**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 PeriodEnded  April 30, 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 June 1, 2004:11,806,796

 

 

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INDEX

 

PPT VISION, INC.

 
| Part I.   | Financial Information                                                                                    |   |
|-----------|----------------------------------------------------------------------------------------------------------|--------|
|      |                                                                                                     |   |
| Item 1.   | Financial Statements                                                                                     |   |
|      |                                                                                                     |   |
|      | Balance  Sheets as of April 30, 2004 and October 31, 2003                                      |   |
|      |                                                                                                     |   |
|      | Statements of Operations for the Three and  Six Months Ended April 30, 2004 and April 30, 2003 |   |
|      |                                                                                                     |   |
|      | Statements  of Cash Flows for the Six Months Ended April 30, 2004 and April 30,  2003          |   |
|      |                                                                                                     |   |
|      | Notes to Condensed Financial Statements –  April 30, 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                                                                                               |   |

 

2

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PPT VISION, INC.

 

BALANCE SHEETS

 
|                                            |   | **April 30,  2004** |      | **October 31,  2003** |   |
|-------------------------------------------------|--------|--------------------------|-----------|----------------------------|--------|
|                                            |   | **(unaudited)**          |      | **(audited)**              |   |
| ASSETS                                          |   |                     |      |                       |   |
| Cash and cash equivalents                       |   | $                        | 2,058,000 |                       | $      | 2,086,000 |   |
| Accounts receivable, net                        |   | 2,105,000                |      | 2,118,000                  |   |
| Inventories:                                    |   |                     |      |                       |   |
| Manufactured and purchased parts                |   | 973,000                  |      | 728,000                    |   |
| Work-in-process                                 |   | 175,000                  |      | 202,000                    |   |
| Finished goods                                  |   | 63,000                   |      | 91,000                     |   |
| Total inventories, net                          |   | 1,211,000                |      | 1,021,000                  |   |
| Other current assets                            |   | 260,000                  |      | 319,000                    |   |
| Total current assets                            |   | 5,634,000                |      | 5,544,000                  |   |
|                                            |   |                     |      |                       |   |
| Fixed assets, net                               |   | 515,000                  |      | 708,000                    |   |
| Intangible assets, net                          |   | 1,968,000                |      | 2,141,000                  |   |
| Other assets                                    |   | 53,000                   |      | 53,000                     |   |
| Total assets                                    |   | $                        | 8,170,000 |                       | $      | 8,446,000 |   |
|                                            |   |                     |      |                       |   |
| LIABILITIES AND SHAREHOLDERS’ EQUITY       |   |                     |      |                       |   |
| Accounts payable and accrued expenses           |   | $                        | 1,483,000 |                       | $      | 1,201,000 |   |
| Deferred revenue – customer advances       |   | 576,000                  |      | 565,000                    |   |
| Total current liabilities                       |   | 2,059,000                |      | 1,766,000                  |   |
|                                            |   |                     |      |                       |   |
| Shareholders’ equity:                      |   |                     |      |                       |   |
| Common stock                                    |   | 1,180,000                |      | 1,180,000                  |   |
| Capital in excess of par value                  |   | 35,080,000               |      | 35,080,000                 |   |
| Accumulated deficit                             |   | (30,149,000)             |      | (29,580,000                | )      |
| Total shareholders’ equity                 |   | 6,111,000                |      | 6,680,000                  |   |
| Total liabilities and shareholders’ equity |   | $                        | 8,170,000 |                       | $      | 8,446,000 |   |

 

See accompanying notes to condensed financialstatements

 

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PPT VISION, INC.

