balance Sheets LIABILITIES AND STOCKHOLDERS' INVESTMENT (in thousands) July 3, Sept 30, 2004 2003 ----------- ------------ (unaudited) (derived from audited statements) Current liabilities: Accounts payable 2,463 1,490 Dividend payable 94 94 Accrued expenses 2,527 2,273 Accrued taxes on income 246 152 ------- ------- Total current liabilities 5,330 4,009 ------- ------- Deferred taxes on income 82 77 ------- ------- Stockholders' investment Preferred stock - - Common stock 313 313 Premium paid in on common stock 4,047 4,047 Retained earnings 5,942 5,897 Cumulative other comprehensive income (loss) 57 (609) ------- ------- Total stockholders' investment $10,359 $ 9,648 ------- ------- $15,771 $13,734 ======= ======= The accompanying notes are an integral part of these financial statements. TECH/OPS SEVCON, INC. Consolidated Statements of Income (Unaudited) (in thousands except per share data) Three Months Ended Nine Months Ended ------------------ ------------------ July 3, June 30, July 3, June 30, 2004 2003 2004 2003 ------- ------- ------- ------- Net sales $ 7,486 $ 5,961 $21,225 $17,744 Costs and expenses: Cost of sales 4,525 3,614 12,670 10,854 Selling, research and Administrative 2,840 2,186 7,981 6,412 ------- ------- ------- ------- 7,365 5,800 20,651 17,266 ------- ------- ------- ------- Operating income 121 161 574 478 Other income (expense), net 36 (11) (73) 6 ------- ------- ------- ------- Income before income taxes 157 150 501 484 Income taxes (54) (52) (175) (169) ------- ------- ------- ------- Net income $ 103 $ 98 326 315 ======= ======= ======= ======= Basic income per share $ .03 $ .03 $ .10 $ .10 ======= ======= ======= ======= Fully diluted income per share $ .03 $ .03 $ .10 $ .10 ======= ======= ======= ======= Consolidated Statement of Comprehensive Income (Unaudited) (in thousands) Three Months Ended Nine Months Ended ------------------ ------------------ July 3, June 30, July 3, June 30, 2004 2003 2004 2003 ------- ------- ------- ------- Net income $ 103 $ 98 $ 326 $ 315 Foreign currency translation adjustment 27 381 646 467 Change in fair market value of cash flow hedge 21 16 20 (3) ------- ------- ------- ------- Comprehensive income $ 151 $ 495 $ 992 $ 779 ======= ======= ======= ======= The accompanying notes are an integral part of these financial statements. TECH/OPS SEVCON, INC. Consolidated Statement of Cash Flows (Unaudited) (in thousands) Nine Months Ended ------------------- July 3, June 30, 2004 2003 ------- ------- Net cash flow from operating activities: Net income $ 326 $ 315 Adjustments to reconcile net income to net cash generated from operating activities: Depreciation and amortization 470 456 Deferred tax provision 5 - Increase (decrease) in cash resulting from changes in operating assets & liabilities: Receivables (1,464) (535) Inventories (103) (399) Pre-paid expenses and other current assets (91) (199) Accounts payable 973 568 Accrued compensation and expenses 254 10 Accrued taxes on income 94 (24) ------- ------- Net cash generated from operating activities 458 192 ------- ------- Cash flow used by investing activities: Acquisition of property, plant, and equipment, net (479) (466) ------- ------- Net cash used by investing activities (479) (466) ------- ------- Cash flow used by financing activities: Dividends paid (281) (281) ------- ------- Effect of exchange rate changes on cash 340 322 ------- ------- Net increase (decrease)in cash 38 (233) Opening balance - cash and cash equivalents 524 695 ------- ------- Ending balance - cash and cash equivalents $ 562 $ 462 ======= ======= Supplemental disclosure of cash flow information Cash paid for income taxes $ 43 $ 251 Cash paid for interest 24 52 ------- ------- Supplemental disclosure of non-cash financing activity: Dividend declared $ 94 $ 94 ======= ======= The accompanying notes are an integral part of these financial statements. TECH/OPS SEVCON, INC. Notes to Consolidated Financial Statements - July 3, 2004 (Unaudited) (1) Basis of Presentation In the opinion of management, the accompanying unaudited condensed consolidated financial statements contain all adjustments (consisting of only normally recurring accruals) necessary to present fairly the financial position of Tech/Ops Sevcon as of July 3, 2004 and the results of operations and cash flows for the three months and nine months ended July 3, 2004. The significant accounting policies followed by Tech/Ops Sevcon are set forth in Note 1 to the financial statements in the 2003 Tech/Ops Sevcon, Inc. Annual Report filed on Form 10-K. The results of operations for the three-month and nine-month periods ended July 3, 2004 are not necessarily indicative of the results to be expected for the full year. (2) New Accounting Pronouncements In December 2003, the Financial Accounting Standards Board issued SFAS #132R, "Employers' Disclosures about Pensions and Other Postretirement Benefits". This Statement revises employers' disclosures about pension plans and other postretirement benefit plans. It does not change the measurement or recognition of those plans required by FASB Statements #87, "Employers' Accounting for Pensions", #88, "Employers' Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefits", and #106, "Employers' Accounting for Postretirement Benefits Other Than Pensions". This Statement retains the disclosure requirements contained in FASB Statement #132, "Employers' Disclosures about Pensions and Other Postretirement Benefits", which it replaces. It requires additional disclosures to those in the original Statement #132 about the assets, obligations, cash flows, and net periodic benefit cost of defined benefit pension plans and other defined benefit postretirement plans. The Company adopted the provisions of SFAS #132R on January 1, 2004. The adoption of this pronouncement did not have a material effect on the Company's financial position, results from operations or cash flows. (3) 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 proscribed 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 for per share amounts) Three Months Ended Nine Months Ended ------------------ ----------------- July 3 June 30 July 3 June 30 2004 2003 2004 2003 ------ ------ ------ ------ Net income As reported $ 103 $ 98 $ 326 $ 315 Pro forma effect of expensing stock options (net of income tax) (17) (17) (51) (45) Net income Pro forma $ 86 $ 81 $ 275 $ 270 Income per share: Basic As reported $ .03 $ .03 $ .10 $ .10 Basic Pro forma $ .03 $ .03 $ .09 $ .09 Diluted As reported $ .03 $ .03 $ .10 $ .10 Diluted Pro forma $ .03 $ .03 $ .09 $ .09 - ---------------------------------------------------------------------------- The effects of applying SFAS #123 in this pro forma disclosure are not indicative of future amounts. SFAS #123 does not apply to awards prior to fiscal 1996 and additional awards in future years are anticipated. 