Sevcon, Inc. (“Sevcon” or “the Company”) is a Delaware corporation organized on December 22, 1987 to carry on the electronic controls business previously performed by Tech/Ops, Inc. Through wholly-owned subsidiaries located in the United States, the United Kingdom, France, South Korea and Japan, the Company designs and sells, under the Sevcon name, microprocessor based controls for zero emission and hybrid electric vehicles. The controls are used to vary the speed and movement of vehicles, to integrate specialized functions and to prolong the shift life of vehicles’ power source. The Company’s customers are manufacturers of on-road, off-road and industrial vehicles including automobiles, buses, fork lift trucks, aerial lifts, mining vehicles, airport ground support vehicles, utility vehicles, sweepers and other battery powered vehicles. Through another subsidiary located in the United Kingdom, Sevcon, Inc. manufactures special metalized film capacitors that are used as components in the power electronics, signaling and audio equipment markets.

In the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments (consisting of only normally recurring accruals) necessary to present fairly the financial position of Sevcon, Inc. as of March 29,June 28, 2014 and the results of operations and cash flows for the sixnine months ended March 29,June 28, 2014. These unaudited interim financial statements should be read in conjunction with the 2013 annual consolidated financial statements and related notes included in the 2013 Sevcon,  Inc. Annual Report filed on Form 10-K (the “2013 10-K”). Unless otherwise indicated, each reference to a year means the Company’s fiscal year, which ends on September 30.

The results of operations for the sixnine month period ended March 29,June 28, 2014 are not necessarily indicative of the results to be expected for the full year.

ThereOther than the matter referred to below and the new accounting pronouncement set forth in Note 3, there have been no changes since the end of 2013 to the significant accounting policies followed by Sevcon, Inc.:

Under the Company’s 1996 Equity Incentive Plan (the “Plan”) there were 183,400 shares reserved and available for grant at March 29,June 28, 2014.   In the second quarter of 2014 stockholders approved an increase of 150,000 in the number of shares of common stock authorized for issuance under the Plan. In the period ended June 28, 2014, 80,000 shares of restricted stock were granted to management, 28,600 shares were granted to non-employee directors and 5,000 shares under option were cancelled. There were 106,000137,000 shares reserved and available for grant at March 30,June 29, 2013. There were no options granted or exercised in the periods ended March 29,June 28, 2014 and March 30,June 29, 2013.

Recipients of grants must execute a standard form of non-competition agreement. The plan provides for the grant of Restricted Stock, Restricted Stock Units, 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.

In December 2013, the Company granted 80,000 shares of restricted stock to seven employees, which will vest in five equal instalmentsannual installments so long as the employee is then employed by the Company, or as determined by the Compensation Committee. The estimated fair value of the stock measured on the date of grant was $354,000, based on the fair market value of the stock on the date of issue. The unvested compensation is being charged to income on a straight line basis over five years. The charge to income for this employee restricted stock in the first sixnine months of 2014 was $35,000 and the subsequent charge will be approximately $18,000 on a quarterly basis.

In February 2014, the Company granted 28,600 shares of restricted stock to eleven non-employee directors, which will vest on the day before the 2015 annual meeting providing that the grantee remains a director of the Company, or as otherwise determined by the Compensation Committee. The aggregate fair value of the stock measured on the date of grant was $213,000, based on the closing sale price of the stock on the date of grant. Compensation expense is being charged to income on a straight line basis over the twelve month requisite service period during which the forfeiture conditions lapse. The charge to income for these restricted stock grants in the first sixnine months of fiscal 2014 was $18,000$71,000 and the subsequent charge will be approximately $53,000 on a quarterly basis.

A summary of restricted stock activity for the sixnine months ended March 29,June 28, 2014 is as follows:

Stock-based compensation expense was $68,000$98,000 and $127,000$225,000 for the three and sixnine month periods ended March 29,June 28, 2014 and $97,000$47,000 and $168,000$215,000 for the three and sixnine month periods ended March 30,June 29, 2013. At March 29,June 28, 2014, there was $812,000$716,000 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 3.13.0 years.

The Company has two reportable segments: electronic controls and capacitors. The electronic controls segment produces microprocessor based control systems for zero emission and hybrid electric vehicles. The capacitors segment produces metalized film capacitors for sale to electronic equipment manufacturers. Each segment has its own management team and sales force and the capacitors segment has its own manufacturing facility.

