**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

**Form 10-QSB**

 

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

 

**For the Quarterly Period Ended July 31,2004**

 

**Commission File Number 0-11518**

 

**PPT VISION, INC.**

(Exact name of Small Business Issuer asspecified in its charter)

 

| **MINNESOTA**                                                   | ** ** | **41-1413345**                           |
|-----------------------------------------------------------------|------------|------------------------------------------|
| (State or other jurisdiction of  incorporation or organization) |       | (I.R.S. Employer  Identification Number) |
|                                                            |       |                                     |
| **12988 Valley View Road**                                      | ** ** | **Eden Prairie, Minnesota 55344**        |
| (Address of principal executive offices)                        |       | (Zip Code)                               |
|                                                            |       |                                     |
| **(952) 996-9500**                                              |
| (Issuer’s telephone number, including area  code)          |

 

Check whether the issuer (1) has filed all reports required to be filedby Section 13 or 15(d) of the Exchange Act during the preceding 12 months(or for such shorter period that the registrant was required to file suchreports), and (2) has been subject to such filing requirements for the last 90days.  Yes ý  No o

 

Shares of $.10 par value common stock outstanding at September 1,2004: 11,981,167

 

 

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INDEX

 

PPT VISION, INC.

 
| Part I.  | Financial Information                                                                                   |   |
|----------|---------------------------------------------------------------------------------------------------------|--------|
|     |                                                                                                    |   |
| Item 1.  | Financial Statements                                                                                    |   |
|     |                                                                                                    |   |
|     | Balance  Sheets as of July 31, 2004 and October 31, 2003                                      |   |
|     |                                                                                                    |   |
|     | Statements of Operations for the Three and  Nine months Ended July 31, 2004 and July 31, 2003 |   |
|     |                                                                                                    |   |
|     | Statements of Cash Flows for the Nine  months Ended July 31, 2004 and July 31, 2003           |   |
|     |                                                                                                    |   |
|     | Notes to Condensed Financial Statements –  July 31, 2004                                      |   |
|     |                                                                                                    |   |
| Item 2.  | Management’s  Discussion and Analysis or Plan of Operation                                         |   |
|     |                                                                                                    |   |
| Item 3.  | Controls  and Procedures                                                                                |   |
|     |                                                                                                    |   |
| Part II. | Other Information                                                                                       |   |
|     |                                                                                                    |   |
| Item 1.  | Legal Proceedings                                                                                       |   |
|     |                                                                                                    |   |
| Item 2.  | Changes in Securities and Use of Proceeds                                                               |   |
|     |                                                                                                    |   |
| Item 3.  | Defaults Upon Senior Securities                                                                         |   |
|     |                                                                                                    |   |
| Item 4.  | Submission of Matters to a Vote of Security  Holders                                                    |   |
|     |                                                                                                    |   |
| Item 5.  | Other Information                                                                                       |   |
|     |                                                                                                    |   |
| Item 6.  | Exhibits and Reports on Form 8-K                                                                        |   |
|     |                                                                                                    |   |
|     | Signatures                                                                                              |   |

 

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PPT VISION, INC.

 

BALANCE SHEETS

 
| ** **                                      | ** ** | **July 31, 2004** | ** ** | **October 31, 2003** | ** ** |
|-------------------------------------------------|------------|------------------------|------------|---------------------------|------------|
| ** **                                      | ** ** | **(unaudited)**        | ** ** | **(audited)**             | ** ** |
| ASSETS                                          |       |                   |       |                      |       |
| Cash and cash equivalents                       |       | $                      | 1,925,000  |                      | $          | 2,086,000 |   |
| Accounts receivable, net                        |       | 2,132,000              |       | 2,118,000                 |       |
| Inventories:                                    |       |                   |       |                      |       |
| Manufactured and purchased parts                |       | 1,085,000              |       | 728,000                   |       |
| Work-in-process                                 |       | 135,000                |       | 202,000                   |       |
| Finished goods                                  |       | 62,000                 |       | 91,000                    |       |
| Total inventories, net                          |       | 1,282,000              |       | 1,021,000                 |       |
| Other current assets                            |       | 239,000                |       | 319,000                   |       |
| Total current assets                            |       | 5,578,000              |       | 5,544,000                 |       |
|                                            |       |                   |       |                      |       |
| Fixed assets, net                               |       | 440,000                |       | 708,000                   |       |
| Intangible assets, net                          |       | 1,887,000              |       | 2,141,000                 |       |
| Other assets                                    |       | 53,000                 |       | 53,000                    |       |
| Total assets                                    |       | $                      | 7,958,000  |                      | $          | 8,446,000 |   |
|                                            |       |                   |       |                      |       |
| LIABILITIES AND SHAREHOLDERS’ EQUITY       |       |                   |       |                      |       |
| Accounts payable and accrued expenses           |       | $                      | 1,397,000  |                      | $          | 1,201,000 |   |
| Deferred revenue – customer advances       |       | 579,000                |       | 565,000                   |       |
| Total current liabilities                       |       | 1,976,000              |       | 1,766,000                 |       |
|                                            |       |                   |       |                      |       |
| Shareholders’ equity:                      |       |                   |       |                      |       |
| Common stock                                    |       | 1,198,000              |       | 1,180,000                 |       |
| Capital in excess of par value                  |       | 35,176,000             |       | 35,080,000                |       |
| Accumulated deficit                             |       | (30,392,000            | )          | (29,580,000               | )          |
| Total shareholders’ equity                 |       | 5,982,000              |       | 6,680,000                 |       |
| Total liabilities and shareholders’ equity |       | $                      | 7,958,000  |                      | $          | 8,446,000 |   |

 

See accompanying notes to condensed financialstatements

 

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PPT VISION, INC.

