UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

x  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 29,June 28, 2014

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

For the transition period from ________________________________ to ________________________________

Commission File Number 1-9789

SEVCON, INC.
(Exact name of registrant as specified in its charter)

Delaware
04-2985631
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)

155 Northboro Road, Southborough, Massachusetts 01772
(Address of principal executive offices and zip code)

(508) 281-5510
(Registrant's telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x  No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes  x  No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer o
Accelerated filer o
Non-accelerated filer o
Smaller reporting company x
 
 
(Do not check if a smaller reporting company)
 

Indicate by check mark whether the registrant is a shell company (as defined in rule 12b-2 of the Exchange Act). Yes o  No x

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.

ClassOutstanding at May 13,August 7, 2014
Common stock, par value $.103,574,765


SEVCON, INC.
FORM 10-Q
FOR THE QUARTER ENDED MARCH 29,JUNE 28, 2014
INDEX

 
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1820
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2223
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2324
2324

1

PART I.
FINANCIAL INFORMATION
PART I.FINANCIAL INFORMATION

Item 1 Financial Statements

CONSOLIDATED BALANCE SHEETS
Sevcon, Inc. and Subsidiaries
(in thousands of dollars except share and per share data)(in thousands of dollars except share and per share data) (in thousands of dollars except share and per share data) 
 
March
29,
2014
  
September
30,
2013
  
June 28,
2014
  
September 30,
2013
 
 (unaudited)  (audited)  (unaudited)  (derived from audited statements) 
ASSETS 
  
  
 
  
 
 
Current assets: 
  
  
  
 
Cash and cash equivalents $1,450  $2,062  $1,303  $2,062 
Trade receivables, net of allowances for doubtful accounts of $48 at March 29, 2014 and $61 at September 30, 2013  6,838   6,746 
Trade receivables, net of allowances for doubtful accounts of $42 at June 28, 2014 and $61 at September 30, 2013  7,188   6,746 
Other receivables  883   357   866   357 
Inventories  5,965   5,723 
Inventories, net  6,384   5,723 
Prepaid expenses and other current assets  2,085   1,862   2,584   1,862 
Total current assets  17,221   16,750   18,325   16,750 
Property, plant and equipment, at cost:                
Land and improvements  23   23   24   23 
Buildings and improvements  757   737   775   737 
Equipment  11,517   10,992   12,063   10,992 
  12,297   11,752   12,862   11,752 
Less: accumulated depreciation  (10,335)  (9,783)  (10,691)  (9,783)
Net property, plant and equipment  1,962   1,969   2,171   1,969 
Long-term deferred tax assets  3,374   3,152   3,367   3,152 
Goodwill  1,435   1,435   1,435   1,435 
Other-long term assets  150   54   170   54 
Total assets $24,142  $23,360  $25,468  $23,360 
LIABILITIES AND STOCKHOLDERS’ EQUITY                
Current liabilities:                
Current portion of long term debt $49  $46  $42  $46 
Accounts payable  4,077   3,880   4,638   3,880 
Accrued expenses  1,943   2,087   1,946   2,087 
Accrued and deferred taxes on income  -   47   -   47 
Total current liabilities  6,069   6,060   6,626   6,060 
Liability for pension benefits  8,255   8,354   8,320   8,354 
Long term debt  1,704   1,728   1,700   1,728 
Total liabilities  16,028   16,142   16,646   16,142 
Stockholders’ equity:
                
Preferred stock, par value $.10 per share - authorized - 1,000,000 shares; outstanding – none  -   -   -   - 
Common stock, par value $.10 per share - authorized - 8,000,000 shares; outstanding 3,574,765 shares at March 29, 2014 and 3,474,388 at September 30, 2013  358   347 
Common stock, par value $.10 per share - authorized - 8,000,000 shares; outstanding 3,574,765 shares at June 28, 2014 and 3,474,388 at September 30, 2013  358   347 
Premium paid in on common stock  5,751   5,699   5,850   5,699 
Retained earnings  9,241   8,591   9,463   8,591 
Accumulated other comprehensive loss  (7,236)  (7,419)  (7,170)  (7,419)
Total Sevcon, Inc. stockholders’ equity  8,501   7,218 
Noncontrolling interests  321   - 
Total stockholders’ equity  8,114   7,218   8,822   7,218 
Total liabilities and stockholders’ equity $24,142  $23,360  $25,468  $23,360 

The accompanying notes are an integral part of these consolidated financial statements.
2


CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Sevcon, Inc. and Subsidiaries

 (in thousands of dollars except per share data)  (in thousands of dollars except per share data) 
 Three months ended  Six months ended  Three months ended  Nine months ended 
 
March 29,
2014
  
March 30,
2013
  
March 29,
2014
  
March 30,
2013
  
June 28,
2014
  
June 29,
2013
  
June 28,
2014
  
June 29,
2013
 
Net sales $9,170  $8,017  $18,219  $14,657  $9,657  $8,675  $27,876  $23,332 
Cost of sales  (5,568)  (5,010)  (10,785)  (9,410)  (6,081)  (5,438)  (16,866)  (14,848)
Gross profit  3,602   3,007   7,434   5,247   3,576   3,237   11,010   8,484 
Selling, research and administrative expenses  (3,406)  (2,865)  (6,528)  (6,290)  (3,363)  (2,944)  (9,891)  (9,234)
Restructuring charge  -   (605)  -   (605)  -   -   -   (605)
Operating income (loss)  196   (463)  906   (1,648)  213   293   1,119   (1,355)
Interest expense  (19)  (26)  (35)  (50)  (18)  (28)  (53)  (78)
Interest income  1   1   1   1   -   -   1   1 
Foreign currency loss  (39)  (88)  (124)  (289)  (7)  (94)  (131)  (383)
Income (loss) before income tax  139   (576)  748   (1,986)  188   171   936   (1,815)
Income tax benefit (provision)  23   638   (98)  746   34   (47)  (64)  699 
Net income (loss)  162   62   650   (1,240)  222   124   872   (1,116)
Less: Net income (loss) attributable to noncontrolling interests  -   -   -   - 
Net income (loss) attributable to common stockholders  222   124   872   (1,116)
Basic income (loss) per share $0.05  $0.02  $0.19  $(0.37) $0.07  $0.04  $0.26  $(0.33)
Fully diluted income (loss) per share $0.05  $0.02  $0.19  $(0.37) $0.06  $0.04  $0.25  $(0.33)


CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Unaudited)
Sevcon, Inc. and Subsidiaries

 (in thousands of dollars)  (in thousands of dollars) 
 Three months ended  Six months ended  Three months ended  Nine months ended 
 
March 29,
2014
  
March 30,
2013
  
March 29,
2014
  
March 30,
2013
  
June 28,
2014
  
June 29,
2013
  
June 28,
2014
  
June 29,
2013
 
Net income (loss)  162   62   650   (1,240) $222  $124  $872  $(1,116)
Other comprehensive income:                                
Foreign currency translation adjustment  30   20   96   121   22   66   118   187 
Defined benefit pension plans:                                
Actuarial loss, net of $13 and $26 tax benefit for the three and six month periods, respectively, (2013: net of $18 and $37 tax benefit for the three and six month periods, respectively)  44   50   87   103 
Amortization of actuarial loss, 2014: net of $13 and $39 tax benefit for the three and nine month periods, respectively, (2013: net of $19 and $56 tax benefit for the three and nine month periods, respectively)  44   49   131   152 
Comprehensive income (loss) $236  $132  $833  $(1,016)  288   239   1,121   (777)
Less: Comprehensive income (loss) attributable to noncontrolling interests  -   -   -   - 
Comprehensive income (loss) attributable to common stockholders $288  $239  $1,121  $(777)

The accompanying notes are an integral part of these consolidated financial statements.

