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PERCEPTRON INC/MI - 10-Q - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF

February 14, 2014

OPERATIONS SAFE HARBOR STATEMENT



We make statements in this Management's Discussion and Analysis of Financial Condition and Results of Operations that may be "forward-looking statements" within the meaning of the Securities Exchange Act of 1934, including the Company's expectation as to its fiscal year 2014 and future new order bookings, revenue, expenses, net income and backlog levels, future dividend payments, trends affecting its future revenue levels, the rate of new orders, the timing of revenue and net income increases from new products which we have recently released or have not yet released, the timing of the introduction of new products, the rate of adoption of our Helix® technology, and our ability to fund our fiscal year 2014 and future cash flow requirements. We may also make forward-looking statements in our press releases or other public or shareholder communications. When we use words such as "will," "should," "believes," "expects," "anticipates," "estimates," "prospects" or similar expressions, we are making forward-looking statements. We claim the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995 for all of our forward-looking statements. While we believe that our forward-looking statements are reasonable, you should not place undue reliance on any such forward-looking statements, which speak only as of the date made. Because these forward-looking statements are based on estimates and assumptions that are subject to significant business, economic and competitive uncertainties, many of which are beyond our control or are subject to change, actual results could be materially different. Factors that might cause such a difference include, without limitation, the risks and uncertainties discussed from time to time in our reports filed with the Securities and Exchange Commission, including those listed in "Part I, Item 1A - Risk Factors" in the Company's Annual Report on Form 10-K, for fiscal year 2013. The Company's Board of Directors may change the Company's dividend policy and dividend amounts at any time, or discontinue the payment of dividends altogether, due to a number of factors, including covenants in the Company's loan agreement requiring the approval of the Company's bank prior to the payment of dividends, the Company's levels of available capital, the Company's future operating results, or the determination to use or reserve the Company's cash resources for other purposes. Other factors not currently anticipated by management may also materially and adversely affect our financial condition, liquidity or results of operations. Except as required by applicable law, we do not undertake, and expressly disclaim, any obligation to publicly update or alter our statements whether as a result of new information, events or circumstances occurring after the date of this report or otherwise. The Company's expectations regarding future bookings and revenues are projections developed by the Company based upon information from a number of sources, including, but not limited to, customer data and discussions. These projections are subject to change based upon a wide variety of factors, a number of which are discussed above. Certain of these new orders have been delayed in the past and could be delayed in the future. Because the Company's products are typically integrated into larger systems or lines, the timing of new orders is dependent on the timing of completion of the overall system or line. In addition, because the Company's products have shorter lead times than other components and are required later in the process, orders for the Company's products tend to be given later in the integration process. A significant portion of the Company's projected revenues and net income may depend upon the Company's ability to successfully develop and introduce new products, expand into new geographic markets or continue sales with current and future customers. Because a significant portion of the Company's revenues are denominated in foreign currencies and are translated for financial reporting purposes into U.S. dollars, the level of the Company's reported net sales, operating profits and net income are affected by changes in currency exchange rates, principally between U.S. Dollar, Euro, Chinese Yuan and Japanese Yen. Currency exchange rates are subject to significant fluctuations, due to a number of factors beyond the control of the Company, including general economic conditions in the United States and other countries. Because the Company's expectations regarding future revenues, order bookings, backlog and operating results are based upon assumptions as to the levels of such currency exchange rates, actual results could differ materially from the Company's expectations.

OVERVIEW



Perceptron, Inc. ("Perceptron" or the "Company") develops, produces and sells non-contact 3D machine vision solutions for measurement, inspection, and robot guidance in industrial applications. The Company's primary operations are in North America, Europe and Asia. While the Company has one operating segment, its non-contact measurement solutions are divided into Automated Systems and Technology Components. Automated Systems products consist of a number of complete metrology solutions for industrial process control - AutoGauge?, AutoGauge? Plus, AutoFit?, AutoScan?, AutoGuide? and Helix® gauging and robot guidance solutions. These products are used by the Company's customers to improve product quality, shorten product launch cycles, reduce overall manufacturing costs, and manage complex manufacturing processes. Technology Components products include ScanWorks®, ScanWorks®xyz, and WheelWorks®. products that target the digitizing, reverse engineering, inspection and original equipment manufacturers wheel alignment markets. Additionally, the Company provides a number of Value Added Services that are primarily related to the Automated Systems line of products. The largest market served by the Company is the automotive market.