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 6%; expected dividend yield of 2.4%; expected life of 7 years; expected volatility of 47%. No options were granted in the first nine months of fiscal 2004. (4) Cash Dividends On June 14, 2004, the Company declared a quarterly dividend of $.03 per share for the third quarter of fiscal 2004, which was paid on July 10, 2004 to stockholders of record on June 26, 2004. The Company has paid regular quarterly cash dividends since the first quarter of fiscal 1990. (5) Calculation of Earnings Per Share and Weighted Average Shares Outstanding Basic and fully diluted earnings per share were calculated as follows: (in thousands, except for per share amounts) Three Months Ended Nine Months Ended ------------------ ----------------- July 3 June 30 July 3 June 30 2004 2003 2004 2003 ------ ------ ------ ------ Net income $ 103 $ 98 $ 326 $ 315 Basic income per share $ .03 $ .03 $ .10 $ .10 Average shares outstanding 3,125 3,125 3,125 3,125 Options outstanding - common stock equivalents 23 - 22 - Average common and common equivalent shares outstanding 3,148 3,125 3,147 3,125 Fully diluted income per share $ .03 $ .03 $ .10 $ .10 ====== ====== ====== ====== (6) 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 significant accounting policies of the segments are the same as those described in note(1) to the 2003 Annual Report filed on Form 10-K. Inter-segment revenues 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) - --------------------------------------------------------------------- Three months ended July 3, 2004 - --------------------------------------------------------------------- Controls Capacitors Corporate Total - --------------------------------------------------------------------- Sales to external customers $ 6,953 $ 533 - $ 7,486 Inter-segment revenues - 63 - 63 Operating income 208 69 (156) 121 Identifiable assets 13,915 1,383 473 15,771 - --------------------------------------------------------------------- Three months ended June 30, 2003 - --------------------------------------------------------------------- Controls Capacitors Corporate Total - --------------------------------------------------------------------- Sales to external customers $ 5,420 $ 541 - $ 5,961 Inter-segment revenues - 47 - 47 Operating income 126 76 (41) 161 Identifiable assets 13,076 1,166 334 14,576 - --------------------------------------------------------------------- - --------------------------------------------------------------------- Nine months ended July 3, 2004 - --------------------------------------------------------------------- Controls Capacitors Corporate Total - --------------------------------------------------------------------- Sales to external customers $19,754 $ 1,471 - $21,225 Inter-segment revenues - 138 - 138 Operating income 711 163 (300) 574 - --------------------------------------------------------------------- Nine months ended June 30, 2003 - --------------------------------------------------------------------- Controls Capacitors Corporate Total - --------------------------------------------------------------------- Sales to external customers $15,975 $ 1,769 - $17,744 Inter-segment revenues - 307 - 307 Operating income 303 353 (178) 478 - --------------------------------------------------------------------- (7) Research and Development The cost of research and development programs is charged against income as incurred and was as follows. (in thousands of dollars) Three Months Ended Nine Months Ended ------------------ ----------------- July 3 June 30 July 3 June 30 2004 2003 2004 2003 ------ ------ ------ ------ Research and Development expense $1,103 $807 $3,097 $2,154 Percentage of sales 14.7% 13.5% 14.6% 12.1% ------ ------ ------ ------ Research and development expense increased by $296,000, or 37%, compared to the third quarter of last fiscal year and by $943,000, or 44% for the nine month period. This increase was principally due to consultancy costs on advanced new product development, recruitment of additional internal engineering resources and currency fluctuations. (8) 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 components of the net pension cost as defined by SFAS #132R. (in thousands of dollars) Three Months Ended Nine Months Ended ------------------ ----------------- July 3 June 30 July 3 June 30 2004 2003 2004 2003 ------- ------- ------- ------- Components of net periodic benefit cost: Service cost $ 118 $ 110 $ 351 $ 323 Interest cost $ 215 196 640 578 Expected return on plan assets $ (218) (197) (649) (581) Amortization of transition obligation $ - - - - Amortization of prior service cost $ 13 12 38 36 Recognized net actuarial gain (loss) $ - - - - ----- ----- ----- ----- Net periodic benefit cost $ 128 $ 121 $ 380 $ 356 ----- ----- ----- ----- Net cost of defined contribution plans $ 8 $ 7 $ 23 $ 21 Tech/Ops Sevcon contributed $434,000 to its pension plans in the nine months ended July 3, 2004 and presently anticipates contributing a further $72,000 to fund its plans in the remainder of fiscal 2004, for a total contribution of $506,000. Item 2. 