** **

**SECURITIESAND EXCHANGE COMMISSION**

**Washington,D.C.  20549**

 

**FORM 10-KSB**

 

**ý********ANNUALREPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**

 

**For thefiscal year ended October 31, 2002**

** **

**OR**

 

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

 

**For the Transition periodfrom                to                **

 

**CommissionFile Number:  0-11518**

 

**PPT VISION, INC.**

(Name of Small BusinessIssuer in its Charter)

 

| **MINNESOTA**                                                                      |   | **41-1413345**                        |
|------------------------------------------------------------------------------------|--------|---------------------------------------|
| (State or other jurisdiction  of incorporation or organization)                    |   | (I.R.S. Employer  Identification No.) |
|                                                                               |   |                                  |
| **12988  Valley View Road  Eden Prairie, MN  55344**                          |
| (Address of principal  executive offices, including zip code)                      |
|                                                                               |   |                                  |
| Registrant’s telephone  number, including area code:  **(952) 996-9500** |
|                                                                               |   |                                  |
| Securities registered  pursuant to Section 12(b) of the Act:   **None**       |
|                                                                               |   |                                  |
| Securities registered  pursuant to Section 12(g) of the Act:                       |
| **(1)  Common Stock $.10 par value (2) Preferred Stock Purchase Rights**           |

 

Check whether the issuer (1) has filed all reports required to be filedby Section 13 or 15(d) of the Exchange Act during the past 12 months (or forsuch 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    ý    NO    o

 

Check if there is no disclosure of delinquent filers in response toItem 405 of Regulation S-B contained in this form, and no disclosure will becontained, to the best of registrant’s knowledge, in definitive proxy orinformation statements incorporated by reference in Part III of this Form10-KSB or any amendment to this Form 10-KSB.  ý

 

The aggregate market value of the voting stock held by nonaffiliates ofthe issuer (based on the closing sale price of such stock as reported by theNasdaq Small Cap Market) as of January 14, 2003 was approximately $3.3 million.

** **

**DOCUMENTS INCORPORATED BY REFERENCE**

Portion of the Company’s Proxy Statement for its Annual Meeting ofShareholders will be filed within 120 days of October 31, 2002 and areincorporated by reference into Part III of this Form 10-KSB.

 

 

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**PART I**

 

This Annual Report on Form10-KSB contains forward-looking statements within the meaning of Section 27A ofthe Securities Act of 1933 and Section 21E of the Securities Exchange Act of1934, including statements regarding the Company’s expectations, beliefs,intentions and strategies regarding the future. Forward-looking statementsinclude, without limitation, statements regarding the extent and timing offuture revenues and expenses and customer demand. All forward-lookingstatements included in this document are based on information available to theCompany as of the date hereof, and the Company assumes no obligation to updateany such forward-looking statements.

 

The Company’s actual resultsare subject to risks and uncertainties and could differ materially from thosediscussed in the forward-looking statements. These statements are based uponthe Company’s expectations regarding a number of factors, including theCompany’s ability to obtain additional working capital if necessary to supportits operations, changes in worldwide general economic conditions, cyclicalityof capital spending by customers, the Company’s ability to keep pace withtechnological developments and evolving industry standards, worldwidecompetition, and the Company’s ability to protect its existing intellectualproperty from challenges from third parties. A detailed description of thefactors that could cause future results to materially differ from the Company’srecent results or those projected in the forward-looking statements arecontained in the section of this Form 10-KSB entitled “Important FactorsRegarding Forward-Looking Statements.”

** **

**Item 1. DESCRIPTION OF BUSINESS**

** **

**CORPORATE PROFILE**

 

PPT VISION, Inc. designs,manufactures, markets, and integrates 2D and 3D machine vision-based automatedinspection systems for manufacturing applications. Machine vision-basedinspection systems enable manufacturers to realize significant economicpaybacks by increasing the quality of manufactured parts and improving theproductivity of manufacturing processes. The Company’s 2D machine visionproduct line is sold on a global basis to end-users, system integrators, andoriginal equipment manufacturers (OEM’s) primarily in the electronic andsemiconductor component, automotive, medical device, and packaged goodsindustries. The Company’s *Speed*Scan3DTM sensor, incorporating the Company’s patented high-speed ScanningMoiré InterferometryTM technology, is sold to original equipmentmanufacturers for specific applications. The Company’s PPT861TM 3Dscanning system, which uses the Company’s *Speed*Scan3D sensor, is an application-specific inspection solution targeted atinspection of leaded and bumped components in the semiconductor back-endmanufacturing process, inspection of surface-mount electronic connectors, andinspection of components used in hard disk drives.

 

PPT VISION was incorporatedunder the laws of the State of Minnesota in 1981.

 

**WHAT IS MACHINE VISION?**

 

A machine vision systemconsists of computer software and hardware working together with cameras andlighting to capture images of products as they are being manufactured. Bycapturing these images and comparing them to images of standard or correctproducts, an effective machine vision system will prevent defective productsfrom being shipped to consumers and enable manufacturers to improve theirprocesses and reduce costs. Commercial use of machine vision technology formanufacturing quality control began to emerge in the early 1980s. However,machine vision systems at that time were complex to program and maintain,difficult to install, limited in performance and not cost-effective. Throughadvances in microprocessor and software technologies, these barriers have beenremoved, enabling machine vision to emerge as a powerful process controltechnology that enables manufacturers to improve quality and increaseproductivity.

** **

**THE MACHINE VISION MARKET**

 

The machine vision market islarge and highly fragmented with over 200 machine vision suppliers around theworld. Many are very small companies focusing on niche applications or nichetechnologies. A small handful of competitors such as Cognex or Orbotech haveemerged as large, global competitors. The Automated Imaging Association (“AIA”)estimates that the North American market for machine vision systems in 2000 wasapproximately $2.1 billion, with worldwide levels estimated at approximately$5.5 billion. The AIA expects this market to grow at approximately 12% per yearover the next 5 years. Demand for machine vision systems comes from end-usermanufacturers who apply these systems as an integral part of theirmanufacturing process, original equipment manufacturers (“OEMs”) whoincorporate machine vision systems into their products, system integrators andmachine builders. 

 

A key factor in theexpansion of the machine vision market has been growth in the demand formachine vision systems in the semiconductor and electronics industries. Ingeneral, the growth in demand for personal computers, cellular communicationsand other electronic devices, as well

 

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as the increase in electronic components inside other products such asconsumer appliances and automobiles, will stimulate demand for electronic andsemiconductor components. For example, VLSI Research, Inc., an independenttechnology research firm, projects that the demand for lead inspectionequipment will grow from $185 million in 2000 to $400 million in 2004. In aneffort to rapidly improve and increase manufacturing capability, while at thesame time introducing innovative new designs and improving quality,manufacturers of these components are increasingly turning to machine vision asa vital part of their manufacturing process. However, over the past 12-18months, the manufacturing sectors of the economy in general, and thesemiconductor and electronics industries in particular, have experienced asignificant decrease in demand for their products. As a result, thesebusinesses have purchased less equipment for use in their production processes,which has led to a significant decrease in demand for vision inspection systemsthroughout the industry.

 

The growth of the end-usermachine vision market is also being driven by global competitive trends, whichhave led manufacturers worldwide to redesign manufacturing processes in orderto reduce cost and increase productivity and quality. In order to meet today’smanufacturing quality requirements, statistical sampling methods are ofteninsufficient and 100% inspection is required. To accomplish these objectives,manufacturers are increasingly adopting machine vision solutions.

 

Manufacturers are demandingexpanded capabilities from machine vision systems, including faster processingcapabilities and greater ease of use. Manufacturers are also demanding morecomprehensive services from machine vision providers, including applicationengineering, technical support and training. Furthermore, manufacturers areseeking the ability to monitor trends, to better comprehend the manufacturingprocess and to identify problems. In addition, manufacturers are being challengedto maintain high production levels that require rapid set up times, flexibilityand seamless networking with the host manufacturing control system to providecomprehensive diagnostic and process control feedback.

** **

**BUSINESS STRATEGY**

 

The Company’s objective isto be a worldwide leader in the design, manufacture, marketing and integrationof 2D and 3D machine vision-based automated inspection systems formanufacturing applications. Through the successful integration of the Company’sfive core competencies, including image acquisition, image processing,application development software, optics and illumination, and vision systemintegration, the Company believes it will be able to meet its objective andsuccessfully implement its strategy.

** **

**Key elementsof the Company’s strategy include:**

 

•                    Providing Complete Solutions: The Company focuses on providing completemachine vision solutions to end-user manufacturers, OEM’s, system integratorsand machine builders. PPT VISION is pursuing what it believes to be the mostfully vertically integrated business model in the industry, includingdesigning, manufacturing, marketing and integrating complete machine visionsolutions. The Company believes this provides it with a competitive advantagein delivering cost-effective, complete vision solutions.

 

•                     Extending Technology Leadership in Speed and Ease-of-Use: The Companyis continuing to aggressively invest in next generation software and hardwarearchitectures that will expand its lead in speed, ease-of-use and the abilityto deliver cost-effective complete solutions to its customers.

 

•                     Targeting Expanding Markets Through Continued Development ofApplication-Specific Software Tools and Hardware Products: The Company’sapplication-specific software tools are a proven solution for a wide variety ofinspection applications. In response to the worldwide expansion of thesemiconductor and electronics industries, the Company is developing additionalsoftware tools and hardware products for electronic component, electronics andsemiconductor applications.

 

•                     Providing a Superior Level of Value-Added Application EngineeringSupport: The Company delivers a high level of value-added applicationengineering support to its end-user customers through its own in-houseapplications engineering resources and through its network of value-addedsystem integrators and international distributors. Manufacturing end-usersincreasingly want to concentrate their engineering expertise on the productsthey manufacture, not on engineering machine vision systems. They are seekingcomplete machine vision solutions with associated application engineeringsupport on an on-going basis.

 

•                     Increasing International Market Presence: The Company is aggressivelyfocusing on increasing its market share in the worldwide machine vision market.The Company believes international markets represent a significant opportunityand intends to capture a significant share of this market through investmentand expansion in its international sales distribution and supportinfrastructure. In fiscal 2002, 33% of the Company’s revenues came fromcustomers based outside of the United States.

 

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**PRODUCTS**

 

The Company designs,manufactures, markets and integrates machine vision-based automated inspectionsystems for manufacturing applications such as electronic and mechanicalassembly verification, verification of printed characters, packaging integrity,surface flaw detection, and gauging and measurement tasks. A machine visionsystem is a combination of cameras, lighting, and computer hardware andsoftware working together to capture and analyze images of moving parts todetermine if the parts match a defined standard. Machine vision-basedinspection systems enable manufacturers to realize significant economicpaybacks by increasing the quality of manufactured parts and improving theproductivity of manufacturing processes. The Company’s vision systems are soldthroughout the Americas, Europe and Asia to a broad range of industrycategories, including automotive, electronic and semiconductor components,consumer goods, medical devices, pharmaceuticals and plastics.

 

The Company’s machine visionsystems are primarily targeted at providing manufacturers with 100% inspectionin high speed, discrete part manufacturing applications. This typicallyreplaces older off-line, random sampling techniques or human vision inspectiontechniques as a means of monitoring quality. The Company’s machine visionsystems enable manufacturers to achieve zero defect production.

 

The Company’s family ofmachine vision systems, which include its proprietary Vision Program ManagerTM(VPM) graphical programming software, provide significant performanceadvantages that meet manufacturers’ critical requirements. These requirementsinclude high speed, flexibility, ease-of-use, networkability and statisticalfeedback, all without sacrificing performance. All PPT VISION systems aresupported by the Company’s focus on providing its customers with complete solutions,not just components, and a major commitment to providing its customers withvalue-added application engineering services.

 

The Company has developedproducts that have specific advantages in terms of speed and ease-of-use. Manyof the Company’s machine vision systems are capable of operating at speeds over10,000 parts per minute performing 100% inspection. This speed can be criticalto successfully employing machine vision in many applications. PPT VISION alsopioneered the use of an icon-based visual programming system (i.e. VPM)operating in the Microsoft® WindowsTM environment. Usersare able to program the Company’s systems by creating a flowchart of iconslinked together rather than having to write a computer program in a programminglanguage such as “C” or using a complex menu-based system. This results inlower cost and less time for implementation.

 

**PassportDSLTM and Scout DSLTM (Digital Serial Link)**

 

The Company introduced itscompletely digital machine vision systems, the patented Passport DSL and ScoutDSL systems, in fiscal 1998. These products offer an integrated network ofcameras, lighting, image processors and hubs, which together form a completemachine vision system.

 

The Passport DSL and ScoutDSL systems are completely digital, which results in much greater accuracy andrepeatability than traditional analog systems. These DSL systems feature PPT’sVision Program Manager (VPM) software, a powerful, graphical programminginterface that requires no programming expertise and operates in the Microsoft®WindowsTM environment. The Passport DSL and Scout DSL bothincorporate a fully integrated Pentium-based PC, which can be easily added ontoa factory network, allowing for a full range of control and monitoringcapabilities and an easy way to import or export process information andimages. The DSL systems support a network of up to 16 asynchronouslyfunctioning cameras that capture non-interlaced video images at rates up to4,000 full frames per minute. To complement the DSL product family, the Companyhas also developed the DSL5000, DSL5600, DSL6000 and DSL7500 digital cameras.

 

The Company has been workingto enhance the price/performance capabilities of its core 2D product line. Inthis regard, the Company has recently made several enhancements to expand theapplications for the Passport and Scout products. These include enhancements tothe Company’s proprietary VPM Software as well as the introduction of newhigh-resolution, remote head and low-cost digital cameras.

** **

**PassportTM440, PassportTM 240, and ScoutTM Machine VisionSystems**

 

The Passport 440 system isdesigned to operate with up to four asynchronously functioning cameras formultiple inspection views and complex imaging tasks. The Passport 240 systemhas all of the basic capabilities of the Passport 440 in a two-camera model.Both systems are housed in industrially rugged enclosures and are capable ofoperating at speeds over 10,000 inspections per minute. The Scout is acost-effective machine vision system designed for industrial applications thatdo not require rugged enclosures. It is packaged in a non-industrial styleenclosure and is capable of running two cameras with speed and power similar tothat of the Passport 440.

** **

**IMPACTTMVision System**

 

In fiscal 2002, PPTintroduced the IMPACT high-speed all digital 2D machine vision “micro-system”and  the Inspection BuilderTM graphicaluser interface software. The IMPACT system provides a breadth of applicationand price/performance ratio that is not available in low-end sensors or smartcameras, while also providing the power and flexibility for advancedapplications. IMPACT offers an advanced Ethernet and Internet capability that

 

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allows remote monitoring and control as part of a network with multipleinspection points. The Company believes that the IMPACT system will providemachine vision inspection solutions to customers who have not in the pastconsidered such systems. The initial targeted OEM market is for inspection ofmarks and leads on electronic components.

 

While the Passport/ Scoutproduct line was primarily targeted at end users, the IMPACT product willenable PPT to target system integrators and OEM’s, thereby opening up major newsales opportunities. The IMPACT system is well suited for the general automationand manufacturing markets through system integration companies which can useInspection Builder as a tool to add value in the form of custom user-controlpanels and inspection techniques.

*** ***

***Speed*****Scan 3DTM Sensor**

 

The *Speed*Scan 3D Sensor is based on PPT’spatented Scanning Moiré InterferometryTM (SMITM) 3Dtechnology. Using a tri-linear CCD sensor and advanced optics, the *Speed*Scan 3D Sensor is capable ofreal-time calculation of 3D topography in a single pass. SMI is a unique,patented, real-time, technology for high speed, high accuracy 3D scanning. Itis an area-scanning technology that gathers height data at rates many timesfaster than conventional laser-based sensors. SMI is especially suitable for applicationsin the semiconductor and electronics industries, such as IC coplanarity (BGA,mBGA, QFP), connector coplanarity, solder paste volume and hard drivecomponents.