New vehicle tooling programs represent the most important selling opportunity for the Company's automotive-related sales. The number and timing of new vehicle tooling programs varies in accordance with individual automotive manufacturers' plans. The existing installed base of Automated Systems products also provides a continuous revenue stream in the form of system additions, upgrades, modifications, and Value Added Services such as customer training and support. Opportunities for Technology Component products include growth from ScanWorks®xyz. The ScanWorks®xyz product opens up a new market opportunity by allowing customers to add scanning capability to their existing coordinate measuring machines.

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On August 30, 2012, the Company completed the sale of substantially all of the assets of its Commercial Products Business Unit ("CBU"). The disposal and operating results of CBU resulted in a net, after-tax gain of approximately $26,000 in the first quarter of fiscal 2013. CBU was reported as a discontinued operation beginning in fiscal year 2012. There was no activity associated with CBU in the first or second quarters of fiscal 2014.

During the second quarter of fiscal 2014, the Company had a net loss of $407,000 compared to net income of $184,000 in the second quarter of fiscal 2013. The $591,000 difference in net income between the second quarters of fiscal 2014 and 2013 was primarily the result of lower sales of $710,000 in the fiscal 2014 quarter. Gross margin is comparable between the second quarters of fiscal 2014 and 2013, but is lower than anticipated for the full year. The Company's gross margin is normally lower in quarters when sales are relatively soft, due to the fixed nature of certain cost of goods sold. Operating expenses increased in the second quarter of fiscal 2014, by 3.8% as compared to the second quarter of fiscal 2013. The increase primarily reflects higher salaries and salary-related expenses and higher recruiting costs related to recent changes in the Company's executive officers.

Outlook -We do not believe reported results for the second quarter and first half of fiscal 2014 are reflective of Perceptron's strong competitive position or our longer-term prospects. With backlog at a record $40.4 million, we expect significantly higher sales in the second half of our 2014 fiscal year compared to the first six months of the year as we deliver on scheduled shipments and begin to partially work down our record backlog. In particular, we have a large number of shipments and installations scheduled in Europe, a challenge we believe our team is prepared to handle successfully. We expect gross margins to increase in the second half of fiscal 2014 to historical levels, as a result of the expected increase in sales levels in the third and fourth quarters. Due to an increase in the Company's public float, as of December 31, 2013, Perceptron, Inc. will become an accelerated filer for its fiscal 2014 year end. This change in filing status requires the Company to have an audit of its internal control over financial reporting (ICFR), which will increase fees related to the annual audit. Sales for fiscal 2014 are expected to be in the same range as fiscal 2013 and we still expect a profitable fiscal year 2014. Our confidence in our full-year outlook is driven by the positive reception our products continue to receive in our core automotive markets. Over the past several months, we have been recognized by several auto manufacturers for the contributions our products make to the quality of their vehicles.

RESULTS OF OPERATIONS



Three Months Ended December 31, 2013 Compared to Three Months Ended December 31,

2012



Overview - Net sales in the second quarter of fiscal year 2014 were $12.5 million with a net loss of $407,000, or ($0.05) per diluted share, compared to net sales of $13.2 million and net income of $184,000, or $0.02 per diluted share in the second quarter of fiscal year 2013.

Sales - The following table sets forth comparison data for the Company's net sales by geographic location.

Sales (by location) Second Quarter Second Quarter (in millions) 2014 2013 Increase/(Decrease) Americas $ 4.4 35.2% $ 5.0 37.9% $ (0.6) (12.0)% Europe 5.7 45.6% 5.2 39.4% 0.5 9.6% Asia 2.4 19.2% 3.0 22.7% (0.6) (20.0)% Totals $ 12.5 100.0% $ 13.2 100.0% $ (0.7) (5.3)%



Sales were approximately $12.5 million, or 5.3%, lower than the $13.2 million in the second quarter of fiscal year 2013. Sales were approximately 9.6% higher in Europe while sales in the Americas and Asia were down approximately 12.0% and 20.0%, respectively. Europe's revenue increased primarily due to higher Automated Systems sales and to a lesser extent, increased sales of Technology Components. Approximately $280,000 of the sales increase in Europe related to the strength of the Euro this year compared to last year. The decrease in sales in Asia was principally due to lower Automated Systems sales and to a lesser extent, lower Technology Component sales. The decline in the Americas was primarily due to lower Automated Systems sales that were partially offset by higher Technology Component sales. Changes in sales levels reflect normal quarter to quarter fluctuations as a result of requested delivery and installation schedules from our customers.