STATEMENTS OF OPERATIONS

(UNAUDITED)

 
| ** **                                  | ** ** | **Three Months Ended  July 31,** | ** ** | **Nine Months Ended  July 31,** | ** ** |
|---------------------------------------------|------------|---------------------------------------|------------|--------------------------------------|------------|
| ** **                                  | ** ** | **2004**                              | ** ** | **2003**                             | ** ** | **2004** | ** ** | **2003** | ** ** |
| Revenue:                                    |       |                                  |       |                                 |       |   |   |   |   |
| Product Revenue                             |       | $                                     | 2,345,000  |                                 | $          | 1,549,000 |   | 6,589,000 |   | 5,193,000 |   |
| Service Revenue                             |       | 388,000                               |       | 470,000                              |       | 1,195,000 |   | 1,187,000 |   |
| Total Revenue                               |       | 2,733,000                             |       | 2,019,000                            |       | 7,784,000 |   | 6,380,000 |   |
|                                        |       |                                  |       |                                 |       |   |   |   |   |
| Cost of revenues                            |       | 1,199,000                             |       | 904,000                              |       | 3,398,000 |   | 3,133,000 |   |
| Gross profit                                |       | 1,534,000                             |       | 1,115,000                            |       | 4,386,000 |   | 3,247,000 |   |
|                                        |       |                                  |       |                                 |       |   |   |   |   |
| Expenses:                                   |       |                                  |       |                                 |       |   |   |   |   |
| Sales and marketing                         |       | 742,000                               |       | 742,000                              |       | 2,083,000 |   | 2,407,000 |   |
| General and administrative                  |       | 358,000                               |       | 513,000                              |       | 1,100,000 |   | 1,461,000 |   |
| Restructuring and other                     |       | —                                |       | —                               |       | — |   | 362,000 |   |
| Research and development                    |       | 666,000                               |       | 820,000                              |       | 2,008,000 |   | 2,956,000 |   |
| Total expenses                              |       | 1,766,000                             |       | 2,075,000                            |       | 5,191,000 |   | 7,186,000 |   |
| Loss from operations                        |       | (232,000                              | )          | (960,000                             | )          | (805,000 | ) | (3,939,000 | ) |
|                                        |       |                                  |       |                                 |       |   |   |   |   |
| Interest Income                             |       | 2,000                                 |       | 2,000                                |       | 5,000 |   | 9,000 |   |
| Other Income (loss), Net                    |       | (13,000                               | )          | 8,000                                |       | (12,000 | ) | 22,000 |   |
| Net loss                                    |       | $                                     | (243,000   | )                                    | $          | (950,000 | ) | $ | (812,000 | ) | $ | (3,908,000 | ) |
|                                        |       |                                  |       |                                 |       |   |   |   |   |
| Per share data:                             |       |                                  |       |                                 |       |   |   |   |   |
| Weighted average basic shares outstanding   |       | 11,920,000                            |       | 10,099,000                           |       | 11,842,000 |   | 10,078,000 |   |
| Weighted average diluted shares outstanding |       | 11,920,000                            |       | 10,099,000                           |       | 11,842,000 |   | 10,078,000 |   |
| Basic and diluted loss per common share     |       | $                                     | (0.02      | )                                    | $          | (0.09 | ) | $ | (0.07 | ) | $ | (0.39 | ) |

 

See accompanying notes to condensed financialstatements

 

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PPT VISION, INC.

STATEMENTS OF CASH FLOWS

(UNAUDITED)

 
| ** **                                                                   | ** ** | **Nine months  Ended  July 31, 2004** | ** ** | **Nine months  Ended  July 31, 2003** | ** ** |
|------------------------------------------------------------------------------|------------|--------------------------------------------|------------|--------------------------------------------|------------|
| Net loss                                                                     |       | $                                          | (812,000   | )                                          | $          | (3,908,000 | ) |
| Adjustments to reconcile net loss to net  cash used in operating activities: |       |                                       |       |                                       |       |
| Depreciation and amortization                                                |       | 638,000                                    |       | 876,000                                    |       |
| Stock option expense                                                         |       | —                                     |       | 18,000                                     |       |
| Loss on disposal of assets                                                   |       | —                                     |       | 136,000                                    |       |
|                                                                         |       |                                       |       |                                       |       |
| Change in assets and liabilities:                                            |       |                                       |       |                                       |       |
| Accounts receivable                                                          |       | (14,000                                    | )          | (510,000                                   | )          |
| Inventories                                                                  |       | (261,000                                   | )          | 716,000                                    |       |
| Other assets                                                                 |       | 79,000                                     |       | 37,000                                     |       |
| Accounts payable and accrued expenses                                        |       | 196,000                                    |       | (14,000                                    | )          |
| Deferred revenue - customer advances                                         |       | 14,000                                     |       | 601,000                                    |       |
| Total adjustments                                                            |       | 652,000                                    |       | 1,860,000                                  |       |
| Net cash used in operating activities                                        |       | (160,000                                   | )          | (2,048,000                                 | )          |
|                                                                         |       |                                       |       |                                       |       |
| Cash flows from investing activities:                                        |       |                                       |       |                                       |       |
| Purchase of fixed assets                                                     |       | (101,000                                   | )          | (145,000                                   | )          |
| Net investment in other long-term assets                                     |       | (14,000                                    | )          | (24,000                                    | )          |
| Net cash used in investing activities                                        |       | (115,000                                   | )          | (169,000                                   | )          |
|                                                                         |       |                                       |       |                                       |       |
| Cash flows from financing activities:                                        |       |                                       |       |                                       |       |
| Proceeds from the issuance of common stock                                   |       | 114,000                                    |       | 30,000                                     |       |
| Net cash provided by financing activities                                    |       | 114,000                                    |       | 30,000                                     |       |
|                                                                         |       |                                       |       |                                       |       |
| Net decrease in cash and cash equivalents                                    |       | (161,000                                   | )          | (2,187,000                                 | )          |
|                                                                         |       |                                       |       |                                       |       |
| Cash and cash equivalents at beginning of  year                              |       | 2,086,000                                  |       | 2,932,000                                  |       |
| Cash and cash equivalents at end of period                                   |       | $                                          | 1,925,000  |                                       | $          | 745,000 |   |