The significant accounting policies of the segments are those described in Note 1 to the Notes to Consolidated Financial Statements in the 2013 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 the electronic controls segment, revenues derive from the following products and services:

The cost of research and development programs is charged against income as incurred and was as follows:

In recent years the Company has received several awards of research and development grants by the Technology Strategy Board, a public body established by the U.K. government to stimulate technology-enabled innovation.

In 2011, the Company was awarded a research and development grant by the Technology Strategy Board to lead a collaborative project with Cummins Generator Technologies and Newcastle University in the U.K. to develop an innovative electric drive system for electric vehicles using advanced switched reluctance motor technology. The Company recorded grant income from this Technology Strategy Board project of $16,000$28,000 and $33,000$61,000 in the three and sixnine month periods ended March 29,June 28, 2014, respectively, associated with research and development expense of $47,000$83,000 and $97,000,$180,000, respectively, in the same periods. The Company recorded grant income of $38,000$39,000 and $44,000$76,000 in the three and sixnine month periods ended March 30,June 29, 2013, respectively, associated with research and development expense of $111,000$114,000 and $130,000,$225,000, respectively, in the same periods.

In 2013, the Company was awarded a research and development grant by the Technology Strategy Board as one of a consortium of organizations in the U.K to research and design ultra-efficient systems for electric and hybrid vehicles. The Company recorded grant income from this Technology Strategy Board project of $2,000$1,000 and $3,000$4,000 in the three and sixnine month periods ended March 29,June 28, 2014, respectively, associated with research and development expense of $7,000$8,000 and $10,000,$18,000, respectively, in the same periods. The Company did not record anyrecorded grant income or incur anyof $1,000 associated with research and development expense of $3,000 in respect of this grant in the first sixthree and nine months ofended June 29, 2013.

In July 2013, the Company was awarded a grant of approximately $480,000 by the Low Emission Transport Collaborative Projects Fund, a U.K. government body. The grant is to develop next-generation controls for high-voltage, low-power applications. This grant will defray part of the research and development expense associated with this project over the period from July 2013 to March 2015. The Company recorded grant income from this project of $139,000$103,000 and $236,000$339,000 in the three and sixnine month periods ended March 29,June 28, 2014, respectively, associated with research and development expense of $547,000$423,000 and $969,000,$1,392,000, respectively, in the same periods.  The Company did not record any grant income or incur any research and development expense in respect of this grant in the first sixnine months of 2013.

The grant income in the first sixnine months of 2014 and 2013 was recorded as a reduction of research and development expense.

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 capacitor business. The Company has frozen U.K. and U.S. defined benefit plans for which no future benefits are being earned by employees.  The following table sets forth the components of the net pension cost for the three and sixnine month periods ended March 29,June 28, 2014 and March 30,June 29, 2013, respectively:

Sevcon, Inc. contributed $100,000 to its frozen U.S. defined benefit plan in the sixnine months ended March 29,June 28, 2014; it presently anticipates contributing a further $100,000 to fund its U.S. plan in the remainder of fiscal 2014. In addition, employer contributions to the U.K. defined benefit plan were $204,000$329,000 in the first sixnine months and are estimated to total $494,000$500,000 in 2014.

The table below presents information about the Company’s pension plan assets measured and recorded at fair value as of March 29,June 28, 2014 and indicates the fair value hierarchy of the inputs utilized by the Company to determine the fair values.

Inventories, net of reserve, were comprised of:

Other receivables of $883,000$866,000 at March 29,June 28, 2014 include $558,000$551,000 of receivables in the Company’s French subsidiary that have been reclassified from trade receivables. In January 2014 management was advised that SITL,SITL-Brandt Motors, a customer of the Company’s French subsidiary and a manufacturer of on-road electric vehicles, had entered administration protection for a minimum period of six months. The Company has submitted a claim with the French court appointed administrator for the full amount of the receivable of $558,000$551,000 and no resolution is expected for at least another month fromthis claim has been acknowledged by the date of this filing.administrator. In late April 2014,addition, the Commercial Court in Lyon gave Sevcon the option to recover from SITLSITL-Brandt Motors the entire inventory of material represented by the receivable of $558,000.$551,000. The inventory concerned represents current saleable product and, in the opinion of management, could be sold by the Company’s French subsidiary to alternative customers in a reasonable timescale.timescale at similar margins.