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 2. NEW ACCOUNTING PRONOUNCEMENTS The Company has adopted the following new accounting pronouncement in fiscal 2004. See Notes to Consolidated Financial Statements (2) for a more detailed description of this new accounting pronouncement. SFAS #132R, "Employers' Disclosures about Pensions and Other Postretirement Benefits" - Adoption on January 1, 2004 did not have a material effect on consolidated financial statements. CRITICAL ACCOUNTING ESTIMATES There have been no material changes from the disclosures regarding critical accounting policies and estimates contained in the Form 10-K for fiscal 2003. RISK FACTORS In addition to the market risk factors relating to foreign currency and interest rate risk set out below, the Company believes that the following represent the most significant risk factors for the Company: Capital Goods Markets The Company's customers are mainly manufacturers of capital goods such as fork lift trucks, aerial lifts, airport ground support vehicles and railway signaling equipment. These markets are cyclical and some are currently depressed. Demand in these markets could decrease further or customers could decide to purchase alternative products. In this event the Company's sales could decrease below its current break even point and there is no certainty that the Company would be able to decrease overhead expenses to enable it to operate profitably. Materials and subcontractors The Company relies on certain suppliers and subcontractors for all of its requirements for certain components, sub-assemblies and finished products. In the event that such suppliers and subcontractors are unable or unwilling to continue supplying the Company, or to meet the Company's cost and quality targets or needs for timely delivery, there is no certainty that the Company would be able to establish alternative sources of supply in time to meet customer demand. Buildings and Insurance In the controller business the majority of product is produced in a single plant in England. The capacitor business is located in a single plant in Wales. In the event that either of these plants was to be damaged or destroyed there is no certainty that the Company would be able to establish alternative facilities in time to meet customer demand. The Company does carry property damage and business interruption insurance but this may not cover certain lost business due to the long-term nature of the relationships with many customers. Litigation Risk 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. OVERVIEW OF THIRD QUARTER AND FIRST NINE MONTHS In the third quarter of fiscal 2004 net income was $103,000, or $.03 per diluted share, which was in line with last year's results for the same period when the Company had net income of $98,000, or $.03 per diluted share. Revenues for the third quarter were $7,486,000, an increase of $1,525,000, or 26%, compared to the prior year's $5,961,000. Foreign currency fluctuations accounted for an increase of $435,000, or 7%, in reported sales but had an insignificant impact on operating income. Volumes increased by 19% compared to the third quarter of last year mainly due to gains in the controls business. Engineering expense, mainly on advanced new products, was $296,000 higher than the third quarter of last year. Operating income for the third quarter was $121,000 compared to $161,000 in the same quarter last year. For the nine month period net income was $326,000, or $.10 per diluted share, compared to $315,000, also $.10 per diluted share, last year. Revenues in the first nine months of this year were $21,255,000, an increase of $3,481,000, or 20%, compared to last year. Foreign currency fluctuations accounted for an increase of $1,635,000, or 9%, in reported sales. Volumes were 11% higher than the prior year period. The gross profit percentage increased to 40.3% of sales compared to 38.8% in the same period last year. Higher operating expenses, mainly related to new product engineering, sales and marketing and adverse foreign currency affects increased operating expenses by $1,569,000 compared to the same period last year. Operating income for the nine months was $574,000 compared to $478,000 in the first nine months of fiscal 2003. The increase in operating income was mainly due to increased volumes and foreign currency fluctuations, partially offset by the higher operating expense mainly related to new products. Cash balances increased by $355,000 in the third quarter of fiscal 2004 to $562,000. In the first nine months of this year cash balances increased by $38,000. Operating activities generated cash of $458,000, capital expenditure used cash of $479,000 and dividend payments amounted to $281,000. Exchange rate changes increased cash by $340,000. Results of Operations Three months ended July 3, 2004 Sales in the third fiscal quarter ended July 3, 2004 were $7,486,000 compared to $5,961,000 in the third quarter of last year, an increase of $1,525,000, or 26%. Foreign currency fluctuations, principally the weakness of the US dollar compared to the Euro and the British pound, accounted for an increase of $435,000, or 7%, in revenues. Shipment volumes were 19% ahead of the third quarter of last year. Volumes in the U.S. Controller business increased by 44% with gains in shipments to the aerial lift, airport ground support and mining markets partially offset by lower demand in the US fork lift truck market. Volumes in the foreign controller markets grew by 10% compared to the third quarter of fiscal 2003, mainly due to strong growth in shipments to the aerial lift market. Shipment volumes to the foreign fork lift truck and airport ground support markets were moderately ahead of the same period last year. Capacitor revenues were 34% lower than last year. Capacitor sales were marginally lower than last year at $533,000 compared to $541,000 in the third quarter of fiscal 2003. An 11% decrease in capacitor volumes mainly in the audio capacitor market was partially offset by the impact of foreign currency fluctuations resulting in a 10% increase in reported sales of capacitors. Third quarter gross profit was 39.6% of sales, an increase of 0.2% from 39.4% in the same quarter of fiscal 2003. Gross profit of $2,961,000 was $614,000 higher than last year. The increase in gross profit was mainly due to higher volumes and to foreign currency fluctuations which caused a $220,000 increase in gross profit in the third quarter. In the third quarter of fiscal 2004 one of the Company's smaller sub-contractors became insolvent and ceased operations disrupting the Company's output for a period of a few weeks and causing increased costs of approximately $40,000 in the third quarter. The sub-assemblies provided by this sub-contractor have now been successfully transferred to other sub-contractors with no long-term adverse impacts on the Company's business. Selling, research and administrative expenses were $4,525,000, an increase of $911,000, or 25%, compared to last year's third quarter. Foreign currency fluctuations increased these expenses by $225,000, or 6%. In the third quarter of fiscal 2004, engineering and R&D expense increased by $296,000 compared to the same period last year. This was mainly due to higher engineering consulting expense and additional internal resources to accelerate the development of new high quality products. Management expects that engineering consulting expense will diminish over the next few quarters as the new products come on line. Foreign currency fluctuations increased the reported engineering and R&D expense by $90,000. In addition sales and marketing expense was 24% higher that the same quarter last year, mainly due to an increase in number of sales employees and additional marketing expense related to forthcoming new product introductions. In the third quarter there was operating income of $121,000 compared to $161,000 in the third quarter last year, a decrease in operating income of $40,000. Foreign currency fluctuations decreased reported operating income by $5,000. Operating income in the controller business of $208,000 was $82,000 higher than in the third quarter of last year. The increase in controller business operating income was mainly due to higher volumes partially offset by additional spending on engineering and marketing of new products. Operating income in the capacitor business segment decreased by $7,000 to $69,000, mainly due to lower volumes. Unallocated corporate expenses were $156,000 in the current year compared to $41,000 in the third quarter of last year. Other income in the third quarter of this year was $36,000 compared to other expense of $11,000 in the same quarter last year, a difference of $47,000. This was mainly due to foreign currency gains in the third quarter of fiscal 2004 compared to losses last year. Income before income taxes of $157,000 was in line with last year when pre-tax income was $150,000. Income taxes were 34.4% of pre-tax income compared to 34.7% in the same quarter last year. Net income was $103,000 compared to $98,000 in the same quarter last year, an increase of $5,000. Basic and fully diluted income per share were unchanged from the prior year at $.03 per share. Nine months ended July 3, 2004 Sales in the first nine months of fiscal 2004 were $21,225,000, compared to $17,744,000 in the prior year, an increase of $3,481,000, or 20%. Foreign currency fluctuations accounted for a $1,635,000, or 9%, increase in reported sales. Volumes were $1,846,000, or 11%, ahead of last year. Volumes in the controller business were 14% better than last year, with strong gains in the aerial lift, mining and airport ground support markets. In the capacitor business sales decreased by $298,000 compared to the same period last year. Capacitor volumes were down by $456,000, or 26%, compared to the first nine months of last year. Foreign currency fluctuations accounted for a $158,000, or 9%, increase in reported sales of the capacitor business segment. Revenues in the US controller business increased by 20%. This was mainly due to significantly higher sales into the US aerial lift market. Higher domestic volumes were also recorded in the mining, airport ground support, and other electric vehicle markets, partially offset by decreased sales into the fork lift truck market. Controller volumes in foreign markets grew by 11%, mainly due to increased demand in the European aerial lift market. All other market segments in the foreign controller business reported increased volumes. Gross profit was 40.3% of sales in the first nine months of fiscal 2004 compared to 38.8% in the comparable period last year. Gross profit increased by $1,655,000 compared to the first nine months of last year mainly due to increased volumes and foreign currency fluctuations. Higher margins on new products also contributed to the improvement in gross profit. Selling, research and administrative expenses were $7,981,000, an increase of $1,569,000, or 24%, compared to the comparable period last year. Foreign currency fluctuations increased reported operating expenses by $640,000, or 10%. In the first nine months of the current year, and excluding the impact of foreign currency fluctuations, engineering and R&D expense increased by $664,000 mainly due to increased consulting expense and additional internal resources to accelerate the development of new high quality products. Operating income for the first nine months was $574,000, an increase of $96,000, or 20% compared to the first nine months of last year. Foreign currency fluctuations resulted in a $135,000 increase in reported operating income. Operating income for the controller business increased by $408,000 to $711,000. The main causes of this increase in operating income were higher volumes partially offset by increased engineering and marketing expense. In the capacitor business segment operating income decreased by $190,000 to $163,000, mainly due to lower volumes, partially offset by a positive impact of foreign currency fluctuations. Other expense was $73,000 compared to other income of $6,000 in the same period last year, an adverse change of $79,000. This was mainly due to foreign currency losses in the current year compared to gains last year. Income before income taxes of $326,000 was in line with last year when pre-tax income was $315,000. Income taxes were 35% of pre-tax income, in both the current and prior year periods. Net income was for the first nine months of fiscal 2004 was $326,000, an increase of $11,000 compared