 

See accompanying notes to condensed financialstatements

 

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PPT VISION, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS

(UNAUDITED)

July 31, 2004

 

NOTE A – DESCRIPTION OF BUSINESS

 

PPT VISION, Inc. designs, manufactures,markets, and integrates 2D and 3D machine vision-based automated inspectionsystems for manufacturing applications. Machine vision-based inspection systemsenable manufacturers to increase the quality of manufactured parts and improvethe productivity of manufacturing processes. The Company’s 2D machine visionproduct line is sold on a global basis to end-users, system integrators,distributors 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 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 B - BASIS OF PRESENTATION

 

The accompanying unaudited condensed financial statements have beenprepared in accordance with accounting principles generally accepted in theUnited States of America for interim financial information and with theinstructions to Form 10-QSB and Rule 10-01 of Regulation S-X.  Accordingly, they do not include all of theinformation and footnotes required by accounting principles generally acceptedin the United States of America for complete financial statements.  In the opinion of management, all adjustments(consisting of normal recurring accruals) considered necessary for a fairpresentation have been included.  Resultsof operations for the interim periods are not necessarily indicative of theresults to be expected for the full year or of the results for any futureperiods.

 

The Balance Sheet at October 31, 2003 has been derived from theCompany’s audited financial statements for the fiscal year endedOctober 31, 2003 but does not include all of the information and footnotesrequired by accounting principles generally accepted in the United States ofAmerica for complete financial statements.

 

For further information, refer to the financial statements andfootnotes thereto included in the Company’s annual report on Form 10-KSB forthe year ended October 31, 2003.

 

NOTE C – REVENUE RECOGNITION AND COST OF REVENUES

 

The Company typically recognizes revenue on product sales upon shipmentto the end user customers if contractual obligations have been substantiallymet and title and risk of loss have passed to the customer, which is generallythe case for sales of 2D machine vision systems, spare parts, accessories and3D machine

 

6

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vision sensors and systems. The Company also recognizes revenue onproducts sold to distributors upon shipment because contracts with distributorsdo not include post-shipment obligations or any right of return provisions andpricing is fixed at the time of sale. Services revenue, which includes application engineering, productdevelopment, customer training and repair services, is recognized when theservices are performed.

 

Costs of revenues include the cost of products sold and the cost ofthird-party application engineers who perform certain installation services atour request for customers.  Cost ofrevenues does not include any costs associated with engineering services performedby PPT employees as these costs are a fixed component of our operating coststructure and an allocation of a portion of these costs to cost of revenueswould be arbitrary and lead to inconsistent presentation of gross margins andoperating costs.  All of the costsassociated with these internal activities are included in research anddevelopment expense.

 

NOTE D – LIQUIDITY AND CAPITAL RESOURCES

 

During fiscal year 2003, the Company raisedapproximately $1.1 million through the exercise of warrants that were issued aspart of its fiscal 2002 Shareholder Rights Offering. As of July 31,2004, the Company had $1.9 million of cash, $3.6 million of working capital andno long-term debt.

 

The Company believes that existing cashbalances together with other potential sources of financing will be sufficientto provide the cash necessary to meet its operating, working capital andcapital resource obligations through the next twelve months.  The other sources of financing that areavailable to the Company include sales of its common or preferred stock,external borrowing, customer or vendor financing, customer sponsored researchand development projects or investments by strategic partners.

 

NOTE E – EARNINGS PER SHARE

 

In fiscal 2002, the Company issued warrantsto purchase 2,242,000 shares of the Company’s common stock in connection with aShareholder Rights Offering.  Warrants topurchase 1.6 million shares of stock were exercised by the expiration date ofSeptember 30, 2003.  The remainingwarrants expired.

 

At July 31, 2004, options to purchase1,084,473 shares and warrants to purchase 25,000 shares of the Company’s commonstock were not considered in the calculation of diluted earnings pershare.  At July 31, 2003, options topurchase 1,116,500 shares and warrants to purchase 2,267,000 shares of theCompany’s common stock were not considered in the calculation of dilutedearnings per share.  As the Company had anet loss for both periods, the inclusion of outstanding options and warrantswould have been anti-dilutive.

 

NOTE F –STOCK-BASED COMPENSATION

 

The Company uses the intrinsic value method prescribed by AccountingPrinciples Board Opinion No. 25, “Accounting for Stock Issued to Employees,”and

 

7

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related interpretations in accounting for employee stock options.  Under the intrinsic value method,compensation expense is recorded only to the extent that the market price ofthe common stock exceeds the exercise price of the stock option on the date ofgrant.