** **

**PPT861TM Inspection System**

 

The PPT861 is anapplication-specific inspection solution utilizing the Company’s core 2D and 3Dvision technology for three target markets: inspection of leaded and bumpedcomponents in the semiconductor back-end manufacturing process, inspection ofsurface-mount electronic connectors, and inspection of components used in harddisk drives.

 

The PPT861 is a high-speed,semi-automated, high resolution, 3D scanning station. The PPT861 provides theflexibility to scan a wide range of in-tray semiconductor packages includingQFP, BGA, CSP and mBGA, as well as electronic connectors and hard drivecomponents. Using the Company’s patented SMI 3D technology, the PPT861 deliversprecise measurements at greatly enhanced throughput rates as compared withtraditional inspection techniques. With the addition of the optional 2D module,the PPT861 provides a comprehensive solution for critical measurement andinspection requirements. The PPT861 can be configured to operate in either anin-line or stand-alone mode, providing capabilities for both small lotproduction and high volume applications. All scanning and motion parameters areprogrammable to allow the inspection of a broad range of component types withvarying size and thickness. As of October 31, 2002, the Company has sold 19PPT861 systems to 6 customers.

** **

**PPT861-SHTM Inspection System**

 

In fiscal 2002 PPTintroduced the PPT861-SH, a high-speed automated 3D & 2D inspection systemwhich utilizes the patented SMI (Scanning Moiré Interferometry) 3D technologyand provides precise measurement of a broad range of critical parameters fordevices in strip format. The PPT861-SH provides a complete solution forautomated strip inspection by combining PPT’s high-speed 2D and 3D scanningwith precise strip-handling and multi-magazine input and output capabilities.SMI collects 3D data for all balls and substrates on the entire strip in asingle scan. This enables coplanarity inspection speeds, accuracy, andperformance in excess of traditional laser or camera-based 3D inspectionsystems. The PPT861-SH also provides a flexible platform for inspecting bothgrid and non-grid array devices. Typical measurements include coplanarity, ballheight, ball diameter, substrate flatness and true position. The system’s graphicaluser interface provides straightforward system setup and operation, and theoptional SECS/GEM interface allows the system to be integrated into thesemiconductor production process. The system can also include a 2D-Matrix codereader for mapping and reporting inspection results.

 

The Company believes that asthe semiconductor industry recovers, the demand for a high-quality, high-speed3D inspection system for semiconductor devices in strip format will growsignificantly as this is an emerging and increasingly preferred method ofhandling components in the back-end of the semiconductor manufacturing process.The PPT861-SH is targeted at semiconductor device manufacturers and contractmanufacturers who need high-speed and high-quality inspection accuracy for gridarray devices in strips.

** **

**MARKETS AND CUSTOMERS**

 

The Company sells itsproducts to a broad range of industries, including manufacturers of electronicand semiconductor components, pharmaceuticals, medical devices, automotivecomponents, consumer products and plastics. As of October 31, 2002, the Companyhad sold more than 4,400 machine vision systems to over 320 customers sinceinception.

 

In the past year, theCompany did not have a customer that accounted for ten percent or more of theCompany’s net revenues. During fiscal 2001,

 

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Tokyo Weld, Co., Ltd. accounted for 22% of net revenues, and revenuefrom Simac Masic B.V. accounted for 11% of net revenues. During fiscal 2000,revenue from Tokyo Weld, Co., Ltd. accounted for 17% of net revenues andrevenue from Tyco International accounted for 12% of net revenues. The loss of,or significant curtailment of purchases by, any of the Company’s principalcustomers could have a material adverse effect on the Company’s results ofoperations.

** **

**SALES, MARKETING AND CUSTOMER SUPPORT**

 

The Company sells itsproducts primarily on a direct basis in the United States to end-users, systemintegrators, machine builders and OEMs. Outside the United States, the Companysells primarily through a network of distributors covering Europe, Asia andSouth America. The Company markets its products through appearances at industrytrade shows, advertising in industry trade journals, articles published inindustry and technical journals, its own website and through direct-selling inspecific vertical markets. In addition, the Company’s strong customerrelationships serve as valuable references.

 

The Company focuses ondelivering a high level of value-added applications engineering support to itsend-user customers through its own in-house applications engineering resources.The Company also provides extensive training opportunities for its customers,either at the Company’s facilities or on-site at the customer’s facilities.

 

The following table setsforth the percentage of the Company’s net revenues (including sales deliveredthrough international distributors) by geographic location during the pastthree years:

** **

| **YEAR ENDED  OCTOBER 31,** |   | **2002** |   | **2001** |   | **2000** |   |
|-----------------------------|--------|----------|--------|----------|--------|----------|--------|
| United States               |   | 63       | %      | 45       | %      | 52       | %      |
|                        |   |     |   |     |   |     |   |
| Europe & Canada         |   | 12       | %      | 13       | %      | 12       | %      |
|                        |   |     |   |     |   |     |   |
| Asia-Pacific                |   | 23       | %      | 40       | %      | 31       | %      |
|                        |   |     |   |     |   |     |   |
| South America               |   | 2        | %      | 2        | %      | 5        | %      |

 

Substantially all of theCompany’s export sales are negotiated, invoiced and paid in United Statesdollars. However, the Company will from time to time enter into export salesnegotiated, invoiced and paid in foreign currencies.

** **

**BACKLOG**

 

The Company does not believebacklog is a key indicator of future revenues in the end-user machine visionmarket. PPT VISION products are typically shipped within 30 days after receiptof an order. The Company believes that maintaining as short a time as practicalfor delivery is a competitive advantage in the end-user machine vision market.Customers in the end-user machine vision market do not normally place ordersfor large multiples of units with scheduled deliveries over many months.Rather, end-user machine vision addresses a specific application or problem ata specific manufacturing site.

** **

**RESEARCH AND PRODUCT DEVELOPMENT**

 

PPT VISION’s products aredistinguished by the Company’s proprietary technology and its significantcommitment to research and product development efforts. The Company’s researchand product development efforts are focused on its five core competencies:image acquisition, imaging processing, application development software, opticsand illumination, and vision system integration. The Company believes that theintegration of these core competencies is essential to achieving long termsuccess in the machine vision market. The Company’s five core competencies canbe described as follows: 

 

Image Acquisition. Thisrefers to the means and methods by which an image is captured, stored, and thenmade available for subsequent processing and display. Image acquisitioncombines the disciplines of photo-optics and electrical engineering.

 

Imaging Processing. Thisrefers to the means and methods whereby an image is analyzed or enhanced toproduce some desired information, measurements or results. Image processingcombines the disciplines of software engineering, mathematics, algorithmdevelopment and electrical engineering to implement efficient solutions tocomputationally complex problems. Typical image processing tasks includereal-time inspection, guidance, gauging and recognition.

 

Application DevelopmentSoftware. This refers to the means and methods whereby a machine vision systemis configured and controlled. The development and support of applicationdevelopment software requires expertise in the disciplines of object-orientedprogramming, graphical

 

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programming environments, man-machine interfaces, device drivers andgeneral software engineering.

 

Optics and Illumination.This refers to the means and methods by which a scene is illuminated andoptically presented to an input device such as a video camera. Special opticsand illumination techniques are often used to reveal features in an image whichwould otherwise go undetected or to optimize an image for subsequentprocessing. Optics and illumination draw on skills from the disciplines ofphysics, mechanical engineering and electrical engineering.

 

Vision System Integration.This refers to the means and methods whereby a machine vision system isinterfaced to and combined with other factory automation equipment for purposesof creating a complete solution for the customer. This may include thedevelopment of application specific solutions for certain vertical marketapplications along with mechanical fixturing for mounting camera and lightingcomponents, networking and programmable controllers for process control, andreject mechanisms for ejection of defective parts.

 

Various configurations ofthe Company’s products include proprietary design work performed by theCompany’s employees in each of these five areas.

 

PPT VISION believes thatcontinued and timely development of new products and enhancements to existingproduct characteristics are essential to maintaining its competitive position.The Company has committed and expects to continue to commit substantialresources to its research and development effort, which plays a significantrole in maintaining and advancing its position as a leading provider ofcomplete machine vision systems. The Company’s current research and developmentefforts are directed to increasing performance in image acquisition, imageprocessing and application development software, which could produce systemswith greater speed and accuracy while also providing customers with moreexpanded software tools. These efforts include the Company’s traditionaltwo-dimensional (2D) machine vision systems as well as three- andone-dimensional (3D and 1D) sensor products. Key software products underdevelopment will enable support for different hardware and user interfaces, aswell as increasing the development speed of application specific softwaretools. The Company also intends to expand its offerings of application-specificsoftware and hardware products for the industries it identifies as being poisedto exhibit significant growth in demand for machine vision solutions, whichincludes electronics and semiconductors.

 

Research and developmentexpenditures were $4.6 million, $5.0 million and $5.3 million in the fiscalyears ended October 31, 2002, 2001, and 2000, respectively.

** **

**MANUFACTURING**

 

The Company assembles,configures and tests its products at its suburban Minneapolis facility. TheCompany’s printed circuit boards are custom built by several manufacturers.Although most of the components used in the Company’s machine vision systemsare available off-the-shelf, some components are available from only a singlesupplier or from a limited number of suppliers. The Company typically purchasesinventory and builds products in response to quarterly sales forecasts,enabling it to ship products within 30 days after receipt of an order.

 

Much of the Company’sproduct manufacturing, consisting primarily of circuit board manufacturing andassembly and machined parts production, is contracted with outside vendors.Company personnel inspect incoming parts and perform final assembly and testingof finished products. The Company believes that its outsourcing strategyenables it to focus its resources on the key core competency areas from whichit derives its competitive advantages.

** **

**COMPETITION**

 

The machine vision industryis highly fragmented. Currently, no competitor holds a significant aggregatemarket share percentage, although some dominate individual niches within theoverall machine vision industry. The Company believes that over the nextseveral years, the industry will experience a continuing trend towardconsolidation. However, given the application-specific nature of the industry,the Company also believes that the machine vision industry will continue tohave a relatively large number of competitors focusing on specific niches.

 

The Company believes themajor competitive factors in the industry are performance, quality, support andprice. Although the Company believes that its products are unique, competitorsoffer technologies and systems that are capable of certain of the functionsperformed by the Company’s products. The Company faces competition from anumber of companies in the machine vision market, some of which have greatermanufacturing and marketing capabilities and greater financial, technologicaland personnel resources.

 

Although the Companybelieves that its current products offer several advantages in terms of speedand ease-of-use, and although the Company has attempted to protect theproprietary nature of such products, it is possible that any of the Company’sproducts could be duplicated by other companies in the same general market.There can be no assurances that the Company would be able to compete withsimilar products produced by a competitor.

 

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**PATENTS AND PROPRIETARY RIGHTS**

 

The Company relies on acombination of patent, copyright, trademark and trade secret laws to establishits proprietary rights in its products. The Company owns several issued andpending United States and international patents for various inventions used inmachine-vision, automated inspection and illumination systems. The Companybelieves that the patents it owns may have been useful in protecting theCompany’s proprietary products and may be useful in protecting potential futureproducts. The Company also believes its ability to efficiently develop and sellhigh performance, cost-effective vision systems on a timely basis, whetherpatented or not, is crucial to the Company’s future success. The Companyrequires each of its employees to enter into standard agreements pursuant towhich the employee agrees to keep confidential all proprietary information ofthe Company and to assign to the Company all rights in any proprietaryinformation or technology made or contributed by the employee during his or heremployment or made thereafter as a result of any inventions conceived or workdone during such employment. Despite these precautions, it may be possible fora third party to copy or otherwise obtain and use the Company’s products ortechnology without authorization or to develop similar technologyindependently. In addition, effective patent, copyright, trademark and tradesecret protection may be unavailable or limited in certain foreign countries.

 

A number of users ofmachine-vision technology have received notice of alleged patent infringementfrom, or have been sued by, the Lemelson Medical, Education and ResearchFoundation Limited Partnership (“Lemelson Foundation”) alleging that their useof machine-vision technology in their production processes infringes certainpatents issued to Jerome H. Lemelson. Certain of these users have notified theCompany that, in the event it is subsequently determined that their use of theCompany’s products in their production processes infringes any of Mr.Lemelson’s patents, they may seek indemnification from the Company for damagesor expenses resulting from this matter. The Company believes that it hasdefenses to such indemnification claims. To date, the Company has received noactual claims for indemnification. The Company cannot predict the outcomes fromthe claims of alleged infringement made by the Lemelson Foundation or theeffect of such outcomes on the operating results of the Company.

 

The Company has obtainedUnited States federal registration for a number of its trademarks including its“PPT”, “PPT VISION”, “Passport”, “Scout”, and “SpeedScan 3D” trademarks. TheCompany has filed for federal registration of additional trademarks and intendsto continue to do so in the future. Although no assurance can be given as tothe strength or scope of the Company’s trademarks, the Company believes thatits trademarks have been and will be useful in developing and protecting marketrecognition for its products.

** **

**EMPLOYEES**

 

As of January 15, 2003, theCompany had 84 full-time employees, including 38 employees in research anddevelopment, 26 in sales, marketing and application engineering, 14 inmanufacturing and 6 in finance and administration. Although the Company hasbeen successful in attracting and retaining qualified technical personnel todate, there can be no assurance that this success will continue. None of theCompany’s employees are covered by collective bargaining agreements or aremembers of a union. The Company has never experienced a work stoppage andbelieves that its relations with its employees are excellent.

** **

**IMPORTANT FACTORS REGARDING FORWARD-LOOKING STATEMENTS**

 

Various forward-lookingstatements have been made in this Annual Report on Form 10-KSB. Forward-lookingstatements may also be made in the Company’s other reports filed under theSecurities Exchange Act of 1934, in its press releases and in other documents.In addition, from time to time the Company, through its management, may makeoral forward-looking statements.

 

Forward-looking statementsare subject to risks and uncertainties, including those identified below, thatcould cause actual results to differ materially from such statements. The words“anticipate,” “believe,” “expect,” “intend,” “optimistic,” “will” or similarexpressions are intended to identify forward-looking statements. Readers arecautioned not to place undue reliance on these forward-looking statements,which speak only as of the date on which they are made. The Company undertakesno obligation to update publicly or revise any forward-looking statements.

 

Important factors that couldcause actual results to differ materially from the Company’s forward-lookingstatements, as well as affect the Company’s ability to achieve its financialand other goals, include, but are not limited to, the following:

** **

**RISK FACTORS**

** **

**We haveincurred losses in each of the last three years, have received a going concernopinion, and may need additional capital. **The Companyhas incurred net losses and negative cash flows from operating activities ineach of the past three years and has an accumulated deficit of $25.5 million atOctober 31, 2002. In 2002, our net loss was $6,875,000.  In 2001, our net loss was $4,843,000. In2000, our net loss was $3,598,000. In addition, the Company expects to incurlosses and negative cash flows for at least the next fiscal year. In connectionwith the audit of

 

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our financial statements for the year ended October 31, 2002, ourindependent accountants have issued an opinion that included a going concernparagraph that states that we have sustained losses and negative cash flowsfrom operating activity in recent years and may need additional capital to supportour future operations.