STATEMENTS OF OPERATIONS

(UNAUDITED)

 
|                                        |   | **Three  Months Ended  April 30,** |      | **Six Months  Ended  April 30,** |   |
|---------------------------------------------|--------|-----------------------------------------|-----------|---------------------------------------|--------|
|                                        |   | **2004**                                |      | **2003**                              |   | **2004** |   | **2003** |   |
| Revenue:                                    |   |                                    |      |                                  |   |   |   |   |   |
| Product Revenue                             |   | $                                       | 2,222,000 |                                  | $      | 1,956,000 |   | 4,244,000 |   | 3,644,000 |   |
| Service Revenue                             |   | 398,000                                 |      | 281,000                               |   | 807,000 |   | 717,000 |   |
| Total Revenue                               |   | 2,620,000                               |      | 2,237,000                             |   | 5,051,000 |   | 4,361,000 |   |
|                                        |   |                                    |      |                                  |   |   |   |   |   |
| Cost of revenues                            |   | 1,080,000                               |      | 1,281,000                             |   | 2,200,000 |   | 2,229,000 |   |
| Gross profit                                |   | 1,540,000                               |      | 956,000                               |   | 2,851,000 |   | 2,132,000 |   |
|                                        |   |                                    |      |                                  |   |   |   |   |   |
| Expenses:                                   |   |                                    |      |                                  |   |   |   |   |   |
| Sales and marketing                         |   | 707,000                                 |      | 803,000                               |   | 1,340,000 |   | 1,666,000 |   |
| General and administrative                  |   | 380,000                                 |      | 525,000                               |   | 743,000 |   | 948,000 |   |
| Restructuring and other                     |   | —                                  |      | 362,000                               |   | — |   | 362,000 |   |
| Research and development                    |   | 674,000                                 |      | 1,052,000                             |   | 1,341,000 |   | 2,135,000 |   |
| Total expenses                              |   | 1,761,000                               |      | 2,742,000                             |   | 3,424,000 |   | 5,111,000 |   |
| Loss from operations                        |   | (221,000                                | )         | (1,786,000                            | )      | (573,000 | ) | (2,979,000 | ) |
|                                        |   |                                    |      |                                  |   |   |   |   |   |
| Interest Income                             |   | 2,000                                   |      | 3,000                                 |   | 3,000 |   | 8,000 |   |
| Other Income (loss), Net                    |   | (4,000                                  | )         | 13,000                                |   | 1,000 |   | 14,000 |   |
| Net loss                                    |   | $                                       | (223,000  | )                                     | $      | (1,770,000 | ) | $ | (569,000 | ) | $ | (2,957,000 | ) |
| Per share data:                             |   |                                    |      |                                  |   |   |   |   |   |
| Weighted average basic shares outstanding   |   | 11,804,000                              |      | 10,068,000                            |   | 11,803,000 |   | 10,068,000 |   |
| Weighted average diluted shares outstanding |   | 11,804,000                              |      | 10,068,000                            |   | 11,803,000 |   | 10,068,000 |   |
| Basic and diluted loss per common share     |   | $                                       | (0.02     | )                                     | $      | (0.18 | ) | $ | (0.05 | ) | $ | (0.29 | ) |

 

See accompanying notes to condensed financialstatements

 

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PPT VISION, INC.

STATEMENTS OF CASH FLOWS

(UNAUDITED)