3


CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Sevcon, Inc. and Subsidiaries

 (in thousands of dollars)  (in thousands of dollars) 
 Six months ended  Nine months ended 
 
March 29,
2014
  
March 30,
2013
  
June 28,
2014
  
June 29,
2013
 
Cash flow from operating activities: 
  
  
  
 
Net income (loss) $650  $(1,240) $872  $(1,116)
Adjustments to reconcile net income (loss) to net cash used by operating activities:                
Depreciation  304   309   456   458 
Gain on sale of fixed assets  -   (3)
Gain on sale of property, plant and equipment  -   (3)
Stock-based compensation  127   168   225   215 
Pension contributions greater than pension expense  (195)  (20)  (264)  (44)
Deferred tax provision (benefit)  98   (912)  64   (1,107)
Increase (decrease) in cash resulting from changes in operating assets and liabilities:                
Trade receivables  18   (300)  (306)  (932)
Other receivables  (526)  -   (494)  - 
Inventories  (136)  115   (460)  301 
Prepaid expenses and other current assets  (530)  54   (1,002)  122 
Accounts payable  99   (52)  566   446 
Accrued expenses  (167)  207   (178)  159 
Accrued and deferred taxes on income  (83)  147   (12)  408 
Net cash used by operating activities  (341)  (1,527)  (533)  (1,093)
Cash flow used by investing activities:                
Acquisition of property, plant and equipment  (249)  (307)  (559)  (383)
Proceeds of sale of fixed assets  -   4 
Proceeds of sale of property, plant and equipment  -   4 
Investment in joint venture, net of cash acquired  322   - 
Net cash used by investing activities  (249)  (303)  (237)  (379)
Cash flow used by financing activities:                
Repayments of long term debt  (23)  (21)  (35)  (31)
Purchase and retirement of common stock  (63)  (53)  (63)  (70)
Net cash used by financing activities  (86)  (74)  (98)  (101)
Effect of exchange rate changes on cash  64   83   109   88 
Net decrease in cash  (612)  (1,821)  (759)  (1,485)
Beginning balance - cash and cash equivalents  2,062   2,823   2,062   2,823 
Ending balance - cash and cash equivalents $1,450  $1,002  $1,303  $1,338 
Supplemental disclosure of cash flow information:                
Cash paid for income taxes $83  $3 
Cash paid for income taxes, net of refunds $12  $22 
Cash paid for interest  35   50   53   78 

The accompanying notes are an integral part of these consolidated financial statements.

4

SEVCON, INC.

Notes to Consolidated Financial Statements – March 29,June 28, 2014

(Unaudited)

(1)Basis of presentation

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.

(2)Summary of significant accounting policies

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.:

Basis of preparation

Joint venture and Noncontrolling Interest

In the third quarter of 2014 the Company completed the establishment of a joint venture company (see Note 16 - Establishment of Joint Venture in China) in which Sevcon has a 50% ownership and in which there is a 50% noncontrolling interest. The financial statements of the joint-venture have been consolidated with the Company’s as at June 28, 2014 as we have a controlling interest in the joint-venture company by virtue of  board voting arrangements.

(3)New accounting pronouncement

In May 2014, the Financial Accounting Standards Board issued ASU 2014-09, “Revenue from Contracts with Customers (Topic 606)”, requiring an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The updated standard will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective and permits the use of either a full retrospective or retrospective with cumulative effect transition method. Early adoption is not permitted. The updated standard becomes effective for the Company in the first quarter of fiscal 2018. The Company has not yet selected a transition method and is currently evaluating the effect that the updated standard will have on the consolidated financial statements.

(4)Stock-based compensation plans

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.
5


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.

5

A summary of option activity for all plans for the sixnine months ended March 29,June 28, 2014 is as follows:

 
 
Shares
under
Option
  
Weighted
average
Exercise
Price
  
Weighted
average
 remaining
contractual
life
(years)
  
Aggregate
Intrinsic
Value
 
Outstanding at September 30, 2013  5,000  $5.40  0.1 years  $- 
Cancelled  (5,000)  5.40   -   - 
Outstanding at March 29, 2014  -  $-   -  $- 
Exercisable at March 29, 2014  -  $-   -  $- 
Exercisable and expected to vest at March 29, 2014  -  $-   -  $- 

The aggregate intrinsic value, if any, included in the table above represents the difference between the exercise price of the options and the market price of the Company’s common stock for the options that had exercise prices that were lower than the $11.36 and $4.85 closing market price of the Company’s common stock at March 29, 2014 and September 30, 2013, respectively.
 
 
Shares
under
Option
  
Weighted average Exercise
Price
  
Weighted average remaining contractual life
(years)
  
Aggregate
Intrinsic Value
 
Outstanding at September 30, 2013  5,000  $5.40  0.1 years  $- 
Cancelled  (5,000)  5.40   -   - 
Outstanding at June 28, 2014  -  $-   -  $- 
Exercisable at June 28, 2014  -  $-   -  $- 
Exercisable and expected to vest at June 28, 2014  -  $-   -  $- 

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:

 Number of shares of Restricted Stock  
Weighted Average
Grant-Date Fair
Value
  Number of shares of Restricted Stock  Weighted Average Grant-Date Fair Value 
Non-vested balance as of September 30, 2013  103,800  $5.05   103,800  $5.05 
Granted  108,600  $5.23   108,600  $5.23 
Vested  (43,800) $4.63   (43,800) $4.63 
Non-vested balance as of March 29, 2014  168,600  $5.27 
Non-vested balance as of June 28, 2014  168,600  $5.27 

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.
6

(4)(5)Cash dividends

Common stock dividends

The Board of Directors suspended common stock dividends to conserve cash during the global recession that began in 2009 and will consider whether to resume paying common stock dividends as conditions and the Company’s operating results improve.

Preference share dividends

On August 1, 2014 the Company filed a registration statement for a rights offering of Series A Convertible Preferred Stock intended to raise $10 million before expenses. The preferred stock, which has a stated value of $24 per share, will pay a 4% cumulative annual dividend paid semi-annually on October 15 and April 15, each year. We will issue up to 465,500 shares of Series A Convertible Preferred Stock and pay an annual dividend of up to $446,880. The first dividend will be paid on October 15, 2014.

