**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

**Form10-QSB**

 

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**QUARTERLYREPORT PURSUANT TO SECTION 13 OR 15(d)**

**OF THESECURITIES EXCHANGE ACT OF 1934**

 

**For the Quarterly Period Ended January 31,2005**

** **

**Commission File Number 0-11518**

 

**PPTVISION, 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 areacode)

 

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 (orfor such shorter period that the registrant was required to file such reports),and (2) has been subject to such filing requirements for the last 90 days.  Yes ý  No o

 

Shares of $.10 par value common stock outstanding at March 15, 2005:11,986,357

 

 

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INDEX

 

PPT VISION, INC.

 
|     |                                                                                       |   |
|----------|--------------------------------------------------------------------------------------------|--------|
|     |                                                                                       |   |
| Part I.  | Financial Information                                                                      |   |
|     |                                                                                       |   |
| Item 1.  | Financial Statements                                                                       |   |
|     |                                                                                       |   |
|     | Balance Sheets as of January 31, 2005 and  October 31, 2004                                |   |
|     |                                                                                       |   |
|     | Statements of Operations for the Three Months Ended January 31, 2005  and January 31, 2004 |   |
|     |                                                                                       |   |
|     | Statements of Cash Flows for the Three Months Ended January 31, 2005  and January 31, 2004 |   |
|     |                                                                                       |   |
|     | Notes to Condensed Financial Statements –  January 31, 2005                           |   |
|     |                                                                                       |   |
| 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.  | Unregistered Sales of Equity 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                                                                                   |   |
|     |                                                                                       |   |
|     | Signatures                                                                                 |   |

 

2

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PPT VISION, INC.

 

BALANCE SHEETS

 
| ** **                                      | ** ** | **January 31, 2005** | ** ** | **October 31, 2004** | ** ** |
|-------------------------------------------------|------------|----------------------|------------|----------------------|------------|
| ** **                                      | ** ** | **(unaudited)**      | ** ** | **(audited)**        | ** ** |
| ASSETS                                          |       |                 |       |                 |       |
| Current assets                                  |       |                 |       |                 |       |
| Cash and cash equivalents                       |       | $                    | 2,254,000  |                 | $          | 2,617,000 |   |
| Accounts receivable, net                        |       | 1,446,000            |       | 1,912,000            |       |
| Inventories:                                    |       |                 |       |                 |       |
| Manufactured and purchased parts                |       | 1,069,000            |       | 828,000              |       |
| Work-in-process                                 |       | 67,000               |       | 105,000              |       |
| Finished goods                                  |       | 37,000               |       | 44,000               |       |
| Total inventories, net                          |       | 1,173,000            |       | 977,000              |       |
| Other current assets                            |       | 221,000              |       | 243,000              |       |
| Assets of discontinued operations               |       | 39,000               |       | 200,000              |       |
| Total current assets                            |       | 5,133,000            |       | 5,949,000            |       |
|                                            |       |                 |       |                 |       |
| Fixed assets, net                               |       | 293,000              |       | 323,000              |       |
| Intangible assets, net                          |       | 96,000               |       | 109,000              |       |
| Other assets                                    |       | 53,000               |       | 53,000               |       |
| Total assets                                    |       | $                    | 5,575,000  |                 | $          | 6,434,000 |   |
|                                            |       |                 |       |                 |       |
| LIABILITIES AND SHAREHOLDERS’ EQUITY       |       |                 |       |                 |       |
| Current liabilities                             |       |                 |       |                 |       |
| Accounts payable                                |       | $                    | 752,000    |                 | $          | 944,000 |   |
| Accrued expenses                                |       | 480,000              |       | 513,000              |       |
| Deferred revenue – customer advances       |       | 27,000               |       | 54,000               |       |
| Total current liabilities                       |       | 1,259,000            |       | 1,511,000            |       |
|                                            |       |                 |       |                 |       |
| Shareholders’ equity                       |       |                 |       |                 |       |
| Common stock                                    |       | 1,199,000            |       | 1,198,000            |       |
| Capital in excess of par value                  |       | 35,179,000           |       | 35,177,000           |       |
| Accumulated deficit                             |       | (32,062,000          | )          | (31,452,000          | )          |
| Total shareholders’ equity                 |       | 4,316,000            |       | 4,923,000            |       |
| Total liabilities and shareholders’ equity |       | $                    | 5,575,000  |                 | $          | 6,434,000 |   |

 

See accompanying notes to condensed financial statements

 

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PPT VISION, INC.