 
|                                                                         |   | **Six Months  Ended  April 30, 2004** |      | **Six Months  Ended  April 30, 2003** |   |
|------------------------------------------------------------------------------|--------|--------------------------------------------|-----------|--------------------------------------------|--------|
| Net loss                                                                     |   | $                                          | (569,000  | )                                          | $      | (2,957,000 | ) |
| Adjustments to reconcile net loss to net  cash used in operating activities: |   |                                       |      |                                       |   |
| Depreciation and amortization                                                |   | 447,000                                    |      | 611,000                                    |   |
| Loss on disposal of assets                                                   |   | —                                     |      | 154,000                                    |   |
|                                                                         |   |                                       |      |                                       |   |
| Change in assets and liabilities:                                            |   |                                       |      |                                       |   |
| Accounts receivable                                                          |   | 13,000                                     |      | (486,000                                   | )      |
| Inventories                                                                  |   | (190,000                                   | )         | 665,000                                    |   |
| Other assets                                                                 |   | 59,000                                     |      | 31,000                                     |   |
| Accounts payable and accrued expenses                                        |   | 282,000                                    |      | 59,000                                     |   |
| Deferred revenue - customer advances                                         |   | 11,000                                     |      | 656,000                                    |   |
| Total adjustments                                                            |   | 622,000                                    |      | 1,690,000                                  |   |
| Net cash provided by (used in) operating  activities                         |   | 53,000                                     |      | (1,267,000                                 | )      |
|                                                                         |   |                                       |      |                                       |   |
| Cash flows from investing activities:                                        |   |                                       |      |                                       |   |
| Purchase of fixed assets                                                     |   | (77,000                                    | )         | (133,000                                   | )      |
| Net investment in other long-term assets                                     |   | (4,000                                     | )         | (20,000                                    | )      |
| Net cash provided by (used in) investing  activities                         |   | (81,000                                    | )         | (153,000                                   | )      |
|                                                                         |   |                                       |      |                                       |   |
| Cash flows from financing activities:                                        |   |                                       |      |                                       |   |
| Net cash provided by financing activities                                    |   | —                                     |      | —                                     |   |
|                                                                         |   |                                       |      |                                       |   |
| Net (decrease) in cash and cash equivalents                                  |   | (28,000                                    | )         | (1,420,000                                 | )      |
|                                                                         |   |                                       |      |                                       |   |
| Cash and cash equivalents at beginning of  year                              |   | 2,086,000                                  |      | 2,932,000                                  |   |
| Cash and cash equivalents at end of period                                   |   | $                                          | 2,058,000 |                                       | $      | 1,512,000 |   |

 

See accompanying notes to condensed financialstatements

 

5

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PPT VISION, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS

(UNAUDITED)

April 30, 2004

 

NOTE A – DESCRIPTION OF BUSINESS

 

PPT VISION, Inc. designs,manufactures, markets, and integrates 2D and 3D machine vision-based automatedinspection systems for manufacturing applications. Machine vision-basedinspection systems enable manufacturers to increase the quality of manufacturedparts and improve the productivity of manufacturing processes. The Company’s 2Dmachine vision product line is sold on a global basis to end-users, systemintegrators, distributors and original equipment manufacturers (OEM’s)primarily in the electronic and semiconductor component, automotive, medicaldevice, and packaged 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-mount electronicconnectors, 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 the UnitedStates 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 the information andfootnotes required by accounting principles generally accepted in the UnitedStates of America for complete financial statements.  In the opinion of management, all adjustments (consisting ofnormal recurring accruals) considered necessary for a fair presentation havebeen included.  Results of operationsfor the interim periods are not necessarily indicative of the results to beexpected for the full year or of the results for any future periods.

 

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 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.

 

NOTE D – LIQUIDITY AND CAPITAL RESOURCES

 

During fiscal year 2003, the Company raised approximately$1.1 million through the exercise of warrants that were issued as part of itsfiscal 2002 Shareholder Rights Offering. As of April 30, 2004, theCompany had $2.1 million of cash, $3.6 million of working capital and nolong-term debt.

 

The Company believes that existing cash balances togetherwith other potential sources of financing will be sufficient to provide thecash necessary to meet its operating, working capital and capital resourceobligations through the next twelve months. The other sources of financing that are available to the Company includesales of its common or preferred stock, external borrowing, customer or vendorfinancing, customer sponsored research and development projects or investmentsby 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.  Warrantsto purchase 1.6 million shares of stock were exercised by the expiration dateof September 30, 2003.  Theremaining warrants expired.  AtApril 30, 2004, options to purchase 1,061,750 shares and warrants topurchase 25,000 shares of the Company’s common stock were not considered in thecalculation of diluted earnings per share. At April 30, 2003, options to purchase 1,122,950 shares and warrantsto purchase 2,267,000 shares of the Company’s common stock were not consideredin the calculation of diluted earnings per share.  As the Company had a net loss for both periods, the inclusion ofoutstanding options and warrants would have been anti-dilutive.

 

NOTE F –STOCK-BASED COMPENSATION

 

The Company uses the intrinsic value method prescribedby Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued toEmployees,” and related interpretations in accounting for employee stockoptions.  Under the

 

7

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intrinsic value method, compensation expense is recorded only to theextent that the market price of the common stock exceeds the exercise price ofthe stock option on the date of grant.