to the same period last year. Basic and fully diluted income per share was $.10 per share in first nine months of both the current and prior fiscal years. Financial Condition The Company has, since January 1990, maintained a program of regular cash dividends, which, for the quarter ended July 3, 2004, amounted to $94,000. Cash balances at the end of the third quarter of 2004 were $562,000 compared to $524,000 in September 2003, an improvement of $38,000. In the third quarter cash balances increased by $355,000, mainly due to better working capital management. Third quarter net income of $103,000 covered the dividend payment of $94,000. In the first nine months of fiscal 2004 net income was $326,000, and operating activities generated $458,000 of cash. There was an increase of $1,464,000 in receivables due to both higher volumes and foreign currency fluctuations. The number of days sales in receivables decreased in the first nine months of fiscal 2004 from 70 days to 61 days. Dividend payments for the first nine months of fiscal 2004 amounted to $281,000. Capital expenditures were $479,000 compared to depreciation of $470,000. The Company has no long-term debt and has overdraft facilities in the UK of $1,815,000 and of $379,000 in France. The UK overdraft facilities are secured by all of the Company's assets in the UK and the French overdraft facilities are unsecured. Tech/Ops Sevcon's capital resources, in the opinion of management, are adequate for projected operations and capital spending programs. Item 3. Quantitative and Qualitative Disclosures about Market Risk. The primary market risks for the Company are foreign currency risk and interest rate risk. There have been no material changes in our exposure as described in the Form 10-K for fiscal 2003. Item 4. 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 "disclosure controls and procedures" (as defined in the Securities Exchange Act of 1934 Rules 13a-15(e) and 15-d-15(e))have concluded that, as of July 3, 2004, the disclosure controls and procedures were effective 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. Our principal executive officer and principal financial officer have identified no change in our "internal control over financial reporting" (as defined in Securities Exchange Act of 1934 Rules 13a-15(f) and 15d-15(f)) that occurred during the period covered by this Quarterly Report on Form 10-Q that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. PART II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K (a) Exhibits filed with this report. See Exhibit Index immediately preceding the exhibits. (b) Reports on Form 8-K. A Current Report on Form 8-K was furnished on August 4, 2004 (Item 12). The report contained information announcing Tech/Ops Sevcon, Inc.'s earnings release issued on August 4, 2004. The description of this Form 8-K in this Item 6 is for informational purposes only and the news release furnished thereon shall not be deemed "filed" with the Commission. SIGNATURES Pursuant to the requirements 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. Date: August 16, 2004 By: /s/ Paul A. McPartlin --------------------- Paul A. McPartlin Chief Financial Officer(Principal financial and chief accounting officer) Exhibit Index Exhibit Description - ------- ----------- (3)(a) Certificate of Incorporation of the registrant. Filed herewith 31.1 Certification of Principal Executive Officer pursuant to section 302 of the Sarbanes-Oxley Act of 2002. Filed herewith. 31.2 Certification of Principal Financial Officer pursuant to section 302 of the Sarbanes-Oxley Act of 2002. Filed herewith. 32.1 Certification of Principal Executive Officer and Principal Financial Officer pursuant to section 906 of the Sarbanes-Oxley Act of 2002. Furnished herewith. EXHIBIT (3) (a) CERTIFICATE OF INCORPORATION OF TECH/OPS SEVCON, INC. I, the undersigned, for the purpose of forming a corporation under the laws of the State of Delaware, hereby certify as follows: FIRST: The name of the corporation is Tech/Ops Sevcon, Inc. SECOND: The address of the corporation's registered office in the State of Delaware is 229 South State Street, City of Dover, County of Kent. The name of its registered agent at such address is the Prentice-Hall Corporation System, Inc. THIRD: The purpose of the corporation is to engage in any lawful act or activity for which corporations may be organized under the General Corporation Law of the State of Delaware. FOURTH: The total number of shares of all classes of stock which the corporation shall have authority to issue is eleven million (11,000,000), of which one million (1,000,000) shares without par value are to be of a class designated "Preferred Stock" and ten million (10,000,000) shares without par value are to be of a class designated "Common Stock". Preferred Stock The Board of Directors is authorized, subject to limitations prescribed by law and the provisions of this Article Fourth, to provide by resolution for the issuance of the shares of Preferred Stock in one or more series, and by filing a certificate pursuant to the applicable law of the State of Delaware, to establish from time to time the number of shares to be included in each such series, and to fix the designations, powers, preferences and rights of the shares of each such series and the qualifications, limitations or restrictions thereof. The authority of the Board with respect to each series shall include, but not be limited to, determination of the following: (a) The number of shares constituting that series and the distinctive designation of that series; (b) The dividend rate, if any, on the shares of that series, whether dividends shall be cumulative, and if so, from which date or dates, and the relative rights of priority, if any, of payment of dividends on shares of the series; (c) Whether that series shall have voting rights, in addition to the voting rights provided by law, and, if so, the terms of such voting rights; (d) Whether that series shall have conversion privileges, and, if so, the terms and conditions of such conversion, including provision for adjustment of the conversion rate