(5)(6)Calculation of earnings per share and weighted average shares outstanding

Basic and fully diluted earnings per share were calculated as follows:

 (in thousands except per share data)  (in thousands except per share data) 
 Three Months ended  Six Months ended  Three Months ended  Nine Months ended 
 
March 29,
2014
  
March 30,
2013
  
March 29,
2014
  
March 30,
2013
  
June 28,
2014
  
June 29,
2013
  
June 28,
2014
  
June 29,
2013
 
Net income (loss) $162  $62  $650  $(1,240) $222  $124  $872  $(1,116)
Weighted average shares outstanding – basic  3,401   3,363   3,388   3,351   3,406   3,365   3,394   3,356 
Basic income (loss) per share $0.05  $0.02  $0.19  $(0.37) $0.07  $0.04  $0.26  $(0.33)
Common stock equivalents  90   -   64   2   93   6   74   4 
Weighted average shares outstanding – diluted  3,491   3,363   3,452   3,353   3,499   3,371   3,468   3,360 
Diluted income (loss) per share $0.05  $0.02  $0.19  $(0.37) $0.06  $0.04  $0.25  $(0.33)
No. of options that are anti-dilutive excluded from calculation of common stock equivalents  -   -   -   -   -   -   -   - 

(6)(7)Segment information

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 thousands of dollars) 
 
 Three months ended March 29, 2014 
 
 Controls  Capacitors  Corporate  Total 
Sales to external customers $8,601   569   -  $9,170 
Inter-segment revenues
  -   2   -   2 
Operating income (loss)  190   104   (98)  196 
Identifiable assets  22,220   1,341   581   24,142 

 
 Three months ended March 30, 2013 
 
 Controls  Capacitors  Corporate  Total 
Sales to external customers  7,581   436   -   8,017 
Inter-segment revenues  -   4   -   4 
Operating loss  (293)  (7)  (163)  (463)
Identifiable assets  20,242   1,147   491   21,880 
(in thousands of dollars) 
 Six months ended March 29, 2014 Three months ended June 28, 2014 
 Controls  Capacitors  Corporate  Total Controls Capacitors Corporate Total 
Sales to external customers $17,136  $1,083  $-  $18,219  $9,063  $594  $-  $9,657 
Inter-segment revenues  -   2   -   2 
Inter-segment revenues
  -   3   -   3 
Operating income (loss)  839   144   (77)  906   194   108   (89)  213 
Identifiable assets  22,220   1,341   581   24,142 
Total assets, excluding goodwill  21,907   1,462   664   24,033 

7


 Six months ended March 30, 2013  Three months ended June 29, 2013 
 Controls  Capacitors  Corporate  Total  Controls  Capacitors  Corporate  Total 
Sales to external customers $13,783  $874  $-  $14,657   8,191  $484  $-  $8,675 
Inter-segment revenues  -   6   -   6   -   -   -   - 
Operating loss  (1,436)  (21)  (191)  (1,648)
Identifiable assets  20,242   1,147   491   21,880 
Operating income (loss)  208   29   56   293 
Total assets, excluding goodwill  19,637   1,149   450   21,236 
 
 Nine months ended June 28, 2014 
 
 Controls  Capacitors  Corporate  Total 
Sales to external customers  26,199  $1,677  $-  $27,876 
Inter-segment revenues
  -   5   -   5 
Operating income (loss)  1,033   252   (166)  1,119 
Total assets, excluding goodwill  21,907   1,462   664   24,033 

 
 Nine months ended June 29, 2013 
 
 Controls  Capacitors  Corporate  Total 
Sales to external customers  21,974  $1,358  $-  $23,332 
Inter-segment revenues  -   6   -   6 
Operating loss  (1,228)  8   (135)  (1,355)
Total assets, excluding goodwill  19,637   1,149   450   21,236 

In the electronic controls segment, revenues derive from the following products and services:

(in thousands of dollars) 
(in thousands of dollars) 
 Three Months ended  Six Months ended Three Months ended Nine Months ended 
 
March 29,
2014
  
March 30,
2013
  
March 29,
2014
  
March 30,
2013
 
June 28,
2014
 
June 29,
2013
 
June 28,
2014
 
June 29,
2013
 
Electronic controls for zero emission and hybrid electric vehicles $6,555  $6,043  $13,139  $10,128  $6,591  $5,718  $19,730  $14,367 
Accessory and aftermarket products and services  2,046   1,538   3,997   3,655   2,472   2,473   6,469   7,607 
Total electronic controls segment revenues $8,601  $7,581  $17,136  $13,783  $9,063  $8,191  $26,199  $21,974 

(7)(8)Research and development

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

(in thousands of dollars) 
 (in thousands of dollars)
 Three Months ended  Six Months ended  Three Months ended  Nine Months ended 
 
March 29,
2014
  
March 30,
2013
  
March 29,
2014
  
March 31,
2013
  
June 28,
2014
  
June 29,
2013
  
June 28,
2014
  
June 29,
2013
 
Research and development expense, net of grants receivable $1,083  $1,004  $2,013  $2,087  $1,045  $970  $3,058  $3,057 
Percentage of sales  12%  13%  11%  14%  10.8%  11.2%  11.0%  13.1%

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.
8

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.
8


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

(8)(9)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 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:

 (in thousands of dollars)  (in thousands of dollars) 
 Three Months ended  Six Months ended  Three Months ended  Nine Months ended 
 
March 29,
2014
  
March 30,
2013
  
March 29,
2014
  
March 30,
2013
  
June 28,
2014
  
June 29,
2013
  
June 28,
2014
  
June 29,
2013
 
Interest cost $325  $313  $643  $636  $330  $309  $973  $945 
Expected return on plan assets  (327)  (297)  (647)  (590)  (331)  (286)  (978)  (876)
Amortization of net loss  57   68   113   140   57   68   170   208 
Net periodic benefit cost  55   84   109   186   56   91   165   277 
Net cost of defined contribution plans $132  $121  $247  $243  $125  $103  $372  $346 
Net cost of all employee benefit plans $187  $205  $356  $429  $181  $194  $537  $623 

The following table sets forth the movement in the liability for pension benefits in the sixnine month periods ended March 29,June 28, 2014 and March 30,June 29, 2013:

 (in thousands of dollars)  (in thousands of dollars) 
 Six Months ended  Nine Months ended 
 
March 29,
2014
  
March 30,
2013
  
June 28,
2014
  
June 29,
2013
 
Liability for pension benefits at beginning of period  8,354   10,264  $8,354  $10,264 
Net periodic benefit cost  109   186   165   277 
Plan contributions  (304)  (206)  (429)  (321)
Recognition of net actuarial loss  (113)  (140)
Amortization of actuarial loss  (170)  (208)
Effect of exchange rate changes  209   (586)  400   516 
Balance at end of period  8,255   9,518  $8,320  $9,496 

9

Amounts recognized in the balance sheet consist of:

 
 (in thousands of dollars) 
 
 
March 29,
2014
  
March 30,
2013
 
Non-current liabilities $8,255  $9,518 
 
(in thousands of dollars) 
 
June 28,
2014
 
June 29,
2013
 
Non-current liabilities $8,320  $9,496 

Amounts recognized in accumulated other comprehensive loss consist of:

 
 (in thousands of dollars) 
 
 Three Months ended  Six Months ended 
 
 
March 29,
2014
  
March 30,
2013
  
March 29,
2014
  
March 30,
2013
 
Actuarial loss, net of $13 and $26 tax benefit for the three and six month periods, respectively, (2013: net of $18 and $37 tax benefit for the three and six month periods, respectively) $44   50  $87   103 
 
 $44  $50  $87  $103 
 
(in thousands of dollars) 
 
Three Months ended Nine Months ended 
 
June 28,
2014
 
June 29,
2013
 
June 28,
2014
 
June 29,
2013
 
Amortization of actuarial loss, net of $13 and $39 tax benefit for the three and nine month periods, respectively, (2013: net of $19 and $56 tax benefit for the three and nine month periods, respectively) $44  $49  $131  $152 

9

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.