 

In December 2002, the Financial Accounting Standards Board (FASB)issued Statement of Financial Accounting Standards (SFAS) No. 148, “Accountingfor Stock-Based Compensation - Transition and Disclosure.”  SFAS No. 148is an amendment to SFAS No. 123 providing alternative methods of transition fora voluntary change to the fair value based method of accounting for stock-basedemployee compensation and also provides required additional disclosures aboutthe method of accounting for stock-based employee compensation. TheCompany adopted the annual disclosure provision of SFAS No. 148 during the yearended October 31, 2003.  The Companychose to not adopt the voluntary change to the fair value based method ofaccounting for stock-based employee compensation, pursuant to SFAS No. 148.

 

The Company has adopted the disclosure-only provisions of SFAS No. 148,Accounting for Stock-Based Compensation. Accordingly, no compensation cost has been recognized with respect tostock options.  Had compensation cost forstock options been determined based on the fair value methodology prescribed bySFAS 123, the Company’s net loss and net loss per share would have been reducedto the pro forma amounts indicated below:

 

| **Three Months Ended  July 31,** | ** **  | **2004** | ** ** | **2003** | ** ** |
|---------------------------------------|-------------|----------|------------|----------|------------|
| Net loss                              | As reported |     | $          | (243,000 | )          | $ | (950,000 | ) |
|                                  | Pro forma   |     | $          | (287,000 | )          | $ | (970,000 | ) |
|                                  |        |     |       |     |       |
| Stock based compensation              | As reported |     | $          | —   |       | $ | — |   |
|                                  | Pro forma   |     | $          | (44,000  | )          | $ | (20,000 | ) |
|                                  |        |     |       |     |       |
| Basic and diluted loss per share      | As reported |     | $          | (0.02    | )          | $ | (0.09 | ) |
|                                  | Pro forma   |     | $          | (0.02    | )          | $ | (0.10 | ) |

 

| **Nine  months Ended  July 31,** | ** **  | **2004** | ** ** | **2003** | ** ** |
|---------------------------------------|-------------|----------|------------|----------|------------|
| Net loss                              | As reported |     | $          | (812,000 | )          | $ | (3,908,000 | ) |
|                                  | Pro forma   |     | $          | (957,000 | )          | $ | (3,951,000 | ) |
|                                  |        |     |       |     |       |
| Stock based compensation              | As reported |     | $          | —   |       | $ | — |   |
|                                  | Pro forma   |     | $          | (145,000 | )          | $ | (43,000 | ) |
|                                  |        |     |       |     |       |
| Basic and diluted loss per share      | As reported |     | $          | (0.07    | )          | $ | (0.39 | ) |
|                                  | Pro forma   |     | $          | (0.08    | )          | $ | (0.39 | ) |

 

| **For All Periods Ended  July 31,** | ** ** | **2004** | ** ** | **2003** | ** ** |
|------------------------------------------|------------|----------|------------|----------|------------|
| Risk free interest rates                 |       | 4.0      | %          | 4.0      | %          |
| Expected lives                           |       | 6.0      |       | 6.0      |       |
| Expected volatility                      |       | 115      | %          | 115      | %          |
| Expected dividends                       |       | 0        | %          | 0        | %          |

 

8

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NOTE G – CUSTOMER AND GEOGRAPHIC DATA

 

The followingtables set forth the percentage of the Company’s net revenues (including salesdelivered through international distributors) by geographic location for thethree and nine months ended July 31, 2004 and 2003:

 

| **Three Months Ended July 31** | ** ** | **2004** | ** ** | **2003** | ** ** |
|-------------------------------------|------------|----------|------------|----------|------------|
| United States                       |       | 38       | %          | 64       | %          |
| Europe and Canada                   |       | 23       | %          | 15       | %          |
| Asia-Pacific                        |       | 38       | %          | 21       | %          |
| South America                       |       | 1        | %          | 0        | %          |

 

| **Nine Months Ended July 31** | ** ** | **2004** | ** ** | **2003** | ** ** |
|------------------------------------|------------|----------|------------|----------|------------|
| United States                      |       | 34       | %          | 53       | %          |
| Europe and Canada                  |       | 33       | %          | 19       | %          |
| Asia-Pacific                       |       | 32       | %          | 27       | %          |
| South America                      |       | 1        | %          | 1        | %          |

 

In the three-month period ended July 31,2004, revenues from one customer represented approximately 26% of totalrevenue.  In the three-month period endedJuly 31, 2003, revenues from two customers accounted for 26% and 15% oftotal revenue, respectively.  In thenine-month period ended July 31, 2004, revenues from two customers representedapproximately 26% and 14% of total revenue, respectively.  In the nine-month period ended July 31,2003, revenues from three customers accounted for 15%, 14% and 10% of totalrevenue, respectively.

