**SECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

 

**Form 10-QSB**

 

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

 

**Forthe Quarterly Period Ended April 30, 2003**

**CommissionFile Number 0-11518**

 

**PPT VISION, INC.**

(Exact name ofSmall Business Issuer as specified 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 filed by Section 13 or 15(d) of theExchange Act during the preceding 12 months (or for such shorter period thatthe registrant was required to file such reports), and (2) has been subject tosuch filing requirements for the last 90 days. Yes ý  No  ̈

 

Shares of $.10 par valuecommon stock outstanding at June 13, 2003: 10,114,091

 

 

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INDEX

 

PPT VISION, INC.

 
| Part I.  | Financial Information                                                                       |
|----------|---------------------------------------------------------------------------------------------|
|     |                                                                                        |
| Item 1.  | Financial Statements                                                                        |
|     |                                                                                        |
|     | Balance Sheets as of April 30, 2003 and October  31, 2002                                   |
|     |                                                                                        |
|     | Income Statements for the Six Months Ended April  30, 2003 and April 30, 2002               |
|     |                                                                                        |
|     | Statements of Cash Flows for the Six Months  Ended April 30, 2003 and April 30, 2002        |
|     |                                                                                        |
|     | Notes to Interim Financial Statements–April 30,  2003                                  |
|     |                                                                                        |
| Item 2.  | Management’s Discussion and Analysis of  Financial Condition and Results of Operations |
|     |                                                                                        |
| Item 3.  | Controls and Procedures                                                                     |
|     |                                                                                        |
| Part II. | Other Information                                                                           |
|     |                                                                                        |
| Item 1.  | Legal Proceedings                                                                           |
|     |                                                                                        |
| Item 2.  | Changes in  Securities                                                                      |
|     |                                                                                        |
| 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                                                                                  |
|     |                                                                                        |
|     | Certifications                                                                              |

 

2

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PPT VISION, INC.

 

BALANCE SHEETS

 
|                                             |   | **April 30,  2003** |      | **October  31, 2002** |   |
|--------------------------------------------------|--------|---------------------|-----------|-----------------------|--------|
|                                             |   | **(unaudited)**     |      |                  |   |
| ASSETS                                           |   |                |      |                  |   |
| Cash  and cash equivalents                       |   | $                   | 1,512,000 |                  | $      | 2,932,000 |   |
| Accounts  receivable, net                        |   | 2,329,000           |      | 1,843,000             |   |
| Inventories:                                     |   |                |      |                  |   |
| Manufactured  and purchased parts                |   | 931,000             |      | 1,339,000             |   |
| Work-in-process                                  |   | 193,000             |      | 449,000               |   |
| Finished  goods                                  |   | 64,000              |      | 65,000                |   |
| Total  inventories, net                          |   | 1,188,000           |      | 1,853,000             |   |
| Other  current assets                            |   | 263,000             |      | 294,000               |   |
| Total  current assets                            |   | 5,292,000           |      | 6,922,000             |   |
|                                             |   |                |      |                  |   |
| Fixed  assets, net                               |   | 994,000             |      | 1,417,000             |   |
| Intangible  assets, net                          |   | 2,375,000           |      | 2,545,000             |   |
| Other  assets                                    |   | 53,000              |      | 53,000                |   |
| Total  assets                                    |   | $                   | 8,714,000 |                  | $      | 10,937,000 |   |
|                                             |   |                |      |                  |   |
| LIABILITIES  AND SHAREHOLDERS’ EQUITY       |   |                |      |                  |   |
| Accounts  payable and accrued expenses           |   | $                   | 1,329,000 |                  | $      | 1,269,000 |   |
| Deferred  revenue – customer advances       |   | 680,000             |      | 24,000                |   |
| Total  current liabilities                       |   | 2,009,000           |      | 1,293,000             |   |
|                                             |   |                |      |                  |   |
| Shareholders’  equity:                      |   |                |      |                  |   |
| Common  stock                                    |   | 1,007,000           |      | 1,007,000             |   |
| Capital  in excess of par value                  |   | 34,112,000          |      | 34,094,000            |   |
| Accumulated  deficit                             |   | (28,414,000)        |      | (25,457,000           | )      |
| Total  shareholders’ equity                 |   | 6,705,000           |      | 9,644,000             |   |
| Total  liabilities and shareholders’ equity |   | $                   | 8,714,000 |                  | $      | 10,937,000 |   |

 