STATEMENTS OF OPERATIONS

(UNAUDITED)

 
| ** **                                  | ** ** | **Three Months Ended** | ** ** |
|---------------------------------------------|------------|------------------------|------------|
| ** **                                  | ** ** | **January 31,**        | ** ** |
| ** **                                  | ** ** | **2005**               | ** ** | **2004** | ** ** |
| ** **                                  | ** ** | ** **             | ** ** | ** ** | ** ** |
| Revenues                                    |       | $                      | 1,525,000  |   | $ | 1,976,000 |   |
| Cost of revenues                            |       | 729,000                |       | 1,073,000 |   |
| Gross profit                                |       | 796,000                |       | 903,000 |   |
|                                        |       |                   |       |   |   |
| Expenses:                                   |       |                   |       |   |   |
| Sales and marketing                         |       | 686,000                |       | 634,000 |   |
| General and administrative                  |       | 291,000                |       | 282,000 |   |
| Research and development                    |       | 374,000                |       | 410,000 |   |
| Total expenses                              |       | 1,351,000              |       | 1,326,000 |   |
| Loss from continuing operations             |       | (555,000               | )          | (423,000 | ) |
|                                        |       |                   |       |   |   |
| Income (loss) from discontinued operations  |       | (55,000                | )          | 77,000 |   |
| Net loss                                    |       | $                      | (610,000   | ) | $ | (346,000 | ) |
| Per share data:                             |       |                   |       |   |   |
| Weighted average basic shares outstanding   |       | 11,983,000             |       | 11,803,000 |   |
| Weighted average diluted shares outstanding |       | 11,983,000             |       | 11,803,000 |   |
| Basic and diluted loss per common share     |       |                   |       |   |   |
| Loss from continuing operations             |       | $                      | (0.04      | ) | $ | (0.04 | )  |
| Income (loss) from discontinued operations  |       | $                      | (0.01      | ) | $ | 0.01 |   |
| Net loss                                    |       | $                      | (0.05      | ) | $ | (0.03 | ) |

 

See accompanying notes to condensed financialstatements

 

4

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PPT VISION, INC.

STATEMENTS OF CASH FLOWS

(UNAUDITED)

 
| ** **                                                                        | ** ** | **Three Months**     | ** ** | **Three Months**     | ** ** |
|-----------------------------------------------------------------------------------|------------|----------------------|------------|----------------------|------------|
| ** **                                                                        | ** ** | **Ended**            | ** ** | **Ended**            | ** ** |
| ** **                                                                        | ** ** | **January 31, 2005** | ** ** | **January 31, 2004** | ** ** |
| Net loss                                                                          |       | $                    | (610,000   | )                    | $          | (346,000 | ) |
| Adjustments to reconcile net loss to net  cash used in operating activities: |       |                 |       |                 |       |
| Depreciation and amortization                                                     |       | 66,000               |       | 123,000              |       |
| Loss (income) from discontinued operations                                        |       | 55,000               |       | (77,000              | )          |
|                                                                              |       |                 |       |                 |       |
| Change in assets and liabilities:                                                 |       |                 |       |                 |       |
| Accounts receivable                                                               |       | 466,000              |       | (211,000             | )          |
| Inventories                                                                       |       | (196,000             | )          | (71,000              | )          |
| Other assets                                                                      |       | 22,000               |       | 54,000               |       |
| Accounts payable                                                                  |       | (192,000             | )          | 31,000               |       |
| Accrued expenses                                                                  |       | (33,000              | )          | 29,000               |       |
| Deferred revenue - customer advances                                              |       | (27,000              | )          | (33,000              | )          |
| Total adjustments                                                                 |       | 161,000              |       | (155,000             | )          |
| Net cash used in operating activities                                             |       | (449,000             | )          | (501,000             | )          |
|                                                                              |       |                 |       |                 |       |
| Cash flows from investing activities:                                             |       |                 |       |                 |       |
| Purchase of fixed assets                                                          |       | (22,000              | )          | (31,000              | )          |
| Net investment in other long-term assets                                          |       | —               |       | (2,000               | )          |
| Net cash used in investing activities                                             |       | (22,000              | )          | (33,000              | )          |
|                                                                              |       |                 |       |                 |       |
| Cash flows from financing activities:                                             |       |                 |       |                 |       |
| Proceeds from the exercise of stock options                                       |       | 3,000                |       | —               |       |
| Net cash provided by financing activities                                         |       | 3,000                |       | —               |       |
| Net cash provided by discontinued  operations                                     |       | 105,000              |       | 254,000              |       |
| Net decrease in cash and cash equivalents                                         |       | (363,000             | )          | (280,000             | )          |
| Cash and cash equivalents at beginning of  year                                   |       | 2,617,000            |       | 2,086,000            |       |
| Cash and cash equivalents at end of period                                        |       | $                    | 2,254,000  |                 | $          | 1,806,000 |   |

 

See accompanying notes to condensed financialstatements

 

5

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PPT VISION, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS

January 31, 2005

(UNAUDITED)

 

NOTE A – DESCRIPTION OF BUSINESS

 

PPT VISION, Inc. (“The Company”) designs, manufactures, and marketscamera-based intelligent systems for automated inspection in manufacturingapplications. The Company’s products, commercially known as machine visionsystems, enable manufacturers to realize significant economic paybacks byincreasing the quality of manufactured parts and improving the productivity ofmanufacturing processes. The Company’s machine vision product line is sold on aglobal basis to end-users, system integrators, distributors and originalequipment manufacturers (OEM’s) primarily in the electronic and semiconductorcomponent, automotive, medical device, and packaged goods industries.

