The accompanying notes are an integral part of these consolidated financial statements.
The accompanying notes are an integral part of these consolidated financial statements.
The accompanying notes are an integral part of these consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Sevcon, Inc. and Subsidiaries
(1)
|
Basis of presentation
|
The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (U.S. GAAP) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. In the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments (consisting of normal recurring accruals) necessary to present fairly the financial position of Sevcon, Inc. ( the “Company”) and subsidiaries as of July 1, 2017 and the results of operations and cash flows for the three and nine-month periods ended July 1, 2017. The accompanying unaudited consolidated financial statements should be read in conjunction with the 2016 annual consolidated financial statements and related notes included in the 2016 Sevcon, Inc. Annual Report filed on Form 10-K (“2016 10-K”). The results of operations for the three and nine-month periods ended July 1, 2017 are not necessarily indicative of the results to be expected for the full year.
During the nine-month period ended July 1, 2017 the Company experienced an operating loss of $8,028,000 and a decrease in cash of $11,809,000 from $14,127,000 at September 30, 2016 to $2,318,000 at July 1, 2017. This negative performance largely reflected difficult conditions in the Company’s traditional controls markets and continuing investment in research and development expense associated with the delivery of the engineering phase of the Company’s new project pipeline. At July 1, 2017 the Company had net current assets of $18,028,000 including cash of $2,318,000. Against this background, management has conducted a review of the Company’s cash requirements for the next twelve months taking into account existing cash resources, forecasted cash from future operations and existing borrowing facilities. In addition, the Company has explored its options to secure further financing. Based on this assessment of the Company’s cash requirements and the financing it believes is available, management believes that the group has sufficient funds available for the next twelve months for its activities under execution.
Unless otherwise indicated, each reference to a “year” means the Company’s fiscal year, which ends on September 30.
Accounting for wholly-owned subsidiaries
The accompanying unaudited consolidated financial statements include the accounts of the Company’s wholly-owned subsidiaries; Sevcon USA, Inc., Sevcon Ltd, Industrial Capacitors (Wrexham) Ltd., Sevcon Asia Limited, Sevcon Japan KK, Sevcon Security Corp., Sevcon S.A.S., Sevcon S.r.l., Bassi S.r.l., Sevcon Canada Inc. and Sevcon GmbH in accordance with the provisions required by the Consolidation Topic 810 of the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”). All material intercompany transactions have been eliminated.
Accounting for joint-venture subsidiary
For the Company's less than wholly-owned subsidiary, Sevcon New Energy Technology (Hubei) Company Limited in China, the Company first analyzes whether this joint venture subsidiary is a variable interest entity (a “VIE”) in accordance with ASC 810 and if so, whether the Company is the primary beneficiary requiring consolidation. A VIE is an entity that has (i) insufficient equity to permit it to finance its activities without additional subordinated financial support or (ii) equity holders that lack the characteristics of a controlling financial interest. VIEs are consolidated by the primary beneficiary, which is the entity that has both the power to direct the activities that most significantly impact the entity’s economic performance and the obligation to absorb losses or the right to receive benefits from the entity that potentially could be significant to the entity. Variable interests in a VIE are contractual, ownership, or other financial interests in a VIE that change with changes in the fair value of the VIE’s net assets. The Company continuously re-assesses at each level of the joint venture whether the entity is (i) a VIE, and (ii) if the Company is the primary beneficiary of the VIE. If it is determined that the entity in which the Company holds its interest qualifies as a VIE and the Company is the primary beneficiary, it is consolidated.
Based on the Company's analysis of its 50% owned joint venture, the Company has determined that it is a VIE and that the Company is the primary beneficiary. While the Company owns 50% of the equity interest in this subsidiary, the other 50% is owned by a local unrelated third party, and the joint venture agreement with that third party provides the Company with greater voting rights. Accordingly, the Company consolidates its joint venture under the VIE rules and reflects the third party’s 50% interest in the consolidated financial statements as a non-controlling interest. The Company records this non-controlling interest at its initial fair value, adjusting the basis prospectively for their share of the respective consolidated investments’ net income or loss or equity contributions and distributions. This non-controlling interest is not redeemable by the equity holders and is presented as part of permanent equity. Income and losses are allocated to the non-controlling interest holder based on its economic ownership percentage.
Effective July 13, 2017, the Company acquired the remaining 50% of Sevcon New Energy Technology (Hubei) Company Limited for a purchase price of $5,000,000. In doing so, the Company agreed to terminate its equity joint venture with Xuchang Fuhua Glass Co. Ltd (“Fuhua Glass”), a Chinese limited liability company. The Company also agreed to reimburse Fuhua Glass for the taxes paid by it in relation to the equity transfer in an amount not to exceed $1,173,675, as well as certain ancillary fees. Upon the consummation of the acquisition, Sevcon New Energy Technology (Hubei) Company Limited became a “wholly foreign-owned enterprise” under Chinese law. As of July 1, 2017, the closing conditions had not been satisfied and as such Sevcon New Energy Technology (Hubei) Company Limited was accounted for as a joint-venture subsidiary during the period ended July 1, 2017.
On July 14, 2017, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”) with BorgWarner Inc., a Delaware corporation (“BorgWarner”), and BorgWarner’s wholly-owned subsidiary, Slade Merger Sub Inc., a Delaware corporation (“Merger Sub”), providing for the merger of Merger Sub with and into the Company (the “Merger”), with the Company surviving the Merger as a wholly-owned subsidiary of BorgWarner. Pursuant to the Merger Agreement, at the effective time of the Merger, (i) each share of common stock, par value $0.10 per share of the Company issued and outstanding immediately prior to the effective time of the Merger (each, a “Common Share”) (other than (A) any Common Shares owned by BorgWarner, Merger Sub or the Company, or by any subsidiary of BorgWarner, Merger Sub or the Company, in each case except to the extent held by any such person on behalf of a third party and (B) any shares that are owned by stockholders who have perfected and not withdrawn a demand for appraisal rights pursuant to Delaware law) will be cancelled and converted into the right to receive cash in an amount, without interest, equal to $22.00, and (ii) if the Charter Amendment (as described below) becomes effective, each share of Series A Convertible Preferred Stock, par value $0.10 per share of the Company issued and outstanding immediately prior to the effective time of the Merger (each of which is convertible into three Common Shares) (each, a “Preferred Share”) (other than (A) any Preferred Shares owned by BorgWarner, Merger Sub or the Company, or by any subsidiary of BorgWarner, Merger Sub or the Company, in each case except to the extent held by any such person on behalf of a third party and (B) any shares that are owned by stockholders who have perfected and not withdrawn a demand for appraisal rights pursuant to Delaware law), will be cancelled and converted into the right to receive cash in an amount, without interest, equal to $66.00. Immediately prior to the effective time of the Merger, the board of directors of the Company intends to declare and pay a special dividend on the Preferred Shares representing the amount of the accrued and unpaid dividends on the Preferred Shares.
Consummation of the Merger is subject to the satisfaction or waiver of specified closing conditions, including (i) the approval of the Merger by the holders of a majority of the outstanding Common Shares, (ii) the approval of an amendment to the Company’s amended and restated certificate of incorporation to provide that, at the effective time of the Merger, each holder of Preferred Shares will be entitled to receive the consideration provided for in the Merger Agreement for each Preferred Share owned by such holder (the “Charter Amendment”), by the holders of a majority of the outstanding Common Shares and a majority of the outstanding Preferred Shares, voting as separate classes, (ii) the receipt of the approval of the Austrian Federal Competition Authority, (iii) the receipt from each holder of outstanding warrants to purchase Common Shares of an agreement with the Company in a form attached to the Merger Agreement agreeing to cancel such warrants in exchange for an amount equal to the product of the per Common Share merger consideration ($22.00) and the number of shares issuable upon exercise of such warrants, less the aggregate exercise price for such warrants, (iv) no more than 10% of the Common Shares and Preferred Shares (on an as if converted to common stock basis) having exercised appraisal rights and (v) other customary closing conditions, including (a) the accuracy of each party’s representations and warranties (subject to customary materiality qualifiers), (b) each party’s compliance with its agreements and covenants contained in the Merger Agreement and (c) the absence of any law, ordinance, rule, regulation, order, judgment or decree being in effect that restrains or enjoins, or otherwise prohibits or makes illegal, the consummation of the Merger or the Charter Amendment.
The Merger Agreement includes customary representations, warranties and covenants of the Company, BorgWarner, and Merger Sub. The Company has agreed to operate its business in all material respects in the ordinary course of business consistent with past practice until the completion of the Merger. The Company has also agreed not to solicit, initiate or knowingly encourage, or knowingly induce or facilitate, proposals regarding alternative transactions and to certain restrictions on its ability to respond to any such proposals. BorgWarner and Merger Sub have agreed to use reasonable best efforts to obtain approval of the proposed transactions under any applicable Antitrust Laws (as defined in the Merger Agreement), as more fully set forth in and subject to the terms and conditions of the Merger Agreement.