 
 (in thousands of dollars) 
 
 
Level 1*
(Quoted prices in
active
markets)
  
Level 2**
(Significant
observable
inputs)
  
Level 3***
(Unobservable
inputs)
 
Mutual Funds 
  
  
 
Standard Life Pension Global Absolute Returns Strategies Fund  7,0067,327   -   - 
Standard Life U.K. Indexed Linked Fund  1,7731,854   -   - 
Standard Life Long Corporate Bond Fund  1,7161,810   -   - 
CF Ruffer Absolute Return Fund  7,1067,321   -   - 
U.S. Equity Funds  327346   -   - 
U.S. Mutual Funds and Fixed Income  Funds  2,3932,477   -   - 
 
            
Other Types of Investments            
Cash  197165   -   - 
Total  20,51821,300   -   - 

*Level 1 investments represent mutual funds for which a quoted market price is available on an active market. These investments will primarily hold stocks or bonds, or a combination of stocks and bonds.

**The Company currently does not have any Level 2 pension plan financial assets.

***The Company currently does not have any Level 3 pension plan financial assets.

The following estimated benefit payments have been, or are expected, to be paid:

 
 
(in thousands
of dollars)
 
2014 $497 
2015  618 
2016  653 
2017  646 
2018  646 
2019 – 2023  3,296 
10


 
 
(in thousands
of dollars)
 
2014 $497 
2015  618 
2016  653 
2017  646 
2018  646 
2019 – 2023 $3,296 

(9)(10)Inventories

Inventories, net of reserve, were comprised of:

 (in thousands of dollars)  (in thousands of dollars) 
 
March 29,
2014
  
September 30,
2013
  
June 28,
2014
  
September 30,
2013
 
Raw materials $2,255  $2,201  $2,327  $2,201 
Work-in-process  17   11   113   11 
Finished goods  3,693   3,511   3,944   3,511 
 $5,965  $5,723  $6,384  $5,723 

(10)(11)Other receivables

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.

(11)(12)Fair value of financial instruments

The Company's financial instruments consist mainly of cash and cash equivalents, short-term investments, accounts receivable and accounts payable. The carrying amount of these financial instruments as of 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.

11

(12)(13)Accrued expenses

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:

 (in thousands of dollars)  (in thousands of dollars) 
 
March 29,
2014
  
September 30,
2013
  
June 28,
2014
  
September 30,
2013
 
Accrued compensation and related costs $1,074  $1,015  $1,041  $1,015 
Other accrued expenses  869   1,072   905   1,072 
 $1,943  $2,087  $1,946  $2,087 

11

(13)Warranty reserves
(14)Warranty reserves

Warranty reserves are included on the balance sheet within accrued expenses; the movement in warranty reserves was as follows:

 (in thousands of dollars)  (in thousands of dollars) 
 Three Months ended  Six Months ended  Three Months ended  Nine Months ended 
 
March 29,
2014
  
March 30,
2013
  
March 29,
2014
  
March 30,
2013
  
June 28,
2014
  
June 29,
2013
  
June 28,
2014
  
June 29,
2013
 
Warranty reserves at beginning of period $139  $106  $138  $89  $140  $90  $138  $89 
Decrease in beginning balance for warranty obligations settled during the period  (1)  (7)  (44)  (15)  (5)  (5)  (49)  (20)
Foreign currency translation adjustment  1   (4)  2   (1)  -   -   2   (1)
Net increase (decrease) in warranty reserves for products sold during the period  1   (5)  44   17 
Net increase in warranty reserves for products sold during the period  8   40   52   57 
Warranty reserves at end of period $140  $90  $140  $90  $143  $125  $143  $125 

(14)(15)Debt

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.
12

Annual principal payments on long term debt at March 29,June 28, 2014 are as follows:

Fiscal year (in thousands of dollars)  (in thousands of dollars) 
2015  4   - 
2016  -   - 
2017  1,700   1,700 
Total  1,704  $1,700 

12

(15)(16)Establishment of Joint Venture in China

During the third quarter of 2014, the Company received the required government approvals in China to formally establish a joint-venture company which will source from Sevcon and supply, market and sell in China, current and future Sevcon products for on-road electric and hybrid vehicle applications. The joint-venture company, in which Sevcon and Risenbo Technology Company Limited each own a 50% stake, will operate as Sevcon New Energy Technology Company Limited. Risenbo Technology Company Limited is a subsidiary of a Chinese Tier 1 automotive supplier based in Hubei Province. The activities of the joint-venture company in the third quarter have been limited to the investment of initial capital of $320,000 by each party to the joint-venture, the sourcing of business premises and the hiring of engineering and sales and marketing staff. The financial statements of the joint-venture company have been consolidated with the Company’s as at June 28, 2014.

Sales in the third quarter of 2014 did not reflect any shipments associated with the joint-venture company; it is anticipated that initial shipments will commence in the fourth quarter of 2014. In addition, in the fourth quarter, the Company will recognize the initial establishment costs of the joint-venture agreement, the cost of sourcing business premises and the hiring cost of initial staff.

(17)Subsequent events

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.

On August 1, 2014 the Company filed a registration statement for a rights offering of Series A Convertible Preferred Stock intended to raise $10 million before expenses. The net proceeds will be used for general corporate purposes and growth, including funding ongoing research and development, product commercialization initiatives and acquisitions of other businesses. The preferred stock, which has a stated value of $24 per share, will pay a 4% cumulative annual dividend paid semi-annually on October 15 and April 15, each year. We will issue up to 465,500 shares of Series A Convertible Preferred Stock and pay an annual dividend of up to $446,880. The first dividend will be paid on October 15, 2014.

No further material subsequent events were identified that require recognition or disclosure in these financial statements.

13

Item 2
Management's Discussion and Analysis of Financial Condition and Results of Operations.

FORWARD LOOKING STATEMENTS

Statements in this discussion and analysis about the Company’s anticipated financial results and growth, as well as those about the development of its products and markets, are forward-looking statements that involve risks and uncertainties that could cause actual results to differ materially from those projected. 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.

CRITICAL ACCOUNTING ESTIMATES

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.

For example:
 
(i)if the financial condition of any of the Company's customers deteriorates as a result of further business declines, the Company may be required to increase its estimated allowance for bad debts;
 
(ii)if actual future demand is less than previously projected, inventory write-downs may be required; or
 
(iii)significant negative industry or economic trends that adversely affect our future revenues and profits, or a reduction of our market capitalization relative to net book value, among other factors, may change the estimated future cash flows or other factors that we use to determine whether or not goodwill has been impaired and lead us to conclude that an impairment charge is required.

All of these factors, and others resulting from the current economic situation, may have a material adverse impact on the Company’s results.
1314

OVERVIEW OF SECONDTHIRD QUARTER AND FIRST SIXNINE MONTHS

Results of Operations

Three months ended March 29,June 28, 2014 and March 30,June 29, 2013

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:

 Three months ended Favorable (unfavorable) % change due to:  Three months ended  Favorable (unfavorable) % change due to: 
 
March 29,
2014
  
March 30,
2013
 Total Currency Volume  
June 28,
2014
  
June 29,
2013
  Total  Currency  Volume 
Sales: 
  
 
 
 
  
  
  
  
  