 

NOTE H – NEW ACCOUNTING PRONOUNCEMENTS

 

In December 2003, the FinancialAccounting Standards Board (FASB) issued FASB Interpretation No. 46 (RevisedDecember 2003), “Consolidation of Variable Interest Entities, anInterpretation of ARB No. 51” (FIN 46R). This standard replaces FIN 46, Consolidation of Variable InterestEntities” that was issued in January 2003. FIN 46R modifies or clarifies various provisions of FIN 46.  FIN 46R addresses the consolidation ofbusiness enterprises of variable interest entities (VIEs), as defined by FIN46R.  FIN 46R exempts certain entitiesfrom its requirements and provides for special effective dates for entitiesthat have fully or partially applied FIN 46 prior to issuance of FIN 46R.  Otherwise, application of FIN 46R is requiredin financial statements of public entities that have interest in structurescommonly referred to as special purpose entities for periods ending afterDecember 15, 2003.  FIN 46 had noeffect on the Company’s financial statements for the quarter endedJuly 31, 2004, as the Company had no interests in special purposeentities.  Application by the Company forall other types of VIEs is required in financial statements for periods endingno later than the quarter ended January 31, 2005.  The Company does not expect the adoption ofFIN 46R to have a material effect on the Company’s financial statements.

 

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Item 2

 

MANAGEMENT’S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION

 

# Overview 

 

PPT VISION,Inc. develops, manufactures and sells 2D and 3D machine vision-based automatedinspection systems that are used by manufacturers to increase the quality ofmanufactured parts and improve the productivity of manufacturingprocesses.  The Company sells its systemsglobally to original equipment manufacturers (OEMs), system integrators,machine builders, and end-users, primarily in the electronic and semiconductorcomponent, automotive, medical device, and packaged goods industries.

 

The Company’srevenues increased 35% to $2,733,000 during the third quarter endedJuly 31, 2004 compared to the prior year’s third quarter and its lossdecreased to $243,000 or $.02 a share compared to $950,000 or $.09 in the prioryear’s period.  The increase in revenuesresulted from a continuing improvement in the Company’s core markets while thedecrease in the net loss resulted from higher level of revenues and a lowerinternal cost structure.  Revenuesincreased 22% to $7,784,000 during the nine month period ended July 31,2004 compared to the prior year’s nine month period and the Company’s lossdecreased to $812,000 or $0.07 a share compared to $3,908,000 or $0.39 a share.

 

During thefiscal 2004 third quarter, revenues from outside the United States accountedfor 62% of revenues compared to 36% in the fiscal 2003 third quarter.  During the first nine months of fiscal 2004,revenues from outside the United States accounted for 66% compared to 47% inthe first nine months of fiscal 2003.

 

Critical Accounting Policies and Estimates

 

Management’s discussion and analysis of its financial condition andresults of operations are based on the Company’s accompanying unauditedcondensed financial statements, which have been prepared in accordance withaccounting principles generally accepted in the United States of America forinterim financial information and with the instructions to Form 10-QSB and Rule10-01 of Regulation S-X.  Accordingly,they do not include all of the information required by accounting principlesgenerally accepted in United States of America for complete financialstatements.  In the opinion ofmanagement, all adjustments (consisting of normal recurring accruals)considered necessary for a fair presentation have been included.

 

The preparation of these financial statements requires management tomake certain estimates and assumptions that affect the reported amounts ofassets and liabilities as of the date of the financial statements and thereported revenues and expenses during 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 results could differ from theseestimates.

 

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Management believes the Company’s critical accounting policies andareas that require more significant judgments and estimates used in thepreparation of its financial statements to be:

 

•      revenue recognition and costof revenues;

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

•      valuation and useful livesof long-lived and intangible assets.

 

### RevenueRecognition and Costs of Revenues

 

The Company typically recognizes revenue on product sales upon shipmentto the end user customers if contractual obligations have been substantiallymet and title and risk of loss have passed to the customer, which is generallythe case for sales of 2D machine vision systems, spare parts, accessories and3D machine vision sensors and systems. The Company also recognizes revenue onproducts sold to distributors upon shipment because contracts with distributorsdo not include post-shipment obligations or any right of return provisions andpricing is fixed at the time of sale. Services revenue, which includes application engineering, productdevelopment, customer training and repair services, is recognized when theservices are performed.

 

Costs of revenues include the cost of products sold and the cost ofthird party application engineers who perform certain installation services atour request for customers.  Cost ofrevenues does not include any costs associated with engineering servicesperformed by PPT employees as these costs are a fixed component of ouroperating cost structure and an allocation of a portion of these costs to costof revenues would be arbitrary and lead to inconsistent presentation of grossmargins and operating costs.  All of thecosts associated with these internal activities are included in research anddevelopment expense.

 

# Valuation Allowances

 

Management estimates the allowance for doubtful accounts by analyzingaccounts receivable balances by age and considering specific factors about theindividual customer’s financial condition. When it is deemed probable that all or a portion of a customer’s accountis uncollectible, a corresponding amount is added to the reserve.

 

Management establishes valuation reserves on inventory for estimatedexcess and obsolete inventory equal to the difference between the cost of inventoryand its estimated market value based on assumptions about future product demandand market conditions.  In view of therapid pace of technological change in the machine vision industry, the Companygenerally considers inventory that has had no usage for one year to beobsolete.  In addition, changes in theCompany’s product offerings or those of the Company’s competitors, may alsoresult in excess or obsolete inventory levels. Accordingly, these factors will also be considered in the determination ofthe market value of inventory.

 

# Long-Lived and Intangible Assets

 

The Company reviews its long-lived assets for impairment wheneverevents or changes in circumstances indicate that the carrying amount of anasset may not be recoverable. Recoverability of assets to be held and used is measured by a comparisonof the carrying amount of an asset to undiscounted future net cash flowsexpected to be generated by the assets. If these assets are considered to

 

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be impaired, the impairment to be recognized is measured by the amountby which the carrying amount of the assets exceeds the fair value of theassets.