The Company may terminate the Merger Agreement prior to the approval of the Merger by the common stock holders should the Company receive a “Superior Proposal”, being an unsolicited alternative acquisition proposal from a third party that the board of directors of the Company has determined is superior to the Merger. In certain circumstances, the Company has agreed to pay to BorgWarner a termination fee in connection with the termination of the Merger Agreement. The Company must pay BorgWarner the termination fee in the event that the Merger Agreement is terminated by BorgWarner following a change of recommendation by the board of directors of the Company or if the Company terminates the Merger Agreement to enter into a Superior Proposal, in each case, as is described in further detail in the Merger Agreement. Under certain additional circumstances described in the Merger Agreement, the Company must also pay BorgWarner the termination fee if the Merger Agreement is terminated and, within twelve months following such termination, (i) the Company enters into a definitive agreement for, or consummates, a transaction of the type described in the relevant provisions of the Merger Agreement, or (ii) the Company’s board of directors recommends to stockholders an alternative acquisition proposal for a transaction of the type described in the relevant provisions of the Merger Agreement and, subsequent to making such recommendation, consummates the proposal so recommended to Company stockholders. In addition, under certain circumstances described in the Merger Agreement, the Company must also pay BorgWarner the expense reimbursement amount if the Merger Agreement is terminated. The termination fee is $1,600,000 if it becomes payable in connection with a Superior Proposal on or prior to 11:59 p.m., Chicago Time, on August 31, 2017 (and in certain other limited circumstances described in the Merger Agreement), and, otherwise, the termination fee is $4,800,000. The expense reimbursement amount is $2,400,000.
The parties to the Merger Agreement are also entitled to an injunction or injunctions to prevent breaches of the Merger Agreement, and to enforce specifically the terms of the Merger Agreement.
In addition, concurrently with the execution of the Merger Agreement, Company stockholders Meson Capital LP, Meson Constructive Capital LP and Ryan J. Morris (which we refer to collectively as Meson Capital) and Bassi Holding S.r.l. entered into separate voting and support agreements with BorgWarner. Under the voting and support agreements, Meson Capital and Bassi Holding S.r.l agreed, on the terms and subject to the conditions set forth in the voting and support agreements, to vote all Company shares owned by them in favor of the adoption of the Merger Agreement and the Charter Amendment and the approval of the transactions contemplated by the Merger Agreement, including the Merger, and any other matter to be approved by the stockholders of the Company to facilitate such transactions. In addition, they agreed not to vote in favor of any alternative transactions, and to be subject to the restrictions on the solicitation or initiation of other acquisition proposals and on engaging in discussions regarding such proposals as are applicable to the Company’s representatives pursuant to the Merger Agreement, and certain restrictions on the transfer of shares of our Common Shares or Preferred Shares. Also, each of our directors (other than Ryan J. Morris, who executed a voting and support agreement in his capacity as a principal of Meson Capital) and our director emeritus entered into separate support agreements with BorgWarner, in which they agreed, on the terms and subject to the conditions set forth in the support agreements, to be subject to the restrictions on the solicitation or initiation of other acquisition proposals and on engaging in discussions regarding such proposals as are applicable to the Company’s representatives pursuant to the merger agreement, and certain restrictions on the transfer of our Common Shares or Preferred Shares. Each of the voting and support agreements and the support agreements automatically terminates upon the termination of the Merger Agreement.
The board of directors of the Company unanimously (i) approved and declared advisable the Merger Agreement and the transactions contemplated by the Merger Agreement, including the Merger, upon the terms and subject to the conditions set forth therein, and the Charter Amendment, (ii) determined that the Merger Agreement, the Charter Amendment and the transactions contemplated by the Merger Agreement, including the Merger, are fair to, and in the best interests of, the Company and its stockholders and (iii) adopted a resolution recommending that the Merger Agreement and the Charter Amendment be adopted by the stockholders of the Company in accordance with the provisions of the Delaware General Corporation Law.
(3)
|
Summary of significant accounting policies
|
There have been no changes since the end of 2016 to the significant accounting policies followed by Sevcon, Inc. and subsidiaries.
Bassi Unipersonale S.r.l (“Bassi”)
On January 26, 2016, the Company acquired Bassi which designs, manufactures and sells battery chargers for electric vehicles, power management and uninterrupted power source systems for industrial, medical and telecom applications, as well as electronic instrumentation for battery laboratories. This acquisition enables the Company to expand its addressable share of the high-growth electrification market and enhance earnings by adding an immediately accretive business. The total consideration for the transaction was approximately $19,100,000 which consisted of approximately $10,800,000 cash, $4,800,000 value of the Company’s common stock and $3,500,000 at fair value of assumed dividends payable to Bassi Holding, the former owner of Bassi. The Company acquired approximately $10,200,000 of intangible assets, which primarily consisted of customer relationships, $6,400,000 of goodwill and $2,500,000 of other assets, net of liabilities. The Company is required to distribute approximately $3,500,000 of assumed dividends in increments over a three-year period, post-closing.
The Company accounted for this acquisition as a business combination using the acquisition method of accounting. During the three and nine-month periods ended July 1, 2017 the Company recognized no expense for acquisition-related items. During the three and nine-month periods ended July 2, 2016 the Company recognized expense for acquisition-related items, of $8,000 and $1,425,000 respectively.
For more information on this acquisition, refer to Note 2 to the consolidated financial statements included in the Company’s 2016 10-K.
Pro Forma Summary
The unaudited consolidated pro forma results for the three and nine-month periods ended July 1, 2017 and July 2, 2016 are shown below. The pro forma consolidated results combine the results of operations of the Company and Bassi as though Bassi had been acquired on October 1, 2015 and include amortization charges for the acquired intangibles and interest expense related to the Company’s borrowings to finance the acquisition. The unaudited pro forma results for the three and nine-month periods ended July 2, 2016 were adjusted to include $279,000 and $814,000 respectively, of intangible assets amortization expense associated with the business combination and $129,000 and $382,000, respectively, of interest expense relating to the credit facility entered into in order to partially fund the Bassi acquisition, and to exclude $8,000 and $1,425,000, respectively, of acquisition-related expense. The unaudited pro forma results for the three and nine-month periods ended July 1, 2017 were adjusted to exclude $1,100,000 of transaction costs.
The unaudited pro forma financial information is presented for informational purposes only and is not necessarily indicative of the results of operations that would have been achieved if the acquisition had taken place on October 1, 2015.
|
|
(in thousands of dollars)
|
|
|
|
Three Months ended
|
|
|
Nine Months ended
|
|
|
|
July 1,
2017
|
|
|
July 2,
2016
|
|
|
July 1,
2017
|
|
|
July 2,
2016
|
|
Revenue
|
|
$
|
18,556
|
|
|
$
|
13,913
|
|
|
$
|
46,771
|
|
|
$
|
41,446
|
|
Net loss
|
|
|
(1,805
|
)
|
|
|
(1,072
|
)
|
|
|
(6,550
|
)
|
|
|
(1,394
|
)
|
(5)
|
Stock-based compensation plans
|
Under the Company’s 1996 Equity Incentive Plan (the “Plan”) there were 69,641 shares reserved and available for grant at July 1, 2017. There were 12,165 options exercised in 2017.
The Plan, which is shareholder-approved, permits the grant of restricted stock, restricted stock units, stock options and stock appreciation rights (“SARs”). SARs may be awarded either separately, or in relation to options granted, and for the grant of bonus shares. Options granted are exercisable at a price not less than fair market value on the date of grant.
Stock options
The Company estimated the fair values of its stock options using the Black-Scholes-Merton option-pricing model, which was developed for use in estimating the fair values of stock options. Option valuation models, including the Black-Scholes-Merton option-pricing model, require the input of assumptions, including stock price volatility. Changes in the input assumptions can materially affect the fair value estimates and ultimately how much the Company recognizes as stock-based compensation expense. The fair values of the Company’s stock options were estimated at the grant dates.
The weighted average input assumptions used and resulting fair values of stock options previously issued at July 1, 2017, were as follows:
|
|
July 1, 2017
|
|
|
|
|
|
Performance based stock options:
|
|
|
|
|
|
|
|
Expected life (in years)
|
|
|
4.0
|
|
Risk-free interest rate
|
|
|
1.64
|
%
|
Volatility
|
|
|
62.16
|
%
|
Dividend yield
|
|
|
0.00
|
%
|
Weighted-average fair value per share
|
|
$
|
8.38
|
|
Expected Life
The expected term represents the period of time that options are expected to be outstanding. As the Company does not have sufficient historical evidence for determining the expected term of the stock option awards granted, the expected life assumption has been determined using the simplified method, which is an average of the contractual term of the option and its ordinary vesting period.