In late June 2014 the Commercial Court in Lyon announced that it had approved the acquisition of SITL-Brandt Motors by Cenntro Motor Corporation, a Nevada based manufacturer of all-electric vehicles. Cenntro Motor Corporation has since announced that it will inject an initial $20 million of working capital into the former SITL-Brandt Motors operation and create a new French company which will serve as the European headquarters of the Cenntro Motors Group. At the date of this filing management are seeking to engage with Cenntro Motor Corporation to discuss the recoverability of the outstanding receivable and the future supply of controllers for electric vehicle manufacture. Due to the high level of uncertainty at this time, management has not assessed a reserve for an uncollectible amount, but any loss incurred may be up to the amount recorded at March 29,June 28, 2014, of $558,000$551,000 less the value of the inventory that would be recovered from SITLSITL-Brandt Motors should the Company exercise its option to do so.

The Company's financial instruments consist mainly of cash and cash equivalents, short-term investments, accounts receivable and accounts payable. The carrying amount of these financial instruments as of March 29,June 28, 2014 approximates fair value due to the short-term nature of these instruments. The fair value of the Company’s long term debt at March 29,June 28, 2014 approximated $1,753,000$1,700,000 (the carrying value on the consolidated balance sheet at March 29,June 28, 2014) based on recent financial market pricing. The long term debt represents a level 2 liability in accordance with the fair value hierarchy described in Note 8.9.

Set out below is an analysis of other accrued expenses at March 29,June 28, 2014 and September 30, 2013, which shows separately any items in excess of 5% of total current liabilities:

At March 29,June 28, 2014, the Company had $53,000$42,000 outstanding under a U.K. bank loan entered into in April 2010, with a fixed interest rate of 6.8%. The loan, which was entered into by the U.K. metalized film capacitor subsidiary to purchase an item of capital equipment, is denominated in British Pounds. The loan agreement provides for equal monthly installments of $4,000 comprising interest and principal for a five year period commencing in May 2010. Of theThe total amount outstanding at March 29,June 28, 2014 $49,000of $42,000 is shown in the current liabilities section of the accompanying consolidated balance sheet under current debt, representing the principal element of the loan installments ending on March 31, 2015. Included in other long term liabilities at March 29, 2014, is $4,000 which represents the principal element of the loan installments payable in fiscal yearJune 30, 2015. The fair market value of the debt at March 29,June 28, 2014 was $53,000.$42,000.

The Company’s wholly owned subsidiary, Sevcon USA, Inc., has a $3,500,000 secured revolving credit facility with RBS Citizens, National Association for working capital and general corporate purposes. The loan and security agreement will expire on June 14, 2017 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 Sevcon USA, Inc., without penalty or premium.  Interest on the loan is payable monthly, and in the secondthird quarter of 2014, was calculated at a margin of 3.125% over LIBOR.  Under the facility, Sevcon USA, Inc. must maintain, on a quarterly basis, a debt to tangible net worth ratio of no more than 2.40:1 and a debt service coverage ratio of no less than 1.25:1 for each rolling twelve-month period.  Upon entering into the revolving credit facility, Sevcon USA, Inc. drew down $1,700,000, which was the total amount outstanding at March 29,June 28, 2014.  This $1,700,000 is shown in the accompanying consolidated balance sheet under long-term debt. The carrying value of the debt approximated to fair value based on current interest rates.

In July 2013,2014, the Company’s U.K. bank renewed the overdraft facilities of the Company’s U.K. controls and capacitor subsidiaries. The facilities total $1,495,000$1,530,000 and are secured by real estate owned by those companies. In common with bank overdrafts in Europe, the renewal of the facilities is for a twelve month period although, in line with normal practice in Europe, they can be withdrawn on demand by the bank. The facilities were unused at March 29,June 28, 2014.

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. Important factors that could cause these statements not to be realized include the risks discussed under “Risk Factors” below and others discussed in this report.

As of March 29,June 28, 2014, there have been no material changes to the critical accounting estimates described in the Company’s 2013 10-K. However, if the business and economic realities vary from those assumed in these judgments and estimates, actual operating results may differ materially from the amounts derived from these judgments and estimates. In addition, if the continuing worldwide economic troubles continue to have a negative effect on our business, estimates used in future periods may vary materially from those included in the Company’s previous disclosures.

All of these factors, and others resulting from the current economic situation, may have a material adverse impact on the Company’s results.