 
Controls - to external customers $8,601  $7,581   13   4   9  $9,063  $8,191   11   5   6 
Capacitors - to external customers  569   436   31   9   22   594   484   23   12   11 
Capacitors - inter-segment  2   4   (50)  2   (52)  3   -  NM  NM  NM 
Capacitors – total  571   440   30   (9)  21   597   484   23   12   11 
Total sales to external customers  9,170   8,017   14   4   10   9,657   8,675   11   5   6 
Gross Profit:                                        
Controls  3,315   2,856   16   (4)  20   3,284   3,039   8   3   5 
Capacitors  287   151   90   11   79   292   198   48   14   34 
Total  3,602   3,007   20   (3)  23   3,576   3,237   11   4   7 
Selling, research and administrative expenses and restructuring charge:                    
Selling, research and administrative expenses:                    
Controls  (3,125)  (3,149)  1   (4)  5   (3,090)  (2,831)  (9)  (6)  (3)
Capacitors  (183)  (158)  (16)  (7)  (8)  (184)  (169)  (9)  (11)  (2)
Unallocated corporate expense  (98)  (163)  40   -   40   (89)  56   (259)  -   (259)
Total  (3,406)  (3,470)  2   (4)  6   (3,363)  (2,944)  (14)  (7)  (7)
Operating income (loss):                                        
Controls  190   (293)  165   (84)  249   194   208   (7)  (50)  43 
Capacitors  104   (7)NM NM NM   108   29   272   29   243 
Unallocated corporate expense  (98)  (163)  40   -   40   (89)  56   259   -   (259)
Total  196   (463)  142   (52)  194   213   293   (27)  (32)  5 
Other income and expense  (57)  (113)  50   (2)  52   (25)  (122)  80   70   10 
Income (loss) before income tax  139   (576)  124   (42)  166 
Income tax benefit  23   638   (96)  -   (96)
Net income (loss) $162  $62   162   (392)  554 
Income before income tax  188   171   10   (5)  15 
Income tax benefit (provision)  34   (47)  172   24   196 
Net income $222  $124   79   (18)  97 

Sales in the secondthird quarter of 2014 were $9,170,000$9,657,000 compared to $8,017,000$8,675,000 in the same quarter last year.year, an increase of $982,000 or 11%. This increase was mainly in our controls business and largely reflected higher sales to customers in our traditional off-road markets of aerial work platform and fork lift truck, as well as higher demand for on-road applications. Sales While we saw overall sales growth of 12% in both the off-road and four-wheel on-road sectorssector of our business, combined was lower than anticipated although we sawthis reflected a mixed result from sales to manufacturers of two-wheel and four-wheel vehicles. Our sales for the quarter in the two-wheel, on-road sector were down 39%,  following 32% growth in controller shipments in excess of 30% for two-wheelthe second quarter, and we expect this business to continue to be volatile from quarter to quarter going forward. In the four-wheel, on-road applications such as electric scooters and motorcycles. Assector, across all geographies, total sales were up 54% in the first fiscal quarter,quarter. A significant portion of this sales growth in two-wheel on-road applications was driven by increased Europeanshipments to a U.S. based manufacturer of hybrid powertrain conversion systems for commercial vans and Asian demandtrucks. Sales to manufacturers of mining equipment were 8% lower in scooter applications and by our business with motorcycle manufacturersthe quarter compared to the prior year, reflecting continued weakness in North America.coal extraction. Foreign currency fluctuations increased reported sales in the secondthird fiscal quarter by $331,000,$474,000, or 4%5%, mainly due to a weaker U.S. Dollar compared to both the British Pound and the Euro than in the prior year period.period, which we expect to continue in the fourth quarter.

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.
1415


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.

There was operating income for the secondthird quarter of $196,000$213,000 compared with an operating loss of $463,000$293,000 in the same period last year, which included a $605,000 restructuring charge.year.  The table on page 14 shows the favorable and unfavorable percentage change for each income statement line item due to the impact of foreign currency exchange rate movements and volume impacts. The 52%32% unfavorable currency change in operating income for the three month period to March 29,June 28, 2014 represents a reduction of $241,000$94,000 in operating income compared to the three month period ended March 30, 2013, due to foreign currency changes.June 29, 2013. Excluding the impact of foreign currency, operating income would have been $437,000,$307,000, an increase of $900,000$14,000 compared to the prior year period. ThisThe adverse currency impact was mainly due to a weaker U.S. Dollar compared to the Euro and the British Pound than in the prior year period.

In the second quarter of 2014, interest expense was $19,000; a decrease of $7,000 compared to the prior year, due to the Company’s U.K. bank overdraft facility being little used during the first half of 2014 and lower interest payable on the bank loan in the capacitor business.

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.

During the third quarter of 2014, the Company received the required government approvals in China to formally establish a joint-venture company which will source from Sevcon and supply, market and sell in China, current and future Sevcon products for on-road electric and hybrid vehicle applications. The joint-venture company, in which Sevcon and Risenbo Technology Company Limited each own a 50% stake, will operate as Sevcon New Energy Technology Company Limited. Risenbo Technology Company Limited is a subsidiary of a Chinese Tier 1 automotive supplier based in Hubei Province. The activities of the joint-venture company in the third quarter have been limited to the investment of initial capital of $320,000 by each party to the joint-venture, the sourcing of business premises and the hiring of engineering and sales and marketing staff. The financial statements of the joint-venture company have been consolidated with the Company’s as at June 28, 2014.
1516


SixSales in the third quarter of 2014 did not reflect any shipments associated with the joint-venture company; it is anticipated that initial shipments will commence in the fourth quarter of 2014. In addition, in the fourth quarter, the Company will recognize the initial establishment costs of the joint-venture agreement, the cost of sourcing business premises and the hiring cost of initial staff.

Nine months ended March 29,June 28, 2014 and March 30,June 29, 2013

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.

 Six months ended  Favorable (unfavorable) % change due to:  Nine months ended  Favorable (unfavorable) % change due to: 
 
March 29,
2014
  
March 30,
2013
  Total  Currency  Volume  
June 28,
2014
  
June 29,
2013
  Total  Currency  Volume 
Sales: 
  
  
  
  
  
  
  
  
  
 
Controls - to external customers $17,136  $13,783   24   3   21  $26,199  $26,974   19   4   15 
Capacitors - to external customers  1,083   874   24   5   19   1,677   1,358   24   7   17 
Capacitors - inter-segment  2   6   (67)  2   (69)  5   6   (16)  6   (22)
Capacitors - total  1,085   880   23   5   18   1,682   1,364   23   7   16 
Total sales to external customers  18,219   14,657   24   3   21   27,876   23,332   20   4   16 
Gross Profit:                                        
Controls  6,940   4,961   40   (4)  44   10,224   8,000   28   (1)  29 
Capacitors  494   286   73   7   67   786   484   63   10   53 
Total  7,434   5,247   42   (3)  45   11,010   8,484   30   (1)  31 
Selling, research and administrative expenses and restructuring charge:                                        
Controls  (6,101)  (6,397)  5   (3)  8   (9,191)  (9,228)  1   (4)  5 
Capacitors  (350)  (307)  (14)  (4)  (10)  (534)  (476)  (12)  (6)  (6)
Unallocated corporate expense  (77)  (191)  59   -   59   (166)  (135)  (23)  -   23 
Total  (6,528)  (6,895)  5   (3)  8   (9,891)  (9,839)  (1)  (4)  5 
Operating income (loss):                                        
Controls  839   (1,436)  158   (25)  183   1,033   (1,228)  184   (38)  222 
Capacitors  144   (21)  786   41   745   252   8  NM  NM  NM 
Unallocated corporate expense  (77)  (191)  59   -   59   (166)  (135)  (23)  -   (23)
Total  906   (1,648)  155   (21)  176   1,119   (1,355)  183   (33)  216 
Other income and expense  (158)  (338)  53   34   19   (183)  (460)  60   55   5 
Income (loss) before income tax  748   (1,986)  138   (12)  150   936   (1,815)  152   (11)  163 
Income tax (provision) benefit  (98)  746   (113)  -   (113)  (64)  699   (109)  2   (111)
Net income (loss) $650  $(1,240)  152   (19)  171  $872  $(1,116)  178   (16)  194 

Sales in the sixnine months ended March 29,June 28, 2014 were $18,219,000,$27,876,000, an increase of 3,562,000$4,544,000 or 24%20%, compared to the same period last year when sales were $14,657,000.$23,332,000. Foreign currency fluctuations increased reported sales in the first half yearthird quarter by $430,000,$904,000, or 3%4%, mainly due to a weaker U.S. Dollar compared to both the British Pound and the Euro than in the prior year period.