 

In December 2002, the FASB issued SFAS No. 148, “Accounting forStock-Based Compensation - Transition and Disclosure.”  SFAS No. 148 is anamendment to SFAS No. 123 providing alternative methods of transition for avoluntary change to the fair value based method of accounting for stock-based employeecompensation and also provides required additional disclosures about the methodof accounting for stock-based employee compensation. The Company adoptedthe annual disclosure provision of SFAS No. 148 during the year endedOctober 31, 2003.  The Company choseto 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 costfor stock options been determined based on the fair value methodologyprescribed by SFAS 123, the Company’s net loss and net loss per share wouldhave been reduced to the pro forma amounts indicated below:

 
| **Three Months EndedApril 30,** |   |        |   | **2004** |         | **2003** |   |
|--------------------------------------|--------|-------------|--------|----------|--------------|----------|--------|
| Net loss                             |   | As reported |   | $        | (223,000     | )        | $      | (1,770,000 | ) |
|                                 |   | Pro forma   |   | $        | (273,000     | )        | $      | (1,825,000 | ) |
|                                 |   |        |   |     |         |     |   |
| Stock based compensation             |   | As reported |   | $        | —  |     | $      | — |   |
|                                 |   | Pro forma   |   | $        | (50,000      | )        | $      | (55,000 | ) |
|                                 |   |        |   |     |         |     |   |   |   |
| Basic and diluted loss per share     |   | As reported |   | $        | (0.02        | )        | $      | (0.18 | ) |
|                                 |   | Pro forma   |   | $        | (0.02        | )        | $      | (0.18 | ) |

 
| **Six Months Ended  April 30,** |   |        |   | **2004** |         | **2003** | ** ** |
|--------------------------------------|--------|-------------|--------|----------|--------------|----------|------------|
| Net loss                             |   | As reported |   | $        | (569,000     | )        | $          | (2,957,000 | ) |
|                                 |   | Pro forma   |   | $        | (670,000     | )        | $          | (3,121,000 | ) |
|                                 |   |        |   |     |         |     |       |
| Stock based compensation             |   | As reported |   | $        | —  |     | $          | —  |   |
|                                 |   | Pro forma   |   | $        | (101,000     | )        | $          | (164,000 | ) |
|                                 |   |        |   |     |         |     |       |   |   |
| Basic and diluted loss per share     |   | As reported |   | $        | (0.05        | )        | $          | (0.29 | ) |
|                                 |   | Pro forma   |   | $        | (0.06        | )        | $          | (0.31 | ) |

 

| **For All Periods Ended  April 30,** |   | **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 six months ended April 30, 2004 and 2003:

 
| **Three Months Ended April 30** |   | **2004** |   | **2003** |   |
|--------------------------------------|--------|----------|--------|----------|--------|
| United States                        |   | 36       | %      | 32       | %      |
| Europe and Canada                    |   | 27       | %      | 25       | %      |
| Asia-Pacific                         |   | 36       | %      | 43       | %      |
| South America                        |   | 1        | %      | 0        | %      |

 
| **Six Months Ended April 30** |   | **2004** |   | **2003** |   |
|------------------------------------|--------|----------|--------|----------|--------|
| United States                      |   | 33       | %      | 47       | %      |
| Europe and Canada                  |   | 31       | %      | 21       | %      |
| Asia-Pacific                       |   | 36       | %      | 30       | %      |
| South America                      |   | 0        | %      | 2        | %      |

 

In the three month period endedApril 30, 2004, revenues from two customers represented approximately 24%and 16% of total revenue, respectively. In the three month period endedApril 30, 2003, revenues from three customers accounted for 23%, 16%, and13% of total revenue, respectively.  Inthe six month period ended April 30, 2004, revenues from two customersrepresented approximately 25% and 17% of total revenue, respectively.  In the six month period ended April 30,2003, revenues from three customers accounted for 24%, 24% and 21% 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 isrequired in financial statements of public entities that have interest instructures commonly referred to as special purpose entities for periods endingafter December 15, 2003.  FIN 46had no effect on the Company’s financial statements for the quarter endedApril 30, 2004, as the Company had no interests in special purposeentities.  Application by the Companyfor all other types of VIEs is required in financial statements for periodsending no 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’SDISCUSSION 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 itssystems globally to original equipment manufacturers (OEMs), systemintegrators, machine builders, and end-users, primarily in the electronic andsemiconductor component, automotive, medical device, and packaged goodsindustries.