Bookings - Bookings represent new orders received from customers. It should be noted that the Company's level of new orders fluctuates from quarter to quarter and the amount of new order bookings during any particular period is not necessarily indicative of the future operating performance of the Company. The following table sets forth comparison data for the Company's bookings by geographic location.

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Bookings (by location) Second Quarter Second Quarter (in millions) 2014 2013 Increase/(Decrease) Americas $ 6.4 37.6% $ 3.6 29.8% $ 2.8 77.8% Europe 5.4 31.8% 6.0 49.6% (0.6) (10.0)% Asia 5.2 30.6% 2.5 20.6% 2.7 108.0% Totals $ 17.0 100.0% $ 12.1 100.0% $ 4.9 40.5%



Bookings in the second quarter were 40.5% higher than in the second quarter of fiscal year 2013 due to significant increases in the Americas and Asia. The increase in the Americas and Asia was principally due to higher orders for Automated Systems products. The decrease in Europe was primarily related to lower Value Added Services and to a lesser extent, lower Automated Systems orders. The stronger Euro helped offset some of the decrease in bookings by approximately $420,000.

Backlog - Backlog represents orders or bookings received by the Company that have not yet been filled. It should be noted that the level of backlog during any particular period is not necessarily indicative of the future operating performance of the Company. Most of the backlog is subject to cancellation by the customer. The Company expects to be able to fill substantially all of the orders in the backlog during the following twelve months. The following table sets forth comparison data for the Company's backlog by geographic location.

Backlog (by location) Second Quarter Second Quarter (in millions) 2014 2013 Increase/(Decrease) Americas $ 9.1 22.5% $ 8.7 29.3% $ 0.4 4.6% Europe 17.9 44.3% 13.5 45.4% 4.4 32.6% Asia 13.4 33.2% 7.5 25.3% 5.9 78.7% Totals $ 40.4 100.0% $ 29.7 100.0% $ 10.7 36.0%



The Company's backlog grew approximately 36.0% from $29.7 million at December 31, 2012, to a record level of $40.4 million on December 31, 2013. Europe's backlog increased by approximately $4.4 million, or 33%, due to strong bookings for several large Automated Systems projects. Included in Europe's backlog are orders for the previously announced project that was delayed by the customer into the second half of fiscal 2014. Asia's backlog increased 79% primarily due to Automated Systems projects in China. The Americas backlog increased primarily due to higher Automated Systems orders that were partially offset by a decrease in Brazil's backlog for Automated Systems orders.

Gross Margin - The Company's gross margin percentage was comparable at 39.7% of sales in the second quarter this year to 39.3% last year. Gross Margin in the second quarter is lower than anticipated for a full fiscal year. The Company's gross margin is normally lower in quarters when sales are relatively soft, due to the fixed nature of certain cost of goods sold. The mix of revenue in the second quarter of fiscal 2014 reflected lower material costs as a percentage of revenue when compared to the second quarter of fiscal 2013. Partially offsetting the lower material costs, were higher costs related to additional personnel and year over year salary increases.

Selling, General and Administrative (SG&A) Expenses - SG&A expenses were approximately $3.6 million, an increase of $142,000, or 4.1%, compared to the second quarter of fiscal 2013. The increase was primarily due to higher executive recruiting expenses. Year over year salary increases and salary related costs also contributed to the increase. The effect of the stronger Euro relative to the U.S. dollar in the second quarter this year compared to last year increased European SG&A expense by approximately $50,000.

Engineering, Research and Development (R&D) Expenses - Engineering, research and development expenses were approximately $1.6 million, an increase of $49,000, or 3.1%, over the first quarter last year. The increase primarily resulted from higher salary and salary-related costs in the quarter this year compared to last year, which includes an increase in personnel and year over year salary increases, partially offset by a decrease in engineering materials costs.

Interest Income, net - Net interest income was $51,000 in the second quarter of fiscal 2014 compared with net interest income of $32,000 in the first quarter of fiscal 2013. The increase in interest income was primarily the result of higher invested cash balances in fiscal 2014 when compared to fiscal 2013.

Foreign Currency - There was a net foreign currency loss of $246,000 in the second quarter of fiscal 2014 compared with a net foreign currency loss of $304,000 a year ago. The $58,000 decrease in net foreign currency losses was primarily related to favorable changes in the Japanese Yen and the Brazilian Real, partially offset by unfavorable changes in the Indian Rupee.