See accompanyingnotes to condensed financial statements

 

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PPT VISION, INC.INCOME STATEMENTS(UNAUDITED)

 
|                                         |   | **Three  Months Ended  April 30,** |       | **Six Months  Ended  April 30,** |   |
|----------------------------------------------|--------|------------------------------------|------------|----------------------------------|--------|
|                                         |   | **2003**                           |       | **2002**                         |   | **2003** |   | **2002** |   |
| Net  revenues                                |   | $                                  | 2,237,000  |                             | $      | 1,607,000 |   | $ | 4,361,000 |   | $ | 3,263,000 |   |
| Cost  of revenues                            |   | 1,281,000                          |       | 805,000                          |   | 2,229,000 |   | 1,740,000 |   |
| Gross  profit                                |   | 956,000                            |       | 802,000                          |   | 2,132,000 |   | 1,523,000 |   |
|                                         |   |                               |       |                             |   |   |   |   |   |
| Expenses:                                    |   |                               |       |                             |   |   |   |   |   |
| Sales  and marketing                         |   | 803,000                            |       | 823,000                          |   | 1,666,000 |   | 1,649,000 |   |
| General  and administrative                  |   | 525,000                            |       | 432,000                          |   | 948,000 |   | 845,000 |   |
| Restructuring  and other                     |   | 362,000                            |       | —                           |   | 362,000 |   | — |   |
| Research  and development                    |   | 1,052,000                          |       | 1,165,000                        |   | 2,135,000 |   | 2,258,000 |   |
| Total  expenses                              |   | 2,742,000                          |       | 2,420,000                        |   | 5,111,000 |   | 4,752,000 |   |
| Loss  from operations                        |   | (1,786,000                         | )          | (1,618,000                       | )      | (2,979,000 | ) | (3,229,000 | ) |
|                                         |   |                               |       |                             |   |   |   |   |   |
| Interest  and other income                   |   | 16,000                             |       | 6,000                            |   | 22,000 |   | 37,000 |   |
| Net  loss                                    |   | $                                  | (1,770,000 | )                                | $      | (1,612,000 | ) | $ | (2,957,000  | ) | $ | (3,192,000 | ) |
| Per  share data:                             |   |                               |       |                             |   |   |   |   |   |
| Weighted  average basic shares outstanding   |   | 10,068,000                         |       | 5,512,000                        |   | 10,068,000 |   | 5,512,000 |   |
| Weighted  average diluted shares outstanding |   | 10,068,000                         |       | 5,512,000                        |   | 10,068,000 |   | 5,512,000 |   |
| Basic  and diluted loss per common share     |   | $                                  | (0.18      | )                                | $      | (0.29 | ) | $ | (0.29 | ) | $ | (0.58 | ) |

 

See accompanyingnotes to condensed financial statements

 

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PPT VISION, INC.

STATEMENTS OF CASH FLOWS

(UNAUDITED)

 
|                                                                         |   | **Six Months  Ended  April 30, 2003** |       | **Six Months  Ended  April 30, 2002** |   |
|------------------------------------------------------------------------------|--------|---------------------------------------|------------|---------------------------------------|--------|
| Net  loss                                                                    |   | $                                     | (2,957,000 | )                                     | $      | (3,192,000 | ) |
| Adjustments  to reconcile net loss to net cash used in operating activities: |   |                                  |       |                                  |   |
| Depreciation  and amortization                                               |   | 611,000                               |       | 684,000                               |   |
| Loss  on disposal of fixed assets and other                                  |   | 154,000                               |       | —                                |   |
| Realized  loss on sale of investments                                        |   | —                                |       | (8,000                                | )      |
| Change  in assets and liabilities                                            |   |                                  |       |                                  |   |
| Accounts  receivable                                                         |   | (486,000                              | )          | 692,000                               |   |
| Inventories                                                                  |   | 665,000                               |       | (285,000                              | )      |
| Other  assets                                                                |   | 31,000                                |       | (88,000                               | )      |
| Accounts  payable and accrued expenses                                       |   | 59,000                                |       | 264,000                               |   |
| Deferred  revenue – customer advances                                   |   | 656,000                               |       | 179,000                               |   |
| Total  adjustments                                                           |   | 1,690,000                             |       | 1,438,000                             |   |
| Net  cash used in operating activities                                       |   | (1,267,000                            | )          | (1,754,000                            | )      |
|                                                                         |   |                                  |       |                                  |   |
| Cash  flows from investing activities:                                       |   |                                  |       |                                  |   |
| Purchase  of fixed assets                                                    |   | (133,000                              | )          | (98,000                               | )      |
| Sales  and maturities of investments                                         |   | —                                |       | 500,000                               |   |
| Net  investment in other long-term assets                                    |   | (20,000                               | )          | (17,000                               | )      |
| Net  cash provided by (used in) investing activities                         |   | (153,000                              | )          | 385,000                               |   |
|                                                                         |   |                                  |       |                                  |   |
| Cash  flows from financing activities                                        |   | —                                |       | —                                |   |
|                                                                         |   |                                  |       |                                  |   |
| Net  decrease in cash and cash equivalents                                   |   | (1,420,000                            | )          | (1,369,000                            | )      |
|                                                                         |   |                                  |       |                                  |   |
| Cash  and cash equivalents at beginning of year                              |   | 2,932,000                             |       | 2,805,000                             |   |
|                                                                         |   |                                  |       |                                  |   |
| Cash  and cash equivalents at end of period                                  |   | $                                     | 1,512,000  |                                  | $      | 1,436,000 |   |