 

The Company’srevenues increased 17% to $2,620,000 during the second quarter endedApril 30, 2004 compared to the prior year’s second quarter and its lossdecreased to $223,000 or $.02 a share compared to $1,770,000 or $.18 in theprior year’s period.  The increase inrevenues resulted from a continuing improvement in the Company’s core marketswhile the decrease in the net loss resulted from higher level of revenues and alower internal cost structure.  Revenuesincreased 16% to $5,051,000 during the six month period ended April 30,2004 compared to the prior year’s six month period and its loss decreased to$569,000 or $0.05 a share compared to $2,957,000 or $0.29 a share.

 

During thefiscal 2004 second quarter, revenues from outside the United States accountedfor 64% of revenues compared to 68% in the fiscal 2003 second quarter.  During the first six months of fiscal 2004,revenues from outside the United States accounted for 67% compared to 53% inthe first six moths 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:

 

•                  revenuerecognition and cost of revenues;

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

•                  valuation anduseful lives of 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 substantially metand title and risk of loss have passed to the customer, which is generally thecase for sales of 2D machine vision systems, spare parts, accessories and 3Dmachine 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 parties application engineers who perform certain installation servicesat our 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 ofinventory and its estimated market value based on assumptions about futureproduct demand and market conditions. In view of the rapid pace of technological change in the machine visionindustry, the Company generally considers inventory that has had no usage forone year to be obsolete.  In addition,changes in the Company’s product offerings or those of the Company’scompetitors, may also result in excess or obsolete inventory levels.  Accordingly, these factors will also beconsidered in the determination of the 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 17% to $2,620,000 for the three-month periodended April 30, 2004, compared to net revenues of $2,237,000 for the sameperiod in fiscal 2003.  For thesix-month period ended April 30, 2004, revenues increased 16% to$5,051,000 from $4,361,000 for the same period in fiscal 2003.  Unit sales of the Company’s machine visionsystems increased to 208 for the second quarter of fiscal 2004 versus 139 forthe same period in fiscal 2003.  Unitsales for the first half of fiscal 2004 increased to 401 from 212 in the firsthalf of fiscal 2003.  In the three-month period endedApril 30, 2004, revenues from two customers represented approximately 24%and 16%, respectively of total revenues. In the three-month period endedApril 30, 2003, revenues from three customers accounted for 23%, 16%, and13% of total revenue, 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 64% of grossrevenues for the three months ended April 30, 2004, compared to 68% forthe same period in fiscal 2003.  Duringthe first six months of fiscal 2004, revenues from outside the United Statesaccounted for 67% compared to 53% in the first six moths of fiscal 2003.

 

Our core 2D revenue grew slightly in the quarter and our 3D productsand services grew more significantly versus the second quarter of fiscal2003.  For the six month period, 2Dsales increased 19% over the first six months of fiscal 2003 and 3D sales wereup 3% over the prior year.  These increases reflect gradual improvementof capital spending in the manufacturing sector and positive customeracceptance of our new IMPACT 2D machine vision product line.

 

While our overall revenue growth is indicative of the improvements weare seeing in the general business environment and reinforces our belief thatthe economic recovery in our markets is well underway, we do believe, like manyothers, that this recovery will be more gradual than spectacular.  We are seeing growing customer acceptance ofour IMPACT 2D machine vision micro-system with its Inspection Builder softwareand we think this trend will continue. This leads us to be optimistic about ourlonger-term prospects for revenue growth.

 

Because the nature of our sales are based onour customers’ capital equipment purchase procedures and customer specificdelivery timetables, which are out of our control, we may at times see someadverse quarter to quarter comparisons as shipments of our vision systems toour customers may move from one quarter to another.