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Income Taxes - The effective tax rate on continuing operations for the second quarter of fiscal 2014 was 11.08% compared to 257.75% in the second quarter of fiscal 2013. The effective rate in both fiscal quarters primarily reflects the effect of the mix of pre-tax income and loss among the Company's various operating entities and their countries' respective tax rates. In the fiscal 2014 quarter, foreign pre-tax losses at an effective tax rate of 23.9% were partially offset by pre-tax income in the United States at an effective tax rate of 30.3%. Affecting the unusual effective tax rate in the fiscal 2013 quarter was the fact that the United States had a pre-tax loss at an effective tax rate of 37.9% that was substantially offset by foreign pre-tax income at a lower effective tax rate of 14.9%.

Six Months Ended December 31, 2013 Compared to Six Months Ended December 31, 2012



Overview - For the first half of fiscal 2014, the Company reported a net loss from continuing operations of $995,000 or ($0.11) per diluted share, compared to income from continuing operations of $813,000 or $0.10 per diluted share, for the first half of fiscal 2013. On August 30, 2012, the Company sold substantially all of the assets of its Commercial Products Business Unit ("CBU"). Accordingly, CBU results are reported as a discontinued operation. In the six months ended December 31, 2012 the Company reported income of $26,000, net of taxes, related to CBU. The Company's net loss for the first half of fiscal 2014 was $995,000, or ($0.11) per diluted share, compared to net income of $839,000 or $0.10 per diluted share for the first half of fiscal 2013. Specific line item results are described below.

Sales - Net sales in the first six months of fiscal 2014 were $24.9 million, compared to $25.4 million for the six months ended December 31, 2012. The following tables set forth comparison data for the Company's net sales by geographic location.

Sales (by location) Six Months Six Months (in millions) Ended 12/31/13 Ended 12/31/12 Increase/(Decrease) Americas $ 9.2 36.9% $ 10.3 40.6% $ (1.1) (10.7)% Europe 10.3 41.4% 9.3 36.6% 1.0 10.8% Asia 5.4 21.7% 5.8 22.8% (0.4) (6.9)% Totals $ 24.9 100.0% $ 25.4 100.0% $ (0.5) (2.0)%



Sales in the Americas decreased $1.1 million, principally due to lower Automated Systems sales. European sales increased $1.0 million primarily from higher Automated Systems sales and to a lesser extent from higher Technology Component sales. The stronger Euro in fiscal 2014 had the effect of increasing European sales by approximately $530,000. Sales in Asia decreased primarily due to lower Technology Component sales.

Bookings - Bookings represent new orders received from customers. New order bookings for the six months ended December 31, 2013 were $34.9 million compared to $24.8 million for the same period one year ago. It should be noted that historically, the Company's level of new orders has varied from period to period and the amount of new order bookings during any particular period is not necessarily indicative of the future operating performance of the Company. The following tables set forth comparison data for the Company's bookings by geographic location.

Bookings (by location) Six Months Six Months (in millions) Ended 12/31/13 Ended 12/31/12 Increase/(Decrease) Americas $ 10.1 28.9% $ 6.7 27.0% $ 3.4 50.7% Europe 15.1 43.3% 12.9 52.0% 2.2 17.1% Asia 9.7 27.8% 5.2 21.0% 4.5 86.5% Totals $ 34.9 100.0% $ 24.8 100.0% $ 10.1 40.7%



The increase in bookings of $10.1 million for the six-month period of fiscal 2014 was primarily due to higher Automated Systems orders in all geographic regions. The stronger Euro also contributed approximately $850,000 to Europe's increase. The increase in Asia's bookings of $4.5 million was partially offset by lower bookings for Technology Component products.

Gross Margin - Gross margin was $9.3 million, or 37.2% of sales, in the first half of fiscal 2014, as compared to $10.8 million, or 42.5% of sales, in the first half of fiscal 2013. The fiscal 2013 six month period had a high level of final buy-off revenue on completed projects that primarily occurred in the first quarter of fiscal 2013. This resulted in a higher gross margin in the fiscal 2013 six month period when compared to a similar level of sales in the current six month period. Cost of goods sold was also higher in fiscal 2014, primarily related to increases in salary and salary-related expenses which included additional personnel and year over year salary increases. Higher benefits and travel expenses in fiscal 2014 also contributed to the variance. The effect of the stronger Euro in the first half of fiscal 2014 compared to 2013 increased gross margin by approximately $230,000.