Risk-free Interest Rate
The Company bases the risk-free interest rate assumption on zero-coupon U.S. treasury instruments appropriate for the expected term of the stock option grants.
Expected Volatility
The expected stock price volatility for the Company’s common stock is estimated based on the historic volatility of the Company’s common stock for a period equivalent to the expected term of the stock option grants.
Expected Dividend Yield
The Company bases the expected dividend yield assumption on the fact that there is no present intention to pay cash dividends. Therefore an expected dividend yield of zero has been used.
Performance-based awards
Stock options:
In December 2015, the Compensation Committee awarded performance-based equity compensation to nine executives and managers, including the principal executive officer and principal financial officer, consisting of 38,460 shares in the form of stock options. The performance options have an exercise price of $9.94 per share, representing the average of the highest intraday bid and ask quotes for the Company’s common stock on the date of grant, December 16, 2015, and the preceding four trading days. The performance options will vest subject to the Company meeting an earnings per share target applicable to fiscal year 2018 set by the Compensation Committee so long as the employee is then employed by the Company. The Company estimated the fair value of its stock options using the Black-Scholes-Merton option-pricing model. The estimated fair value of the stock options on the date of the grant was $185,000 and is being recognized over the requisite service period of the award. The unrecognized compensation is being expensed over three years. The expense for these employee stock option grants was $14,844 and $43,663 for the three and nine-month periods ended July 1, 2017, respectively. The expense for these employee stock option grants was $13,505 and $29,766 for the three and nine-month periods ended July 2, 2016, respectively.
In February 2017, the Compensation Committee awarded performance-based equity compensation to five executives and managers, consisting of 2,800 shares in the form of stock options. The performance options have an exercise price of $11.86 per share, representing the average of the highest intraday bid and ask quotes for the Company’s common stock on the date of grant, February 7, 2017, and the preceding four trading days. The performance options will vest on the later of the third anniversary of the grant date or the date the Compensation Committee determines that the Company has met the earnings per share target for fiscal year 2018. The Company estimated the fair value of its stock options using the Black-Scholes-Merton option-pricing model. The estimated fair value of the stock options on the date of the grant was $7,000 and is being recognized over the requisite service period of the award. The unrecognized compensation is being expensed over three years. The expense for these employee stock option grants was $1,762 and $2,772 for the three and nine-month periods ended July 1, 2017, respectively.
A summary of performance-based option activity under the Plan as of July 1, 2017, and changes during the nine months then ended, is presented below:
|
|
Shares
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Weighted
Average
Remaining
Contractual
Term
(Years)
|
|
|
Aggregate
Intrinsic
Value
|
|
Outstanding as of September 30, 2016
|
|
|
38,460
|
|
|
$
|
9.94
|
|
|
|
4.21
|
|
|
$
|
-
|
|
Granted
|
|
|
2,800
|
|
|
|
11.86
|
|
|
|
2.86
|
|
|
|
-
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Forfeited or Expired
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Outstanding at July 1, 2017
|
|
|
41,260
|
|
|
$
|
10.07
|
|
|
|
3.54
|
|
|
$
|
-
|
|
Exercisable
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Vested and expected to vest
|
|
|
38,693
|
|
|
$
|
10.07
|
|
|
|
3.54
|
|
|
$
|
-
|
|
Restricted stock:
In December 2015, the Company granted 11,540 shares of restricted stock to four employees which will vest subject to the Company achieving the same earnings per share target applicable to fiscal year 2018 as for the stock options disclosed above, so long as the employee is then employed by the Company. The estimated fair value of the stock on the date of the grant was $116,000 based on the fair market value of stock on the date of issue. The unrecognized compensation is being expensed over three years. Management has assessed the performance criteria relating to these grants and concluded they are likely to be met. Accordingly, the relevant portion of the expense has been recorded through July 1, 2017. The expense for these restricted stock grants was $9,301 and $27,358 for the three and nine-month periods ended July 1, 2017, respectively. The expense for these grants was $8,080 and $17,877 for the three and nine-month periods ended July 2, 2016, respectively.
In March 2017, the Company granted 80,000 shares of restricted stock to two executives, which will vest subject to the Company achieving one or both financial targets for the 2017, 2018 and 2019 fiscal years. The shares of restricted stock shall be divided into six equal tranches (two per year). The estimated fair value of the stock on the date of the grant was $1,106,534 based on the fair market value of stock on the date of issue. The unrecognized compensation is being expensed over three years. Management has assessed the performance criteria relating to these grants and concluded they are likely to be met. Accordingly, the relevant portion of the expense has been recorded through July 1, 2017. The expense for these restricted stock grants was $202,332 and $259,391 for the three and nine-month periods ended July 1, 2017, respectively.
Time-based awards
Stock options:
In August 2016, the Board of Directors awarded the Executive Chairman equity compensation consisting of stock options to purchase 56,700 shares. The options were granted in two tranches. The first tranche, consisting of 36,496 options with an exercise price of $10.93 per share, would vest in twelve substantially equal monthly installments beginning September 2016, and the second tranche, consisting of 20,204 options with an exercise price of $12.35 per share, would vest in twelve substantially equal monthly installments beginning September 2017, in each case so long as the director is in the position of Executive Chairman. The Company estimated the fair value of its stock options using the Black-Scholes-Merton option-pricing model. The estimated fair value of the stock options on the date of the grant was $211,000. The Executive Chairman position was terminated on December 6, 2016, as a result of which 12,165 vested options were exercisable for three months, and all un-vested options expired. On February 7, 2017 the director exercised 12,165 options via a cashless exercise in which 8,474 shares were surrendered to pay the exercise price. In the three months ended July 1, 2017 there was a reversal of expense of $9,694 and in the nine months ended July 1, 2017 there was an expense of $20,890, in respect of these stock options grants.
A summary of time-based option activity under the Plan as of July 1, 2017, and changes during the nine months then ended, is presented below:
|
|
Shares
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Weighted
Average
Remaining
Contractual
Term
(Years)
|
|
|
Aggregate
Intrinsic
Value
|
|
Outstanding at September 30, 2016
|
|
|
12,165
|
|
|
$
|
10.93
|
|
|
|
4.08
|
|
|
$
|
-
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Exercised
|
|
|
(12,165
|
)
|
|
|
(10.93
|
)
|
|
|
-
|
|
|
|
-
|
|
Outstanding at July 1, 2017
|
|
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
|
$
|
-
|
|
Exercisable
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Vested
|
|
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
|
$
|
-
|
|
Restricted stock:
In February 2016, the Company granted 29,700 shares of restricted stock, representing 3,300 shares to each of the non-employee directors and the then emeritus directors of the Company, 26,400 of which vested on February 6, 2017. The aggregate fair value of the stock measured on the date of the grant was $292,000 based on the closing sale price of the stock on the date of grant. Compensation expense was recognized on a straight-line basis over the twelve-month period to February 2017. The expense for these restricted stock grants was $0 and $108,020 for the three and nine-month periods ended July 1, 2017, respectively. The expense for these restricted stock grants was $64,812 and $86,416 for the three and nine-month periods ended July 2, 2016, respectively.
In February 2017, the Company granted 145,000 shares of restricted stock to eleven employees, which will vest one-third each year on the third business day after the announcement of the Company’s results for the first quarter of fiscal 2018, 2019 and 2020. The aggregate fair value of the stock measured on the date of the grant was $2,039,020 based on the closing sale price of the stock on the date of grant. Compensation expense is being recognized on a straight-line basis over the period during which the forfeiture conditions lapse. The expense for these restricted stock grants was $169,918 and $226,558 for the three and nine-month periods ended July 1, 2017, respectively.
In February 2017, the Company granted 24,800 shares of restricted stock, representing 3,100 shares to each of the non-employee directors and the emeritus director of the Company, which will vest on the day before the 2018 annual general meeting providing that the grantee remains a director or an emeritus director of the Company, or as otherwise determined by the Compensation Committee. The aggregate fair value of the stock measured on the date of the grant was $344,244 based on the closing sale price of the stock on the date of grant. Compensation expense is being recognized on a straight-line basis over the twelve-month period during which the forfeiture conditions lapse. The expense for these restricted stock grants was $86,056 and $114,741 for the three and nine-month periods ended July 1, 2017, respectively.