 

Gross profit increased 61% to $1,540,000 for the three-month periodended April 30, 2004, compared to $956,000 for the same period in fiscal2003.  For the six-

 

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month period ended April 30, 2004, gross profit increased 34% to$2,851,000 from $2,132,000 for the same period in fiscal 2003.  As a percentage of net revenues, the grossprofit for the second quarter of fiscal 2004 increased to 59% compared to 43%in the same period in fiscal 2003.  Forthe six-month period, gross profit as a percentage of net revenues increased to56% from 49% for the same period 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 these services willcontinue to be included in research and development expense as these costs arenot variable in nature and any allocation of costs would be arbitrary and leadto an inconsistent presentation of operating costs as compared with priorperiods. In addition, in the second quarter of fiscal 2003 the Company decidedto discontinue certain 3D product lines and as a result included a $223,000reserve for obsolete inventory in cost of revenues.

 

All operating expense categories in fiscal 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 othercost reductions in the past year in our 2D business, has resulted in an over30% reduction in our second quarter operating expenses, to $1,761,000, incomparison to $2,742,000 in the prior year. The same relationship holds true for the six month periods as well.  In view of these changes to our businessmodel, we have much greater operating leverage than in the past.  We expect that as sales results improve dueto an improving economic climate and the improved competitiveness of our newproducts, our operating expenses will only rise modestly.

 

Sales and marketing expenses decreased 12% to $707,000 forthe three-month period ended April 30, 2004, compared to $803,000 for thesame period in fiscal 2003.  For the six-monthperiod ended April 30, 2004, sales and marketing expenses decreased to$1,340,000 from $1,666,000 for the same period in fiscal 2003.  As a percentage of net revenues, sales andmarketing expenses decreased to 27% for the second quarter of fiscal 2004compared to 36% for the same period in fiscal 2003.  For the six-month period ended April 30, 2004, sales andmarketing expenses as a percentage of net revenues decreased to 27% compared to38% in the same period in fiscal 2003. The Company expects sales and marketing expenses in absolute dollars toremain relatively flat or only increase modestly on a quarterly basis for theremainder fiscal 2004. Increases in sales and marketing expenditures may occurto the extent that revenue growth is achieved.

 

General and administrative expenses decreased 28% to $380,000for the three-month period ended April 30, 2004, compared to $525,000 forthe same period in fiscal 2003.  For thesix-month period ended April 30, 2004, general and administrative expensesdecreased 22% to $743,000 as compared to $948,000 in the same period in fiscal2003. As a percentage of net revenues, general and administrative expensesdecreased to 15% for the second quarter of fiscal 2004 versus 23% for the sameperiod in fiscal 2003. For the six-month period ended April 30, 2004,general and administrative expenses as a percentage of net revenues decreasedto 15% from 22% in the same period in fiscal 2003.  The Company expects general and administrative expenses on aquarterly basis will generally remain at current levels for the remainder offiscal 2004.

 

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Research and development expenses decreased 36% to $674,000for the three-month period ended April 30, 2004, compared to $1,052,000for the same period in fiscal 2003. For the six-month period endedApril 30, 2004, research and development expenses decreased 37% to$1,341,000 from $2,135,000 in the same period in fiscal 2003.  As a percentage of net revenues, researchand development expenses decreased to 26% for the second quarter of fiscal2004, compared to 47% for the second quarter of fiscal 2003. For the six-monthperiod ended April 30, 2004, research and development expenses as apercentage of net revenues decreased to 27% from 49% in the same period infiscal 2003. Again, research and development expenses should remain at or onlyslightly above these levels for the remainder of the fiscal year.

 

The restructuring costs reported in the second quarter of $362,000represent severance charges for employees affected by the elimination of thePPT-861 product operations, the reorganization of our research and developmentactivities and the write-off of PPT-861 related equipment.

 

Interest and other income(loss) decreased to ($2,000) for thethree-month period ended April 30, 2004, compared to $16,000 for the sameperiod in fiscal 2003. For the six-month period, interest and other incomedecreased to $4,000 from $22,000 reported in fiscal 2003.