 

Results of Operations

 

  Revenues

 

Net revenues increased 35% to $2,733,000 for the three-month periodended July 31, 2004, compared to net revenues of $2,019,000 for the sameperiod in fiscal 2003.  For thenine-month period ended July 31, 2004, revenues increased 22% to$7,784,000 from $6,380,000 for the same period in fiscal 2003.  Unit sales of the Company’s machine visionsystems increased to 281 for the third quarter of fiscal 2004 versus 94 for thesame period in fiscal 2003.  Unit salesfor the first nine months of fiscal 2004 increased to 682 from 306 in the firstnine months of fiscal 2003.  In the three-month period endedJuly 31, 2004, revenues from one customer represented approximately 26% oftotal revenue. In the three-month period ended July 31, 2003, revenuesfrom two customers accounted for 26% and 15% of total revenue, respectively. Inthe nine-month period ended July 31, 2004, revenues from two customersrepresented approximately 26% and 14% of total revenue, respectively.  In the nine-month period ended July 31,2003, revenues from three customers accounted for 15%, 14% and 10% of totalrevenue, respectively.

 

The increase in revenues reflects the continued gradual improvement inthe economic conditions of the businesses in the Company’s core markets.  The decreasing trend of the average sellingprice of our equipment generally reflects increasing sales of our IMPACT 2Dmachine vision system, which has a lower average selling price than our olderDSL products.

 

Sales to customers outside the United States represented 62% of grossrevenues for the three months ended July 31, 2004, compared to 36% for thesame period in fiscal 2003.  During thefirst nine months of fiscal 2004, revenues from outside the United Statesaccounted for 66% compared to 47% in the first nine months of fiscal 2003.

 

2D sales, our historic core business,increased 35% over last year and also improved 20% over last quarter.  This reflects the fact that our core businessis recovering as capital spending increases and as our distribution partnersand customers become more familiar with our new 2D products.  This is evidenced by the growth in revenuesfor our IMPACT product line, which has grown 40% over the second quarter andalmost three fold from year ago levels.

 

Our revenue levels in the third quarterreflected our expectations that the on-going economic recovery would be moregradual than spectacular.  We continue tobe on pace to achieve full year revenue improvement in the 20-25% range.  However, because the nature of our sales arebased on our customers’ capital equipment purchase procedures and customerspecific delivery timetables, which are out of our control, our actual revenueresults may not achieve these goals as shipments of our vision systems to ourcustomers may move from one quarter to another.

 

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Gross profit increased 38% to $1,534,000 for the three-month periodended July 31, 2004, compared to $1,115,000 for the same period in fiscal2003.  For the nine-month period endedJuly 31, 2004, gross profit increased 35% to $4,386,000 from $3,247,000for the same period in fiscal 2003.  As apercentage of net revenues, the gross profit for the third quarter of fiscal2004 increased slightly to 56% compared to 55% in the same period in fiscal2003.  For the nine-month period, grossprofit as a percentage of net revenues increased to 56% from 51% for the sameperiod in fiscal 2003.

 

Gross profit dollars and margins werepositively affected in this fiscal year by the inclusion in revenue of theamounts related to the services provided to Ismeca.  The costs of the engineers performing theseservices will continue to be included in research and development expense asthese costs are not variable in nature and any allocation of costs would bearbitrary and lead to an inconsistent presentation of operating costs as comparedwith prior periods. In addition, gross profit for the nine months endedJuly 31, 2003 were adversely impacted by the Company’s decision in April,2003 to discontinue certain 3D product lines and as a result included a$223,000 reserve for obsolete inventory in cost of revenues.

 

All operating expensecategories for the nine month period ended July 31, 2004 were positivelyaffected by the decisions made last year to change our strategy in the 3D area to sell our *Speed*Scan3D product through OEMs and system integrators as opposed to developing andsupporting completely automated turnkey systems.  This change in our 3D business model,together with certain other cost reductions in the past year in our 2Dbusiness, has resulted in a 15% reduction in our third quarter operatingexpenses, to $1,766,000, in comparison to $2,075,000 in the prior year.  For the nine-month period ended July 31,2004, operating expenses were down almost 28% from the prior year. In view ofthese changes to our business model, we have much greater operatingleverage than in the past.  We expectthat as sales results improve due to an improving economic climate and theimproved competitiveness of our new products, our operating expenses will onlyrise modestly.

 

Sales and marketing expenses remained flatat $742,000 for the three-month period ended July 31, 2004 and 2003.  For the nine-month period ended July 31,2004, sales and marketing expenses decreased to $2,083,000 from $2,407,000 forthe same period in fiscal 2003.  As apercentage of net revenues, sales and marketing expenses decreased to 27% forthe third quarter of fiscal 2004 compared to 37% for the same period in fiscal2003.  For the nine-month period endedJuly 31, 2004, sales and marketing expenses as a percentage of net revenuesdecreased to 27% compared to 38% in the same period in fiscal 2003.  The Company expects sales and marketingexpenses in absolute dollars to remain relatively flat or only increasemodestly on a quarterly basis for the remainder fiscal 2004. Increases in salesand marketing expenditures may occur to the extent that revenue growth isachieved.