 

During fiscal year 2002, theCompany raised approximately $4.3 million of additional capital through itsShareholder Rights Offering. As of October 31, 2002, the Company has workingcapital of $5.6 million and no long-term debt. In January 2003, the Companyreceived a $750,000 commitment from a shareholder to provide additional debt orequity financing through April 2004 depending on the needs of the Company. TheCompany also believes it has other sources of financing to fund futureoperations. There can be no assurance, however, that additional capital will beavailable on acceptable terms or at all, and the failure to obtain additionalcapital as needed may have an adverse effect on the Company’s ability tocontinue to operate at current levels and may not allow the Company to takeadvantage of future opportunities or respond to competitive pressures orunanticipated requirements, which could seriously harm its business, financialposition, results of operations and cash flows.

 

**We haveencountered significantly increased competition from lower priced competitiveproducts.**Several ofour competitors have introduced lower priced 2D vision inspection systems thatpresent a significant challenge to us. Although these competitors’ products donot include all the features of our PassportTM and ScoutTM productlines, they may provide vision inspection solutions for some customers atattractive prices. Although we have introduced a new lower priced,high-performance 2D inspection system, we cannot guarantee that this systemwill successfully compete in this market.

 

**Our marketis characterized by rapidly changing technology and new product development.**Our future success depends upon our abilityto keep pace with the evolving market for machine vision inspection systems. Weneed to continue enhancing our current products, developing and introducing newproducts, responding to changes in customer requirements and achieving marketacceptance. Our failure to anticipate or respond adequately to technologicaldevelopments and customer requirements, or any significant delays in productdevelopment or introduction, could have a material adverse effect on ourbusiness, results of operations, financial condition and liquidity. Even if wedo enhance our current products, develop new products, and remain responsive toour customers, we cannot assure that we will achieve market acceptance.

 

**We aredependent upon a limited number of principal customers.**In two of the past three fiscal years, wehave had one or more customers that have accounted for ten percent or more ofour net revenues. While no customer accounted for ten percent or more of ournet revenues in fiscal 2002, during the fiscal year ending October 31, 2001,revenue from Tokyo Weld, Co., Ltd. accounted for 22% of net revenues andrevenue from Simac Masic B.V. accounted for 11% of net revenues. We do not havein effect long-term agreements with these customers under which they agree tocontinue purchasing significant quantities of our products. The loss of, orsignificant decrease in purchases by, any of our principal customers andsubsequent failure to replace those customers could have a material adverseeffect on our results of operations.

 

**Ourrevenues are dependent in part on capital spending in the electronics andsemiconductor industries.**The electronics and semiconductor industries combined have historicallyaccounted for over 50% of all machine vision industry sales. Capital spendingon new manufacturing capacity by these industries has historically been verycyclical and is currently in the midst of a very pronounced down cycle. We havehistorically received over 60% of our revenue flow from electronic componentinspection applications. As such, our revenue results have been adversely affectedover the past six quarters and there can be no assurance as to when capitalspending in these industries will begin a cyclical upturn. While revenues haveincreased sequentially each quarter from the quarter ended April 30, 2002through the quarter ended October 31, 2002, we can not be assured that thistrend will continue.

 

**Our futuresuccess is dependent upon sales of our SMITM technology.**Over the last five years, we have acquiredpatent rights for Scanning Moiré Interferometry (“SMI”) technology and incurredsignificant expenditures in developing this technology. Our SMI technology hasbeen incorporated into our PPT861 inspection system. In order to achieveprofitability, we need to successfully introduce the PPT861 and achievecontinued revenues from this product line. There can be no assurance that wecan do this.

 

**We relyheavily on our proprietary technology, much of which is protected as tradesecrets.**We relyheavily on our image acquisition and image processing hardware designs, alongwith proprietary software technology. We have been issued patents, or obtainedlicenses to patents, in the past on certain technology and have patents pendingon new technologies. We currently rely most heavily on protecting ourproprietary information as trade secrets. We cannot ensure that the steps wetake will be adequate to prevent misappropriation of our technology by thirdparties. We also cannot be certain that the steps taken will be adequate underthe laws of some foreign countries, which may not protect our proprietaryrights to the same extent as do laws of the United States. In addition, thepossibility exists that others may “reverse engineer” our products in order todetermine their method of operation and then introduce competing products.Further, many high technology markets, including segments of the machine visionindustry, are characterized by the existence of a large number of patents andfrequent litigation for financial gain based on patents with broad, and oftenquestionable, applications. As the number of our products increases, themarkets in which our products are sold expands and the functionality of those

 

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products grows and overlaps with products offered by competitors. Wehave been sued for patent infringement in the past and may be subject to patentinfringement claims in the future. In addition to being expensive and timeconsuming for us, protracted litigation to defend or to prosecute intellectualproperty could result in some customers deferring or limiting their purchase ofour product until resolution of the litigation. Although we do not believe thatany of our products or proprietary rights infringe upon the valid rights ofthird parties, we cannot guarantee that infringement claims will not beasserted against us in the future or that any such claims will not require usto enter into royalty arrangements or result in costly litigation. 

 

**Our revenuefluctuates from year to year.**We have experienced annual fluctuations in operating results andanticipate that these fluctuations will continue. These fluctuations have beencaused by various factors, including the order flow of our principal customers,the timing and acceptance of new product introductions and enhancements and thetiming of product shipments. Future operating results may fluctuate as a resultof these and other factors, including our ability to continue to developinnovative products, the announcement or introduction of new products by ourcompetitors, our product and customer mix, and the level of competition andoverall trends in the economy.

 

**We aredependent on a limited number of outside contractors and suppliers for asubstantial portion of our components and assembly needs.**We currently contract with third party assemblyhouses for a substantial portion of our components and assembly needs. Althoughwe inspect these components prior to final assembly, reliance on outsidecontractors reduces our control over quality and delivery schedules. Thefailure by one or more of these subcontractors to deliver quality components ina timely manner could have a material adverse effect on our results ofoperations. In addition, a number of the components integral to the functioningof our products are available from only a single supplier or from a limitednumber of suppliers. Any interruption in or termination of supply of thesecomponents, material changes in the purchase terms, or reductions in theirquality or reliability, could have a material adverse effect on our business orresults of operations.

 

**Asignificant portion of our revenue arises from international markets.**In the years ending October 31, 2002, 2001and 2000, sales of our products to customers outside of the United Statesaccounted for approximately 37%, 55% and 48%, respectively, of our netrevenues. We anticipate that international revenue will continue to account fora significant portion of our net revenues. Our operating results are subject tothe risks inherent in international sales, including various regulatoryrequirements, political and economic changes and disruptions, transportationdelays and difficulties in staffing and managing foreign sales operations anddistributor relationships. In addition, fluctuations in exchange rates mayrender our products less price competitive relative to local product offerings.There can be no assurance that these factors will not have a material adverseeffect on our future international sales and, consequently, on our operatingresults.

 

**The coststo remain competitive may adversely affect our financial performance.**We compete with other vendors of machinevision systems, some of which have greater financial and other resources thanwe do. We cannot be sure that we will be able to compete successfully in thefuture. In addition, to remain competitive we may be required to incursignificant costs to increase our engineering research, development, marketingand customer service efforts. Competitive pressures may result in price erosionor other factors that adversely affect our financial performance. 

 

**We aredependent on key personnel.**Our success depends in large part upon the continued services of manyof our highly-skilled personnel involved in management, research and productdevelopment and sales. We must also be able to attract and retain additionalhighly-qualified employees. The loss of services of these key personnel couldhave a material adverse effect on us. We do not have key-person life insuranceon any of our employees.

 

**We may beunable to utilize our net operating loss if we fail to generate sufficienttaxable income.**Theutilization of the net operating loss carryforward is dependent upon ourability to generate sufficient taxable income during the carryforward period.In fiscal 2002, there was no tax provision due to the net loss for the period.At October 31, 2002, we had available net operating loss and tax creditcarryforwards for income tax purposes of approximately $23.7 million and $0.8million, respectively. These carryforwards expire in the years ending October31, 2003 through October 31, 2022.

 

**Our CommonStock may be subject to delisting from Nasdaq if the stock fails to achieve andmaintain, for 10 days, a price of $1.00 per share.**Under the rules of the Nasdaq Small CapMarket, we are subject to delisting of our Common Stock if it fails to maintaina bid price of $1.00 per share or the market value of our publicly held sharesis less than $5,000,000 for any 30-day period, subject to a 180-day graceperiod during which we would need to achieve the criteria for 10 consecutivetrading days. On September 3, 2002 we were notified that we were not incompliance with the $1.00 share price requirement. We were provided a 180-daygrace period through March 3, 2003. If we fail to meet the Nasdaq criteria atthe end of grace period Nasdaq will determine whether the Company meets theinitial listing criteria for the Nasdaq Small Cap Market requiring issuers tohave stockholders’ equity in excess of $5 million. The Company’s stockholderequity at October 31, 2002 is $9.6 million. If the Company meets thisrequirement, an additional 180-day grace period will be provided to demonstratecompliance. If the Company fails to meet these requirements in the future, ourcommon stock will be subject to delisting from the Nasdaq Small Cap Market.

 

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**EXECUTIVE OFFICERS AND OTHER KEY MEMBERS OF MANAGEMENT**

 

The executive officers of the Company are as follows:

** **

| **NAME**              |   | **AGE** |   | **POSITION**                                                          |   |
|-----------------------|--------|---------|--------|-----------------------------------------------------------------------|--------|
| Joseph C. Christenson |   | 44      |   | President, Director                                                   |   |
| Arye Malek            |   | 46      |   | Vice President and General Manager, Microelectronics Systems Division |   |
| David L. Friske       |   | 58      |   | Vice President, Manufacturing                                         |   |
| Timothy C. Clayton    |   | 48      |   | Chief Financial Officer                                               |   |

 

**Joseph C.Christenson**has beenPresident of the Company since January 1989 and a director since December 1987.Prior to being elected President of the Company, Mr. Christenson served in aseries of positions of increasing responsibility since joining the Company in1985. Mr. Christenson has a Masters in Business Administration from theUniversity of Michigan and a Bachelor of Arts degree from St. Olaf College.

 

**Arye Malek**has been Vice President and General Managerof the Microelectronics Systems Division since February 2000. Prior to that, heserved as Vice President of Marketing of the Company since May 1996. He joinedthe Company in May 1990 as a Senior Account Manager and became Director ofInternational Operations in November 1992. Mr. Malek holds a Bachelor ofScience Degree from the University of Minnesota.

 

**David L.Friske**has been VicePresident of Manufacturing of the Company since March 1999. From February 1984,Mr. Friske served as Director of Manufacturing and Purchasing. Prior to joiningthe Company, Mr. Friske was employed by Medtronic, Inc.

 

**Timothy C.Clayton**was electedChief Financial Officer of the Company in November 2002. Mr. Clayton serves asa consultant to the Company and is a principal of the firm Emerging Capital, afinancial consulting and merger and acquisition advisory firm that he foundedin September 2000. From November 1997 until September 2000, Mr. Clayton wasExecutive Vice President, Chief Financial Officer and Treasurer of Building OneServices Corp. Prior to Building One Services, Mr. Clayton was a partner withPrice Waterhouse, LLP.

 

**Item 2. DESCRIPTION OF PROPERTIES**

 

The Company entered into aten-year lease in May 1999 for approximately 59,000 square feet of office andmanufacturing space in Eden Prairie, Minnesota. The lease commenced on June 1,1999 at an initial monthly rate of approximately $51,000. The Company alsoleases space for its regional sales and support offices in Massachusetts andMichigan.

 

**Item 3. LEGAL PROCEEDINGS**

 

None

** **

**Item 4. SUBMISSION OF MATTERS TO A VOTE OFSECURITY HOLDERS**

 

None

 

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**PART II**

 

**Item 5. MARKET FOR COMMON EQUITY AND RELATEDSTOCKHOLDER MATTERS**

** **

**PRICE RANGE OF COMMON STOCK**

 

The Company’s Common Stocktrades on the Nasdaq Small Cap Market under the symbol “PPTV”. The followingtable sets forth the high and low closing sale prices of the Company’s CommonStock as reported by Nasdaq.

 

|                                    |   | **HIGH** |   | **LOW** |   |
|-----------------------------------------|--------|----------|--------|---------|--------|
| **FISCAL  YEAR ENDED OCTOBER 31, 2002** |   |     |   |    |   |
| First Quarter                           |   | $        | 1.64   |    | $      | 1.27 |   |
| Second Quarter                          |   | 1.48     |   | 0.96    |   |
| Third Quarter                           |   | 1.10     |   | 0.65    |   |
| Fourth Quarter                          |   | 1.04     |   | 0.60    |   |
|                                    |   |     |   |    |   |
|                                    |   |     |   |    |   |
| **FISCAL  YEAR ENDED OCTOBER 31, 2001** |   |     |   |    |   |
| First Quarter                           |   | $        | 4.39   |    | $      | 2.75 |   |
| Second Quarter                          |   | 4.63     |   | 2.38    |   |
| Third Quarter                           |   | 3.50     |   | 2.10    |   |
| Fourth Quarter                          |   | 2.33     |   | 1.35    |   |

 

**HOLDERS**

 

On January 13, 2003, therewere approximately 650 holders of record of the Company’s Common Stock. Thisfigure does not reflect more than 1,700 beneficial stockholders whose sharesare held in nominee names.

 

**DIVIDEND POLICY**

 

The Company has neverdeclared or paid any cash dividends on its Common Stock. The Company currentlyintends to retain any earnings for use in its operations and expansion of itsbusiness and therefore does not anticipate paying any cash dividends in theforeseeable future.

 

**EQUITY COMPENSATION PLAN INFORMATION**

 

The following table belowpresents the Company’s Equity Compensation Plan information as of October 31,2002

 
|                                                   |   | **(a)**                                                                                          |   | **(b)**                                                                          |       | **(c)**                                                                                                                                           |       |
|--------------------------------------------------------|--------|--------------------------------------------------------------------------------------------------|--------|----------------------------------------------------------------------------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| **Plan Category**                                      |   | **Number of securities to be issued upon exercise of  outstanding options, warrants and rights** |   | **Weighted-average exercise price of outstanding  options, warrants and rights** | ** ** | **Number of securities remaining available for future  issuance under equity compensation plans (excluding securities reflected in  column (a))** | ** ** |
| Equity compensation plans approved by security holders |   | 842,384                                                                                          |   | $                                                                                | 2.86       |                                                                                                                                              | 299,512    |   |
|                                                        |        |                                                                                                  |        |                                                                                  |            |                                                                                                                                                   |            |  |

 

The Company has three equitycompensation plans: its 1988 Stock Option Plan, its 1997 Stock Option Plan andits 2000 Stock Option Plan. The table above does not include an additional600,000 shares that have been authorized under the 2000 Stock Option Plan, butare subject to shareholder approval at the Company’s 2003 Annual Meeting ofShareholders.

 

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**Item 6. MANAGEMENT’S DISCUSSION AND ANALYSISOR PLAN OF OPERATIONS**

** **

**CRITICAL ACCOUNTING POLICIES AND ESTIMATES**

 

Management’s discussion andanalysis of its financial condition and results of operations are based on theCompany’s accompanying financial statements, which have been prepared inaccordance with generally accepted accounting principles. The preparation ofthese financial statements requires management to make certain estimates andassumptions that affect the reported amounts of assets and liabilities as ofthe date of the financial statements and the reported revenues and expensesduring the reporting period. Management bases its estimates on historicalexperience and various other assumptions that are believed to be reasonableunder the circumstances, the results of which form the basis for makingjudgments about the carrying values of assets and liabilities. Actual resultscould differ from these estimates.