In March 2017, the Company granted 12,800 shares of restricted stock representing 1,600 shares to each of the non-employee directors and the emeritus director of the Company, which will vest on the day before the 2018 annual general meeting providing that the grantee remains a director or an emeritus director of the Company, or as otherwise determined by the Compensation Committee. The aggregate fair value of the stock measured on the date of the grant was $192,000 based on the closing sale price of the stock on the date of grant. Compensation expense is being recognized on a straight-line basis over the twelve-month period during which the forfeiture conditions lapse. The expense for these restricted stock grants was $48,000 and $64,000 for the three and nine-month periods ended July 1, 2017, respectively.
For the purposes of calculating average issued shares for basic earnings per share, these shares are only considered to be outstanding when the forfeiture conditions lapse and the shares vest.
A summary of restricted stock and stock option activity, including both performance-based awards and time-based awards, for the nine-month period ended July 1, 2017, is as follows:
|
|
Number of shares of
Restricted Stock
|
|
|
Weighted Average
Grant-Date Fair
Value
|
|
Non-vested balance as of September 30, 2016
|
|
|
138,940
|
|
|
$
|
6.50
|
|
Granted
|
|
|
262,600
|
|
|
$
|
15.03
|
|
Vested
|
|
|
(86,400
|
)
|
|
$
|
7.44
|
|
Non-vested balance as of July 1, 2017
|
|
|
315,140
|
|
|
$
|
13.35
|
|
|
|
Number of shares
subject to Stock
Options
|
|
|
Weighted Average
Grant-Date Fair
Value
|
|
Non-vested balance as of September 30, 2016
|
|
|
50,625
|
|
|
$
|
4.67
|
|
Granted
|
|
|
2,800
|
|
|
$
|
2.65
|
|
Exercised
|
|
|
(12,165
|
)
|
|
$
|
4.39
|
|
Non-vested balance as of July 1, 2017
|
|
|
41,260
|
|
|
$
|
4.62
|
|
Stock-based compensation expense was $555,000 and $1,037,000 for the three and nine-month periods ended July 1, 2017, respectively. Stock-based compensation expense was $169,000 and $527,000 for the three and nine-month periods ended July 2, 2016, respectively. At July 1, 2017, there was approximately $3,237,000 of unrecognized compensation expense related to restricted stock granted under the Plan. The Company expects to recognize that cost over a weighted average period of 2 years.
Under the merger agreement with BorgWarner, at the effective time of the merger, each share of restricted stock and each stock option will be cancelled and converted into the right to receive (a) for each share of restricted stock, $22.00, and (b) for each share subject to an option, an amount equal to the excess of $22.00 over the applicable per share exercise price of the option, in each case less any applicable withholding taxes. Payment of the foregoing amounts will be made (a) for options and restricted stock that would have vested in accordance with their terms at the effective time of the merger or on or before December 31, 2018 (assuming the holder’s continued employment or service and achievement of any applicable performance-based vesting conditions), the payment will be made promptly following the effective time of the merger, and (b) for options and restricted stock that, in accordance with their terms, would not vest at the effective time of the merger and would have vested on or after January 1, 2019 (assuming the holder’s continued employment or service through the date on which the options are scheduled to become vested and the achievement of any applicable performance based vesting conditions), the payment will vest and become payable in accordance with the vesting schedule applicable to the original award, except that any performance-based vesting conditions applicable to such award will no longer apply and the award will be treated as subject to service-based vesting only, with vesting occurring at the time the original performance vesting condition could have been satisfied. Accordingly, payment will be made promptly following the effective time of the merger with respect to approximately 71% of the shares subject to outstanding stock options and restricted stock awards, and payment will be deferred consistently with the existing vesting provisions with respect to approximately 29% of the shares subject to outstanding stock options and restricted stock awards. With respect to the options and restricted stock awards for which payment will be deferred, pro rata option payments may be made in connection with certain qualifying terminations of employment.
(6)
|
Common Stock Warrants
|
Sevcon entered into a Securities Purchase Agreement with certain institutional and accredited investors on July 6, 2016 in which the Company sold and issued 1,124,000 units at $9.12 per unit. Each unit consists of 1 share of common stock and 0.5 warrant to purchase 1 share of common stock for $10.00 exercise price per warrant share. The closing date of this transaction was July 8, 2016, which resulted in the Company receiving $10,250,880 of gross proceeds. The investors received 1,124,000 shares of common stock and warrants to purchase 562,000 shares of common stock.
The Company has analyzed the warrants under FASB Accounting Standards Codification Topic 480,
Distinguishing Liabilities From Equity
and other relevant literature, and determined that the warrants meet the criteria for classification as equity instruments. The Company estimated the fair value of the warrants using the Black-Scholes-Merton option-pricing model and recorded them in stockholders’ equity with an offset to additional paid in capital recorded from the sale of the units.
In February 2017, a warrant holder exercised the right to purchase 2,741 shares of common stock of the Company at the exercise price of $10.00 per share. Accordingly, the Company issued 2,741 shares of common stock for cash proceeds of $27,410.
Common stock dividends –
The Board of Directors suspended common stock dividends in 2009.
Preferred Stock dividends -
At July 1, 2017 there were 422,433 shares of Series A Convertible Preferred Stock issued and outstanding. The preferred stock, which has a stated value of $24 per share, pays a 4% cumulative annual dividend semi-annually on October 15 and April 15 each year. A semi-annual dividend of $207,018 was paid on April 17, 2017. The next semi-annual dividend will be paid on October 16, 2017, or immediately before the closing under the Merger Agreement, if earlier.
(8)
|
Calculation of earnings per share and weighted average shares outstanding
|
Basic earnings per share is computed by dividing the net income or loss for the period by the weighted average number of shares of common stock outstanding during the period. The computation of diluted earnings per share is similar to the computation of basic earnings per share, except that the denominator is increased for the assumed exercise of dilutive options and other potentially dilutive securities, including convertible preferred stock, using the treasury stock method unless the effect is anti-dilutive.
For the calculation of basic and diluted net loss per common share for the three-month period ended July 1, 2017, approximately 1,267,000 shares of common stock issuable on conversion of our Series A Convertible Preferred Stock, approximately 315,000 shares of un-vested restricted stock and approximately 41,000 outstanding stock options were not included in the computation of diluted earnings per share because that would have been anti-dilutive for the period presented.
For the calculation of basic and diluted net loss per common share for the nine-month period ended July 1, 2017, approximately 1,302,000 shares of common stock issuable on conversion of our Series A Convertible Preferred Stock, approximately 209,000 shares of un-vested restricted stock and approximately 46,000 outstanding stock options were not included in the computation of diluted earnings per share because that would have been anti-dilutive for the period presented.
Basic and diluted net loss per common share for the three and nine-month periods ended July 1, 2017 and July 2, 2016, is calculated as follows:
|
|
(in thousands of dollars except per share data)
|
|
|
|
Three months ended
|
|
|
Nine months ended
|
|
|
|
July 1,
2017
|
|
|
July 2,
2016
|
|
|
July 1,
2017
|
|
|
July 2,
2016
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to common stockholders
|
|
$
|
(2,993
|
)
|
|
$
|
(1,538
|
)
|
|
$
|
(7,802
|
)
|
|
$
|
(3,221
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares used in calculating net loss per ordinary share - basic
|
|
|
5,366
|
|
|
|
4,070
|
|
|
|
5,291
|
|
|
|
3,828
|
|
Weighted average shares used in calculating net loss per ordinary share - diluted
|
|
|
5,366
|
|
|
|
4,070
|
|
|
|
5,291
|
|
|
|
3,828
|
|
Net loss per ordinary share - basic
|
|
$
|
(0.56
|
)
|
|
$
|
(0.38
|
)
|
|
$
|
(1.47
|
)
|
|
$
|
(0.84
|
)
|
Net loss per ordinary share - diluted
|
|
$
|
(0.56
|
)
|
|
$
|
(0.38
|
)
|
|
$
|
(1.47
|
)
|
|
$
|
(0.84
|
)
|
The Company has three reportable segments: controls, capacitors and chargers. The controls segment produces microprocessor based control systems for zero-emission and hybrid electric vehicles. The capacitors segment produces special-metalized film capacitors for sale to electronic equipment manufacturers. The chargers segment designs and manufactures battery chargers for electric vehicles. Each segment has its own management team and sales force and the capacitors and battery chargers segments have their own manufacturing facilities.
The significant accounting policies of the segments are the same as those described in Note 3 and in 2016 10-K Note 1. 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 corporate expense, acquisition expenses, interest expense, foreign currency translation gain/losses, interest income or income taxes to segments.