 

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 the instructionsto 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, 2004 has been derived from the Company’saudited financial statements for the fiscal year ended October 31, 2004 butdoes not include all of the information and footnotes required by accountingprinciples generally accepted in the United States of America for completefinancial 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, 2004.

 

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 machine vision systems, spare parts and accessories.  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. Revenue related to applicationengineering, product development and customer training services is recognizedwhen the services are performed.

 

6

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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.

 

NOTE D – LIQUIDITY AND CAPITAL RESOURCES

 

The Company had a loss from continuing operations forthe three months ended January 31, 2005 of $555,000 and a net loss of$610,000.  Cash used in operations was$449,000 for the quarter.  The Companyreceived the final $200,000 payment related to the sale of its 3D business inthe quarter ended January 31, 2005 which helped offset this cash deficiency inthe quarter.  As a result, cash balancesdropped to $2.3 million as of January 31, 2005 from $2.6 million at October 31,2004.

 

TheCompany is working to reduce its cash consumption primarily by implementingplans to increase revenues.  Otheractions, such as cost reductions will be considered if revenues do not increasesufficiently to achieve a positive cash flow. One of the most significantelements of our operating costs however, relates to the rent on ourbuilding.  To date, we have beenunsuccessful in subleasing the unused portion of this facility.  We are contractually committed to thisbuilding until May 2009.  Our lease doesinclude a termination provision which enables us to terminate our leaseeffective May 2006.  In order to exercisethis termination provision, the Company will be required to pay $300,000 ofpreviously accrued deferred rent and pay the first $250,000 of the $500,000termination payment required by the lease in May, 2005.

 

Thedecision to terminate our lease would adversely impact our current cashsituation; however, the termination of our existing lease and relocation to amuch smaller, less costly facility would improve our long-term prospects forprofitability.  The Company is currentlyin negotiations with our landlord on this issue but no resolution isimminent.  The Company is evaluating it’soptions with respect to the decision to terminate the lease, including thepotential that additional capital may be required to fund operations in theevent that the decision is made to terminate the lease.  No assurances can be made that the additionalcapital will be available at acceptable terms. Absent a decision to terminate our lease, the Company believes thatexisting cash balances and available sources of capital willenable the Company to meet its operating, working capital and capitalresource obligations through the next twelve months.

 

The other sources of financing that are available tothe Company include sales of its common or preferred stock, external borrowing,customer or vendor financing, customer sponsored research and developmentprojects or investments by strategic partners.

 

There can be no assurance that the Companywill not incur additional losses for a longer period of time, will generatepositive cash flow from it operations, or that the Company will attain orthereafter sustain profitability in any future period.

 

7

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NOTE E – EARNINGS PER SHARE

 

At January 31, 2005, options to purchase 979,784 shares of the Company’scommon stock were not considered in the calculation of diluted earnings pershare.  At January 31, 2004, options topurchase 1,047,750 shares and warrants to purchase 25,000 shares of the Company’scommon stock were not considered in the calculation of diluted earnings pershare.  As the Company had a net loss forboth periods, the inclusion of outstanding options and warrants would have beenanti-dilutive.

 

NOTE F –STOCK-BASED COMPENSATION

 

The Company uses theintrinsic value method prescribed by Accounting Principles Board Opinion No.25, “Accounting for Stock Issued to Employees,” and related interpretations inaccounting for employee stock options. Under the intrinsic value method, compensation expense is recorded onlyto the extent that the market price of the common stock exceeds the exerciseprice of the stock option on the date of grant.