in such events as the Board of Directors shall determine; (e) Whether or not the shares of that series shall be redeemable, and, if so, the terms and conditions of such redemption, including the date or dates upon or after which they shall be redeemable, and the amount per share payable in case of redemption, which amount may vary under different conditions and at different redemption dates; (f) Whether that series shall have a sinking fund for the redemption or purchase of shares of that series, and, if so, the terms and amount of such sinking fund; (g) The rights of the shares of that series in the event of voluntary or involuntary liquidation, dissolution or winding up of the corporation, and the relative rights of priority, if any, of payment of shares of that series; (h) Any other relative rights, preferences and limitations of that series. Dividends on outstanding shares of Preferred Stock shall be paid or declared and set apart for payment before any dividends shall be paid or declared and set apart for payment on the outstanding shares of Common Stock with respect to the same dividend period. If upon any voluntary or involuntary liquidation, dissolution or winding up of the corporation, the assets available for distribution to holders of shares of Preferred Stock of all series shall be insufficient to pay such holders the full preferential amount to which they are entitled, then such assets shall be distributed ratably among the shares of all series of Preferred Stock in accordance with the respective preferential amounts (including unpaid cumulative dividends, if any) payable with respect thereto. Common Stock The Common Stock is subject to the rights and preferences of the Preferred Stock as hereinbefore set forth or authorized. Subject to the provisions of any applicable law or of the by-laws of the corporation, as front time to time amended, with respect to the fixing of a record date for the determination of stockholders entitled to vote, and except as otherwise provided by law or by the resolution or resolutions providing for the issue of any series of Preferred Stock, the holders of outstanding shares of Common Stock shall have exclusive voting rights for the election of directors and for all other purposes, each holder of record of shares of Common Stock being entitled to one vote for each share of Common Stock standing in his name on the books of the corporation. Subject to the rights of any one or more series of Preferred Stock, the holders of Common Stock shall be entitled to receive such dividends as from time to time may be declared by the Board of Directors out of any funds of the corporation legally available for the payment of such dividends. In the event of the liquidation, dissolution, or winding up of the corporation, whether voluntary or involuntary, after payment shall have been made to the holders of the Preferred Stock of the full amount to which they are entitled, the holders of Common Stock shall be entitled to share, ratably according to the number of shares of Common Stock held by them, in all remaining assets of the corporation available for distribution to its stockholders. Issuance Subject to the provisions of this Certificate of Incorporation and except as otherwise provided by law, the shares of stock of the corporation, regardless of class, may be issued for such consideration and for such corporate purposes as the Board of Directors may from time to time determine. FIFTH: The name and mailing address of the incorporator are as follows: Name Mailing Address ---- --------------- Marvin G. Schorr One Beacon Street Boston, Massachusetts 02108 SIXTH: The Board of Directors shall consist of not less than three nor more than fifteen directors, the exact number to be determined from time to time by resolution adopted by the affirmative vote of a majority of the directors then in office. The directors shall be divided into three classes, as nearly equal in number as the then total number of directors constituting the entire Board permits, with the term of office of one class expiring each year. The initial directors of the first class shall be elected to hold office for a term expiring at the next succeeding annual meeting, the initial directors of the second class shall be elected to hold office for a term expiring at the second succeeding annual meeting and the initial directors of the third class shall be elected to hold office for a term expiring at the third succeeding annual meeting. At each succeeding annual meeting of stockholders beginning in 1989, successors to the class of directors whose term expires at that meeting shall be elected for a three year term. If the number of directors is changed, any increase or decrease shall be apportioned among the classes so as to maintain the number of directors in each class as nearly equal as possible, and any additional directors of any class elected to fill a vacancy resulting from an increase in the size of such class shall hold office for a term that shall coincide with the remaining term of that class, but in no event will a decrease in the number of directors shorten the term of any incumbent director. Any vacancies in the Board of Directors for any reason, and any directorships resulting from any increase in the number of directors, may be filled by the Board of Directors, acting by a majority of the directors then in office, although less than a quorum, and any directors so chosen shall hold office until the next election of the class for which such directors shall have been chosen. Notwithstanding the foregoing, and except as otherwise required by law, whenever the holders of any one or more series of Preferred Stock shall have the right, voting separately as a class, to elect one or more directors of the corporation, the election, terms of office and other features of such directorships shall be governed by the terms of this Certificate of Incorporation and certificates of designation applicable thereto, and such directors so elected shall not be divided into classes pursuant to this Article Sixth unless expressly provided by such terms. Subject to the