Information concerning operations of the reportable segments is as follows:
|
|
|
|
|
(in thousands of dollars)
|
|
|
|
|
|
|
Three months ended July 1, 2017
|
|
|
|
Controls
|
|
|
Capacitors
|
|
|
Chargers
|
|
|
Corporate
|
|
|
Total
|
|
Sales
|
|
|
9,822
|
|
|
|
500
|
|
|
|
8,234
|
|
|
|
-
|
|
|
|
18,556
|
|
Operating income (loss)
|
|
|
(2,497
|
)
|
|
|
64
|
|
|
|
520
|
|
|
|
(1,375
|
)
|
|
|
(3,288
|
)
|
Identifiable assets, excluding goodwill
|
|
|
34,561
|
|
|
|
962
|
|
|
|
23,449
|
|
|
|
1,672
|
|
|
|
60,644
|
|
Goodwill
|
|
|
1,435
|
|
|
|
-
|
|
|
|
6,707
|
|
|
|
-
|
|
|
|
8,142
|
|
|
|
|
|
|
Three months ended July 2, 2016
|
|
|
|
Controls
|
|
|
Capacitors
|
|
|
Chargers
|
|
|
Corporate
|
|
|
Total
|
|
Sales
|
|
|
8,462
|
|
|
|
405
|
|
|
|
5,046
|
|
|
|
-
|
|
|
|
13,913
|
|
Operating income (loss)
|
|
|
(511
|
)
|
|
|
(5
|
)
|
|
|
(257
|
)
|
|
|
(158
|
)
|
|
|
(931
|
)
|
Identifiable assets, excluding goodwill
|
|
|
38,149
|
|
|
|
901
|
|
|
|
8,715
|
|
|
|
3,853
|
|
|
|
51,618
|
|
Goodwill
|
|
|
1,435
|
|
|
|
-
|
|
|
|
7,169
|
|
|
|
-
|
|
|
|
8,604
|
|
|
|
|
|
|
(in thousands of dollars)
|
|
|
|
|
|
|
Nine months ended July 1, 2017
|
|
|
|
Controls
|
|
|
Capacitors
|
|
|
Chargers
|
|
|
Corporate
|
|
|
Total
|
|
Sales
|
|
|
25,043
|
|
|
|
1,193
|
|
|
|
20,535
|
|
|
|
-
|
|
|
|
46,771
|
|
Operating income (loss)
|
|
|
(6,641
|
)
|
|
|
86
|
|
|
|
708
|
|
|
|
(2,181
|
)
|
|
|
(8,028
|
)
|
Identifiable assets, excluding goodwill
|
|
|
34,561
|
|
|
|
962
|
|
|
|
23,449
|
|
|
|
1,672
|
|
|
|
60,644
|
|
Goodwill
|
|
|
1,435
|
|
|
|
-
|
|
|
|
6,707
|
|
|
|
-
|
|
|
|
8,142
|
|
|
|
|
|
|
Nine months ended July 2, 2016
|
|
|
|
Controls
|
|
|
Capacitors
|
|
|
Chargers
|
|
|
Corporate
|
|
|
Total
|
|
Sales
|
|
|
25,968
|
|
|
|
1,215
|
|
|
|
9,026
|
|
|
|
-
|
|
|
|
36,209
|
|
Operating income (loss)
|
|
|
(449
|
)
|
|
|
(61
|
)
|
|
|
9
|
|
|
|
(1,921
|
)
|
|
|
(2,422
|
)
|
Identifiable assets, excluding goodwill
|
|
|
38,149
|
|
|
|
901
|
|
|
|
8,715
|
|
|
|
3,853
|
|
|
|
51,618
|
|
Goodwill
|
|
|
1,435
|
|
|
|
-
|
|
|
|
7,169
|
|
|
|
-
|
|
|
|
8,604
|
|
Revenues by region below are based on the location of the business selling the products rather than the destination of the products.
|
|
(in thousands of dollars)
|
|
|
|
Three Months ended
|
|
|
Nine Months ended
|
|
|
|
July 1,
2017
|
|
|
July 2,
2016
|
|
|
July 1,
2017
|
|
|
July 2,
2016
|
|
U.S. sales
|
|
$
|
5,283
|
|
|
$
|
3,924
|
|
|
$
|
13,481
|
|
|
$
|
11,621
|
|
Foreign sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.K.
|
|
|
2,342
|
|
|
|
2,518
|
|
|
|
6,171
|
|
|
|
9,225
|
|
Italy
|
|
|
7,975
|
|
|
|
5,046
|
|
|
|
20,162
|
|
|
|
9,026
|
|
France
|
|
|
2,272
|
|
|
|
2,307
|
|
|
|
5,672
|
|
|
|
5,840
|
|
China
|
|
|
684
|
|
|
|
118
|
|
|
|
1,285
|
|
|
|
497
|
|
Total foreign sales
|
|
|
13,273
|
|
|
|
9,989
|
|
|
|
33,290
|
|
|
|
24,588
|
|
Total sales
|
|
$
|
18,556
|
|
|
$
|
13,913
|
|
|
$
|
46,771
|
|
|
$
|
36,209
|
|
Long-term assets by region below are as follows:
|
|
(in thousands of dollars)
|
|
|
|
July 1, 2017
|
|
|
September 30, 2016
|
|
U.S. long-term assets:
|
|
$
|
2,490
|
|
|
$
|
2,224
|
|
Foreign long-term assets:
|
|
|
|
|
|
|
|
|
U.K.
|
|
|
7,919
|
|
|
|
5,891
|
|
Italy
|
|
|
16,934
|
|
|
|
16,580
|
|
France
|
|
|
374
|
|
|
|
302
|
|
Korea, Japan, China
|
|
|
461
|
|
|
|
388
|
|
Canada
|
|
|
39
|
|
|
|
-
|
|
Total foreign long-term assets
|
|
|
25,727
|
|
|
|
23,161
|
|
Total long-term assets
|
|
$
|
28,217
|
|
|
$
|
25,385
|
|
(10)
|
Research and development
|
The cost of research and development programs is charged against income as incurred and amounted to $2,465,000 and $5,733,000 for the three and nine-month periods ended July 1, 2017, respectively, net of U.K. government grants received, “above the line” tax credits arising from U.K. government research and development incentives as well as research and development expense associated with engineering services revenue recorded in cost of sales. The cost of research and development programs amounted to $1,212,000 and $3,419,000 for the three and nine-month periods ended July 2, 2016, respectively, net of U.K. government grants received, “above the line” tax credits arising from U.K. government research and development incentives as well as research and development expense associated with engineering services revenue recorded in cost of sales.
In 2015 the Company was awarded a grant of approximately $625,000 by the U.K. Regional Growth Fund, a U.K. government body. The grant is to develop an innovative range of low voltage motor controls which are designed to serve the emerging needs for on-road, automotive electrification. The grant includes a commitment to create or safeguard a total of twenty jobs at the Company’s U.K. facility over the period of the project. The Company recorded grant income from this project of $0 and incurred research and development expense on this project of $0 for the three months ended July 1, 2017. The Company recorded grant income from this project of $281,000, which was offset against the Company’s research and development expense on this project of $1,206,000, for the nine months ended July 1, 2017. The Company recorded grant income from this project of $21,000, which was offset against the Company’s research and development expense on this project of $90,000, for the three months ended July 2, 2016. The Company recorded grant income from this project of $115,000, which was offset against the Company’s research and development expense on this project of $392,000, for the nine months ended July 2, 2016.
During 2015 through 2017, the Company participated in a U.K. government research and development arrangement which allows U.K. companies to receive an additional available tax credit subject to meeting certain qualifying conditions. The credit is a percentage, which currently ranges from 11% to 14.5% depending on circumstances, of qualifying research and development expenditure in the period. The credit discharges income tax the Company would have to pay or allows companies without an income tax liability to receive a refund payment from the U.K. government. For the three and nine months ended July 1, 2017 the Company recorded $264,000 (three months ended July 2, 2016 - $0) and $615,000 (nine months ended July 2, 2016 - $0), respectively, as a reduction in research and development expense in the unaudited consolidated statements of operations. The Company had an income tax receivable balance of $1,211,000 at July 1, 2017 from this initiative (September 30, 2016 - $985,000), which is included within prepaid expenses and other current assets on the unaudited consolidated balance sheets.
The Company’s effective tax rate of 12.8% is significantly lower than the U.S. statutory rate of 34%, primarily due to the fact that certain current year operating losses in the U.K. have been foregone in exchange for a cash refund, and in addition the local statutory rate in certain countries in which the Company operates, notably the U.K. (19%) and Italy, (24%), is lower than the U.S. statutory rate.