 

Management believes theCompany’s critical accounting policies and areas that require more significantjudgments and estimates used in the preparation of its consolidated financialstatements to be: 

 

•  revenue recognition; 

 

•  estimating valuation allowances,specifically the allowance for doubtful accounts and inventory; and 

 

•  valuation and useful lives of long-lived andintangible assets. 

 

The Company typically recognizesrevenue on product sales upon shipment to the end user customers if contractualobligations have been substantially met and title and risk of loss have passedto the customer, which is generally the case for sales of 2D machine visionsystems, spare parts, accessories and some 3D machine vision sensors andsystems. Some 3D machine vision system sales, however, may includepost-shipment obligations or contractual terms that can only be satisfied aftershipment, such as installation and meeting customer-specified performancerequirements at the customer’s site. In these cases, revenue is not recognizeduntil these obligations have been satisfied and there is objective evidencethat the applicable contract terms have been met. The Company also recognizesrevenue on products sold to distributors upon shipment because contracts withdistributors do not include post-shipment obligations or any right of returnprovisions and pricing is fixed at the time of sale. Revenue related toapplication engineering, product development and customer training services isrecognized when the services are performed. Due to the higher selling price ofcertain 3D machine vision systems, the timing of revenue recognition of arelatively small number of transactions may have a significant impact on ourquarterly results.

 

Management estimates theallowance for doubtful accounts by analyzing accounts receivable balances byage and considering specific factors about the individual customer’s financialcondition. When it is deemed probable that all or a portion of a customer’saccount is uncollectible, a corresponding amount is added to the reserve. 

 

Management establishesvaluation reserves on inventory for estimated excess and obsolete inventoryequal to the difference between the cost of inventory and its estimated marketvalue based on assumptions about future product demand and market conditions.In view of the rapid pace of technological change in the machine visionindustry, the Company generally considers inventory that has had no usage forone year to be obsolete. In addition, changes in the Company’s productofferings or those of their competitors, may also result in excess or obsoleteinventory levels. Accordingly, these factors will also be considered in thedetermination of the market value of inventory. 

 

In fiscal 2002, theCompany’s analysis of the net realizable value of its inventories includedconsideration of a variety of factors, including existing inventory quantities,historical usage, expected future demand, the effect of technological advancesand the impact of newly-introduced products. As a result of these analyses, theCompany recorded a provision of $500,000. 

 

Actual results could differfrom these estimates under different assumptions. If the financial condition ofone or more of our customers were to deteriorate, or if actual product demandor market conditions are less favorable than anticipated by management,additional reserves may be required. 

 

The Company reviews itslong-lived assets for impairment whenever events or changes in circumstancesindicate that the carrying amount of an asset may not be recoverable.Recoverability of assets to be held and used is measured by a comparison of thecarrying amount of an asset to the undiscounted future net cash flows expectedto be generated by the assets. If these assets are considered to be impaired,the impairment to be recognized is measured by the amount by which the carryingamount of the assets exceeds the fair value of the assets.

** **

**RESULTS OF OPERATIONS**

** **

**Comparison of Year Ended October 31, 2002 to YearEnded October 31, 2001**

** **

**NetRevenues**decreased43.6% to $7.5 million in fiscal 2002 from $13.3 million in fiscal 2001. Unitsales of the Company’s machine vision systems decreased to 234 in fiscal 2002versus 688 in fiscal 2001. Net revenues decreased primarily due to asignificant downturn in the level of

 

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purchases of capital equipment in the manufacturing sector of theglobal economy. This economic downturn was particularly pronounced in theCompany’s core markets, including electronics and automotive. Sales tocustomers outside the United States represented 37% of net revenues in fiscal2002, compared to 55% in fiscal 2001. Average selling prices in fiscal 2002were 65% higher on a per unit basis when compared to fiscal 2001 due to asignificant decrease in international sales, which generally occur throughdistributors at lower average sales prices. In addition, in fiscal 2001 theCompany  had sales to one customer thatprovided lower unit pricing due to the significant volume purchased by thatcustomer.

** **

**GrossProfit**decreased55.9% to $3.0 million in fiscal 2002 from $6.8 million in fiscal 2001. Grossprofit as a percentage of net revenues for fiscal 2002 decreased to 40.6%compared to 50.7% in fiscal 2001. The decrease in gross profit and gross profitmargin is primarily as a result of the decrease in net revenues, but also as aresult of recording a provision for excess and obsolete inventory of $500,000and a loss related to a purchase commitment of $215,000 in fiscal 2002. 

 

**SellingExpenses**decreased18.2% to $3.6 million in fiscal 2002, compared to $4.4 million in fiscal 2001.This decrease is the result of cost-control measures implemented at the end offiscal 2001. As a percentage of net revenues, fiscal 2002 selling expensesincreased to 48.6%, compared with 33.1% in fiscal 2001. The percentage increaseis due to lower fiscal 2002 revenues.

 

**General andAdministrative Expenses**decreased18.2% to $1.8 million in fiscal 2002, compared to $2.4 million in fiscal 2001.As a percentage of net revenues, general and administrative expenses increasedto 24.0% for fiscal 2002, compared to 18.0% for fiscal 2001. The decrease ingeneral and administrative expenses reflects the cost-cutting measuresimplemented by the Company in fiscal 2001 to lower its cost structure primarilythrough reductions in the number of employees and by aggressively reducingdiscretionary spending. The increase in general and administrative expenses asa percentage of revenues reflects the lower fiscal 2002 revenues.

 

**Researchand Development Expenses**decreased 8.0% to $4.6 million in fiscal 2002, from $5.0 million infiscal 2001. Research and development expenses as a percentage of net revenuesfor fiscal 2002 increased to 61.3%, compared to 37.6% for fiscal 2001. Thedecrease in research and development spending reflects the Company’s effort tocontrol operating costs in a weak economic environment, while still supportingan aggressive new product development agenda focused both on its 2D and 3Dtechnology.

 

**InterestIncome**decreased to$60,000 in fiscal 2002, compared to $72,000 in fiscal 2001. The decrease ininterest income is due to the decline in balances of cash, cash equivalents andinvestments.

 

**Income TaxBenefit (Expense):**Therewas no tax provision or benefit for fiscal 2002 or 2001 due to the net loss inthe period.

 

**Comparison of Year Ended October 31, 2001 to YearEnded October 31, 2000**

 

**NetRevenues**decreased27.1% to $13.3 million in fiscal 2001 from $18.3 million in fiscal 2000. Unitsales of the Company’s machine vision systems decreased to 688 in fiscal 2001versus 853 in fiscal 2000. Net revenues decreased primarily due to slowereconomic growth, both domestically and internationally, in the Company’s coremarkets, including electronics and automotive. Gross revenues in fiscal 2001decreased 38.5% in the United States and decreased 14.1% outside the UnitedStates. Sales to customers outside the United States represented 55% of netrevenues in fiscal 2001, compared to 48% in fiscal 2000.

 

**GrossProfit**decreased33.1% to $6.8 million in fiscal 2001 from $10.1 million in fiscal 2000primarily as a result of the decrease in net revenues. Gross profit as apercentage of net revenues for fiscal 2001 decreased to 50.7% compared to 55.3%in fiscal 2000. The decrease in gross profit margin in fiscal 2001 wasattributable to the decrease in net revenues, as overhead was being allocatedover a lower revenue base.

 

**SellingExpenses**decreased6.4% to $4.4 million in fiscal 2001, compared to $4.7 million in fiscal 2000.As a percentage of net revenues, fiscal 2001 selling expenses increased to33.1%, compared with 25.8% in fiscal 2000. The percentage increase is due tolower fiscal 2001 revenues.

 

**General andAdministrative Expenses**decreasedslightly to $2.4 million in fiscal 2001, compared to $2.5 million in fiscal2000. As a percentage of net revenues, general and administrative expensesincreased to 18.0% for fiscal 2001, compared to 13.7% for fiscal 2000. Thedecrease in general and administrative expenses reflects the cost cuttingmeasures implemented by the Company in fiscal 2001 to lower its cost structure.The increase in general and administrative expenses as a percentage of revenuesreflects the lower fiscal 2001 revenues.

 

**Researchand Development Expenses**decreased 6.8% to $5.0 million in fiscal 2001, from $5.3 million infiscal 2000. Research and development expenses as a percentage of net revenuesfor fiscal 2001 increased to 37.2%, compared to 29.2% for fiscal 2000. Theslight decrease in research and development spending reflects the Company’seffort to control operating costs in a weak economic environment, while stillsupporting an aggressive new product development agenda focused both on its 2Dand 3D technology.

** **

**Interestand Other Income**decreasedto $177,000 in fiscal 2001, compared to $540,000 in fiscal 2000. The decreasein interest income is due to the decline in balances of cash, cash equivalentsand investments.

 

**Income TaxBenefit (Expense):**Therewas no tax provision for fiscal 2001 or 2000 due to the net loss in the period.

 

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**LIQUIDITY AND CAPITAL RESOURCES**

 

Due to its continuinglosses, the Company has been using its existing cash and cash equivalents tofund the shortfall in cash generated from its operating activities. In order tosatisfy the Company’s anticipated working capital and capital resources needs,the Company initiated a Shareholder Rights Offering during the second quarterof fiscal 2002. The Company completed this offering in the third quarter andraised net proceeds of approximately $4.3 million. The Offering resulted in theissuance of approximately 4.5 million shares of Common Stock and approximately2.25 million warrants to purchase a share of Common Stock at $2.50 per shareuntil September 30, 2003.

 

The Company believes thatcash generated from operations together with the cash provided by this RightsOffering will be sufficient to provide the majority of the cash necessary tomeet its working capital and capital resource obligations through the nexttwelve months based on the anticipated level of sales and operating expenses.However, the Company believes that it will need to obtain additional financingwithin the next 18 months to fund its operating plan which anticipates revenuegrowth and a need for cash to provide working capital. In order to provide forthese cash needs, in January 2003, the Company obtained a $750,000 commitmentfrom a shareholder to provide debt or equity financing through April of 2004depending on the Company’s needs.

 

As of October 31, 2002, theCompany had working capital of $5.6 million and no long-term debt. The Companybelieves that a variety of financing alternatives are available includinglowering the exercise price of the 2.25 million outstanding warrants, theissuance of additional stock to the public or to strategic partners, customeror vendor financing, customer-sponsored research and development projects orexternal borrowing against our accounts receivable and inventory.

 

There can be no assurance,however, that additional capital will be available on acceptable terms or atall, and the failure to obtain additional capital as needed may have an adverseeffect on the Company’s ability to continue to operate at current levels andmay not allow the Company to take advantage of future opportunities or respondto competitive pressures or unanticipated requirements, which could seriouslyharm its business, financial position, results of operations and cash flows.

 

The Company financed itsoperations during fiscal 2002 through internally generated cash flow, existingcash and cash equivalents and from the cash generated from the ShareholderRights Offering. Net cash used in operating activities during fiscal 2002 was$4.5 million. Accounts receivable decreased $332,000 primarily due to lower netrevenues in fiscal 2002 as compared with 2001 and strong collections.Inventories decreased $739,000 during fiscal 2002 due to lower levels ofinventory purchases, the utilization of existing inventory items and as theresult of the recognition of an inventory valuation reserve for inventory withmarket values below cost. Accounts payable and accrued expenses increased by $298,000while deferred revenue decreased $261,000 from the prior year end.

 

Net cash provided byinvesting activities was $203,000, primarily due to the sale of investments,net of fixed asset additions. During fiscal 2002, fixed asset additions totaled$255,000 in comparison with $676,000 in fixed asset additions realized for thesame period in fiscal 2001. Fixed asset additions in fiscal 2003 are expectedto be at levels comparable with fiscal 2002.

 

Net cash provided byfinancing activities was $4.4 million for fiscal 2002, primarily from thecompletion of the Shareholder Rights Offering during the year. This Offeringraised approximately $4.3 million. The remainder of the cash generated was fromsales of stock through the employee stock purchase plan. In fiscal 2001, theCompany generated $58,000 of cash from financing activities all from theissuance of stock under the employee stock purchase plan.

 

The Company incurred a netloss of $6,875,000 for fiscal 2002, and has an accumulated deficit of $25.5 millionas of October 31, 2002. There can be no assurance that the Company will notincur additional losses, will generate positive cash flow from its operations,or that the Company will attain or thereafter sustain profitability in anyfuture period. To the extent the Company continues to incur losses or grows inthe future, its operating and investing activities may use cash and,consequently, may require the Company to obtain additional sources of financingin the future.

 

The Company does not haverelationships with unconsolidated entities or financial partnerships, such asentities often referred to as structured finance or special purpose entities,which would have been established for the purpose of facilitatingoff-balance-sheet financial arrangements. As such, the Company is notmaterially exposed to any financing, liquidity, market or credit risk thatcould arise if we had engaged in such arrangements.

 

The Company entered into aten-year lease in May 1999 for approximately 59,000 square feet of office andmanufacturing space in Eden Prairie, Minnesota. The lease commenced on June 1,1999 at an initial monthly rate of approximately $51,000. Annual rental andcommon area maintance (CAM) payment obligations are approximately $1.0 millionin the aggregate.

** **

**RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS**

 

In July 2001, the FinancialAccounting Standards Board (“FASB”) issued SFAS No. 141, “BusinessCombinations” and No. 142, “Goodwill and Other Intangible Assets.” SFAS No. 141requires the purchase method of accounting be used for all businesscombinations completed after June 30, 2001 and clarifies the criteria forrecognition of intangible assets separately from goodwill. SFAS No. 142,effective for fiscal years beginning after

 

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December 15, 2001, requires that ratable amortization of goodwill bereplaced with periodic tests of goodwill impairment and that intangible assets,other than goodwill, which have determinable useful lives be amortized overtheir useful lives. Management believes that the adoption of SFAS No. 142effective November 1, 2002 will have no impact on the Company’s financialposition or results of operations.

 

In October 2001, the FASBissued SFAS No. 144, “Accounting for Impairment of Long-Lived Assets”. SFAS No.144, effective for financial statements for fiscal years beginning afterDecember 15, 2001, addresses issues relating to the implementation of SFAS No.121, “Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assetsto be Disposed Of”, and develops a single accounting model for long-livedassets to be disposed of by sale, whether previously held and used or newlyacquired. Management believes the adoption of SFAS No. 144 effective November1, 2002, will not have a material impact on the Company’s financial position orresults of operations.

 

In July 2002, the FASBissued SFAS No. 146, “Accounting for Costs Associated with Exit or DisposalActivities.” SFAS No. 146 addresses the financial accounting and reporting forcosts associated with exit or disposal activities, including costs to terminatecontracts that are not capital leases, costs to consolidate facilities orrelocate employees and one-time termination benefits provided to employees whoare involuntarily terminated. SFAS No. 146 requires that a liability for a costassociated with an exit or disposal activity, including restructuring, berecognized and measured at fair value when the liability is incurred, insteadof the commitment date. Management believes that the adoption of SFAS No. 146effective November 1, 2002 will have no impact on our financial position,results of operations or cash flows as the provisions apply prospectively.However, adoption may change the timing of the Company’s recognition of certainof these costs in the future.

** **

**EFFECTS OF INFLATION**

 

The Company believes thatthe effect of inflation has not been material during each of the years endedOctober 31, 2002 and 2001.

 

**Quantitative and Qualitative Disclosures About MarketRisk**

 

The Company believes it doesnot have material exposure to quantitative and qualitative market risks. Thecarrying amounts reflected in the balance sheets of cash and cash equivalents,investments, trade receivables and trade payables approximate fair value at October31, 2002 due to the short maturities of these instruments.