foregoing, at each annual meeting of stockholders the successors to the class of directors whose terms shall then expire shall be elected to held office for a term expiring at the annual meeting for the year in which their term expires and until their successors shall be elected and qualified, subject to prior death, resignation, retirement or removal. SEVENTH: The Board of Directors is expressly authorized to exercise all powers granted to the directors by law except insofar as such powers are limited or denied herein or in the by-laws of the corporation. In furtherance of such powers, the Board of Directors shall have the right to adopt, amend or repeal the by-laws of the corporation, but the stockholders may adopt additional by-laws and may amend or repeal any by-law whether adopted by them or otherwise. EIGHTH: Election of directors need not be by written ballot unless the by-laws of the corporation shall so provide. NINTH: No action required to be taken or which may be taken at any annual or special meeting of stockholders of the corporation may be taken by written consent without a meeting, and the power of stockholders to consent in writing, without a meeting, to the taking of any action is specifically denied. This Article Ninth may not be amended, revised or revoked, in whole or in part, except by the affirmative vote of the holders of 80% of the shares of all classes of stock of the corporation entitled to vote for the election of directors, considered for the purposes of this Article Ninth as one class of stock. TENTH: (i) Except as set forth in part (ii) of this Article Tenth, the affirmative vote of the holders of 80% of the shares of all classes of stock of the corporation entitled to vote for the election of directors, considered for the purposes of this Article as one class, shall be required (a) for the adoption of any agreement for the merger or consolidation of the corporation or any Subsidiary (as hereinafter defined) with or into any Other Corporation (as hereinafter defined), (b) to authorize any sale, lease, exchange, mortgage, pledge or other disposition of all or substantially all of the assets of the corporation or any Subsidiary to any Other Corporation, (c) to authorize the issuance or transfer by the corporation of any Substantial Amount (as hereinafter defined) of securities of the corporation in exchange for the securities or assets of any Other Corporation, or (d) to engage in any other transaction the effect of which is to combine the assets and business of the corporation or any Subsidiary with any Other Corporation. Such affirmative vote shall be in addition to the vote of the holders of the stock of the corporation otherwise required by law, the Certificate of Incorporation of the corporation or any agreement or contract to which the corporation is a party. (ii) The provisions of part (i) of this Article Tenth shall not be applicable to any transaction described herein if such transaction is approved by a resolution of the Board of Directors of the corporation, provided that the directors voting in favor of such resolution consist of a majority of the persons who were duly elected and acting members of the Board of Directors prior to the time any such Other Corporation became a Beneficial Owner (as hereinafter defined) of 5% or more of the shares of stock of the corporation entitled to vote for the election of directors (a "Continuing Director"), including any successor of a Continuing Director who is not an affiliate or an associate or a representative of such Other Corporation and is recommended or elected to succeed such Continuing Director by a majority of Continuing Directors. In considering such transaction, the Board of Directors shall give due consideration to all relevant factors, including without limitation the social and economic effects on the employees, customers, suppliers and other constituents of the corporation and its Subsidiaries and on the communities in which the corporation and its Subsidiaries operate or are located. (iii) The Board of Directors shall have the power and duty to determine for the purposes of this Article Tenth, on the basis of information known to such Board, if and when any Other Corporation is the Beneficial Owner of 5% or more of the outstanding shares of stock of the corporation entitled to vote for the election of directors. Any such determination, if made in good faith, shall be conclusive and binding for all purposes of this Article Tenth. (iv) As used in this Article Tenth, the following terms shall have the meanings indicated: "Other Corporation" means any person, firm, corporation or other entity, other than a Subsidiary of the corporation, which is the Beneficial Owner of 5% or more of the shares of stock of the corporation entitled to vote in the election of directors. "Subsidiary" means any corporation in which the corporation owns, directly or indirectly, more than 50% of the voting securities. "Substantial Amount" means any securities of the corporation having a then fair market value of more than $500,000. An Other Corporation (as defined above) shall be deemed to be the "Beneficial Owner" of stock if such Other Corporation or any "affiliate" or "associate" of such Other Corporation (as those terms are defined in Rule 12b-2 promulgated under the Securities Exchange Act of 1934 (15 U.S.C. 78 aaa et seq.), as amended from time to time), directly or indirectly, controls the voting of such stock or has any options, warrants, conversion or other rights to acquire such stock. (v) This Article Tenth may not be amended, revised or revoked, in whole or in part, except by the affirmative vote of the holders of 80% of the shares of all classes of stock of the corporation entitled to vote for the election of directors, considered for the purposes of this Article Tenth as one class of stock. ELEVENTH: No director shall be personally liable to the corporation or its stockholders for monetary damages for any breach of fiduciary duty by such director as a director. Notwithstanding the foregoing sentence, a director shall be liable to the extent provided by applicable law (i) for