 

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 of accountingfor 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****January 31,** | ** ** | ** **  | ** ** | **2005** | ** ** | **2004** | ** ** |
|---------------------------------------|------------|-------------|------------|----------|------------|----------|------------|
| Net loss                              |       | As reported |       | $        | (610,000   | )        | $          | (346,000 | ) |
|                                  |       | Pro forma   |       | $        | (637,000   | )        | $          | (396,000 | ) |
|                                  |       |        |       |     |       |     |       |
| Stock based compensation              |       | As reported |       | $        | —     |     | $          | — |   |
|                                  |       | Pro forma   |       | $        | (27,000    | )        | $          | (50,000 | ) |
|                                  |       |        |       |     |       |     |       |
| Basic and diluted loss per share      |       | As reported |       | $        | (0.05      | )        | $          | (0.03 | ) |
|                                  |       | Pro forma   |       | $        | (0.05      | )        | $          | (0.03 | ) |

 

8

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| **For All Periods Ended  January 31,** | ** ** | **2005** | ** ** | **2004** | ** ** |
|----------------------------------------|------------|----------|------------|----------|------------|
| Risk free interest rates               |       | 4.0      | %          | 4.0      | %          |
| Expected lives                         |       | 6.0      |       | 6.0      |       |
| Expected volatility                    |       | 115      | %          | 115      | %          |
| Expected dividends                     |       | 0        | %          | 0        | %          |

 

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 months ended January 31, 2005 and 2004:

 
| **Three Months Ended January 31,** | ** ** | **2005** | ** ** | **2004** | ** ** |
|------------------------------------|------------|----------|------------|----------|------------|
| United States                      |       | 51       | %          | 33       | %          |
| Europe and Canada                  |       | 30       | %          | 21       | %          |
| Asia-Pacific                       |       | 18       | %          | 45       | %          |
| South America                      |       | 1        | %          | 1        | %          |
|                               |       | 100      | %          | 100      | %          |

 

In the three-month period ended January 31, 2005, revenues from twocustomers each represented approximately 14% of the total revenue.  In the three-month period ended January 31,2004, revenues from two customers accounted for 33% and 12% of total revenue,respectively.

 

NOTE H – NEW ACCOUNTING PRONOUNCEMENTS

 

In December 2004, FASB issued SFAS No. 153 “Exchanges of NonmonetaryAssets” amends APB Opinion No. 29, “Accounting for Nonmonetary Transactions.”APB No. 29 is based on the principle that exchanges of nonmonetary assets shouldbe measured based on the fair value of the assets exchanged. The guidance inthat Opinion, however, included certain exceptions to that principle. SFAS No.153 amends APB No. 29 to eliminate the exception for nonmonetary exchanges ofsimilar productive assets and replaces it with a general exception forexchanges of nonmonetary assets that do not have commercial substance. Anonmonetary exchange has commercial substance if the future cash flows of theentity are expected to change significantly as a result of the exchange.   SFAS No. 153 shall be effective fornonmonetary asset exchanges occurring in fiscal periods beginning after June15, 2005. Earlier application is permitted for nonmonetary asset exchanges occurringin fiscal periods beginning after the date SFAS No. 153 was issued. SFAS No.153 shall be applied prospectively.  TheCompany does not expect the adoption of SFAS No. 153 to have a material effecton its financial statements.

 

In December 2004, FASB issued SFAS No. 123 (revised 2004), “Share-BasedPayment”, that focuses primarily on accounting for transactions in which anentity obtains employee services in share-based payment transactions.  This statement replaces SFAS No. 123, “Accountingfor Stock-Based Compensation”, and supersedes APB Opinion No. 25, “Accountingfor Stock Issued to Employees.”

 

9

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Beginning with our quarterly period that begins February 1, 2006, wewill be required to expense the fair value of employee stock options and similarawards.  As a public company, we areallowed to select from two alternative transition methods, each havingdifferent reporting implications.  Theimpact of SFAS No. 123R has not been determined at this time.

 

NOTE I – DISCONTINUED OPERATIONS

 

In the fourth quarter of fiscal 2004, the Company implemented astrategy to focus all of its resources on its core 2D machine visionbusiness.  In accordance with this plan,in the fourth quarter of fiscal 2004, the Company initiated and completed thesale of its 3D business unit, together with all the related patents,intellectual property, inventory and equipment. The terms of the sale included cash payments of $1.0 million and theopportunity to receive royalties on sales of certain products by the buyer for thenext five years.  The royalties areanticipated to be minimal, if any.  As aresult of the sale, in accordance with appropriate accounting principles, theCompany has revised the financial results for all periods presented to includethe 3D business as a discontinued operation. Accordingly, all 3D related revenue and expenses have been removed fromcontinuing operations and presented in a separate line in the statement ofoperations entitled “income or loss from discontinued operations”.