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Selling, General and Administrative (SG&A) Expenses - SG&A expenses were $7.1 million in the first half of fiscal 2014 compared to $6.8 million in the same period one year ago. The increase of approximately $255,000, or 3.7% was primarily due to year over year salary increases and salary-related costs. SG&A expenses were also higher for recruiting costs related to the recent changes in the Company's executive officers. Partially offsetting the increases in SG&A were lower bad debt expense and legal fees. The stronger Euro in the fiscal 2014 period compared to fiscal 2013, increased expenses by approximately $100,000.

Engineering, Research and Development (R&D) Expenses - Engineering and R&D expenses were $3.3 million for the six months ended December 31, 2013 compared to $3.2 million for the six-month period a year ago. The $146,000 increase was primarily due to higher salary and salary-related costs, which include additional personnel and year over year salary increases that were partially offset by lower engineering materials expenses.

Interest Income, net - Net interest income was $63,000 in the first half of fiscal 2014 compared with net interest income of $76,000 in the first half of fiscal 2013. The decrease was principally due to lower interest rates in the first half of fiscal 2014 compared to the first half of fiscal 2013.

Foreign Currency - There was a net foreign currency loss of $249,000 in the first half of fiscal 2014 compared with a loss of $158,000 a year ago. The $91,000 change in foreign currency losses principally represented unfavorable changes in the Indian Rupee and to a lesser extent unfavorable changes in the Euro that were partially offset by favorable changes in the Brazilian Real and Japanese Yen.

Income Taxes - The effective tax rate on income from continuing operations for the first six months of fiscal 2014 was 23.0% compared to 8.4% in the first half of fiscal 2013. The effective tax rate in both fiscal periods primarily reflected the effect of the mix of pre-tax income and loss among the Company's various operating entities and their countries' respective tax rates. The effective tax rate in the United States was 24.0% on pre-tax income in the fiscal 2014 period compared to 40.1% on a pre-tax loss in the fiscal 2013 period. The foreign subsidiaries combined effective tax rates were 23.3% on a

combined pre-tax loss in the fiscal 2014 period compared to 20.9% on combined pre-tax income in the 2013 period.

LIQUIDITY AND CAPITAL RESOURCES

The Company's cash and cash equivalents were $18.1 million at December 31, 2013, compared to $13.4 million at June 30, 2013. The $4.7 million increase in cash was provided from continuing operations of approximately $3.8 million, cash received from stock plans of $3.1 million, and $228,000 from changes in foreign currency rates. Offsetting cash received was $2.1 million used for net purchases of short-term investments and $319,000 used for capital expenditure purchases.

Of the $3.8 million in cash provided from continuing operations, $4.4 million was generated from working capital changes and $995,000 was used for operations less non-cash items totaling $402,000. The change in working capital resulted from a decrease in receivables of $9.9 million, which was partially offset by a $3.3 million change in other current assets and liabilities, an increase in inventories of $1.3 million and a reduction in accounts payable of $857,000.

The $9.9 million decrease in receivables primarily reflects the collection of the large receivables balance at June 30, 2013 and the level of sales in the first half of fiscal 2014. The $3.3 million change in other current assets and liabilities related primarily to a reduction in accrued compensation related to the payout of the Company's fiscal 2013 profit sharing awards. The $1.3 million increase in inventories primarily represented the timing of shipments of finished goods, additional raw materials purchased to manufacture the new Helix® sensors and safety stock levels needed to reduce lead time requirements. The reduction in accounts payable represents normal fluctuations in the timing of payments.

The Company provides a reserve for obsolescence to recognize inventory impairment for the effects of engineering change orders, age and use of inventory that affect the value of the inventory. The reserve for obsolescence creates a new cost basis for the impaired inventory. When inventory that has previously been impaired is sold or disposed of, the related obsolescence reserve is reduced resulting in the reduced cost basis being reflected in cost of goods sold. A detailed review of the inventory is performed annually with quarterly updates for known changes that have occurred since the annual review. During the six-month period ended December 31, 2013, the Company increased its reserve for obsolescence by a net $74,000.

The Company determines its allowance for doubtful accounts by considering a number of factors, including the length of time trade accounts receivable are past due, the Company's previous loss history, the customer's current ability to pay its obligation to the Company, and the condition of the general economy and the industry as a whole. The Company writes-off accounts receivable when they become uncollectible, and payments subsequently received on such receivables are credited to the allowance for doubtful accounts. The Company decreased its allowance for doubtful accounts by a net $69,000 during the six-month period ended December 31, 2013.