 

General and administrative expensesdecreased 30% to $358,000 for the three-month period ended July 31, 2004,compared to $513,000 for the same period in fiscal 2003.  This decrease is due to the fact thatseverance costs for some of the restructuring efforts discussed above wererecognized in the third quarter of fiscal 2003. For the nine-month period ended July 31, 2004, general andadministrative expenses decreased 25% to $1,100,000 as compared to $1,461,000in the same period in fiscal 2003. As a percentage of net revenues, general andadministrative expenses decreased to 13% for the third quarter of fiscal 2004versus 25% for the same period in fiscal 2003. For the nine-month period ended

 

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July 31, 2004, general andadministrative expenses as a percentage of net revenues decreased to 14% from23% in the same period in fiscal 2003. The Company expects general and administrative expenses on a quarterlybasis will generally remain at current levels for the remainder of fiscal 2004.

 

Research and development expenses decreased19% to $666,000 for the three-month period ended July 31, 2004, comparedto $820,000 for the same period in fiscal 2003. For the nine-month period endedJuly 31, 2004, research and development expenses decreased 32% to$2,008,000 from $2,956,000 in the same period in fiscal 2003.  As a percentage of net revenues, research anddevelopment expenses decreased to 24% for the third quarter of fiscal 2004,compared to 41% for the third quarter of fiscal 2003. For the nine-month periodended July 31, 2004, research and development expenses as a percentage ofnet revenues decreased to 26% from 46% in the same period in fiscal 2003.Again, research and development expenses should remain at or only slightlyabove these levels for the remainder of the fiscal year.

 

The restructuring costs reported in the nine-month period endedJuly 31, 2003 of $362,000 represent severance charges for employeesaffected by the elimination of the PPT-861 product operations, thereorganization of our research and development activities and the write-off ofPPT-861 related equipment.

 

Interest and other income (loss) decreasedto ($11,000) for the three-month period ended July 31, 2004, compared to$10,000 for the same period in fiscal 2003. For the nine-month period, interestand other income (loss) decreased to ($7,000) from $31,000 reported in fiscal2003.

 

The Company did not record an income taxbenefit or expense for either of the three-month or nine-month periods endedJuly 31, 2004 or 2003.

 

The Company’s net loss for the third quarterimproved substantially from year-ago levels, dropping to $243,000 or 2 centsper share, as compared with a loss of $950,000 or 9 cents per share for thesame period in fiscal 2003.  Sharesoutstanding for the quarter were approximately 11.9 million versus 10.1 millionin the third quarter of last fiscal year reflecting the issuance of stock fromthe exercise of warrants that occurred in September of 2003.

 

LIQUIDITY AND CAPITAL RESOURCES

 

At July 31, 2004 the Company had cashbalances of $1.9 million, working capital of approximately $3.6 million and nolong-term debt.

 

Over the past nine months, the Company hassubstantially reduced its quarterly net losses as a result of increased revenueand cost cutting actions.  In the thirdquarter of fiscal 2004 the Company incurred a net loss from operations of$243,000 which included non-cash charges related to depreciation andamortization of $191,000. The net loss for the quarter improved $707,000 fromthe $950,000 loss reported in the third quarter of fiscal 2003.  Cash used in operating activities was $212,000for the quarter ended July 31, 2004 and $161,000 for the nine-month periodended July 31, 2004. For the nine-month period, this represents animprovement of approximately $1.9 million.

 

The Company has been using its existingcash and cash equivalents to fund the cash needs of its operatingactivities.  We are carefully monitoringour cash position and evaluating the need for additional capital to enable usto achieve

 

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our short and long-term objectives. Ifthere was a need for additional capital, the Company believes that othersources of financing are available including sales of its common or preferredstock, external borrowing, customer or vendor financing, customer sponsoredresearch and development projects or investments by strategic partners. Theavenues that we take to satisfy our potential capital requirements will dependin large part on the pace of the growth of our revenues, and we will evaluatethese alternatives as we obtain better visibility of our revenue expectations.

 

The Company believes that its current cash balances and availablesources of capital will enable the Company to meet its operating, workingcapital and capital resource obligations through the next twelve months.

 

There can be no assurance that the Company will not incur additionallosses for a longer period of time, will generate positive cash flow from itoperations, or that the Company will attain or thereafter sustain profitabilityin any future period.  To the extent thatthe Company continues to incur losses or achieves revenue growth in the futurerequiring an increase in working capital, its operating and investingactivities may use cash and, consequentially, such losses or growth willrequire the Company to obtain additional sources of financing to provide forthese cash needs.

 

As of July 31, 2004, the Company had no outstanding debt.

 

The Company leases facilities and equipment under non-cancelableoperating lease agreements.  TheCompany entered into a ten-year lease in May 1999 for approximately 64,000square feet of office and manufacturing space in Eden Prairie, Minnesota. Thelease commenced on June 1, 1999 at an initial monthly rate ofapproximately $51,000. Annual rental and common area maintenance (CAM) paymentobligations are approximately $900,000 in the aggregate.  The lease agreement also includes a provisionwhereby in July 2005, the landlord can, at its option, require the Companyto take 17,000 square feet of additional space in the same building.  The lease also includes a provision thatallows the Company to terminate the lease effective May 30, 2006 in exchangefor a $500,000 termination payment. In view of the current favorable realestate environment, the Company is carefully considering exercising its optionto terminate the lease early.

 

Over the past several months, the Companyhas been working closely with our building owner in an effort to implement thetermination of our lease earlier than allowed in the lease agreement inconnection with the possible leasing of our current building to another entity.The Company would then move into another space which is much smaller and lessexpensive.  These discussions areongoing.  If successful, PPT will furtherreduce our monthly operating expenses and eliminate a potential incrementalobligation.