 

 
| **Condensed Statement of  Operations**     | ** ** | **Quarter Ended  January 31, 2005** | ** ** | **Quarter Ended  January 31, 2004** | ** ** |
|--------------------------------------------|------------|-------------------------------------|------------|-------------------------------------|------------|
| Revenues                                   |       | $                                   | 169,000    |                                | $          | 455,000 | ** ** |
| Cost of revenues                           |       | 56,000                              |       | 58,000                              |       |
| Gross profit                               |       | 113,000                             |       | 397,000                             |       |
| Total operating expenses                   |       | 168,000                             |       | 320,000                             |       |
| Income (loss) from discontinued operations |       | $                                   | (55,000    | )                                   | $          | 77,000 |   |
|                                       |       |                                |       |                                |       |
| **Assets**                                 | ** ** | **January 31, 2005**                | ** ** | **October 31, 2004**                | ** ** |
| Accounts receivable                        |       | $                                   | 39,000     |                                | $          | 200,000 |   |

 

NOTE J – SUBSEQUENT EVENT

 

On March 10, 2005 the Company’s Board of Directors approved a 1-for-4reverse split of its common stock effective as of the close of business onMarch 31, 2005 and the conversion to book-entry share registration alsoeffective as of March 31, 2005. In connection with the reverse split, the Boardof Directors also approved an amendment to Article 4.1 of the Company’sArticles of Incorporation to proportionately reduce the number of shares ofcommon stock authorized from 20,000,000 shares to 5,000,000 shares.  The Company’s net loss per share on a proforma basis, reflecting the reverse split, would have been $0.21 for thequartering ending January 31, 2005 and $0.13 for the same period last year.

 

10

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Item 2

 

MANAGEMENT’S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION

 

# Overview 

 

PPT VISION, Inc.designs, manufactures, and markets camera-based intelligent systems forautomated inspection in manufacturing applications. The Company’s products,commercially known as machine vision systems, enable manufacturers to realizesignificant economic paybacks by increasing the quality of manufactured partsand improving the productivity of manufacturing processes. The Company’smachine vision product line is sold on a global basis to end-users, systemintegrators, distributors and original equipment manufacturers (OEM’s)primarily in the electronic and semiconductor component, automotive, medicaldevice, and packaged goods industries.

 

The Company’s revenues decreased 23% to $1,525,000 during the firstquarter ended January 31, 2005 compared to the prior year’s first quarter andits loss from continuing operations increased to $555,000 or $.04 a sharecompared to $423,000 or $.04 in the prior year’s period.  Net loss for the first quarter, including theresults of our discontinued 3D business unit was $610,000 or $.05 per sharecompared to our net loss in the first quarter of fiscal 2004 of $346,000 or$.03 per share.  The decrease in revenuesin the first quarter were resulted fromthe discontinuation of sales of our older analog vision units to a large OEM customer,which accounted for approximately $660,000 of revenue in the first quarter offiscal 2004.  Sales to other customersapproximated $1.3 million in the first quarter of last year.  The transition to Impact vision systemscontinued to build as sales of IMPACT systems increased substantially over thefirst quarter of last year—growing 130% in unit terms.   In the first quarter of this year, IMPACTrevenue accounted for approximately 69% of our total revenue.  In the first quarter last year IMPACT revenueaccounted for 26% of our reported revenue.

 

During thefiscal 2005 first quarter, revenues from outside the United States accountedfor 49% of revenues compared to 67% in the fiscal 2004 first quarter.

 

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

 

11

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historical experience and various other assumptions that are believedto be reasonable under the circumstances, the results of which form the basisfor making judgments about the carrying values of assets and liabilities.  Actual results could differ from theseestimates.

 

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:

 

•       revenuerecognition and cost of revenues;

•       estimatingvaluation allowances, specifically the allowance for doubtful accounts andinventory; and

•       valuationand useful lives of long-lived and intangible assets.

 

### Revenue Recognition 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 andaccessories.  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.  Services revenue, which includes applicationengineering, product development, customer training and repair services, isrecognized when the services 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.

 

# ValuationAllowances

 

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.

 

The Company’s inventory primarily consists of parts and other materialsthat are used in the manufacture of vision systems.  The Company generally only builds systemsbased on customer orders and as a result maintains only a minor amount offinished goods inventory.  Managementestablishes valuation reserves on inventory for estimated excess and obsoleteinventory equal to the difference between the cost of inventory and itsestimated market value based on assumptions about future product demand andmarket conditions.  In view of the rapidpace 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 determinationof the market value of inventory.

 

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# Long-Livedand 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 ismeasured by a comparison of the carrying amount of an asset to undiscountedfuture net cash flows expected to be generated by the assets. If these assetsare considered to be impaired, the impairment to be recognized is measured bythe amount by which the carrying amount of the assets exceeds the fair value ofthe assets.

 

RESULTS OF OPERATIONS

 

Revenues

 

Net revenues decreased 23% to $1,525,000 for the three-month periodended January 31, 2005, compared to net revenues of $1,976,000 for the sameperiod in fiscal 2004.  Unit sales of theCompany’s machine vision systems increased to 221 for the first quarter offiscal 2005 versus 189 for the same period in fiscal 2004.  In the three-month period ended January 31,2005, revenues from two customers each represented approximately 14% of thetotal revenue. In the three-month period ended January 31, 2004, revenues fromtwo customers accounted for 33% and 12% of total revenue, respectively.