During the nine-month period ended July 1, 2017, the Company’s deferred tax assets increased by $1,427,000. The Company continues to assess the need for a valuation allowance against these assets. In assessing the continuing need for a valuation allowance the Company has assessed the available means of recovering its deferred tax assets, including the ability to carryback net operating losses, the existence of reversing temporary differences, the availability of tax planning strategies, and available sources of future taxable income, including a revised estimate of future sources of pre-tax income. The Company has historically had profitable operations. The Company’s current projections reflect future profitable operations. Since the majority of the Company’s deferred tax assets relate to operations in countries where net operating losses have unlimited carry forwards, the Company has concluded that no valuation allowance is required on these deferred tax assets.
During the second quarter of 2017, the U.S. Internal Revenue Service initiated an audit of the Company’s U.S. federal income tax return for the period ended September 30, 2015. This audit was completed during the third quarter of 2017, resulting in a small assessment of tax payable by the Company.
(12)
|
Employee benefit plans
|
Sevcon has defined contribution plans covering the majority of its U.S. and U.K. employees in the controls business. There is also a small defined contribution plan covering senior managers in the capacitors business. The Company has frozen U.K. and U.S. defined benefit plans for which no future benefits are being earned by employees. The Company uses a September 30 measurement date for its defined benefit pension plans.
The Company’s French subsidiary, Sevcon S.A.S., has a liability to pay its employees a service and salary-based award when they leave the Company’s employment at retirement age. This unfunded liability, recorded in accrued expenses, was $227,000 and $198,000 at July 1, 2017 and September 30, 2016, respectively. The obligation to pay this award is a French legal requirement.
The Company’s Italian subsidiary, Bassi S.r.l., has a liability to pay its employees a severance indemnity, ‘Trattamento di fine Rapporto’ (“TFR”) when they leave the Company’s employment. TFR, which is mandatory for Italian companies, is deferred compensation and is based on the employees’ years of service and the compensation earned by the employee during the service period. This unfunded liability, recorded in other long-term liabilities, was $1,075,000 and $987,000 at July 1, 2017 and September 30, 2016, respectively.
The following table sets forth the components of the net pension cost for the three and nine-month periods ended July 1, 2017 and July 2, 2016, respectively:
|
|
(in thousands of dollars)
|
|
|
|
Three Months ended
|
|
|
Nine Months ended
|
|
|
|
July 1,
2017
|
|
|
July 2,
2016
|
|
|
July 1,
2017
|
|
|
July 2,
2016
|
|
Interest cost
|
|
$
|
201
|
|
|
$
|
304
|
|
|
$
|
621
|
|
|
$
|
885
|
|
Service cost
|
|
|
-
|
|
|
|
49
|
|
|
|
-
|
|
|
|
82
|
|
Expected return on plan assets
|
|
|
(272
|
)
|
|
|
(281
|
)
|
|
|
(770
|
)
|
|
|
(846
|
)
|
Amortization of net loss
|
|
|
93
|
|
|
|
128
|
|
|
|
271
|
|
|
|
278
|
|
Net periodic benefit cost
|
|
|
22
|
|
|
|
200
|
|
|
|
122
|
|
|
|
399
|
|
Cost of defined contribution plans
|
|
$
|
122
|
|
|
$
|
105
|
|
|
$
|
360
|
|
|
$
|
388
|
|
Net cost of all employee benefit plans
|
|
$
|
144
|
|
|
$
|
305
|
|
|
$
|
482
|
|
|
$
|
787
|
|
The following table sets forth the movement in the liability for pension benefits, all of which is non-current, in the nine-month period ended July 1, 2017:
|
|
(in thousands of dollars)
|
|
|
|
Nine Months ended
|
|
|
|
July 1,
2017
|
|
Liability for pension benefits at beginning of period
|
|
$
|
11,511
|
|
Interest cost
|
|
|
621
|
|
Expected return on plan assets
|
|
|
(770
|
)
|
Plan contributions
|
|
|
(621
|
)
|
Effect of exchange rate changes
|
|
|
(39
|
)
|
Liability for pension benefits at end of period
|
|
|
10,702
|
|
Sevcon, Inc. contributed $150,000 to its frozen U.S. defined benefit plan in the nine months ended July 1, 2017; it presently anticipates contributing an additional $50,000 to fund its U.S. plan during the remainder of fiscal 2017. In addition, employer contributions to the frozen U.K. defined benefit plan were $471,000 in the first nine months and are estimated to total $666,000 in 2017.
The tables below present information about the Company’s pension plan assets measured and recorded at fair value as of July 1, 2017 and September 30, 2016, and indicate the fair value hierarchy of the inputs utilized by the Company to determine the fair values.
|
|
(in thousands of dollars)
|
|
July 1, 2017
|
|
Level 1*
(Quoted prices in
active
markets)
|
|
|
Level 2**
(Significant
observable
inputs)
|
|
|
Level 3***
(Unobservable
inputs)
|
|
|
|
|
|
|
|
|
|
|
|
Adept Strategy 9 Fund (a sub-fund of Adept Investment Management plc)
|
|
$
|
-
|
|
|
$
|
12,808
|
|
|
$
|
-
|
|
Schroder Matching Plus Nominal and Index Linked Liability Driven Investment Swap Funds (funds managed by Schroder Investment Management Limited)
|
|
|
-
|
|
|
|
4,519
|
|
|
|
-
|
|
U.S. Mutual Funds and Fixed Income Funds
|
|
|
3,077
|
|
|
|
-
|
|
|
|
-
|
|
U.S. Equity Funds
|
|
|
447
|
|
|
|
-
|
|
|
|
-
|
|
Other Types of Investments
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Cash
|
|
|
214
|
|
|
|
-
|
|
|
|
-
|
|
Total Pension Plan Assets – Fair Value
|
|
$
|
3,738
|
|
|
$
|
17,327
|
|
|
$
|
-
|
|
|
|
(in thousands of dollars)
|
|
September 30, 2016
|
|
Level 1*
(Quoted prices in
active markets)
|
|
|
Level 2**
(Significant
observable
inputs)
|
|
|
Level 3***
(Unobservable
inputs)
|
|
Adept Strategy 9 Fund (a sub-fund of Adept Investment Management plc)
|
|
$
|
-
|
|
|
$
|
13,268
|
|
|
$
|
-
|
|
Schroder Matching Plus Nominal and Index Linked Liability Driven Investment Swap Funds (funds managed by Schroder Investment Management Limited)
|
|
|
-
|
|
|
|
5,335
|
|
|
|
-
|
|
U.S. Mutual Funds and Fixed Income Funds
|
|
|
2,837
|
|
|
|
-
|
|
|
|
-
|
|
U.S. Equity Funds
|
|
|
400
|
|
|
|
-
|
|
|
|
-
|
|
Other Types of Investments
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Cash
|
|
|
439
|
|
|
|
-
|
|
|
|
-
|
|
Total Pension Plan Assets – Fair Value
|
|
$
|
3,676
|
|
|
$
|
18,603
|
|
|
$
|
-
|
|
*
|
Level 1 investments represent mutual funds for which a quoted market price is available on an active market. These investments primarily hold stocks or bonds, or a combination of stocks and bonds.
|
**
|
Level 2 inputs are inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly. The Company’s pension plan financial assets held in the Adept Strategy 9 Fund and the Schroder investments are Level 2 assets. The Company uses the Net Asset Value to determine the fair value of underlying investments which (a) do not have readily determinable fair value; and (b) prepare their financial statements consistent with the measurement principles of an investment company. The Funds are not exchange traded. The Funds are not subject to any redemption notice periods or restrictions and can be redeemed on a daily basis. No gates or holdbacks or dealing suspensions are being applied to the Funds. The Funds are of perpetual duration.
|
***
|
The Company currently does not have any Level 3 pension plan financial assets.
|
The estimated benefit payments, which reflect future service, as appropriate, for the years ended September 30 are as
follows:
|
|
(in thousands
of dollars)
|
|
2017
|
|
$
|
470
|
|
2018
|
|
|
488
|
|
2019
|
|
|
494
|
|
2020
|
|
|
502
|
|
2021
|
|
|
499
|
|
2022 – 2026
|
|
$
|
2,722
|
|
Inventory, net of reserve, is comprised of:
|
|
(in thousands of dollars)
|
|
|
|
July 1,
2017
|
|
|
September 30,
2016
|
|
Raw materials
|
|
$
|
7,361
|
|
|
$
|
6,532
|
|
Work-in-process
|
|
|
327
|
|
|
|
266
|
|
Finished goods
|
|
|
9,384
|
|
|
|
6,868
|
|
Total inventory, net of reserve
|
|
$
|
17,072
|
|
|
$
|
13,666
|
|
(14)
|
Property, Plant and Equipment, net
|
Property, plant and equipment, net of accumulated depreciation, is comprised of:
|
|
(in thousands of dollars)
|
|
|
|
July 1,
2017
|
|
|
September 30,
2016
|
|
Property, plant and equipment, gross:
|
|
|
|
|
|
|
Land and improvements
|
|
$
|
18
|
|
|
$
|
18
|
|
Buildings and improvements
|
|
|
1,440
|
|
|
|
1,069
|
|
Equipment
|
|
|
13,645
|
|
|
|
12,166
|
|
Total property, plant and equipment, gross
|
|
|
15,103
|
|
|
|
13,253
|
|
Less: accumulated depreciation
|
|
|
(10,107
|
)
|
|
|
(9,410
|
)
|
Net property, plant and equipment
|
|
$
|
4,996
|
|
|
$
|
3,843
|
|
(15)
|
Fair value of financial instruments
|
The Company's financial instruments consist mainly of cash and cash equivalents, short-term investments, trade receivables, accounts payable and debt. The carrying amount of these financial instruments, other than the debt, approximates their fair value as of July 1, 2017 due to their short-term nature. The fair value of the Company’s long-term bank debt at July 1, 2017 approximated $15,994,000 (the gross carrying value as of July 1, 2017 before the offset of debt issuance costs) based on recent financial market pricing. The bank debt represents a Level 2 liability in accordance with the fair value hierarchy described in Note 12.