 

Working capital decreased slightly to $3,602,000 at July 31, 2004from $3,778,000 at October 31, 2003. The Company financed its operations during the first nine months offiscal 2004 through cash provided by operations and existing cash and cashequivalents.  Net cash used in operatingactivities during the first nine months of fiscal 2004 was $160,000.  Accounts receivable increased $14,000 andinventories increased $261,000 during the first nine months of fiscal2004.  Accounts payable and accruedexpenses increased by $196,000.

 

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Net cash used in investing activities was $114,000.  During the first nine months endingJuly 31, 2004, fixed asset additions totaled $101,000 in comparison with $145,000in fixed asset additions incurred for the same period in fiscal 2003. TheCompany expects that fixed asset additions for the remainder of the currentfiscal year will approximate $35,000.

 

The Company does not have relationships with unconsolidated entities orfinancial partnerships, such as entities often referred to as structuredfinance or special purpose entities, which would have been established for thepurpose of facilitating off-balance sheet financial arrangements.  As such, the Company is not materiallyexposed to any financing, liquidity, market or credit risk that could arise ifwe had engaged in such arrangements.

 

The Company believes it does not havematerial exposure to quantitative and qualitative market risks. The carryingamounts reflected in the balance sheets of cash and cash equivalents, tradereceivables and trade payables approximate fair value at July 31, 2004 dueto the short maturities of these instruments.

 

NEW ACCOUNTING PRONOUNCEMENTS

 

Information regarding new accounting pronouncements is included in theNotes to Condensed Financial Statements.

 

FORWARD LOOKING STATEMENTS

 

The discussion above contains forward-looking statements within themeaning of the Private Securities Litigation Reform Act of 1995, includingstatements regarding the Company’s expectations, beliefs, intentions andstrategies regarding the future. Forward-looking statements include, without limitation, statementsregarding the extent and timing of future revenues and expenses and customerdemand.  All forward-looking statementsincluded in this document are based on information available to the Company asof the date hereof, and the Company assumes no obligation to update any suchforward-looking statements.

 

The Company’s actual results are subject to risks and uncertainties andcould differ materially from those discussed in the forward-looking statements.These statements are based upon the Company’s expectations regarding a numberof factors, including the Company’s ability to obtain additional workingcapital if necessary to support its operations, changes in worldwide generaleconomic conditions, cyclicality of capital spending by customers, theCompany’s ability to keep pace with technological developments and evolvingindustry standards, worldwide competition, and the Company’s ability to protectits existing intellectual property from challenges from third parties. Adetailed description of the factors that could cause future results tomaterially differ from the Company’s recent results or those projected in theforward-looking statements are contained in the section entitled “Descriptionof Business” under the caption “Important Factors Regarding Forward-LookingStatements” contained in its filing with the Securities and Exchange Commissionon Form 10-KSB for the year ended October 31, 2003 and other reports filed withthe Securities and Exchange Commission.

 

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Item 3:         CONTROLS AND PROCEDURES

 

(a) Evaluationof Disclosure Controls and Procedures.

 

The Company’s Chief ExecutiveOfficer, Joseph C. Christenson and Chief Financial Officer, Timothy C. Claytonhave reviewed the Company’s disclosure controls and procedures as ofJuly 31, 2004.  Based upon this review,these officers believe that the Company’s disclosure controls and proceduresare effective in ensuring that material information related to the Company ismade known to them by others within the Company.

 

(b) Changes in InternalControl Over Financial Reporting.

 

There have been no significant changes in internal control overfinancial reporting that occurred during the fiscal quarter covered by thisreport that have materially affected, or are reasonably likely to materiallyaffect, the registrant’s internal control over financial reporting.

 

PART II.     Other Information

 

Item 1:         LEGALPROCEEDINGS

None.

 

Item 2:         CHANGES IN SECURITIES

None.

 

Item 3:         DEFAULTS UPON SENIORSECURITIES

Not Applicable.

 

Item 4:         SUBMISSION OF MATTERSTO A VOTE OF SECURITY HOLDERS

None.

 

Item 5:         OTHERINFORMATION

None.

 

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Item 6:         EXHIBITS AND REPORTSON FORM 8-K

 

(a)       Thefollowing exhibits are included herein:

 

31.1         Certification of Chief Executive Officerpursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (Rules 13a- 14and 15d-14 of the Exchange Act).

 

31.2         Certification of Chief Financial Officerpursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (Rules 13a- 14and 15d-14 of the Exchange Act).

 

32            Certifications pursuant Section 906 ofthe Sarbanes-Oxley Act of 2002 (18 U.S.C. §1350).

 

(b)      Reportson Form 8-K.

 

The Company filed a Form 8-K dated August 20, 2004 reporting underItem 12 its results of operations for the quarter ended July 31, 2004, andfiling as an exhibit under Item 7 its press release dated August 18, 2004reporting these results.

 

 

SIGNATURES

 

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

 
|                          | PPT VISION, INC.                             |
|-------------------------------|----------------------------------------------|
|                          |                                         |
| Date: September 13, 2004 |                                         |
|                          |                                         |
|                          | /s/ Joseph C. Christenson                    |   |
|                          | Joseph C. Christenson                        |
|                          | President                                    |
|                          | (Principal Executive Officer)                |
|                          |                                         |
|                          |                                         |
|                          | /s/ Timothy C. Clayton                       |   |
|                          | Timothy C. Clayton                           |
|                          | Chief Financial Officer                      |
|                          | (Principal Financial and Accounting Officer) |

 

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