 

The Company did not record an income tax benefit or expensefor either of the three-month or six-month periods ended April 30, 2004 or2003.

 

The Company’s net loss for the second quarterimproved substantially from year-ago levels, dropping to $223,000 or 2 centsper share, as compared with a loss of $1,770,000 or 18 cents per share for thesame period in fiscal 2003.  Sharesoutstanding for the quarter were approximately 11.8 million versus 10.1 millionin the second 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 April 30, 2004 the Company had cash balances of $2.1million, working capital of approximately $3.6 million and no long-term debt.

 

Over the past nine months, the Company has substantiallyreduced its quarterly net losses as a result of increased revenue and costcutting actions.  In the second quarterof fiscal 2004 the Company incurred a net loss from operations of $221,000which included non-cash charges related to depreciation and amortization of$220,000. The net loss for the quarter improved $1,547,000 from the $1,770,000loss reported in the second quarter of fiscal 2003.  Importantly, the Company generated net positive cash flow from operationsin the quarter and for the six-month period as measured by cash provided byoperating activities.  For the quarter,cash provided by operating activities was $300,000 and for the six-month periodended April 30, 2004, cash provided by operating activities was $53,000.For the six-month period, this represents an improvement of over $1.3 million.

 

The Company has been using its existing cash and cashequivalents to fund the cash needs of its operating activities.  We are carefully monitoring our cashposition and evaluating the need for additional capital to enable us to achieveour short and long-term objectives. If there was a need for additional capital,the Company believes that other sources of financing are available including

 

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sales of its common or preferred stock, external borrowing, customer orvendor financing, customer sponsored research and development projects orinvestments by strategic partners. The avenues that we take to satisfy ourpotential capital requirements will depend in large part on the pace of thegrowth of our revenues, and we will evaluate these alternatives as we obtainbetter visibility of our revenue expectations.

 

TheCompany believes that its current cash balances and available sources ofcapital will enable the Company to meet its operating, working capital andcapital resource obligations through the next twelve months.

 

Therecan be no assurance that the Company will not incur additional losses for alonger period of time, will generate positive cash flow from it operations, orthat the Company will attain or thereafter sustain profitability in any futureperiod.  To the extent that the Companycontinues to incur losses or achieves revenue growth in the future requiring anincrease in working capital, its 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.

 

Asof April 30, 2004, the Company had no outstanding debt.

 

TheCompany leases facilities and equipment under non-cancelable operating leaseagreements.  The Company entered into a ten-year lease in May 1999 forapproximately 59,000 square feet of office and manufacturing space in EdenPrairie, Minnesota. The lease commenced on June 1, 1999 at an initialmonthly rate of approximately $51,000. Annual rental and common areamaintenance (CAM) payment obligations are approximately $900,000 in theaggregate.  The lease agreement alsoincludes a provision whereby in July 2005, the landlord can, at itsoption, require the Company to take 17,000 square feet of additional space inthe same building.  The lease alsoincludes a provision that allows the Company to terminate the lease effectiveMay 30, 2006 in exchange for a $500,000 termination payment.  In view of the current favorable real estateenvironment, the Company is carefully considering exercising its option toterminate the lease early.

 

Workingcapital decreased slightly to $3,575,000 at April 30, 2004 from $3,778,000at October 31, 2003.  The Companyfinanced its operations during the first six months of fiscal 2004 through cashprovided by operations and existing cash and cash equivalents.  Net cash provided by operating activitiesduring the first six months of fiscal 2004 was $53,000.  Accounts receivable decreased $13,000 andinventories increased $190,000 during the first six months of fiscal 2004.  Accounts payable and accrued expensesincreased by $283,000.

 

Net cash used in investing activities was $81,000.  During the first six months endingApril 30, 2004, fixed asset additions totaled $76,000 in comparison with$133,000 in fixed asset additions incurred for the same period in fiscal 2003.The Company expects that fixed asset additions for the remainder of the currentfiscal year will approximate $50,000.