 

**INTEREST RATE RISK**

 

The Company’s cash and cashequivalents represent investments purchased with original maturities of threemonths or less. Investments having original maturities in excess of threemonths are stated at amortized cost, which approximates fair value, and areclassified as available-for-sale. Given the short maturities and investmentgrade quality of the portfolio holdings at October 31, 2002, as well as theCompany’s policy of holding rate-sensitive instruments to maturity, a 100 basispoint rise in interest rates would not be expected to have a material adverseimpact on the fair value of the Company’s cash and cash equivalents. As aresult, the Company does not currently hedge these interest rate exposures.

 

**FOREIGN CURRENCY EXCHANGE RATE RISK**

 

Historically, the Company’sinternational sales, which are primarily in Europe, South America, Japan andSoutheast Asia, have been transacted in U.S. Dollars. However, during fiscal 2000the Company entered into forward foreign exchange contracts in Japanese Yen tohedge currency exposures associated with specific contracts denominated inJapanese Yen. These contracts were used to reduce the Company’s risk associatedwith exchange rate movements, as the gains or losses on these contracts areintended to offset the exchange rate losses or gains on the underlyingcontracts. The Company does not engage in foreign currency speculation. AtOctober 31, 2002, the Company had no foreign exchange contracts outstanding.

 

**Item 7. FINANCIAL STATEMENTS**

 

The financial statements arelisted in Item 13 of this Form 10-KSB.

 

**Item 8. CHANGES IN AND DISAGREEMENTS WITHACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE**

 

None.

 

16

----

 

**PART III**

 

**Item 9. DIRECTORS, EXECUTIVE OFFICERS,PROMOTERS AND CONTROL PERSONS: Compliance with Section 16(a) of the ExchangeAct.**

 

Information required underthis item with respect to directors is contained in the section “Election ofDirectors” in the Company’s Proxy Statement for the Annual Meeting ofShareholders (the “2003 Proxy Statement”), a definitive copy of which will befiled within 120 days of October 31, 2002 and is incorporated herein byreference.

 

Information concerningexecutive officers is set forth in the Section entitled “Executive Officers ofthe Company” in the 2003 Proxy Statement and is incorporated herein byreference.

 

**Item 10. EXECUTIVE COMPENSATION**

 

Information required underthis item is contained in the section entitled “Executive Compensation andOther Information,” in the Company’s 2003 Proxy Statement and is incorporatedherein by reference.

 

**Item 11. SECURITY OWNERSHIP OF CERTAINBENEFICIAL OWNERS AND MANAGEMENT**

 

Information required underthis item is contained in the section entitled “Security Ownership of PrincipalShareholders and Management” in the Company’s 2003 Proxy Statement and isincorporated herein by reference.

 

**Item 12. CERTAIN RELATIONSHIPS AND RELATEDTRANSACTIONS**

 

Information required underthis item is contained in the section entitled “Certain Transactions” in theCompany’s 2003 Proxy Statement and is incorporated herein by reference.

 

**Item 13. EXHIBITS AND REPORTS ON FORM 8-K**

** **

**(a)Documents filed as Part of this Report**

 

(1) FINANCIAL STATEMENTS.The following financial statements of the Company are hereby included in thisForm 10-KSB.

 
| Report of Independent  Accountants                                                           |
|----------------------------------------------------------------------------------------------|
| Income  Statements for the three years ended October 31, 2002, 2001 and 2000                 |
| Balance  Sheets as of October 31, 2002 and 2001                                              |
| Statements of Cash Flows for  the Years ended October 31, 2002, 2001 and 2000                |
| Statements of  Shareholders’ Equity for the Years ended October 31, 2002, 2001 and 2000 |
| Notes to Financial  Statements                                                               |

 

17

----

 

(2) LISTING OF EXHIBITS

 
| **Exhibit No.** |   | **Description**                                                                                                                                                                                                                                                                                                                                                          |
|-----------------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 3.1             |   | Restated Articles of Incorporation of PPT Vision, Inc. as currently  in effect                                                                                                                                                                                                                                                                                           |
|            |   |                                                                                                                                                                                                                                                                                                                                                                     |
| 3.2             |   | By-Laws of PPT Vision (incorporated by reference to Exhibit 3.2 of  1996 Form 10-K)                                                                                                                                                                                                                                                                                      |
|            |   |                                                                                                                                                                                                                                                                                                                                                                     |
| 4.1             |   | Preferred Stock Purchase Rights Agreement, as amended (incorporated  by reference to Exhibit 1 to June 17, 1999 Registration Statement on Form  8-A, as amended by Exhibit 1 to October 19, 1999 Amendment No. 1 to  Registration Statement on Form 8-A/A and as amended by amendment No. 1 to  March 11, 2002 Amendment No. 2 to Registration Statement on Form 8-A/A.) |
|            |   |                                                                                                                                                                                                                                                                                                                                                                     |
| 10.1            |   | Employment Agreement with Joseph C. Christenson dated as of May 7,  1984  (incorporated by reference from Exhibit 10.4 to May 15, 1996 Form S-2)                                                                                                                                                                                                                         |
|            |   |                                                                                                                                                                                                                                                                                                                                                                     |
| 10.2            |   | Employment Agreement with Arye Malek dated as of May 1, 1990  (incorporated by reference from Exhibit 10.7 to May 15, 1996 Form S-2)                                                                                                                                                                                                                                     |
|            |   |                                                                                                                                                                                                                                                                                                                                                                     |
| 10.3*           |   | PPT VISION, Inc. 1988 Stock Option Plan, as amended  (incorporated by reference to Exhibit 10.6 of 1997 Form 10-K)                                                                                                                                                                                                                                                       |
|            |   |                                                                                                                                                                                                                                                                                                                                                                     |
| 10.4*           |   | PPT VISION, Inc. 1997 Stock Option Plan  (incorporated by reference to Exhibit 10.7 of 1997 Form 10-K)                                                                                                                                                                                                                                                                   |
|            |   |                                                                                                                                                                                                                                                                                                                                                                     |
|            |   |                                                                                                                                                                                                                                                                                                                                                                     |
| 10.5*           |   | PPT VISION, Inc. 2000 Stock Option Plan                                                                                                                                                                                                                                                                                                                                  |
|            |   |                                                                                                                                                                                                                                                                                                                                                                     |
| 10.6            |   | Lease Agreement dated July 17, 1998 for facilities at the Prairie  Crossroads Corporate Center, Eden Prairie, Minnesota (incorporated by  reference to Exhibit 10.7 of 1999 Form 10-K)                                                                                                                                                                                   |
|            |   |                                                                                                                                                                                                                                                                                                                                                                     |
| 10.7            |   | First Amendment of Lease dated October 16, 1999 for Facilities at the  Prairie Crossroads Corporate Center, Eden Prairie, Minnesota (incorporated by  reference to Exhibit 10.8 of 1999 Form 10-K)                                                                                                                                                                       |
|            |   |                                                                                                                                                                                                                                                                                                                                                                     |
| 10.8            |   | Commitment letter dated January 9, 2003 from P.R. Peterson to PPT  VISION, Inc.                                                                                                                                                                                                                                                                                          |
|            |   |                                                                                                                                                                                                                                                                                                                                                                     |
| 21              |   | The Company has no subsidiaries                                                                                                                                                                                                                                                                                                                                          |
|            |   |                                                                                                                                                                                                                                                                                                                                                                     |
| 23              |   | Consent of PricewaterhouseCoopers LLP                                                                                                                                                                                                                                                                                                                                    |
|            |   |                                                                                                                                                                                                                                                                                                                                                                     |
| 99.1            |   | Certifications                                                                                                                                                                                                                                                                                                                                                           |

 

----

*Indicates compensatory plan

 

**(b) Reports on Form 8-K — None**

 

18

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**Item 14. CONTROLS AND PROCEDURES**

 

**(a) Evaluation of Disclosure Controls and Procedures.**

 

The Company’s Chief ExecutiveOfficer, Joseph Christenson, and Chief Financial Officer, Timothy Clayton havereviewed the Company’s disclosure controls and procedures within 90 days priorto the filing of this report. Based upon this review, these officers believethat the Company’s disclosure controls and procedures are effective in ensuringthat material information related to the Company is made known to them byothers within the Company.

 

**(b) Changes in Internal Controls.**

 

There were no significantchanges in the Company’s internal controls or in other factors that couldsignificantly affect these controls during the quarter covered by this reportor from the end of the reporting period to the date of this Form 10-KSB.

 

**SIGNATURES**

 

Pursuant to the requirementsof Section 13 of the Securities Exchange Act of 1934, the Registrant has dulycaused this report to be signed on its behalf by the undersigned, thereuntoduly authorized.

 
| **PPT  VISION, INC.**   |
|-------------------------|
|                    |   |
| Date : February 4, 2003 | **By:** | **/s/Joseph C. Christenson** |   |
|                    |   | Joseph C. Christenson |   |
|                    | (Principal Executive  Officer) |   |

 

**Signatures and Power of Attorney**

 

Pursuant to the requirementsof the Securities Exchange Act of 1934, this Report has been signed by thefollowing persons on behalf of the Registrant, in the capacities, and on thedates, indicated. Each person whose signature appears below constitutes andappoints Joseph C. Christenson as his true and lawful attorney-in-fact andagent, each acting alone, with full power of substitution and resubstitution,for him and in his name, place, and stead, in any and all capacities, to signany or all amendments to this Annual Report on Form 10-KSB and to file thesame, with the exhibits thereto, and other documents in connection therewith,with the Securities and Exchange Commission.

 
| Date: February 4, 2003 | **/s/  Joseph C. Christenson**       |   |
|------------------------|--------------------------------------|--------|
|                   | Joseph C. Christenson                |   |
|                   | President, Director                  |   |
|                   | (Principal Executive  Officer)       |   |
|                   |                                 |   |
| Date: February 4, 2003 | **/s/  Timothy C. Clayton**          |   |
|                   | Timothy C. Clayton                   |   |
|                   | Chief Financial Officer              |   |
|                   | (Principal Accounting  Officer)      |   |
|                   |                                 |   |
| Date: February 4, 2003 | **/s/  Robert W. Heller, Director**  |   |
|                   | Robert W. Heller, Director           |   |
|                   |                                 |   |
| Date: February 4, 2003 | **/s/ David  C. Malmberg, Director** |   |
|                   | David C. Malmberg,  Director         |   |
|                   |                                 |   |
| Date: February 4, 2003 | **/s/ Peter  R. Peterson, Director** |   |
|                   | Peter R. Peterson,  Director         |   |
|                   |                                 |   |
| Date: February 4, 2003 | **/s/ Benno  G. Sand, Director**     |   |
|                   | Benno G. Sand, Director              |   |

 

19

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** **

**Certifications**

 

I, Joseph C. Christenson, certify that:

 

1.        I have reviewed this annual report on Form 10-KSB of PPT Vision, Inc.;

 

2.                       Basedon my knowledge, this annual report does not contain any untrue statement of amaterial fact or omit to state a material fact necessary to make the statementsmade, in light of the circumstances under which such statements were made, notmisleading with respect to the period covered by this annual report;

 

3.                       Basedon my knowledge, the financial statements, and other financial informationincluded in this annual report, fairly present in all material respects thefinancial condition, results of operations and cash flows of the registrant asof, and for, the periods presented in this annual report;

 

4.                       Theregistrant’s other certifying officer and I are responsible for establishingand maintaining disclosure controls and procedures (as defined in Exchange ActRules 13a-14 and 15d-14) for the registrant and we have:

 

a)                        designedsuch disclosure controls and procedures to ensure that material informationrelating to the registrant, including its consolidated subsidiaries, is madeknown to us by others within those entities, particularly during the period inwhich this annual report is being prepared;

 

b)                       evaluatedthe effectiveness of the registrant’s disclosure controls and procedures as ofa date within 90 days prior to the filing date of this annual report (the“Evaluation Date”); and

 

c)                        presentedin this annual report our conclusions about the effectiveness of the disclosurecontrols and procedures based on our evaluation as of the Evaluation Date;

 

5.                       Theregistrant’s other certifying officer and I have disclosed, based on our mostrecent evaluation, to the registrant’s auditors and the audit committee ofregistrant’s board of directors (or persons performing the equivalentfunction):

 

a)                        allsignificant deficiencies in the design or operation of internal controls whichcould adversely affect the registrant’s ability to record, process, summarizeand report financial data and have identified for the registrant’s auditors anymaterial weaknesses in internal controls; and

 

b)                       anyfraud, whether or not material, that involves management or other employees whohave a significant role in the registrant’s internal controls; and

 

6.                       Theregistrant’s other certifying officer and I have indicated in this annualreport whether or not there were significant changes in internal controls or in other factors that could significantly affectinternal controls subsequent to the date of our most recent evaluation,including any corrective actions with regard to significant deficiencies and materialweaknesses.

 
| Date:  | February 4, 2003 |   | **/s/Joseph  C. Christenson** |   |
|--------|------------------|--------|-------------------------------|--------|
|   |             |   | President                     |   |

 

20

----

 

I, Timothy C. Clayton, certify that:

 

1.                       I have reviewed this annual report on Form10-KSB of PPT Vision, Inc.;

 

2.                       Based on my knowledge, this annual reportdoes not contain any untrue statement of a material fact or omit to state amaterial fact necessary to make the statements made, in light of thecircumstances under which such statements were made, not misleading withrespect to the period covered by this annual report;

 

3.                       Based on my knowledge, the financialstatements, and other financial information included in this annual report,fairly present in all material respects the financial condition, results ofoperations and cash flows of the registrant as of, and for, the periodspresented in this annual report;

 

4.                       The registrant’s other certifying officer andI are responsible for establishing and maintaining disclosure controls andprocedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for theregistrant and we have:

 

a)                        designed such disclosure controls andprocedures to ensure that material information relating to the registrant,including its consolidated subsidiaries, is made known to us by others withinthose entities, particularly during the period in which this annual report isbeing prepared;

 

b)                       evaluated the effectiveness of theregistrant’s disclosure controls and procedures as of a date within 90 daysprior to the filing date of this annual report (the “Evaluation Date”); and

 

c)                        presented in this annual report ourconclusions about the effectiveness of the disclosure controls and proceduresbased on our evaluation as of the Evaluation Date;

 

5.                       The registrant’s other certifying officer andI have disclosed, based on our most recent evaluation, to the registrant’sauditors and the audit committee of registrant’s board of directors (or personsperforming the equivalent function):

 

a)                        all significant deficiencies in the design oroperation of internal controls which could adversely affect the registrant’sability to record, process, summarize and report financial data and haveidentified for the registrant’s auditors any material weaknesses in internalcontrols; and

 

b)                       any fraud, whether or not material, thatinvolves management or other employees who have a significant role in theregistrant’s internal controls; and

 

6.                       The registrant’s other certifying officer andI have indicated in this annual report whether or not there were significantchanges in internal controls or in other factors that could significantlyaffect internal controls subsequent to the date of our most recent evaluation,including any corrective actions with regard to significant deficiencies andmaterial weaknesses.

 
| Date:  | February 4, 2003 |   | **/s/Timothy  C. Clayton** |   |
|--------|------------------|--------|----------------------------|--------|
|   |             |   | Chief Financial Officer    |   |

 

 

21

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**REPORT OF INDEPENDENT ACCOUNTANTS**

 

**To the Shareholders and Board of Directors of PPTVISION, Inc.**

 

In our opinion, thefinancial statements listed in the accompanying index on page 18 presentfairly, in all material respects, the financial position of PPT VISION, Inc. atOctober 31, 2002 and 2001, and the results of its operations and its cash flowsfor each of the three fiscal years in the period ended October 31, 2002 inconformity with accounting principles generally accepted in the United Statesof America. These financial statements are the responsibility of the Company’smanagement; our responsibility is to express an opinion on these financialstatements based on our audits. We conducted our audits of these statements inaccordance with auditing standards generally accepted in the United States ofAmerica, which require that we plan and perform the audit to obtain reasonableassurance about whether the financial statements are free of materialmisstatement. An audit includes examining, on a test basis, evidence supportingthe amounts and disclosures in the financial statements, assessing theaccounting principles used and significant estimates made by management, andevaluating the overall financial statement presentation. We believe that ouraudits provide a reasonable basis for our opinion.