The following table compares the results by segment for the three months ended March 29,June 28, 2014 with the same period in the prior year. The table shows the effect of currency and volume changes in percentage terms:

In the controls business segment, our sales were higher thanfor the second quarter last year in all three of our main geographic markets. Excluding foreign currency effects,geographically generally tracked global economic trends. We recorded sales growth, year-over-year, in the Far East and the U.S. of 38% and 18%, respectively, while sales in Europe were flat. In the Far East, although sales growth continues to be fueled mainly by demand from our traditional off-road industrial and construction customers, our new business initiatives in the on-road sector are beginning to generate sales. We continue to expand our portfolio of development programs with large Asian original equipment manufacturers, primarily in China. The stronger sales in the U.S. reflected increased 82% driven by stronger product demandshipments for hybrid on-road vehicles and strong growth in the aftermarket sector. In Europe, sales in the third quarter were flat year-over-year; this was largely a consequence of higher aerial work platform applications in China and Japan. Sales in Europe increased 5% fromsales offset by lower sales to the second quarter last year, also reflecting stronger aerial work platform business,aftermarket as well as continued modest growth in productlower demand for four-wheel on-road EV applications. Sales increased 7% from the second quarter last year in North America driven largely by an increase in sales of 160% to two-wheel, on-road OEM’s which more than offset a combined reduction in sales of 32% in the traditional areas of aerial work platform, airport ground support and the mining sector.fork-lift truck market.

The secondthird quarter of 2014 marked Sevcon’s fifthsixth consecutive quarter of sequential revenue growth.growth since the recent low point in quarter one of 2013. We believe that underlying demand is slowly gatheringcontinues to gather strength in the majority of our markets worldwide and our business continues to benefit from having a low-cost, flexible manufacturing model. However, we cannot predict the likelihood, timing or the magnitude of any potential resulting improvements in our revenues or margin.

In the capacitor business, volumes shipped were 31%11% higher compared to the secondthird quarter last year, largely reflecting continuing higher demand from railway signaling customers.

Gross profit of $3,602,000$3,576,000 was 39.3%37.0% of sales in the secondthird quarter, compared to $3,007,000$3,237,000 or 37.5%37.3% of sales in the same quarter last year. The increasegross profit percentage achieved in the gross profit percentagequarter compared to the prior year was due toreflected improved sales mix in both the controls business and the capacitor business offset to some extent by some lower margin business in China and the impact of the cost savings implemented in the controls division in the second quarter last year.

Selling, research and administrative expenses in the secondthird quarter increased by $541,000 from$419,000 compared with the secondthird quarter of fiscal 2013, this2013. Approximately half of the increase largely reflects continued investment inadditional sales and marketing and engineering and research and development resources,expense, including the hiring of additional engineering staff.staff and the other half of the increase reflects adverse movements in foreign currency due to a weaker U.S. Dollar compared to the British Pound and the Euro than in the prior year period. Engineering and research and development expense as a percentage of total sales was 12%10.8% in the secondthird quarter of fiscal 2014, compared with 13%11.2% in the same period last yearyear. In addition, the Company recorded grant income of $157,000$132,000 in the secondthird quarter of 2014 compared to $38,000$40,000 in the same period last year; this grant income was recorded as a reduction of research and development expense in each year.

The Company recorded income before income taxes of $139,000$188,000 in the secondthird quarter of 2014 compared to a loss before income taxes of $576,000$171,000 in the same period last year. There was an income tax benefit of $23,000$34,000 compared with a benefitan income tax provision of $638,000,$47,000, in the same period last year. The tax benefit recorded in the secondthird quarter of 2014 reflects the significant variance in income tax rates in the jurisdictions in which the Company operates, the benefit of research and development tax credits in the Company’s U.K. subsidiaries and the relative profit or loss made in each business.

There was net income for the quarter, after income tax benefit, of $162,000$222,000 or $0.05$0.06 per diluted share, compared to net income after tax of $62,000,$124,000, or income of $0.02$0.04 per diluted share in the same quarter last year.

We have announced that we are considering raising additional equity capital to finance growth, including investment in our engineering and other technical resources. We may seek to generate growth organically, through the acquisition of other businesses, or both and we may commence these activities during the current quarter.both. Any such activity will incur additional cost, in both the near and longer term, which is likely to be material.

The following table compares the first half year results by segment for the sixnine months ended March 29,June 28, 2014 with the same period in the prior year.  The table shows the effect of currency and volume changes in percentage terms.