 

The decrease in revenues in thefirst quarter was primarily the result of the discontinuation of sales of ourolder analog vision units to a large OEM customer, which accounted forapproximately $660,000 of revenue in the first quarter of fiscal 2004.  Sales to other customers approximated $1.3million last year.  The transition toImpact vision systems continued to build as sales of IMPACT systems increasedsubstantially over the first quarter of last year—growing 130% in unitterms.  In the first quarter of thisyear, IMPACT revenue accounted for approximately 69% of our total revenue.  In the first quarter last year IMPACT revenueaccounted for 26% of our reported revenue.

 

Sales to customers outside the United States represented 49% of grossrevenues for the three months ended January 31, 2005, compared to 67% for thesame period in fiscal 2004.

 

We will continue to experience adversequarter-over-quarter revenue comparisons as we transition almost exclusively toproduct development and sales of the IMPACT family of products.  In addition revenue comparisons may beunfavorable for the next two quarters as we will no longer be shipping productto the one large OEM customer who was a significant customer in each of thefirst three quarters of fiscal 2004. Revenue trends may also be inconsistent given the nature of the machinevision industry and the capital nature of our product.

 

Gross profit decreased 12% to $796,000 for the three-month period endedJanuary 31, 2005, compared to $903,000 for the same period in fiscal 2004.  As a percentage of net revenues, the grossprofit for the first quarter of fiscal 2005 increased to 52% compared to 46% inthe same period in fiscal 2004.  The improvements in our gross marginpercentages relate to the substantial portion of our revenue that was to thelarge OEM customer in the first quarter of last fiscal year.  These sales were at a lower gross margin dueto the size of the orders.  This year thegross margins were adversely impacted by the low volume,

 

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which resulted in our manufacturing overheadbeing spread over a smaller number of units. We would expect to see our margins improve as our sales increase.

 

Sales and marketing expenses increased 8% to $686,000for the three-month period ended January 31, 2005 compared to $634,000 for thesame period in fiscal 2004.    As apercentage of net revenues, sales and marketing expenses increased to 45% forthe first quarter of fiscal 2005 compared to 32% for the same period in fiscal2004.  This increase is the result of anincrease in headcount in fiscal 2005. The Company expects sales and marketingexpenses in absolute dollars to remain relatively flat on a quarterly basis forthe remainder of fiscal 2005. Increases in sales and marketing expenditures mayoccur to the extent that revenue growth is achieved.

 

General and administrative expenses increased slightlyto $291,000 for the three-month period ended January 31, 2005, compared to$282,000 for the same period in fiscal 2004. As a percentage of net revenues, general and administrative expensesincreased to 19% for the first quarter of fiscal 2005 versus 14% for the sameperiod in fiscal 2004.  The Companyexpects general and administrative expenses on a quarterly basis will generallyremain at current levels for the remainder of fiscal 2005.

 

Research and development expenses decreased 9% to$374,000 for the three-month period ended January 31, 2005, compared to$410,000 for the same period in fiscal 2004. This decrease is the result of headcount reductions in this area.  As a percentage of net revenues, research anddevelopment expenses increased slightly to 25% for the first quarter of fiscal2005, compared to 21% for the first quarter of fiscal 2004.  Again, research and development expensesshould remain at or only slightly above these levels for the remainder of thefiscal year.

 

The Company did not record an income tax benefit orexpense for the three-month periods ended January 31, 2005 or 2004.

 

The Company’s net loss from continuingoperations for the first quarter of fiscal 2005 increased from year-ago levelsto $555,000 or 4 cents per share, as compared with a loss of $423,000 or 4cents per share for the same period in fiscal 2004.  Shares outstanding for the quarter wereapproximately 12.0 million versus 11.8 million in the first quarter of lastfiscal.

 

The results of our discontinued operationsresulted in a loss of $55,000 or $0.01 per share in the first in the quarterended January 31, 2005 as opposed to income of $77,000 or $0.01 per share inthe first quarter of fiscal 2004.

 

LIQUIDITY AND CAPITAL RESOURCES

 

At January 31, 2005 the Company had cash balances of$2.3 million, working capital of approximately $3.9 million and no long-termdebt.

 

In the first quarter of fiscal 2005 the Company incurreda net loss from continuing and discontinued operations of $610,000 whichincluded non-cash charges related to depreciation and amortization of $66,000.The net loss for the quarter increased $264,000 from the $346,000 loss reportedin the first quarter of fiscal 2004. Cash used in operating activities was $449,000 for the quarter endedJanuary 31, 2005.

 

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TheCompany is working to reduce its cash consumption primarily by implementingplans to increase revenues.  Otheractions, such as cost reductions will be considered if revenues do not increasesufficiently to achieve a positive cash flow. As discussed below, we areanalyzing alternatives with respect to the lease on our facilities.