 

The accompanying financialstatements have been prepared assuming that the Company will continue as agoing concern. As discussed in Note 3 to the financial statements, the Companyhas sustained losses and negative cash flows from operating activities inrecent years and may require additional capital to support future operations,which raises substantial doubt about the Company’s ability to continue as agoing concern. Management’s plans in regard to these matters are also describedin Note 3. The financial statements do not include any adjustments that mightresult from the outcome of this uncertainty.

 

| **/**s**/**PricewaterhouseCoopers  LLP                               |   |
|----------------------------------------------------------------------|--------|
|                                                                 |
| **PricewaterhouseCoopers LLP**                                       |
| Minneapolis, Minnesota                                               |
| December 6, 2002, except as to Note 3 which is as of January 9, 2003 |

 

22

----

 

**INCOME STATEMENTS**

 
| **YEAR ENDED OCTOBER 31,**           |   | **2002**   |       | **2001**   |   | **2000**   |   |
|--------------------------------------|--------|------------|------------|------------|--------|------------|--------|
| Net revenues                         |   | $          | 7,474,000  |       | $      | 13,326,000 |   | $ | 18,272,000 |   |
| Cost of sales                        |   | 4,436,000  |       | 6,566,000  |   | 8,162,000  |   |
| Gross profit                         |   | 3,037,000  |       | 6,760,000  |   | 10,110,000 |   |
| Expenses:                            |   |       |       |       |   |       |   |
| Selling                              |   | 3,609,000  |       | 4,408,000  |   | 4,710,000  |   |
| General and administrative           |   | 1,781,000  |       | 2,409,000  |   | 2,511,000  |   |
| Research and development             |   | 4,583,000  |       | 4,963,000  |   | 5,327,000  |   |
| Non-recurring charges                |   | —     |       | —     |   | 1,700,000  |   |
| Total expenses                       |   | 9,973,000  |       | 11,780,000 |   | 14,248,000 |   |
| Loss from operations                 |   | (6,935,000 | )          | (5,020,000 | )      | (4,138,000 | )      |
| Interest and other income            |   | 60,000     |       | 177,000    |   | 540,000    |   |
| Net loss                             |   | $          | (6,875,000 | )          | $      | (4,843,000 | )      | $ | (3,598,000 | ) |
| Net loss per share:                  |   |       |       |       |   |       |   |
| Basic                                |   | $          | (0.90      | )          | $      | (0.88      | )      | $ | (0.67 | ) |
| Diluted                              |   | $          | (0.90      | )          | $      | (0.88      | )      | $ | (0.67 | ) |
| Weighted average shares outstanding: |   |       |       |       |   |       |   |
| Basic                                |   | 7,631,000  |       | 5,492,000  |   | 5,346,000  |   |
| Diluted                              |   | 7,631,000  |       | 5,492,000  |   | 5,346,000  |   |

 

The accompanying notes are anintegral part of the financial statements

 

23

----

 

**BALANCE SHEETS**

 
| **YEAR ENDED OCTOBER 31,**                                                                                                         |   | **2002**    |       | **2001**    |   |
|------------------------------------------------------------------------------------------------------------------------------------|--------|-------------|------------|-------------|--------|
| ASSETS                                                                                                                             |   |        |       |        |   |
| Current assets                                                                                                                     |   |        |       |        |   |
| Cash and cash equivalents                                                                                                          |   | $           | 2,932,000  |        | $      | 2,805,000 |   |
| Investments                                                                                                                        |   | —      |       | 502,000     |   |
| Accounts receivable, net                                                                                                           |   | 1,843,000   |       | 2,175,000   |   |
| Inventories, net                                                                                                                   |   | 1,853,000   |       | 2,592,000   |   |
| Other current assets                                                                                                               |   | 294,000     |       | 228,000     |   |
| Total current assets                                                                                                               |   | 6,922,000   |       | 8,302,000   |   |
| Fixed assets, net                                                                                                                  |   | 1,417,000   |       | 2,116,000   |   |
| Intangible assets, net                                                                                                             |   | 2,545,000   |       | 2,885,000   |   |
| Other assets, net                                                                                                                  |   | 53,000      |       | 53,000      |   |
| Total assets                                                                                                                       |   | $           | 10,937,000 |        | $      | 13,356,000 |   |
|                                                                                                                               |   |        |       |        |   |
| LIABILITIES AND SHAREHOLDERS’ EQUITY                                                                                          |   |        |       |        |   |
| Current liabilities                                                                                                                |   |        |       |        |   |
| Accounts payable                                                                                                                   |   | $           | 676,000    |        | $      | 494,000 |   |
| Accrued expenses                                                                                                                   |   | 593,000     |       | 478,000     |   |
| Deferred revenue                                                                                                                   |   | 24,000      |       | 286,000     |   |
| Total current liabilities                                                                                                          |   | 1,293,000   |       | 1,258,000   |   |
|                                                                                                                               |   |        |       |        |   |
| Commitments and contingencies                                                                                                      |   |        |       |        |   |
| Shareholders’ equity                                                                                                          |   |        |       |        |   |
| Preferred stock $.10 par value; authorized  10,000,000 shares, none outstanding                                                    |   |        |       |        |   |
| Common stock $.10 par value; authorized  20,000,000 and 10,000,000 shares; issued and outstanding 10,067,950 and  5,479,782 shares |   | 1,007,000   |       | 551,000     |   |
| Capital in excess of par value                                                                                                     |   | 34,094,000  |       | 30,117,000  |   |
| Accumulated deficit                                                                                                                |   | (25,457,000 | )          | (18,582,000 | )      |
| Accumulated other comprehensive income                                                                                             |   | —      |       | 12,000      |   |
| Total shareholders’ equity                                                                                                    |   | 9,644,000   |       | 12,098,000  |   |
| Total liabilities and shareholders’ equity                                                                                    |   | $           | 10,937,000 |        | $      | 13,356,000 |   |

 

The accompanying notes are anintegral part of the financial statements

 

24

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**STATEMENTS OF CASH FLOWS**

 
| **YEAR ENDED OCTOBER 31,**                                                   |   | **2002**   |       | **2001**   |   | **2000**   |   |
|------------------------------------------------------------------------------|--------|------------|------------|------------|--------|------------|--------|
| Net loss                                                                     |   | $          | (6,875,000 | )          | $      | (4,843,000 | )      | $ | (3,598,000 | ) |
| Adjustment to reconcile net loss   to net cash used in operating activities: |   |       |       |       |   |       |   |
| Depreciation and amortization                                                |   | 1,336,000  |       | 1,404,000  |   | 1,189,000  |   |
| Stock based compensation                                                     |   | 20,000     |       | —     |   | —     |   |
| Provision for excess and obsolete  inventories                               |   | 500,000    |       | —     |   | —     |   |
| Accrued interest income                                                      |   | —     |       | 2,000      |   | 59,000     |   |
| Realized gain (loss) on sales of  investments                                |   | (12,000    | )          | 74,000     |   | 1,000      |   |
| Change in assets and liabilities:                                            |   |       |       |       |   |       |   |
| Accounts receivable                                                          |   | 332,000    |       | 3,027,000  |   | (1,911,000 | )      |
| Inventories                                                                  |   | 239,000    |       | 298,000    |   | (699,000   | )      |
| Other assets                                                                 |   | (66,000    | )          | 97,000     |   | (34,000    | )      |
| Restricted cash                                                              |   | —     |       | 400,000    |   | (400,000   | )      |
| Accounts payable                                                             |   | 182,000    |       | (1,059,000 | )      | 182,000    |   |
| Accrued expenses                                                             |   | 115,000    |       | (227,000   | )      | (598,000   | )      |
| Deferred revenue                                                             |   | (262,000   | )          | 3,000      |   | 283,000    |   |
| Total adjustments                                                            |   | 2,384,000  |       | 4,019,000  |   | (1,928,000 | )      |
| Net cash used in operating activities                                        |   | (4,491,000 | )          | (824,000   | )      | (5,526,000 | )      |
| Cash flows from investing activities:                                        |   |       |       |       |   |       |   |
| Purchase of fixed assets                                                     |   | (255,000   | )          | (676,000   | )      | (1,060,000 | )      |
| Purchase of investments                                                      |   | —     |       | —     |   | (2,643,000 | )      |
| Sales and maturities of investments                                          |   | 502,000    |       | 2,506,000  |   | 7,797,000  |   |
| Net investment in other long-term assets                                     |   | (42,000    | )          | (77,000    | )      | (107,000   | )      |
| Net cash provided by investing activities                                    |   | 205,000    |       | 1,753,000  |   | 3,987,000  |   |
| Cash flows from financing activities:                                        |   |       |       |       |   |       |   |
| Proceeds from issuance of common stock, net  of offering costs               |   | 4,413,000  |       | 58,000     |   | 1,222,000  |   |
| Net cash provided by financing activities                                    |   | 4,413,000  |       | 58,000     |   | 1,222,000  |   |
| Net increase (decrease) in cash and cash  equivalents                        |   | 127,000    |       | 987,000    |   | (317,000   | )      |
| Cash and cash equivalents at beginning of  year                              |   | 2,805,000  |       | 1,818,000  |   | 2,135,000  |   |
| Cash and cash equivalents at end of year                                     |   | $          | 2,932,000  |       | $      | 2,805,000  |   | $ | 1,818,000 |   |
|                                                                         |   |       |       |       |   |       |   |
| Supplemental disclosure of cash flow  information:                           |   |       |       |       |   |       |   |
| Cash paid during the year for:                                               |   |       |       |       |   |       |   |
| Income tax                                                                   |   | $          | —     |       | $      | —     |   | $ | — |   |
| Interest                                                                     |   | $          | —     |       | $      | —     |   | $ | — |   |

 

The accompanying notes are anintegral part of the financial statements

 

25

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**STATEMENTSOF SHAREHOLDERS’ EQUITY**

 
|                                                               |   | **COMMON  SHARES** | ** ** | **STOCK  AMOUNT** | ** ** | **CAPITAL IN  EXCESS OF  PAR VALUE** | ** ** | **ACCUMULATED  OTHER  COMPREHENSIVE  INCOME** | ** ** | **ACCUMULATED  (DEFICIT)** |    | **TOTAL  SHAREHOLDERS’  EQUITY** |   |
|--------------------------------------------------------------------|--------|--------------------|------------|-------------------|------------|--------------------------------------|------------|-----------------------------------------------|------------|----------------------------|---------|---------------------------------------|--------|
| October 31, 1999                                                   |   | 5,256,275          |       | $                 | 526,000    |                                 | $          | 28,862,000                                    |       | $                          | (76,000 | )                                     | $      | (10,141,000 | ) | $ | 19,171,000 |   |
| Stock issued through the exercise of stock options                 |   | 19,275             |       | 2,000             |       | 69,000                               |       |                                          |       |                       |    | 71,000                                |   |
| Stock issued through the employee stock purchase plan              |   | 34,232             |       | 3,000             |       | 128,000                              |       |                                          |       |                       |    | 131,000                               |   |
| Issuance of common stock                                           |   | 170,000            |       | 17,000            |       | 1,003,000                            |       |                                          |       |                       |    | 1,020,000                             |   |
| Comprehensive loss:                                                |   |               |       |              |       |                                 |       |                                          |       |                       |    |                                  |   |
| Net loss                                                           |   |               |       |              |       |                                 |       |                                          |       | (3,598,000                 | )       | (3,598,000                            | )      |
| Change in unrealized gain (loss) on investments                    |   |               |       |              |       |                                 |       | 76,000                                        |       |                       |    | 76,000                                |   |
| Total comprehensive loss                                           |   |               |       |              |       |                                 |       |                                          |       |                       |    | (3,522,000                            | )      |
| October 31, 2000                                                   |   | 5,479,782          |       | 548,000           |       | 30,062,000                           |       | —                                        |       | (13,739,000                | )       | 16,871,000                            |   |
| Stock issued through the employee stock purchase plan              |   | 32,336             |       | 3,000             |       | 55,000                               |       |                                          |       |                       |    | 58,000                                |   |
| Comprehensive loss:                                                |   |               |       |              |       |                                 |       |                                          |       |                       |    |                                  |   |
| Net loss                                                           |   |               |       |              |       |                                 |       |                                          |       | (4,843,000                 | )       | (4,843,000                            | )      |
| Change in unrealized gain (loss) on investments                    |   |               |       |              |       |                                 |       | 12,000                                        |       |                       |    | 12,000                                |   |
| Total comprehensive loss                                           |   |               |       |              |       |                                 |       |                                          |       |                       |    | (4,831,000                            | )      |
| October 31, 2001                                                   |   | 5,512,118          |       | 551,000           |       | 30,117,000                           |       | 12,000                                        |       | (18,582,000                | )       | 12,098,000                            |   |
| Stock based compensation                                           |   |               |       |              |       | 20,000                               |       |                                          |       |                       |    | 20,000                                |   |
| Stock issued through the employee stock purchase plan              |   | 71,971             |       | 7,000             |       | 48,000                               |       |                                          |       |                       |    | 55,000                                |   |
| Stock issued in Shareholder Rights Offering, net of offering costs |   | 4,483,861          |       | 449,000           |       | 3,909,000                            |       |                                          |       |                       |    | 4,358,000                             |   |
| Comprehensive loss:                                                |   |               |       |              |       |                                 |       |                                          |       |                       |    |                                  |   |
| Net loss                                                           |   |               |       |              |       |                                 |       |                                          |       | (6,875,000                 | )       | (6,875,000                            | )      |
| Change in unrealized gain (loss) on investments                    |   |               |       |              |       |                                 |       | (12,000                                       | )          |                       |    | (12,000                               | )      |
| Total comprehensive loss                                           |   |               |       |              |       |                                 |       |                                          |       |                       |    | (6,887,000                            | )      |
| October 31, 2002                                                   |   | 10,067,950         |       | $                 | 1,007,000  |                                 | $          | 34,094,000                                    |       | $                          | —  |                                  | $      | (25,457,000 | ) | $ | 9,644,000 |   |

 

The accompanying notes are an integral part of the financial statements

 

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**NOTESTO FINANCIAL STATEMENTS**

 

**NOTE 1: ORGANIZATION AND OPERATIONS**

 

PPT VISION, Inc. designs,manufactures, markets, and integrates 2D and 3D machine vision-based automatedinspection systems for manufacturing applications. Machine vision-basedinspection systems enable manufacturers to increase the quality of manufacturedparts and improve the productivity of manufacturing processes. The Company’s 2Dmachine vision product line is sold on a global basis to end-users, systemintegrators, and original equipment manufacturers (OEM’s) primarily in theelectronic and semiconductor component, automotive, medical device, andpackaged goods industries. The Company’s SpeedScan 3DTM sensor,incorporating the Company’s patented high-speed Scanning Moiré InterferometryTMtechnology is sold to original equipment manufacturers for specificapplications. The Company’s PPT861TM 3D scanning system, which usesthe Company’s SpeedScan 3D sensor, is an application-specific inspectionsolution targeted at inspection of leaded and bumped components in thesemiconductor back-end manufacturing process, inspection of surface-mountelectronic connectors, and inspection of components used in hard disk drives.