In the controls business segment, volumes shipped were higher in all geographic regions in which the Company operates; Europe, North America and the Far East were 17%9%, 16% and 71%58% higher, respectively, compared to the same period last year. The Company’s traditional marketsShipments to customers were 25%15% higher than the same period last year driven by higher sales to customers in aerial work platform and fork lift truck, as well as higher demand for on-road applications and aftermarket products. Sales increases in these sectors more than offset an 18%a 20% decrease in sales to mining customers. Sales in the four-wheel on-road sector were up substantially at 62%59% year-over-year, while sales in the two-wheel on-road sector were slightly15% lower than last year.
17


VolumesExcluding the impact of favorable foreign currency fluctuations, volumes shipped in the capacitor business were 24%17% higher than the same period last year with higher demand from railway signaling customers and industrial equipment manufacturers.

Gross profit of $7,434,000$11,010,000 was 40.8%39.5% of sales in the period compared to $5,247,000,$8,484,000, or 35.8%36.4%, in the comparable period in 2013; this increase in gross profit percentage was largely due to improved sales mix in both the controls business and the capacitor business and the impact of the cost savings implemented in the controls business in the secondthird quarter last year.
16


Selling, research and administrative expenses in the period were $6,528,000,$9,891,000, an increase of $238,000$52,000 from the same period in 2013;2013 which included a restructuring charge of $605,000; excluding the restructuring charge, the increase in operating expense year-on-year was $657,000. Approximately $275,000, or one third of the increase, reflects increased investment inadditional sales and marketing and engineering and research and development expense, including the hiring of additional staff and sales and marketing$382,000, or approximately two thirds of the increase, reflects adverse movements in responseforeign currency due to the increased sales levels and customer demanda weaker U.S. Dollar compared to the British Pound and the Euro than in the prior year.year period.  Engineering and research and development expense as a percentage of total sales was 11% in the first halfnine months of 2014, compared with 14%13.1% in the same period last year.  In addition, the Company recorded grant income of $272,000$404,000 in the first halfnine months of 2014 compared to $44,000$77,000 in the same period in the prior year; this grant income was recorded as a reduction of research and development expense in each period.

The Company recorded operating income in the first halfnine months of fiscal 2014 of $906,000$1,119,000 compared with an operating loss in the first halfnine months of fiscal 2013 of $1,648,000.$1,355,000.  The table on page 16 shows the favorable and unfavorable percentage change for each income statement line item due to the impact of foreign currency exchange rate movements and volume impacts. The 21%33% unfavorable currency change in operating income for the sixnine month period to March 29,June 28, 2014 represents a reduction of $352,000 $446,000 in operating income compared to the sixnine month period ended March 30,June 29, 2013, due to foreign currency changes. Excluding the impact of foreign currency, operating income would have been $1,258,000,$1,565,000, an increase of $2,906,000,$2,920,000, compared to the prior year period. This was mainly due to a weaker U.S. Dollar compared to the Euro and the British Pound than in the prior year period.

In the first halfnine months of 2014 the Company recorded an income tax charge of $98,000,$64,000, or 13.1%7% of income before income tax, compared to an income tax benefit of $746,000,$699,000, or 37.6%38.5% of the loss before income tax in the same period in 2013. The lower effective tax rate in 2014 reflects the significant variance in income tax rates in the jurisdictions in which we do business, 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 in each period. In addition, there is a continuing impact of the year-on-year reduction in the corporate income tax rate in the U.K. and also the availability in the U.K. of favorable research and development tax credits, which further reduces our effective U.K.global income tax rate.

The Company recorded net income for the first halfnine months of 2014 of $650,000$872,000 or $0.19$0.25 per diluted share compared to a net loss for the first halfnine months of 2013 of $1,240,000$1,116,000 or $0.37$0.33 per diluted share.

Financial Condition

Cash balances at the end of the secondthird quarter of 2014 were $1,450,000$1,303,000 compared to $2,062,000 on September 30, 2013, a reduction in cash of $612,000$759,000 in the first sixnine months of 2014.

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. 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.
18


In the first sixnine months of 2014, operating activities used $341,000$533,000 of cash. Excluding the impact of currency fluctuations, receivables increased by $508,000,$800,000, inventories increased by $136,000$460,000 and prepaid expenses and other current assets increased by $530,000,$1,002,000, all of which reduced cash during the period. Accounts payable increased by $99,000$566,000 which increased cash in the period. Accrued expenses and accrued taxes decreased by $167,000$178,000 and $83,000,$12,000, respectively, which reduced cash in the period. The number of days sales in receivables increased in the first sixnine months of 2014 by one day from 65 days at September 30, 2013 to 66 days at March 29,June 28, 2014. Capital expenditures in the first sixnine months were $249,000.$559,000. Exchange rate changes increased reported cash by $64,000$109,000 in the first sixnine months of 2014.

The Company had a U.K. bank loan of $53,000,$42,000, all of which $49,000 was short-term and $4,000 long-term debt at March 29,June 28, 2014. It has overdraft facilities in the United Kingdom amounting to $1,495,000,$1.530, 000, which were unused as of March 29,June 28, 2014 and September 30, 2013. The overdraft facility of the U.K. capacitor subsidiary is secured by a legal charge over the property owned and occupied by that company. The overdraft facility of the U.K. controls subsidiary is secured by a legal charge over a property owned by that company. Both facilities were renewed in the third quarter of 2013July 2014 for a further period of twelve months but, in line with normal practice in Europe, can be withdrawn on demand by the bank. Management believes that, if these facilities were withdrawn, adequate alternative credit resources would be available. However, this would depend on the Company’s situation and the economic environment at the time. Accordingly, management does not rely on their availability in projecting the adequacy of the Company’s capital resources.
17


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 obligations under the revolving credit facility are guaranteed by the Company and are secured by all of the assets of Sevcon USA, Inc. and a pledge of all of the capital stock of Sevcon USA, Inc.  The facility imposes customary limitations on Sevcon USA, Inc.’s ability to, among other things, pay dividends, make distributions, and incur additional indebtedness.  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. The revolving credit facility will expire on June 14, 2017 when all outstanding principal and unpaid interest will be due and payable in full.

There were no significant capital expenditure commitments at March 29,June 28, 2014. It is estimated that the Company will make contributions to its frozen U.K. and U.S. defined benefit pension plans of approximately $695,000$700,000 in fiscal 2014. Should the Company suffer a material reduction in revenues in the remainder of 2014 this commitment could adversely impact the Company’s financial position.

The outlook continues to remain uncertain,is potentially volatile given the continuing worldwide economic situation and in particular the low economic growth environment in Europe and North America and the continuing austerity measures in Europe. In the opinion of management, the Company’s requirements for working capital to meet projected operational and capital spending at status quo levels in both the short and long term can be met by a combination of existing cash resources, future earnings and existing borrowing facilities in Europe. Any material reduction in revenues will have a materially adverse impact on the Company’s financial position, which would be exacerbated if any of the Company’s lenders withdraws or reduces available credit. If the Company is unable to generate sufficient cash from operations and if the bank overdraft facilities are withdrawn, the Company would need to raise additional debt or equity capital from other sources to avoid significantly curtailing its business and materially adversely affecting its results.