 

The Company has been using its existing cash and cashequivalents to fund the cash needs of its operating activities.  We are carefully monitoring our cash positionand evaluating the need for additional capital to enable us to achieve ourshort and long-term objectives. If there was a need for additional capital, theCompany believes that other sources of financing are available including salesof its common or preferred stock, external borrowing, customer or vendorfinancing, customer sponsored research and development projects or investmentsby strategic partners. The avenues that we take to satisfy our potentialcapital requirements will depend in large part on the level of our revenues,and we will evaluate these alternatives as we obtain better visibility of our revenueexpectations.

 

The Company entered into a ten-year lease inMay 1999 for approximately 59,000 square feet of office and manufacturing spacein Eden Prairie, Minnesota. The lease commenced on June 1, 1999 at an initialmonthly rate of approximately $51,000. During fiscal 2004 the monthly rateincreased to $54,700.  The lease includesa provision that enables the landlord to require us to take an additional21,000 square feet of space in July, 2005. The monthly rent on this space would be approximately $19,000.  This space is currently occupied by anothercompany and negotiations are underway to extend the term of their lease on thatspace.  There can be no assurances,however, that these negotiations will be successful and that we will not berequired to assume the responsibility for this additional space.  Our lease also includes a terminationprovision that enables us to terminate our lease effective May of 2006.  The termination fee is $500,000, half ofwhich is payable in May, 2005 with the remainder due in December, 2005  The Company is evaluating the issuessurrounding a decision to exercise this termination provision.  This may involve the negotiation of arestructuring of our existing lease agreement and the need to raise additionalcapital.

 

Althoughthe decision to terminate our lease would adversely impact our current cashsituation, the termination of our existing lease and relocation to a muchsmaller, less costly facility would improve our long-term prospects forprofitability.  The Company is currentlyin negotiations with our landlord on this issue but no resolution isimminent.  The Company is evaluating it’soptions with respect to the decision to terminate the lease, including thepotential that additional capital may be required to fund operations in theevent that the decision is made to terminate the lease.  No assurances can be made the additionalcapital will be available at acceptable terms.

 

Absenta decision to terminate our lease, the Company believes that existing cashbalances and available sources of capital willenable the Company to meet its operating, working capital and capitalresource obligations through the next twelve months.

 

There can be no assurance that the Companywill not incur additional losses for a longer period of time, will generatepositive cash flow from it operations, or that the Company will attain orthereafter sustain profitability in any future period.  To the extent that the Company continues toincur losses or achieves revenue growth in the future requiring an increase inworking capital, its

 

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operating and investing activities may usecash and, consequentially, such losses or growth will require the Company toobtain additional sources of financing to provide for these cash needs.

 

As of January 31, 2005, the Company had nooutstanding debt.

 

Working capital decreased 13% to $3,874,000at January 31, 2005 from $4,438,000 at October 31, 2004.  The Company financed its operations duringthe first three months of fiscal 2005 through cash provided by operations andexisting cash and cash equivalents.  Netcash used in operating activities during the first three months of fiscal 2005was $449,000.  Accounts receivabledecreased $466,000 and inventories increased $196,000 during the first threemonths of fiscal 2005.  Accounts payableand accrued expenses decreased by $192,000 and $33,000, respectively.

 

Net cash used in investing activities was $22,000 during the threemonths ended January 31, 2005 and related to fixed asset additions.  This compares with $31,000 in fixed assetadditions for the same period in fiscal 2004. The Company expects that fixedasset additions for the remaining quarters of fiscal 2005 to continue atapproximately the same rate as the first quarter of fiscal 2005.

 

The Company does not have relationships withunconsolidated entities or financial partnerships, such as entities oftenreferred to as structured finance or special purpose entities, which would havebeen established for the purpose of facilitating off-balance sheet financialarrangements.  As such, the Company isnot materially exposed to any financing, liquidity, market or credit risk thatcould arise if we 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 January 31, 2005 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 containsforward-looking statements within the meaning of the Private SecuritiesLitigation Reform Act of 1995, including statements regarding the Company’sexpectations, beliefs, intentions and strategies regarding the future.  Forward-looking statements include, withoutlimitation, statements regarding the extent and timing of future revenues andexpenses and customer demand.  Allforward-looking statements included in this document are based on informationavailable to the Company as of the date hereof, and the Company assumes noobligation to update any such forward-looking statements.

 

The Company’s actual results are subject to risks anduncertainties and could differ materially from those discussed in theforward-looking statements. These statements are based upon the Company’sexpectations regarding a number of

 

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factors, including the Company’s ability to obtain additionalworking capital if necessary to support its operations, changes in worldwidegeneral economic 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 “Description ofBusiness” 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, 2004 and other reports filed withthe Securities and Exchange Commission.