At December 31, 2013, the Company had $34.0 million in cash, cash equivalents and short-term investments of which $21.7 million or 64% was held in foreign bank accounts. The Company does not repatriate its foreign earnings and based on its business plan, current cash, cash equivalents and short-term investments, the level of cash, cash equivalents and short-term investments in foreign bank accounts is not expected to have an impact on the Company's liquidity.

The Company had no debt outstanding at December 31, 2013 and June 30, 2013. The Company has a $6.0 million secured credit agreement with Comerica Bank ("Credit Agreement"). On October 31, 2013, the Company entered into a Sixth Amendment to the Credit

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Agreement that extended the maturity date until November 2, 2015 and increased the dividend amount the Company could declare to $2.5 million from $1.8 million in any fiscal year provided the Company maintains a minimum Tangible Net Worth as defined in the Credit Agreement. Proceeds under the Credit Agreement may be used for working capital and capital expenditures. Security under the Credit Agreement is substantially all non-real estate assets of the Company held in the United States. Borrowings are designated as a Libor-based Advance or as a Prime-based Advance if the Libor-based Advance is not available. Interest on Libor-based Advances is calculated at 2.35% above the Libor Rate offered at the time for the period chosen, and is payable on the last day of the applicable period. Quarterly, the Company pays a commitment fee of 0.15% per annum on the average daily unused portion of the revolving credit commitment. The Credit Agreement requires the Company to maintain a minimum Tangible Net Worth of not less than $33.2 million. The Company was in compliance with this financial covenant at December 31, 2013. The Credit Agreement also requires the Company to have no advances outstanding for 30 days (which need not be consecutive) during each calendar year.

At December 31, 2013, the Company's German subsidiary ("GmbH") had an unsecured credit facility totaling 350,000 Euros (equivalent to approximately $482,000). The facility allows 100,000 Euros to be used to finance working capital needs and equipment purchases or capital leases bearing an interest rate of 7.15%. The facility allows up to 250,000 Euros to be used for providing bank guarantees bearing an interest rate of 2.0%. The German credit facility is cancelable at any time by either GmbH or the bank and any amounts then outstanding would become immediately due and payable.

For a discussion of certain contingencies relating to the Company's liquidity, financial position and results of operations, see Item 1, "Legal Proceedings" and Note 10 to the Consolidated Financial Statements, "Commitments and Contingencies", contained in this Quarterly Report on Form 10-Q, and Item 3, "Legal Proceedings" and Note 5 to the Consolidated Financial Statements, "Contingencies", of the Company's Annual Report on Form 10-K for fiscal year 2013. See also, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations - Critical Accounting Policies - Litigation and Other Contingencies" of the Company's Annual Report on Form 10-K for fiscal year 2013.

At December 31, 2013 the Company had short-term investments totaling $15.9 million and a long-term investment valued at $725,000. See Note 6 to the Consolidated Financial Statements, "Short-Term and Long-Term Investments", contained in this Quarterly Report on Form 10-Q, for further information on the Company's investments and their current valuation. The market for the long-term investment is currently illiquid.

On September 27, 2012, the Company announced that its Board of Directors declared a special dividend of twenty-five ($0.25) per share of Common Stock. The special dividend was paid on November 1, 2012. During fiscal 2013, the Company also announced that it intended to pay regular annual dividends. The Company may change its dividend policy and dividend amounts at any time, or discontinue the payment of dividends altogether.

The Company spent $319,000 on capital equipment in the first six months of fiscal year 2014 and could spend up to an aggregate of approximately $1.9 million for capital expenditures during fiscal 2014, although there is no binding commitment to do so. Based on the Company's current business plan, the Company believes that available cash on hand, short-term investments and existing credit facilities will be sufficient to fund anticipated fiscal 2014 cash flow requirements, except to the extent that the Company implements business development opportunities, which would be financed as discussed below. The Company does not believe that inflation has significantly impacted historical operations and does not expect any significant near-term inflationary impact.

The Company will consider evaluating business opportunities that fit its strategic plans. There can be no assurance that the Company will identify any opportunities that fit its strategic plans or will be able to enter into agreements with identified business opportunities on terms acceptable to the Company. The Company anticipates that it would finance any such business opportunities from available cash on hand, issuance of additional shares of its stock or additional sources of financing, as circumstances warrant.

CRITICAL ACCOUNTING POLICIES



A summary of critical accounting policies is presented in Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations - Critical Accounting Policies" of the Company's Annual Report on Form 10-K for fiscal year 2013.

New Accounting Pronouncements

For a discussion of new accounting pronouncements, see Note 2 to the Consolidated Financial Statements, "New Accounting Pronouncements".


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