However, management has said that in order to increase the rate of growth and improve shareholder value we would need to increase our investment in sales and marketing and engineering and other technical resources. We may do this organically, through the acquisition of other businesses, or both. In either case,To fund these growth plans we need to raisehave announced that we are raising additional equity capital. Such capital may notThis growth activity will incur additional cost, in both the near and longer term, which is likely to be available to us at a reasonable cost or at all.material.

Item 3Quantitative and Qualitative Disclosures about Market Risk.
Item 3Quantitative and Qualitative Disclosures about Market Risk.

As a smaller reporting company, the Company is not required to respond to this item. However, we are providing the following information about our foreign currency and interest rate risks to supplement the disclosures in Item 2.

Foreign currency risk

The Company sells to customers throughout the industrialized world. The majority of the Company’s products are manufactured in, or sourced from, the United Kingdom. In the first sixnine months of 2014, approximately 50% of the Company’s sales were made in U.S. Dollars, 27%25% were made in British Pounds and 23%25% were made in Euros. Approximately 80% of the Company’s cost of sales was incurred in British Pounds and Euros. This resulted in the Company’s sales and margins being exposed to fluctuations due to the change in the exchange rates of the U.S. Dollar, the British Pound and the Euro. The Company has trade accounts receivable and accounts payable denominated in both British Pounds and Euros that are exposed to exchange fluctuations.

In addition, the translation of the sales and income of foreign subsidiaries into U.S. Dollars is also subject to fluctuations in foreign currency exchange rates.

The following table provides information about the Company’s foreign currency accounts receivable, accounts payable and firmly committed sales contracts outstanding as of March 29,June 28, 2014. The information is provided in U.S. Dollar amounts, as presented in the Company’s consolidated financial statements. The table presents the amounts at which the Company’s foreign currency accounts receivable, accounts payable and firmly committed sales contracts as of March 29,June 28, 2014 are expected to mature based on the exchange rate of the relevant foreign currency to U.S. Dollars at March 29,June 28, 2014:

 
  
  (in thousands of dollars) 
 
 (in thousands of dollars) 
 
Expected maturity or
transaction date
  
Expected maturity or
transaction date
  
   
 
Expected maturity or
transaction date
 
Expected maturity or
transaction date
 
 
 
 Fiscal 2014  Fiscal 2015  Fair Value Fiscal 2014 Fiscal 2015 Fair Value 
On balance sheet financial instruments: 
  
  
 
 
 
 
In $ U.S. Functional Currency 
  
  
 
 
 
 
Accounts receivable in British Pounds  1,337   -   1,337   1,307   -   1,307 
Accounts receivable in Euros  2,363   -   2,363   3,199   -   3,199 
Accounts payable in British Pounds  695   -   695   1,809   -   1,809 
Accounts payable in Euros  2,937   -   2,937   2,193   -   2,193 
Anticipated Transactions                        
In $ U.S. Functional Currency                        
Firmly committed sales contracts                        
In British Pounds  1,381   -   1,381   1,017   225   1,242 
In Euros  1,968   -   1,968   1,833   -   1,833 

Interest Rate Risk

The Company’s policy is to invest surplus funds in instruments with maturities of less than 12 months at both fixed and floating interest rates. This investment portfolio is generally subject to general credit, liquidity, counterparty, market and interest rate risks. If the banking system or the fixed income or credit markets deteriorate or become volatile, the values and liquidity of these investments could be adversely affected. The Company did not have any surplus funds invested as of March 29,June 28, 2014.

At March 29,June 28, 2014, the Company had $53,000$42,000 of interest bearing debt related to a bank loan for the purchase of capital equipment by the Company’s U.K. metalized film capacitor business. The Company also had, at March 29,June 28, 2014, a $3,500,000 secured revolving credit facility with RBS Citizens, National Association of which $1,700,000 had been drawn down by the Company’s U.S. controller business, Sevcon USA, Inc., and which was the total amount outstanding at that date. The Company incurs short-term borrowings from time-to-time on its overdraft facilities in Europe at variable interest rates.

Item 4Controls and Procedures.
Item 4Controls and Procedures.

(a)            Evaluation of disclosure controls and procedures. The Company’s principal executive officer and principal financial officer, after evaluating the effectiveness of the Company’s “disclosure controls and procedures” (as defined in the Securities Exchange Act of 1934 Rule 13a-15(e)), have concluded that, as of March 29,June 28, 2014, these disclosure controls and procedures were effective.

(b)            Changes in internal control over financial reporting. Our principal executive officer and principal financial officer have identified no change in the Company’s “internal control over financial reporting” (as defined in Securities Exchange Act of 1934 Rule 13a-15(f)) that occurred during the period covered by this Quarterly Report on Form 10-Q that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II.OTHER INFORMATION
PART II.OTHER INFORMATION

Item 1
Item 1 Legal Proceedings

None.

Item 1A
Item 1A Risk Factors

In addition to the market risk factors set forth in Part I, Item 1A of our 2013 10-K and the considerations set out in Part I, Items 2 and 3 above, the Company believes that the following represent the most significant risk factors for the Company:

Capital markets are cyclical and weakness in the United States and international economies may harm our business.

The Company’s traditional customers are mainly manufacturers of capital goods such as fork lift trucks, aerial lifts and railway signaling equipment. These markets are cyclical and depend heavily on worldwide transportation, shipping and other economic activity. They experienced a significant decline in demand during the recent global recession. Further, as our business has expanded globally, we have become increasingly subject to the risks arising from adverse changes in global economic conditions. While market conditions have appeared to improve since 2010, economic instability remains, particularly in the Eurozone. As a result, current or potential customers may be unable to fund purchases or manufacturing of products, which could cause them to delay, decrease or cancel purchases of our products or not to pay the Company or to delay paying for previously purchased products. In addition, the effect of the crisis on the Company’s banks and other banks may cause the Company to lose its current overdraft facilities and be unable otherwise to obtain financing for operations as needed.

Demand for on-road electric vehicles incorporating our products may not materialize.

The Company is increasingly involved in developing products for the on-road electric vehicle market. We have relationships with several customers that incorporate our products into their EV products. Our competitors and others are also developing products for other entrants in the EV market, with similar and competing technologies. If our customers’ products or technology are not successful commercially, or if worldwide demand for EVs fails to grow as much as we hope, we may not realize the anticipated demand for our products in the EV market, which may have a material adverse effect on our results of operations.

The Company relies on a small number of key customers for a substantial portion of its revenues.

Ten customers accounted for 51% of the Company’s revenues in the first sixnine months of 2014 and the largest customer accounted for 14%13% of revenues. Although we have had business relationships with some of these customers for many years, our relationships with on-road EV customers are newer and, in any event, there are no long-term contractual supply agreements in place with any customer. Accordingly our performance could be adversely affected by the loss of one or more of these key customers.
The Company’s commitment to make defined benefit pension contributions could adversely impact its financial position.

It is estimated that the Company will make contributions to its frozen U.K. and U.S. defined benefit pension plans of approximately $695,000$700,000 in fiscal 2014.2014 and in subsequent years. Should the Company suffer a material reduction in revenues in 2014 this commitment could adversely impact the Company’s financial position.

The Company has substantial sales and operations outside the United States that could be adversely affected by changes in international markets.