 

**NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTINGPOLICIES**

 

**REVENUE RECOGNITION**

 

The Company typicallyrecognizes revenue on product sales upon shipment to end-user customers ifcontractual obligations have been substantially met and title and risk of losshave passed to the customer, which is generally the case for sales of 2Dmachine vision systems, spare parts, accessories and some 3D machine visionsensors and systems. Some 3D machine vision system sales, however, may includepost-shipment obligations or contractual terms that can only be satisfied aftershipment, such as installation and meeting customer-specified performancerequirements at the customer’s site. In these cases, revenue is not recognizeduntil these obligations have been satisfied and there is objective evidencethat the applicable contract terms have been met. In situations where equipmentis shipped but revenue and the related receivable are not recognized, the costof the equipment is included in inventories on our balance sheet. 

 

The Company also recognizesrevenue on products sold to distributors upon shipment because contracts withdistributors do not include post shipment obligations or any right of returnprovisions and pricing is fixed at the time of sale. Revenue related to applicationengineering, product development and customer training services is recognizedwhen the services are performed.

 

**CASH AND CASH EQUIVALENTS**

 

For purposes of reportingcash flows, cash and cash equivalents include cash on hand and investments withoriginal maturities of three months or less.

 

**INVESTMENT SECURITIES**

 

Investment securities withoriginal maturities greater than three months are stated at market values asprovided by a third party service organization, and are categorized asavailable-for-sale debt securities. Changes in unrealized gains or losses oninvestment securities are recorded as other comprehensive income.

 

**ACCOUNTS RECEIVABLE**

 

Accounts receivable are shown net of allowance for doubtful accounts of$133,000 at October 31, 2002, and $108,000 at October 31, 2001.

 

**INVENTORIES**

 

Inventories are stated atthe lower of cost or market, with costs determined on a first-in, first-out(“FIFO”) basis. As of October 31, inventories consist of the following:

 

|                              |   | **2002** |      | **2001** |   |
|-----------------------------------|--------|----------|-----------|----------|--------|
| Manufactured and purchased  parts |   | $        | 1,338,000 |     | $      | 2,126,000 |   |
| Work-in-process                   |   | 450,000  |      | 436,000  |   |
| Finished goods                    |   | 65,000   |      | 30,000   |   |
| Totals                            |   | $        | 1,853,000 |     | $      | 2,592,000 |   |

 

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The Company does notmaintain a finished goods inventory for expected orders. The Company buildsfinished systems only when a firm sales order is in place for the purchase of asystem. The finished goods on hand at the end of fiscal 2002 and 2001 wereconsignment inventory.

 

In view of the rapid pace oftechnological change in the machine vision industry, the Company may reduce thecarrying value of its inventories for excess or obsolete inventories. In fiscal2002, the Company’s analysis of the net realizable value of its inventoriesincluded consideration of a variety of factors including existing inventoryquantities, historical usage, expected future demand, the effect oftechnological advances and the impact of newly introduced products. As a resultof its analysis, the Company recorded a provision for excess and obsoleteinventories of $500,000.

 

**FAIR VALUE OF FINANCIAL INSTRUMENTS**

 

The Company’s financialinstruments consist of cash and cash equivalents, investments, short-term tradereceivables and payables for which current carrying amounts approximate fairmarket value.

 

**INTANGIBLE ASSETS**

 

Intangible assets at October 31, 2002 and October 31, 2001, consistedof the following:

 

|                           |   | **2002**   |      | **2001** |   |
|--------------------------------|--------|------------|-----------|----------|--------|
| Patent and trademark           |   | $          | 3,652,000 |     | $      | 3,615,000 |   |
| Less accumulated  amortization |   | (1,107,000 | )         | (730,000 | )      |
| Totals intangible assets       |   | $          | 2,545,000 |     | $      | 2,885,000 |   |

 

Patent and trademark costsare amortized over five to ten years. The patent and trademark balance includes$3,041,000 representing the cost to acquire United States Patent No. 5,646,733(“Scanning Phase Measurement Method and System for an Object at a VisionStation”), which was purchased from a third party company in fiscal year 1998.The Company commenced amortizing Patent No. 5,646,733 in June 2000 inconjunction with the shipment of production product utilizing the underlyingtechnology. As of October 31, 2002 the Company has recorded $753,000 ofamortization expense related to Patent No. 5,656,733.

 

**OTHER ASSETS**

 

Other assets at October 31,2002 and October 31, 2001, represent an investment of $53,000 inElectro-Sensors, Inc. a related party shareholder of the Company. The Company’spercentage ownership is less than 1% of Electro-Sensors, Inc. outstandingcommon stock. There are no commitments or obligations associated with thisinvestment.

 

**FIXED ASSETS**

 

Fixed assets consist offurniture, fixtures and equipment and are stated at cost net of accumulateddepreciation. Depreciation is computed for book purposes on a straight-linebasis over the estimated useful life of the asset and for tax purposes overfive and ten years using accelerated and straight-line methods. At October 31,furniture, fixtures and equipment consisted of the following:

 

|                           |   | **2002**   |      | **2001**   |   |
|--------------------------------|--------|------------|-----------|------------|--------|
| Equipment                      |   | $          | 6,949,000 |       | $      | 6,694,000 |   |
| Furniture and fixtures         |   | 972,000    |      | 972,000    |   |
|                           |   | 7,921,000  |      | 7,666,000  |   |
| Less accumulated  depreciation |   | (6,504,000 | )         | (5,550,000 | )      |
| Totals fixed assets            |   | $          | 1,417,000 |       | $      | 2,116,000 |   |

 

**IMPAIRMENT OF LONG-LIVED ASSETS**

 

The Company reviews itslong-lived assets for impairment whenever events or changes in circumstances indicatethat the carrying amount of an asset may not be recoverable. Recoverability ofassets to be held and used is measured by a comparison of the carrying amountof an asset to undiscounted future net cash flows expected to be generated bythe assets. If these assets are considered to be impaired, the impairment to berecognized is measured by the amount by which the carrying amount of the assetsexceeds the fair value of the assets.

 

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**DEFERRED REVENUE**

 

Deferred revenue resultsfrom amounts collected from customers in advance of shipment of systems or inadvance of performing services related to the installation of the Company’sproduct. The Company recognizes revenue as systems are shipped or as servicesare performed, as this is when significant risks and rewards of ownership havetransferred to the buyer.

 

**RESEARCH AND DEVELOPMENT**

 

Expenditures for researchand development are expensed as incurred.

 

**INCOME TAXES**

 

The Company accounts forincome taxes under the provisions of Statement of Financial AccountingStandards (SFAS) No. 109, “Accounting for Income Taxes.” Under the asset andliability method prescribed in SFAS No. 109, deferred tax assets andliabilities are recognized for the future tax consequences attributable todifferences between the financial statement carrying amounts of existing assetsand liabilities and their respective tax bases. The Company provides avaluation allowance for deferred tax assets for which it does not considerrealization of such assets to be more likely than not.

 

**EARNINGS PER SHARE**

 

Basic earnings per share iscomputed using only weighted average common shares outstanding. Dilutedearnings per share gives effect to all dilutive potential common sharesoutstanding during the fiscal reporting periods.

 

|                                                |   | **2002**  |       | **2001**  |   | **2000**   |   |
|-----------------------------------------------------|--------|-----------|------------|-----------|--------|------------|--------|
| Net  loss                                           |   | $         | (6,875,000 | )         | $      | (4,843,000 | )      | $ | (3,598,000 | ) |
| Weighted average shares  outstanding – basic   |   | 7,630,660 |       | 5,492,000 |   | 5,346,000  |   |
| Dilutive effect of stock  options                   |   | —    |       | —    |   | —     |   |
| Weighted average shares  outstanding – diluted |   | 7,630,660 |       | 5,492,000 |   | 5,346,000  |   |
| Basic net loss per share                            |   | $         | (0.90      | )         | $      | (0.88      | )      | $ | (0.67 | ) |
| Diluted net loss per share                          |   | $         | (0.90      | )         | $      | (0.88      | )      | $ | (0.67 | ) |

 

At October 31, 2002, 2001and 2000, options to purchase 842,000, 740,000 and 788,000, shares of theCompany’s common stock respectively, and warrants to purchase 2,267,000, 25,000and 25,000 shares of the Company’s common stock respectively, were not includedin the calculation of diluted earnings per share. As the Company had a netloss, the inclusion of the aforementioned shares would have been anti-dilutive.

 

**STOCK OPTIONS**

 

The Company follows thedisclosure only provisions of Statement of Financial Accounting Standards No.123, “Accounting for Stock-Based Compensation” regarding disclosure of proforma information for stock compensation. As permitted by Statement No. 123,the Company measures compensation cost using the methods described inAccounting Principles Board Opinion No. 25, “Accounting for Stock Issued toEmployees.”

 

**RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS**

 

In July 2001, the FinancialAccounting Standards Board (“FASB”) issued SFAS No. 141, “BusinessCombinations” and No. 142, “Goodwill and Other Intangible Assets.” SFAS No. 141requires the purchase method of accounting be used for all businesscombinations completed after June 30, 2001 and clarifies the criteria forrecognition of intangible assets separately from goodwill. SFAS No. 142,effective for fiscal years beginning after December 15, 2001, requires thatratable amortization of goodwill be replaced with periodic tests of goodwillimpairment and that intangible assets, other than goodwill, which havedeterminable useful lives be amortized over their useful lives. Managementbelieves that the adoption of SFAS No. 142 effective November 1, 2002 will haveno impact on the Company’s financial position or results of operations.

 

In October 2001, the FASBissued SFAS No. 144, “Accounting for Impairment of Long-Lived Assets.” SFAS No.144, effective for financial statements for fiscal years beginning afterDecember 15, 2001, addresses issues relating to the implementation of SFAS No.121, “Accounting for the Impairment of Long-Lived Assets and for Long-LivedAssets to be Disposed Of,” and develops a single accounting model forlong-lived assets to be disposed of by sale, whether previously held and usedor newly acquired. Management believes the adoption of SFAS No. 144 effectiveNovember 1, 2002, will not have a material impact on the Company’s financialposition or results of operations.

 

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In July 2002, the FASBissued SFAS No. 146, “Accounting for Costs Associated with Exit or DisposalActivities.” SFAS No. 146 addresses the financial accounting and reporting forcosts associated with exit or disposal activities, including costs to terminatecontracts that are not capital leases, costs to consolidate facilities orrelocate employees and one-time termination benefits provided to employees whoare involuntarily terminated. SFAS No. 146 requires that a liability for a costassociated with an exit or disposal activity, including restructuring, berecognized and measured at fair value when the liability is incurred, insteadof the commitment date. Management believes that the adoption of SFAS No. 146effective November 1, 2002 will have no impact on our financial position,results of operations or cash flows as the provisions apply prospectively.However, adoption may change the timing of the Company’s recognition of certainof these costs in the future.

 

**NOTE 3: LIQUIDITY AND CAPITAL RESOURCES**

 

The Company has incurred netlosses and negative cash flows from operating activities in each of the pastthree years and has an accumulated deficit of $25.5 million at October 31,2002. During fiscal year 2002, the Company raised approximately $4.3 millionthrough its Shareholder Rights Offering (see Note 4) to provide for thesecapital needs and as of  October 31,2002, the Company had $2.9 million of cash, $5.6  million of working capital and no long-term debt. However, theCompany expects to incur losses and negative cash flows for at least the nextfiscal year and the continued execution of the Company’s business plan isdependent upon raising sufficient capital to support future operations.

 

In order to address the needfor additional capital, in January 2003, the Company obtained a letter ofcommitment from a shareholder to provide up to $750,000 in either debt orequity financing through April 2004 depending on the needs of the Company. TheCompany also believes that other sources of financing are available to fundfuture operations including lowering the exercise price of the 2.25 millionoutstanding warrants, sales of its common or preferred stock, externalborrowing, customer or vendor financing, customer sponsored research anddevelopment projects or investments by strategic partners. There can be noassurance, however, that other sources of financing or capital will beavailable on acceptable terms or at all. The failure to obtain additionalcapital as needed may have an adverse effect on the Company’s ability tocontinue to operate at current levels and may not allow the Company to takeadvantage of future opportunities or respond to competitive pressures orunanticipated requirements, which could seriously harm its business, financialposition, results of operations and cash flows.

 

**NOTE 4: SHAREHOLDER RIGHTS OFFERING**

 

In order to satisfy theCompany’s anticipated working capital and capital resources needs, the Company initiateda Shareholder Rights Offering (“Offering”) during the second quarter of fiscal2002. The Offering closed on May 10, 2002. In the Offering, the Board ofDirectors authorized the sale of 5.5 million units at $1 per unit to existingshareholders. Each unit consisted of one share of common stock and a warrant topurchase one-half share of common stock. The warrants are exercisable at $2.50until September 30, 2003. As a result of the Offering, the Company issuedapproximately 4,484,000 shares of common stock and approximately 2,242,000warrants to purchase a share of common stock at $2.50 per share. The netproceeds to the Company were approximately $4.3 million after Offeringexpenses. The issuance of the shares of stock and warrants and the related receiptof cash have been reflected in the accompanying financial statements.

 

**NOTE 5: CUSTOMER INFORMATION**

 

**SIGNIFICANT CUSTOMER INFORMATION**

 

During 2001, revenue fromone customer accounted for 22% of net revenues and revenue from one othercustomer accounted for 11% of net revenues. During 2000, revenue from onecustomer accounted for 17% of net revenues and revenue from one other customeraccounted for 12% of net revenues. No individual customers accounted for 10% ofnet revenues in fiscal 2002.

 

At October 31, 2002, onecustomer accounted for 14% of total accounts receivable. At October 31, 2001,two customers accounted for 22% and 11% of total accounts receivable,respectively.

 

**CUSTOMER GEOGRAPHIC DATA**

 

United States and exportsales by geographic region as a percentage of net revenues at October 31 are asfollows:

 

|                |   | **2002** |   | **2001** |   | **2000** |   |
|---------------------|--------|----------|--------|----------|--------|----------|--------|
| United States       |   | 63       | %      | 45       | %      | 52       | %      |
| Europe & Canada |   | 12       | %      | 13       | %      | 12       | %      |
| Asia-Pacific        |   | 23       | %      | 40       | %      | 31       | %      |
| South America       |   | 2        | %      | 2        | %      | 5        | %      |

 

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**NOTE 6: ACCRUED EXPENSES**

 

Accrued expenses at October 31, include:

 

|                                             |   | **2002** |    | **2001** |   |
|--------------------------------------------------|--------|----------|---------|----------|--------|
| Employee stock purchase  plan payroll deductions |   | 84,000   |    | 69,000   |   |
| Accrued compensation                             |   | 74,000   |    | 66,000   |   |
| Sales and use taxes  payable                     |   | 26,000   |    | 96,000   |   |
| Severance and office  closure costs              |   | 66,000   |    | 52,000   |   |
| Loss on purchase  commitments                    |   | 215,000  |    | —   |   |
| Other                                            |   | 128,000  |    | 195,000  |   |
| Totals                                           |   | $        | 593,000 |     | $      | 478,000 |   |
|                                                  |        |          |         |          |        |  |  |

 

**NOTE 7: COMMON STOCK OPTIONS AND WARRANTS**

 

Under the Company’s 2000Stock Option Plan, 1988 Stock Option Plan and 1997 Stock Option Plan theCompany may issue options to purchase up to 1,600,000 shares of common stock toemployees and directors. Options are granted at the fair market value on thedate of grant. The granting of options and their vesting is within thediscretion of the Company’s Board of Directors.