 

Item 3:  CONTROLS AND PROCEDURES

 

(a) Evaluation of 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 of January31, 2005.  Based upon this review, theCompany’s disclosure controls and procedures are effective.  Subsequent to the end of the quarter, theCompany determined that it had inadvertently failed to file its Proxy Statementwith the Securities and Exchange Commission on a timely basis.  This document should have been filed at thetime it was mailed to our shareholders which occurred February 6, 2005.  Due to an oversight, the document was notfiled until March 4, 2005.  The Company hasimplemented new procedures to prevent this situation from happening in thefuture.

 

(b) Changes in InternalControl Over Financial Reporting.

 

There have been no other changes in internal control over financialreporting that occurred during the fiscal quarter covered by this report thathave materially affected, or are reasonably likely to materially affect, theregistrant’s internal control over financial reporting.

 
| PART II. |   | OTHER INFORMATION                                            |   |
|----------|--------|--------------------------------------------------------------|--------|
|     |   |                                                         |   |
| Item 1:  |   | LEGAL PROCEEDINGS                                            |   |
|     |   |                                                         |   |
|     |   | None.                                                        |   |
|     |   |                                                         |   |
| Item 2:  |   | UNREGISTERED SALES OF EQUITY SECURITIES AND  USE OF PROCEEDS |   |
|     |   |                                                         |   |
|     |   | None.                                                        |   |
|     |   |                                                         |   |
| Item 3:  |   | DEFAULTS UPON SENIOR SECURITIES                              |   |
|     |   |                                                         |   |
|     |   | Not  Applicable.                                             |   |

 

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Item 4:         SUBMISSIONOF MATTERS TO A VOTE OF SECURITY HOLDERS

 

The Company’s Annual Meeting of Shareholders was held on March 10,2005.  Of the 11,986,357 shares of commonstock outstanding and entitled to vote at the meeting, 11,056,855 shares werepresent, either in person or by proxy. The following describes the matters considered by the Company’sshareholders at the Annual Meeting, as well as the results of the votes cast atthe Annual Meeting:

 

1.            Toelect five (5) directors to hold office until the next Annual Meeting of Shareholdersor until their respective successors have been elected and shall qualify.

 
| **Name of Nominee**   |   | **For**    |   | **Withhold** |   |
|-----------------------|--------|------------|--------|--------------|--------|
| Joseph C. Christenson |   | 10,999,979 |   | 56,876       |   |
| Robert W. Heller      |   | 11,030,347 |   | 26,508       |   |
| David C. Malmberg     |   | 11,031,407 |   | 25,448       |   |
| Peter R. Peterson     |   | 11,010,091 |   | 46,764       |   |
| Benno G. Sand         |   | 11,031,207 |   | 25,648       |   |

 

2.            Toadopt the PPT Vision, Inc. 2005 Employee Stock Purchase Plan.

 
| **For:**             |   | 6,997,535 | ** ** |
|----------------------|--------|-----------|------------|
| **Against:**         |   | 57,429    |       |
| **Abstain:**         |   | 24,656    |       |
| **Broker Non-Vote:** |   | 3,977,235 |       |

 

Item 5:         OTHERINFORMATION

 

As previously reported by the Company, on March 10, 2005 the Company’sBoard of Directors approved a 1-for-4 reverse split of its common stockeffective as of the close of business on March 31, 2005 and the conversion tobook-entry share registration also effective as of March 31, 2005. Inconnection with the reverse split, the Board of Directors also approved anamendment to Article 4.1 of the Company’s Articles of Incorporation toproportionately reduce the number of shares of common stock authorized from20,000,000 shares to 5,000,000 shares. In connection with the conversion to book-entry share registration, theBoard of Directors approved amendments to Sections 5.01 and 5.02 of the Company’sBylaws on March 10, 2005 to allow for the issuance and transfer of shares ofthe Company’s common stock in uncertificated form.

 

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Item 6:              EXHIBITS

 

(a)          Thefollowing exhibits are included herein:

 
| 31.1   |   | Certification of Chief Executive Officer pursuant to Section 302 of  the Sarbanes-Oxley Act of 2002 (Rules 13a- 14 and 15d-14 of the Exchange  Act). |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                 |
| 31.2   |   | Certification of Chief Financial Officer pursuant to Section 302 of  the Sarbanes-Oxley Act of 2002 (Rules 13a- 14 and 15d-14 of the Exchange  Act). |

 

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

 

SIGNATURES

 

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

 
|                 |   | PPT VISION, INC.               |
|----------------------|--------|--------------------------------|
|                 |   |                           |
| Date: March 17, 2005 |   |                           |
|                 |   |                           |
|                 |   | /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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