A significant portion of our operations is located, and a significant portion of our business comes from, outside the United States. Accordingly, our performance could be adversely affected by economic downturns in Europe or the Far East as well as in the United States. A consequence of significant international business is that a large percentage of our revenues and expenses are denominated in foreign currencies that fluctuate in value versus the U.S. Dollar. Significant fluctuations in foreign exchange rates can and do have a material impact on our financial results, which are reported in U.S. Dollars. Other risks associated with international business include: changing regulatory practices and tariffs; staffing and managing international operations, including complying with local employment laws; longer collection cycles in certain areas; and changes in tax and other laws.

The continuing debt crisis in the Eurozone may have a material adverse effect on our business and operating results, which could adversely affect our stock price.

There continues to be significant uncertainty about the stability of global credit and financial markets in light of the continuing debt crisis in certain European countries.  A default or a withdrawal from the Eurozone by any of the countries involved, or the uncertainty alone, could cause the value of the Euro to deteriorate.  This, or a change to a local currency, would reduce the purchasing power of affected European customers. We are unable to predict the likelihood of any of these events but, if any occurs, our business, financial position and results of operations could be materially and adversely affected.
20


Single source materials and sub-contractors may not meet the Company’s needs.

The Company relies on single, or a small number of, suppliers and sub-contractors for its requirements for most components, sub-assemblies and finished products. In the event that such suppliers and sub-contractors are unable or unwilling to continue supplying the Company, or to meet the Company’s cost and quality targets or needs for timely delivery, there is no certainty that the Company would be able to establish alternative sources of supply in time to meet customer demand.

Damage to the Company’s or sub-contractors’ buildings would hurt results.

In the electronic controls segment, the majority of the Company’s finished product is produced in three separate plants in Poland, Mexico and China; these plants are owned by sub-contractors. The capacitor business is located in a single plant in Wales. In the event that any of these plants was to be damaged or destroyed, there is no certainty that the Company would be able to establish alternative facilities in time to meet customer demand. The Company does carry property damage and business interruption insurance but this may not cover certain lost business due to the long-term nature of the relationships with many customers.

Failure to comply with financial covenants in our loan agreement could adversely affect us.

As of March 29,June 28, 2014, the Company’s subsidiary in the United States, Sevcon USA, Inc. had $1,700,000 of outstanding indebtedness under a revolving credit facility with RBS Citizens, National Association.  This indebtedness is secured by all of Sevcon USA, Inc.’s assets and a pledge of all the capital stock of Sevcon USA, Inc.  The loan agreement includes financial covenants which require us to maintain compliance with certain financial ratios during the term of the agreement.  See “Management's Discussion and Analysis of Financial Condition and Results of Operations – Financial Condition”.  Failure to comply with the financial covenants would be an event of default under the loan agreement that would give the lender the right to cease making additional advances, accelerate repayment of all sums due and take action to collect the monies owed to it, including foreclosing on its security interest, which would have a material adverse effect on the Company’s financial condition.
Product liability claims may have a material adverse effect.

The Company’s products are technically complex and are installed and used by third parties. Defects in their design, installation, use or manufacturing may result in product liability claims against the Company. Such claims may result in significant damage awards, and the cost of any such litigation could be material.

We may not be able to attract and retain the level of high quality engineering staff that we need to develop the new and improved products we need to be successful.

The Company needs sufficient highly qualified engineers and technicians to develop and test the products our customers require. This is an expensive and scarce resource. If we are unable to attract and retain the level of high quality engineering staff that we need for our new and improved products, we will lose business and our financial condition will be adversely affected.

We may not be able to raise the capital we would like to have to grow our business.

Growing organically or through acquisitions of other businesses is expensive. We have recently announced that we are considering raisingseeking to raise equity capital either through a rights offering or otherwise.offering. If we are not able to raise as much as would be needed to pursue all the opportunities available to us, we will have to cut back or delay development projects, which could have a material adverse effect on our results of operations and financial condition.

Businesses we acquire may not generate the revenue and earnings we anticipate and may otherwise adversely affect our operations and financial condition.

We are considering supplementing our growth by acquiring new businesses. If we do that, but we fail to successfully integrate and manage the businesses we acquire, or if an acquisition does not further our business strategy as we expected, our operating results and financial condition may be materially adversely affected. Business combinations also involve a number of risks and uncertainties that can have an adverse impact, including that:
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·the costs of acquiring and integrating another business may be materially greater than we anticipate;
·managing an acquired company’s technologies or lines of business or entering new markets where we have limited or no prior experience or where competitors may have stronger market positions may be more difficult than we anticipate;
·we may fail to achieve the expected return on our investments, which could adversely affect our business or operating results and potentially cause impairment to assets that we recorded as a part of an acquisition, including intangible assets and goodwill;
·the attention of our management and employees may be diverted;
·we may not be able to retain key personnel of an acquired business;
·we may assume unanticipated legal or financial liabilities;
·we may suffer significant increases in our interest expense, leverage and debt service requirements if we incur additional debt to pay for an acquisition; and
·our existing stockholders may be diluted and earnings per share may decrease if we were to issue a significant amount of equity securities in connection with an acquisition.

Item 2
Unregistered Sales of Equity Securities and Use of Proceeds

Shares of common stock re-acquired in order to pay the withholding taxes due upon vesting of restricted stock awards during the three months ended March 29, 2014, were as follows:None.
Period 
Total number of
shares purchased
  
Average price
paid per share
  
Total number of
shares purchased as
part of publicly
announced plans or programs
  
Maximum number of
shares that may yet be purchased under the plans or programs
 
December 29, 2013 to January 25, 2014  8,223  $7.70   -   - 
January 26, 2014 to February 22, 2014  -   -   -   - 
February 23, 2014 to March 29, 2014  -   -   -   - 
Total  8,223  $7.70   -   - 

Item 3
Defaults upon Senior Securities

None.

Item 4
Mine Safety Disclosures

Not Applicable.

Item 5
Other Information

None.

Item 6
Exhibits

See Exhibit Index immediately preceding the exhibits.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 
SEVCON, INC.
 
 
Date: May 13,August 7, 2014By: /s/ Paul N. Farquhar
 
Paul N. Farquhar
 
Chief Financial Officer (Principal Financial Officer)



INDEX OF EXHIBITS

Exhibit
Description
 
 
ExhibitDescription
3.1Restated Certificate of Incorporation of the registrant (incorporated by reference to Exhibit 3.2 to the Current Report on Form 8-K filed on June 7, 2011).
 
 
3.2Amended and Restated Certificate of Designations of Series A Convertible Preferred Stock (incorporated by reference to Exhibit 3.2 to the registration statement on Form S-1 filed on July 29, 2014).
3.3Amended and Restated By-laws of the registrant (incorporated by reference to Exhibit 3.1 to the Current Report on Form 8-K filed on December 11, 2013).
 
 
10.1Sevcon, Inc. 1996 Equity Incentive Plan, as amended (incorporated by reference to Appendix B to Proxy Statement filed on January 6, 2014).
 
 
Certification of Principal Executive Officer pursuant to section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith).
 
 
Certification of Principal Financial Officer pursuant to section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith).
 
 
Certification of Principal Executive Officer and Principal Financial Officer pursuant to section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith).
 
 
101The following materials formatted in eXtensible Business Reporting Language (XBRL): (i) Consolidated Statements of Operations (ii) Consolidated Statements of Comprehensive Income (Loss) (iii) Consolidated Balance Sheets (iv) Consolidated Statements of Cash Flows and (v) Notes to Consolidated Financial Statements.  These materials are furnished and not “filed” herewith.
 
 
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