 

A summary of stock optionsissued and outstanding under these plans is as follows:

 

|                         |   | **NUMBER  OF SHARES** |   | **WEIGHTED  AVG.  OPTION PRICE** |   |
|------------------------------|--------|-----------------------|--------|----------------------------------|--------|
| Balance at October 31,  1999 |   | 671,425               |   | $                                | 5.78   |   |
| Granted                      |   | 274,650               |   | $                                | 4.23   |   |
| Exercised                    |   | (19,275               | )      | $                                | 3.67   |   |
| Forfeited                    |   | (138,500              | )      | $                                | 5.89   |   |
| Balance at October 31,  2000 |   | 788,300               |   | $                                | 5.25   |   |
| Granted                      |   | 144,900               |   | $                                | 2.38   |   |
| Forfeited                    |   | (193,432              | )      | $                                | 4.33   |   |
| Balance at October 31,  2001 |   | 739,768               |   | $                                | 4.97   |   |
| Granted                      |   | 373,850               |   | $                                | 1.10   |   |
| Cancelled                    |   | (211,650              | )      | $                                | 6.88   |   |
| Forfeited                    |   | (59,584               | )      | $                                | 6.23   |   |
| Balance at October 31,  2002 |   | 842,384               |   | $                                | 2.86   |   |

 

In fiscal year 2002,pursuant to an option exchange program approved by the Company’s Board ofDirectors, the Company allowed employees to cancel any or all of their currentstock options which were issued pursuant to the 1988 or 1997 plans and whichhad exercise prices of $5 per share or greater in exchange for a grant of thesame number of stock options cancelled in six months and one day from the dateof cancellation at exercise prices equal to the fair value of the Company’scommon stock on the date of grant. Under this program, 211,650 stock optionswere voluntarily cancelled at a weighted average option price of $6.88 and211,650 stock options were subsequently granted at an option price of $0.90.This option exchange resulted in variable accounting for 25,000 of the stockoptions granted under the program. Variable accounting will continue until allstock options subject to variable accounting are exercised, cancelled orforfeited. As of October 31, 2002, 24,000 stock options remain under variableaccounting treatment. There was no income statement impact from this variableaccounting treatment during fiscal year 2002.

 

The estimated weightedaverage grant-date fair value of stock options granted is as follows: 2002—$0.94, 2001 - $1.76, and 2000 - $2.56.

 

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Had the Company’s stockoption plans and its stock purchase plans compensation costs been determinedbased on the fair value at the option grant dates for awards consistent withthe accounting provision of SFAS No. 123, the Company’s net loss and loss pershare for fiscal years 2002, 2001 and 2000 would have been adjusted to the proforma amount indicated below:

 

| **FISCAL  YEAR ENDED OCTOBER 31,** |   |        |   | **2002** |       | **2001** |   | **2000**   |   |
|------------------------------------|--------|-------------|--------|----------|------------|----------|--------|------------|--------|
| Net loss                           |   | As reported |   | $        | (6,875,000 | )        | $      | (4,843,000 | )      | $ | (3,598,000 | ) |
|                               |   | Pro forma   |   | $        | (7,219,000 | )        | $      | (5,303,000 | )      | $ | (4,198,000 | ) |
| Basic and diluted loss  per share  |   | As reported |   | $        | (0.90      | )        | $      | (0.88      | )      | $ | (0.67 | ) |
|                               |   | Pro forma   |   | $        | (0.95      | )        | $      | (0.97      | )      | $ | (0.79 | ) |

 

The following table summarizes stock options outstanding andexercisable at October 31, 2002.

 

|                      |   | **OUTSTANDING** |   | **EXERCISABLE**                                 |   |
|---------------------------|--------|-----------------|--------|-------------------------------------------------|--------|
| **Exercise  Price Range** |   | **Options**     |   | **Weighted  Avg.  Contractual Life  Remaining** |   | **Weighted  Avg.  Exercise Price** |   | **Options** |   | **Weighted  Avg.  Exercise Price** |   |
| $ 0.85 - $  1.41     |   | 353,850         |   | 6.45                                            |   | $ | 1.09 |   | 0 |   | $ | — |   |
| $ 2.13 - $  3.34     |   | 77,050          |   | 5.36                                            |   | $ | 2.55 |   | 33,553 |   | $ | 2.65 |   |
| $ 3.56 - $  3.91     |   | 264,584         |   | 4.03                                            |   | $ | 3.73 |   | 219,930 |   | $ | 3.76 |   |
| $ 4.19 - $  6.19     |   | 120,500         |   | 4.38                                            |   | $ | 5.15 |   | 60,187 |   | $ | 5.11 |   |
| $ 6.81 - $12.00           |   | 26,400          |   | 1.99                                            |   | $ | 7.64 |   | 25,150 |   | $ | 7.67 |   |
|                      |   | 842,384         |   | 5.16                                            |   | $ | 2.84 |   | 338,820 |   | $ | 4.18 |   |

 

The fair value of optionsgranted under the Company’s fixed stock option plans during fiscal 2002, 2001and 2000 was estimated on the dates of grant using the Black-Scholesoptions-pricing model. The assumptions for the fiscal periods ending October31, were as follows:

 

| **FISCAL  YEAR ENDED OCTOBER 31,** |   | **2002** |   | **2001** |   | **2000** |   |
|------------------------------------|--------|----------|--------|----------|--------|----------|--------|
| Risk free interest rates           |   | 4.0      | %      | 4.2      | %      | 5.1      | %      |
| Expected lives                     |   | 6.0      |   | 6.0      |   | 6.0      |   |
| Expected volatility                |   | 115      | %      | 85       | %      | 59       | %      |
| Expected dividends                 |   | 0        | %      | 0        | %      | 0        | %      |

 

Pro forma compensation costrelated to shares purchased under the Company’s Employee Stock Purchase Plan ismeasured based on the discount from market value.

 

As of October 31, 2002 thereare warrants outstanding to purchase 2,267,000 shares of the Company’s commonstock. In May 2002, in connection with the Company’s Shareholder RightsOffering, the Company issued warrants to purchase 2,242,000 shares of theCompany’s common stock at a price of $2.50 per share, all of which expire onSeptember 30, 2003. In September of 1997, the Company issued a warrant topurchase 25,000 shares of common stock with an exercise price of $12.00 and anexpiration date of September of 2004.

 

**NOTE 8: EMPLOYEE STOCK PURCHASE PLAN**

 

In March 2000, shareholdersapproved the adoption of the 2000 Employee Stock Purchase Plan (the “2000Plan”) to replace the 1995 Employee Stock Purchase Plan (the “1995 Plan”) whichby its terms expired during 2000. The 2000 Plan provides for the purchase of upto 150,000 shares of common stock during a five-year annual offering periodbeginning June 1, 2000. Under the terms of the 2000 Plan, eligible employeesmay purchase

 

32

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common stock annually at 85% of the lesser of (1) the fair market valueon the first day of the annual offering period or (2) the fair market value onthe last day of each annual offering period. The 1995 Plan had similarprovisions.

 

The first phase of the 2000Plan began on June 1, 2000 and employees were granted the right to purchase53,354 shares at $3.88 per share. The first phase of the 2000 Plan ended on May31, 2001 and employees purchased 32,336 shares at $1.81 per share. The secondphase of the 2000 Plan began on June 1, 2001 and employees were granted theright to purchase 110,652 shares at $1.81 per share. The second phase of the2000 Plan ended on May 31, 2002 and employees purchased 71,971 shares at $0.76per share. 

 

In fiscal 2003, theCompany’s Board of Directors amended the Plan to increase the number of sharesauthorized from 150,000 to 300,000 shares subject to shareholder approval atthe 2003 Annual Meeting of Shareholders.

 

**NOTE 9: SHAREHOLDER RIGHTS PLAN**

 

On June 2, 1999, the Companyadopted a Shareholder Rights Plan (the “Rights Plan”) designed to detercoercive or unfair takeover tactics and to prevent a person or a group fromgaining control of the Company without offering a fair price to allshareholders. Under the terms of the Rights Plan, a dividend distribution ofone Preferred Stock Purchase Right (“Right”) for each outstanding share of theCompany’s common stock was made to holders of record on June 22, 1999. TheseRights entitle the holder to purchase one one-hundredth of a share of theCompany’s Series A Junior Participating Preferred Stock (“Preferred Stock”) atan exercise price of $28. The Rights become exercisable (a) 10 days after apublic announcement that a person or group has acquired shares representing 20%or more of the outstanding shares of common stock, or (b) 10 business daysfollowing commencement of a tender or exchange offer for 20% or more of suchoutstanding shares of common stock. The Company can redeem the Rights for$0.001 per Right at any time prior to their becoming exercisable. The Rightsexpire on June 2, 2009, unless redeemed earlier by the Company. Under certaincircumstances, if a person or group acquires 20% or more of the Company’scommon stock, the Rights permit shareholders other than the acquirer topurchase common stock having a market value of twice the exercise price of theRights. In addition, in the event of certain business combinations, the Rightspermit shareholders to purchase the common stock of an acquirer at a 50%discount. Rights held by the acquirer will become null and void in both cases.

 

In October 1999, theCompany’s Board of Directors amended the terms of the Rights Plan to enable Mr.P.R. Peterson, a member of the Board of Directors of the Company, to purchaseup to 30% of the common stock of the Company without being deemed an “AcquiringPerson” within the meaning of the Rights Agreement. In March, 2002, the Companyamended the terms of the Rights Plan to exclude Mr. Peterson completely fromthe definition of Acquiring Person, regardless of his share ownership.

 

**NOTE 10: OPERATING LEASES**

 

The Company leasesfacilities and equipment under non-cancelable operating lease agreements. Rentexpense was $810,000, $762,000, and $729,000 in 2002, 2001, and 2000respectively. Minimum future rental payments due under non-cancelable operatinglease agreements are as follows:

 

| 2003       |   | 704,000 |      |
|------------|--------|---------|-----------|
| 2004       |   | 694,000 |      |
| 2005       |   | 693,000 |      |
| 2006       |   | 638,000 |      |
| 2007       |   | 627,000 |      |
| Thereafter |   | 836,000 |      |
| Total      |   | $       | 4,192,000 |   |
|            |        |         |           |  |

 

**NOTE 11: EMPLOYEE SAVINGS PLAN**

 

The Company provides asupplementary retirement savings plan which is structured in accordance withSection 401(k) of the Internal Revenue Code. Employees eligible for the Planmay contribute from one to fifteen percent of their monthly earnings on apre-tax basis, subject to annual contribution limitations. The Companycurrently makes matching contributions of one dollar for each dollarcontributed by each Plan participant up to a maximum of $500 annually.

 

The Company’s contributionsunder this program were approximately $39,000, $188,000, and $199,000 for theyears ended October 31, 2002, 2001, and 2000, respectively. Companycontributions in fiscal 2002 were funded through accumulated forfeitures ofunvested Company contributions and therefore there was no expense recorded infiscal year 2002.

 

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**NOTE 12: INCOME TAXES**

 

The provision for incometaxes differs from the statutory U.S. federal tax rate of 34% applied toearnings before income taxes for the fiscal periods ended October 31, asfollows:

 

|                                                 |   | **2002**  |       | **2001**  |   | **2000**   |   |
|------------------------------------------------------|--------|-----------|------------|-----------|--------|------------|--------|
| Expected tax benefit at  statutory rate              |   | $         | (2,338,000 | )         | $      | (1,643,000 | )      | $ | (1,223,000 | ) |
| State income tax benefit,  net of federal tax effect |   | (272,000  | )          | (191,000  | )      | (142,000   | )      |
| Permanent differences                                |   | 7,000     |       | 7,000     |   | 7,000      |   |
| Tax credits and other                                |   | (17,000   | )          | (87,000   | )      | 110,000    |   |
| Increase in valuation  allowance                     |   | 2,620,000 |       | 1,914,000 |   | 1,248,000  |   |
| Total income tax expense  (benefit)                  |   | $         | —     |      | $      | —     |   | $ | — |   |

 

Deferred tax assets (liabilities) are comprised of the following atOctober 31:

 

| **YEAR ENDED  OCTOBER 31,**                           |   | **2002**    |    | **2001**   |   |
|-------------------------------------------------------|--------|-------------|---------|------------|--------|
| Depreciation                                          |   | $           | 207,000 |       | $      | 141,000 |   |
| Net operating loss  carryforwards                     |   | 8,303,000   |    | 6,062,000  |   |
| Income tax credits                                    |   | 1,263,000   |    | 1,205,000  |   |
| Inventory Allowances                                  |   | 209,000     |    | —     |   |
| Other                                                 |   | 72,000      |    | 26,000     |   |
| Total deferred tax assets  before valuation allowance |   | 10,054,000  |    | 7,434,000  |   |
| Less valuation allowance                              |   | (10,054,000 | )       | (7,434,000 | )      |
| Net deferred tax asset                                |   | $           | —  |       | $      | — |   |

 

At October 31, 2002, theCompany has available federal net operating loss and tax credit carryforwardsfor income tax purposes of approximately $23.7 million and $.8 million,respectively. These carryforwards expire in the years ending October 31, 2003 throughOctober 31, 2022.

 

The utilization of the netoperating loss and tax credit carryforwards is dependent upon the Company’sability to generate sufficient taxable income during the carryforward period.Because of the uncertainty of future realization, a valuation allowance equalto the deferred tax asset has been recorded.

 

**NOTE 13: NON-RECURRING CHARGES**

 

During fiscal 2000, theCompany had non-recurring legal costs and expenses of $1,700,000 incurred inconnection with the Company’s defense and settlement of the patent infringementlawsuit brought by National Instruments Corporation and the Company’s defenseand settlement of the breach of contract lawsuit brought by IntegratedElectronic Technologies. Both lawsuits were settled during the third quarter offiscal 2000.

 

**NOTE 14: QUARTERLY FINANCIALINFORMATION–UNAUDITED–in thousands**

 
|        |   | **Net Sales** |   | **Gross  Profit** |   | **Net Loss** |   | **Basic and  Diluted  Net Loss Per Share** |   |
|-------------|--------|---------------|--------|-------------------|--------|--------------|--------|--------------------------------------------|--------|
| **Quarter** |   | **2002**      |   | **2001**          |   | **%Change**  |   | **2002**                                   |   | **2001** |   | **%Change** |   | **2002** |   | **2001** |   | **%Change** |   | **2002** |   | **2001** |   | **%Change** |   |
| **First**   |   | $             | 1,655  |              | $      | 4,801        |   | (66                                        | )%     | $ | 721 |   | $ | 2,562 |   | (72 | )% | $ | (1,580 | ) | $ | (446 | ) | (254 | )% | $ | (0.29 | ) | $ | (0.08 | ) | (362 | )% |
| **Second**  |   | 1,606         |   | 4,438             |   | (64          | )%     | 802                                        |   | 2,381 |   | (66 | )% | (1,612 | ) | (597 | ) | (170 | )% | (0.29 | ) | (0.11 | ) | (263 | )% |
| **Third**   |   | 2,026         |   | 2,009             |   | 1            | %      | 1,019                                      |   | 890 |   | 14 | % | (1,492 | ) | (2,049 | ) | 27 | % | (0.16 | ) | (0.37 | ) | 57 | % |
| **Fourth**  |   | 2,184         |   | 2,078             |   | 5            | %      | 496                                        |   | 927 |   | (46 | )% | (2,191 | ) | (1,751 | ) | (25 | )% | (0.22 | ) | (0.32 | ) | 31 | % |
| **Total**   |   | $             | 7,474  |              | $      | 13,326       |   | (44                                        | )%     | $ | 3,037 |   | $ | 6,760 |   | (55 | )% | $ | (6,875 | ) | $ | (4,843 | ) | (42 | )% | $ | (0.90 | ) | $ | (0.88 | ) | (2 | )% |

 

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