 

TheCompany does not have relationships with unconsolidated entities or financialpartnerships, such as entities often referred to as structured finance orspecial purpose entities, which would have been established for the purpose offacilitating 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.

 

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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 April 30, 2004due to 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 statementswithin the meaning of the Private Securities Litigation Reform Act of 1995,including statements regarding the Company’s expectations, beliefs, intentionsand strategies 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 anduncertainties and could differ materially from those discussed in theforward-looking statements. These statements are based upon the Company’sexpectations regarding a number of factors, including the Company’s ability toobtain additional working capital if necessary to support its operations,changes in worldwide general economic conditions, cyclicality of capitalspending by customers, the Company’s ability to keep pace with technologicaldevelopments and evolving industry standards, worldwide competition, and theCompany’s ability to protect its existing intellectual property from challengesfrom third parties. A detailed description of the factors that could causefuture results to materially differ from the Company’s recent results or thoseprojected in the forward-looking statements are contained in the section entitled“Description of Business” under the caption “Important Factors RegardingForward-Looking Statements” contained in its filing with the Securities andExchange Commission on Form 10-KSB for the year ended October 31, 2003 andother reports filed with the Securities and Exchange Commission.

 

Item 3:  CONTROLSAND 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 ofApril 30, 2004.  Based upon thisreview, these officers believe that the Company’s disclosure controls andprocedures are effective in ensuring that material information related to theCompany is made known to them by others within the Company.

 

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(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:                                                                                                                                | LEGAL  PROCEEDINGS                                   |
|                                                                                                                                   | None.                                                |
|                                                                                                                                   |                                                 |
| Item 2:                                                                                                                                | CHANGES  IN SECURITIES                               |
|                                                                                                                                   | None.                                                |
|                                                                                                                                   |                                                 |
| Item 3:                                                                                                                                | DEFAULTS UPON SENIOR SECURITIES                      |
|                                                                                                                                   | Not Applicable.                                      |
|                                                                                                                                   |                                                 |
| Item 4:                                                                                                                                | SUBMISSION  OF MATTERS TO A VOTE OF SECURITY HOLDERS |
| On March 23, 2004, the Company held its Annual Meeting of  Shareholders.  At the meeting, the  following actions were taken: |

 

Election of Directors

 

The following persons were elected to the Company’s Board of Directors,receiving the votes set forth opposite their names:

 

|                  |   | **For**    |   | **Withheld** |   |
|-----------------------|--------|------------|--------|--------------|--------|
| Joseph C. Christenson |   | 11,340,020 |   | 102,283      |   |
| Robert W. Heller      |   | 11,419,107 |   | 23,196       |   |
| David C. Malmberg     |   | 11,415,807 |   | 24,496       |   |
| Peter R. Peterson     |   | 11,330,607 |   | 111,696      |   |
| Benno G. Sand         |   | 11,419,107 |   | 23,196       |   |

 

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Amendment to the Employee Stock Purchase Plan

 

An amendment to the Employee Stock Purchase Plan to increase the numberof shares issuable under the Plan from 300,000 shares to 600,000 shares wasapproved by the following vote.

 
|    | For                              |   | 7,154,234 |   |
|---------|----------------------------------|--------|-----------|--------|
|    | Against                          |   | 237,733   |   |
|    | Abstain                          |   | 8,549     |   |
|    | Broker Non-Vote                  |   | 4,041,787 |   |
|    |                             |   |      |   |
| Item 5: | OTHER INFORMATION                |   |      |   |
|    | None.                            |   |      |   |
|    |                             |   |      |   |
| Item 6: | EXHIBITS AND REPORTS ON 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- 14 and15d-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 pursuantSection 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. §1350).

 

(b)              Reportson Form 8-K.

 

The Company filed a Form 8-K dated February 17, 2004 reportingunder Item 12 its results of operations for the quarter ended January 31,2004, and filing as an exhibit under Item 7 its press release dated February 17,2004 reporting these results.

 

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SIGNATURES

 

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

 
|                     | PPT VISION, INC.                              |
|--------------------------|-----------------------------------------------|
|                     |                                          |
| Date: June 11, 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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