Accrued expenses, in excess of 5% of total current liabilities, are as follows:
|
|
(in thousands of dollars)
|
|
|
|
July 1,
2017
|
|
|
September 30,
2016
|
|
Accrued compensation and related costs
|
|
$
|
2,267
|
|
|
$
|
1,945
|
|
Deferred revenue
|
|
|
1,230
|
|
|
|
548
|
|
Other accrued expenses
|
|
|
2,746
|
|
|
|
2,438
|
|
Total accrued expenses
|
|
$
|
6,243
|
|
|
$
|
4,931
|
|
The following table summarizes the warranty reserve activity:
|
|
(in thousands of dollars)
|
|
|
|
Three Months ended
|
|
|
Nine Months ended
|
|
|
|
July 1,
2017
|
|
|
July 2,
2016
|
|
|
July 1,
2017
|
|
|
July 2,
2016
|
|
Warranty reserves at beginning of period
|
|
$
|
360
|
|
|
$
|
249
|
|
|
$
|
332
|
|
|
$
|
278
|
|
Warranty expense
|
|
|
34
|
|
|
|
-
|
|
|
|
135
|
|
|
|
5
|
|
Acquisition assumed liability
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
34
|
|
Warranty usage
|
|
|
(17
|
)
|
|
|
(6
|
)
|
|
|
(81
|
)
|
|
|
(72
|
)
|
Currency translation
|
|
|
12
|
|
|
|
-
|
|
|
|
3
|
|
|
|
(2
|
)
|
Warranty reserves at end of period
|
|
$
|
389
|
|
|
$
|
243
|
|
|
$
|
389
|
|
|
$
|
243
|
|
The Company’s U.K. controls and capacitors subsidiaries each have multi-currency overdraft facilities which together total $1,100,000 and are secured by real estate owned by those companies. In July 2017, the Company’s U.K. bank renewed these facilities for a twelve-month period, although they can be withdrawn on demand by the bank. The facilities were unused at July 1, 2017 and at September 30, 2016.
The Company entered into a €14,000,000 ($15,994,000 at July 1, 2017) credit facility with Banca Monte dei Paschi di Siena S.p.A. (“MPS Bank”) on January 27, 2016. The loan and security agreement will expire on January 27, 2021 when all outstanding principal and unpaid interest will be due and payable in full. The facility may be paid before maturity in whole or in part at the option of the Company, on or after the nine-month anniversary of the funding date, without penalty or premium. A change of control (including the closing under the BorgWarner Merger Agreement) would constitute an event of default, triggering acceleration of the repayment obligation. Interest on the loan is payable quarterly at a margin of 3% over EuroLIBOR, with a minimum EuroLIBOR rate of 0.0%. The loan interest rate at July 1, 2017 was 3%. Under the facility, the Company must maintain, on an annual basis, a net debt to EBITDA ratio defined as the ratio of consolidation indebtedness of the Company and its subsidiaries, minus cash and marketable securities, to EBITDA of the Company and its subsidiaries, measured on a fiscal year basis, plus (under a December 2016 amendment) the net cash proceeds received by the Company from the issuance and sale of equity securities during such twelve-month period, of no more than 3.5:1 for fiscal years 2016 and 2017 and a net debt to EBITDA ratio of no more than 3.0:1 thereafter. Upon entering into the credit facility, the Company drew down €14,000,000 ($15,994,000), which was the total amount outstanding at July 1, 2017. This amount is shown in the accompanying consolidated balance sheets under long-term debt.
Annual principal payments on bank debt, net of debt issuance costs, and converted to U.S. dollars at the July 1, 2017 exchange rate of $1.1424 Euros per U.S. dollar, are as follows (in thousands of dollars):
2018 – short-term
|
|
$
|
800
|
|
2018 – long-term
|
|
|
400
|
|
2019
|
|
|
1,599
|
|
2020
|
|
|
1,599
|
|
2021
|
|
|
11,596
|
|
|
|
|
15,994
|
|
Less: debt issuance costs
|
|
|
(181
|
)
|
Total
|
|
$
|
15,813
|
|
On May 22, 2017, the Company entered into a loan agreement with FrontFour Capital Group, LLC (“FrontFour“), pursuant to which FrontFour made a commitment to the Company to provide an unsecured term loan in the principal amount of $10,000,000 (the “Term Loan”). The period of FrontFour’s commitment under the loan agreement began on the date the Company entered into the loan agreement, and terminates on (i) August 22, 2017, or (ii) if the Company chooses to request an extension, November 22, 2017. The Company paid a commitment fee to FrontFour of $450,000. The commitment fee plus $34,000 of associated legal fees have been accounted for as deferred financing costs and are being amortized over the life of the loan agreement. If the Company elects to extend the commitment period, it will be required to pay FrontFour an additional $150,000 extension fee. The interest rate on amounts borrowed under the loan agreement is 10% per annum.
Subsequent to the end of the period, on July 3, 2017, the Company drew down $7,500,000 under the FrontFour loan agreement. The Term Loan, which is pari-passu with the Company’s existing senior credit facility with MPS Bank, will mature and be repayable in full on July 3, 2018; provided that maturity would accelerate upon an event of default, a change of control (including the closing under the BorgWarner Merger Agreement), or the Company’s repayment of all amounts due under the MPS Bank credit facility. The loan agreement provides for mandatory prepayment in the event that the Company receives net cash proceeds from an equity issuance, in an amount equal to such net cash proceeds. The loan agreement also provides for voluntary prepayment at any time without penalty.
The loan agreement imposes customary limitations on the Company’s ability to, among other things, dispose of certain assets other than the sale of inventory in the ordinary course, incur liens, incur additional indebtedness, and engage in transactions with affiliates. The loan agreement also provides for events of default customary for credit facilities of this type, including, but not limited to, bankruptcy, non-payment, breach of covenants, and insolvency. Upon an event of default, the interest rate would be increased and FrontFour may elect a number of remedies including, but not limited to declaring all obligations (including principal, interest and expenses) immediately due and payable.
(19)
|
Commitments and Contingencies
|
Sevcon, Inc. and subsidiaries are involved in various legal proceedings in the ordinary course of business but the Company 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 expensed, the plan is not separately funded. The estimated liability which has been recorded based on the cost of buying deferred annuities at July 1, 2017 and September 30, 2016 was $136,000 and $144,000, respectively.
On March 24, 2017 the company entered into a 15-year operating lease for land and buildings at a total commitment of £4,185,000 (approximately $5,435,000). The company is entitled to a rent-free period of 6 months and a further 24 months at half-rent.
Minimum rental commitments under all non-cancelable leases for the years ended September 30 are as follows: 2017 - $271,000; 2018 - $1,041,000; 2019 - $998,000; 2020 - $896,000; 2021 - $865,000 and $6,002,000 thereafter.
The U.K. subsidiaries of the Company have given to RBS NatWest Bank a security interest in certain leasehold and freehold property assets as security for overdraft facilities of $1,100,000 as mentioned in Note 18.