breach of the director's duty of loyalty to the corporation or its stockholders, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) pursuant to Section 174 of the Delaware General Corporation Law or (iv) for any transaction from which the director derived an improper personal benefit. No amendment to or repeal of this Article Eleventh shall apply to or have any effect on the liability or alleged liability of any director of the corporation for or with respect to any acts or omissions of such director occurring prior to such amendment. TWELFTH: The corporation reserves the right to amend, alter, change or repeal any provision contained in this Certificate of Incorporation, in the manner now or hereafter prescribed by statute, and all rights conferred upon stockholders herein are granted subject to this reservation, Signed this 23 day of November, 1987. /s/ Marvin G. Schorr ----------------------------- Marvin G. Schorr, Incorporator CERTIFICATE OF AMENDMENT OF CERTIFICATE OF INCORPORATION OF TECH/OPS SEVCON, INC. Tech/Ops Sevcon, Inc., a corporation organized and existing under and by virtue of the General Corporation Law of the State of Delaware, DOES HEREBY CERTIFY: FIRST: That at a meeting of the Board of Directors of Tech/Ops Sevcon, Inc., a resolution was duly adopted setting forth a proposed amendment of the Certificate of Incorporation of said corporation, declaring said amendment to be advisable and directing that it be considered at the next annual meeting of the stockholders of said corporation. The resolution setting forth the proposed amendment is as follows: Resolved that this corporation's Certificate of Incorporation be amended by changing the first paragraph of Article FOURTH to read as follows: The total number of shares of all classes of stock which the corporation shall have authority to issue is five million (5,000,000), of which one million (1,000,000) shares $.10 par value, are to be of a class designated "Preferred Stock" and four million (4,000,000) shares, $.10 par value, are to be of a class designated "Common Stock". SECOND: That thereafter, pursuant to resolution of its Board of Directors, the annual meeting of the stockholders of said corporation was duly called and held, upon notice in accordance with Section 222 of the General Corporation Law of the State of Delaware, at which meeting the necessary number of shares as required by statute were voted in favor of the amendment. THIRD: That said amendment was duly adopted in accordance with the provisions of Section 242 of the General Corporation Law of the State of Delaware. IN WITNESS WHEREOF, said Tech/Ops Sevcon, Inc. has caused this certificate to be signed by Bernard F. Start, its President, and Robert P. Moncreiff, its Secretary, this twenty-seventh day of January 1993. BY: /s/ Bernard F. Start --------------------------- Bernard F. Start, President ATTEST: /s/ Robert P. Moncreiff ----------------------------- Robert P. Moncreiff, Secretary CERTIFICATE OF AMENDMENT OF CERTIFICATE OF INCORPORATION OF TECH/OPS SEVCON, INC. Tech/Ops Sevcon, Inc., a corporation organized and existing under and by virtue of the General Corporation Law of the State of Delaware, DOES HEREBY CERTIFY: FIRST: That at a meeting of the Board of Directors of Tech/Ops Sevcon, Inc., a resolution was duty adopted setting forth a proposed amendment of the Certificate of Incorporation of said corporation, declaring said amendment to be advisable and directing that it be considered at the next annual meeting of the stockholders of said corporation. The resolution setting forth the proposed amendment is as follows: Resolved that this corporation's Certificate of Incorporation be amended by changing the first paragraph of Article FOURTH to read as follows: The total number of shares of all classes of stock which the corporation shall have authority to issue is nine million (9,000,000), of which one million (1,000,000) shares, $.10 par value, are to be of a class designated "Preferred Stock" and eight million (8,000,000) shares, $.10 par value, are to be designated "Common Stock". SECOND: That thereafter, pursuant to resolution of its Board of Directors, the annual meeting of the stockholders of said corporation was duly called and held, upon notice in accordance with Section 222 of the General Corporation Law of the State of Delaware, at which meeting the necessary number of shares as required by statute were voted in favor of the amendment. THIRD: That said amendment was duly adopted in accordance with the provisions of Section 242 of the General Corporation Law of the State of Delaware. IN WITNESS WHEREOF, said Tech/Ops Sevcon, Inc. has caused this certificate to be signed by Bernard F. Start, its President, and David R. Pokross, Jr., its Secretary, this thirty-first day of January 1996. BY: /s/ Bernard F. Start --------------------------- Bernard F. Start, President ATTEST: /s/ David R. Pokross, Jr. ------------------------- David R. Pokross, Jr., Secretary 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 Quarterly Report on Form 10-Q 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 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 most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) 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: August 16, 2004 /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 Quarterly Report on Form 10-Q 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 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 most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) 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: August 16, 2004 /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 Quarterly Report on Form 10-Q of the Company for the quarter ended July 3, 2004 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-Q fairly presents, in all material respects, the financial condition and results of operations of the Company. Dated: August 16, 2004 /s/ Matthew Boyle ----------------------- Matthew Boyle Chief Executive Officer Dated: August 16, 2004 /s/ Paul A. McPartlin ----------------------- Paul A. McPartlin Chief Financial Officer 1