(20)
|
Changes in Other Comprehensive Loss
|
The following table illustrates changes in the balances of each component of accumulated other comprehensive loss in fiscal 2017 and 2016:
(in thousands of dollars)
|
|
Foreign Currency
Items
|
|
|
Defined Benefit
Pension Plans
|
|
|
Accumulated Other
Comprehensive Loss
|
|
Balance September 30, 2015
|
|
|
(1,274
|
)
|
|
|
(9,730
|
)
|
|
|
(11,004
|
)
|
Other comprehensive loss
|
|
|
(996
|
)
|
|
|
(1,420
|
)
|
|
|
(2,416
|
)
|
Balance September 30, 2016
|
|
|
(2,270
|
)
|
|
|
(11,150
|
)
|
|
|
(13,420
|
)
|
Other comprehensive loss
|
|
|
1,095
|
|
|
|
204
|
|
|
|
1,299
|
|
Balance July 1, 2017
|
|
|
(1,175
|
)
|
|
|
(10,946
|
)
|
|
|
(12,121
|
)
|
Bassi Holding (see Note 4) is considered a related party as a stockholder of the Company.
As of July 1, 2017 and September 30, 2016 there was a net payable balance of $1,626,000 and $1,858,000, respectively, due to Bassi Holding. This debt mainly relates to the dividends payable to Bassi Holding as a result of the acquisition on January 29, 2016 and it excludes rent payable, which is shown below.
During the three and nine months ended July 1, 2017 the Company paid rent to Bassi Holding in the amount of $81,000 and $262,000 respectively. During the three and nine months ended July 2, 2016 the Company paid rent to Bassi Holding in the amount of $83,000 and $138,000 respectively. As of July 1, 2017 and September 30, 2016 the Company owed $56,000 and $84,000, respectively, to Bassi Holding for rent.
During the quarter ended April 1, 2017, the Company’s U.K. subsidiary made short-term loans in amounts ranging from £2,820 to £39,274 to nine employees of that subsidiary to cover the employees’ income tax withholding obligations arising from the vesting of restricted stock. The amounts due to the Company are included in prepaid expenses and other current assets at July 1, 2017. The loans were not approved by the Company’s Board of Directors. They included loans of £39,274 and £28,829 ($49,632 and $36,019 at the contemporary exchange rate), respectively, to the chief executive officer and chief financial officer. The loans to the chief executive officer and chief financial officer were repaid in full, with interest at the Inland Revenue-prescribed market rate of 3% per annum, promptly after they were disclosed to the Board of Directors in connection with the preparation of the Company’s consolidated financial statements for the quarter ended April 1, 2017.
In preparing these interim consolidated financial statements, the Company has evaluated, for potential recognition or disclosure, events or transactions subsequent to the end of the most recent quarterly period, the issuance date of these financial statements.
As outlined in Note 1 above, effective July 13
,
2017, the Company acquired Fuhua Glass’s entire 50% equity interest in Sevcon New Energy Technology (Hubei) Co., Ltd and terminated its equity joint venture with Fuhua Glass
As outlined in Note 2 above, on July 14, 2017, the Company entered into a Definitive Agreement with BorgWarner Inc. and its wholly-owned subsidiary, Slade Merger Sub Inc., providing for the merger of Slade Merger Sub Inc. with and into the Company with the Company surviving the merger as a wholly-owned subsidiary of Borg Warner Inc. Consummation of the Merger is subject to the satisfaction or waiver of specified closing conditions, including the approval of the Merger by the holders of a majority of the outstanding Common Shares.
No other material subsequent events were identified that require recognition or disclosure in these financial statements.
(23)
|
Recent Accounting Pronouncements
|
In May 2014, the FASB issued ASU No. 2014-09: “Revenue from Contracts with Customers (Topic 606)”, comprehensive new revenue recognition guidance which will supersede almost all existing revenue recognition guidance. It affects any entity that enters into contracts with customers for the transfer of goods or services. The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In addition, in August 2015, the FASB issued ASU No. 2015-14: “Revenue from Contracts with Customers (Topic 606)”. This update was issued to defer the effective date of ASU No. 2014-09 by one year. Therefore, the effective date of ASU No. 2014-09 for public business entities is the annual reporting period beginning after December 15, 2017 including interim reporting periods within that reporting period. The Company is evaluating the impact of the adoption of this standard on our consolidated financial statements. This guidance will be effective for the Company in fiscal year 2019.
In August 2014, the FASB issued ASU No. 2014-15,
Preparation of Financial Statements – Going Concern (Subtopic 205-40), Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern
which states that under U.S. GAAP, continuation of a reporting entity as a going concern is presumed as the basis for preparing financial statements unless and until the entity’s liquidation becomes imminent. If and when an entity’s liquidation becomes imminent, financial statements should be prepared under the liquidation basis of accounting. Even when an entity’s liquidation is not imminent, there may be conditions or events that raise substantial doubt about the entity’s ability to continue as a going concern. In those situations, financial statements should continue to be prepared under the going concern basis of accounting, but the amendments in this ASU should be followed to determine whether to disclose information about the relevant conditions and events. The new guidance is effective for the Company’s annual reporting for fiscal 2017, and for annual periods and interim periods thereafter. Early adoption is permitted. The Company is assessing the impact of this ASU on its consolidated financial statements and plans to adopt it in the fourth quarter of fiscal year 2017.
In July 2015, the FASB issued ASU No. 2015-11: “Inventory (Topic 330): Simplifying the Measurement of Inventory” which requires inventory within the scope of this standard to be measured at the lower of cost and net realizable value. For public business entities, the guidance is effective for annual periods beginning after December 15, 2016. The Company is evaluating the impact of the adoption of this standard on our consolidated financial statements. This guidance will be effective for the Company in fiscal year 2018.
In September 2015, the FASB issued ASU No. 2015-16: “Business Combinations (Topic 805)” which amends existing guidance related to measurement period adjustments associated with a business combination. The new standard requires the Company to recognize measurement period adjustments in the reporting period in which the adjustments are determined. The amendment removes the requirement to adjust prior period financial statements for these measurement period adjustments. The guidance is effective for annual periods beginning after December 15, 2015. The Company adopted the provisions of ASU, 2015-16 in fiscal year 2017, the implementation of which did not have any impact on our consolidated financial statements.
In February 2016, the FASB issued FASB ASU No. 2016-02: “Leases (Topic 842)” in which the core principle is that a lessee should recognize the assets and liabilities that arise from leases. For operating leases, a lessee is required to recognize a right-of-use asset and a lease liability, initially measured at the present value of the lease payments, in the balance sheet. For leases with a term of 12 months or less, a lessee is permitted to make an accounting policy election by class of underlying asset not to recognize lease assets and lease liabilities. The accounting applied by a lessor is largely unchanged from that applied under current U.S. GAAP. The guidance is effective for fiscal years beginning after December 15, 2018, including interim periods within that reporting period. The Company is evaluating the impact of the adoption of this standard on our consolidated financial statements. This guidance will be effective for the Company in fiscal year 2020.
In March 2016, the FASB issued ASU No. 2016-09: “Compensation - Stock Compensation (Topic 718)” simplifies several aspects of the accounting for employee share-based payment award transactions. The guidance is effective for fiscal years beginning after December 15, 2016 including interim periods within those fiscal years. The Company is evaluating the impact of the adoption of this standard on our consolidated financial statements. This guidance will be effective for the Company in fiscal year 2018.
In August 2016, the FASB issued ASU 2016-15: “Statement of Cash Flows (Topic 230) – Classification of Certain Cash Receipts and Cash Payments” which addresses eight specific statement of cash flow issues with the objective of reducing diversity in practice. The guidance is effective for fiscal years beginning after December 15, 2017, including interim periods within that reporting period. The Company is evaluating the impact of the adoption of this standard on our consolidated financial statements. This guidance will be effective for the Company in fiscal year 2019.
In October 2016, the FASB issued ASU 2016-16: “Income Taxes (Topic 740) Intra-Entity Transfers of Assets Other Than Inventory” which requires an entity to recognize the income tax consequences of an intra-entity transfer of an asset (excluding inventory) when the transfer occurs instead of when the asset is sold to an outside party. The guidance is effective for fiscal years beginning after December 15, 2017, including interim periods within that reporting period. The Company is evaluating the impact of the adoption of this standard on our consolidated financial statements. This guidance will be effective for the Company in fiscal year 2019.
In January 2017, the FASB issued ASU 2017-04: “Intangibles – Goodwill and Other (Topic 740)” which simplifies the test for goodwill impairment. The guidance is effective for fiscal years beginning after December 15, 2019, including interim periods within that reporting period. The Company is evaluating the impact of the adoption of this standard on our consolidated financial statements. This guidance will be effective for the Company in fiscal year 2021.
In May 2017, the FASB issued ASU No. 2017-09, Compensation-Stock Compensation (Topic 718), which provides additional guidance on which changes to the terms and conditions of a share-based payment award require an entity to apply modification accounting. This ASU is effective for reporting periods beginning after December 15, 2017. The Company is evaluating the potential impact the adoption of this standard on our consolidated financial statements. This guidance will be effective for the Company in fiscal year 2019.