 

See accompanyingnotes to condensed financial statements

 

5

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PPT VISION, INC.

NOTES TO INTERIM FINANCIALSTATEMENTS

(UNAUDITED)

April 30, 2003

 

NOTE A – DESCRIPTION OFBUSINESS

 

PPT VISION, Inc. develops and markets 2D and 3Dmachine vision-based automated inspection systems for manufacturingapplications.  Machine vision-basedsystems enable manufacturers to increase the quality of manufactured parts andimprove the productivity of manufacturing processes. The Company’s 2D and 3Dmachine vision product lines are sold on a global basis to original equipmentmanufacturers (OEMs), system integrators, machine builders, and end-users,primarily in the electronic and semiconductor component, automotive, medicaldevice, and packaged goods industries. The Company’s *Speed*Scan 3DTMsensor product incorporates PPT VISION’s patented high-speed Scanning MoiréInterferometryTM technology.

 

NOTE B – BASIS OFPRESENTATION

 

The accompanyingunaudited condensed financial statements have been prepared in accordance withgenerally accepted accounting principles for interim financial information andwith the instructions to Form 10-QSB and Rule 10-01 of Regulation S-X.  Accordingly, they do not include all of theinformation and footnotes required by generally accepted accounting principlesfor complete financial statements.  Inthe opinion of management, all adjustments (consisting of normal recurringaccruals) considered necessary for a fair presentation have been included.

 

The Balance Sheet atOctober 31, 2002 has been derived from the Company’s audited financialstatements for the fiscal year ended October 31, 2002 but does not include allof the information and footnotes required by generally accepted accountingprinciples for complete financial statements.

 

For further information,refer to the financial statements and footnotes thereto included in theCompany’s annual report on Form 10-KSB for the year ended October 31, 2002.

 

NOTE C – LIQUIDITY ANDCAPITAL RESOURCES

 

TheCompany has incurred net losses and negative cash flows from operatingactivities in each of the past three years and has an accumulated deficit of$28.4 million at April 30, 2003. During fiscal year 2002, the Company raisedapproximately $4.3 million through its Shareholder Rights Offering to providefor these capital needs and as of April 30, 2003, the Company had $1.5million of cash, $3.3 million of working capital and no long-term debt.However, the Company expects to incur losses and negative cash flows for fiscal2003 and the continued execution of the Company’s business plan is dependentupon raising sufficient capital to support future operations.

 

6

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Inorder to address the need for additional capital, in January 2003, the Companyobtained a letter of commitment from a shareholder to provide up to $750,000 ineither debt or equity financing through April 2004 depending on the needs ofthe Company. The Company also believes that other sources of financing areavailable to fund future operations including lowering the exercise price ofthe 2.242 million outstanding warrants and the subsequent exercise of thesewarrants, sales of its common or preferred stock, external borrowing, customeror vendor financing, customer sponsored research and development projects orinvestments by strategic partners. There can be no assurance, however, thatother sources of financing or capital will be available on acceptable terms orat all. The failure to obtain additional capital as needed may have an adverseeffect on the Company’s ability to continue to operate at current levels andmay not allow the Company to take advantage of future opportunities or respondto competitive pressures or unanticipated requirements, which could seriouslyharm its business, financial position, results of operations and cash flows.

 

NOTE D – EARNINGS PERSHARE

 

Infiscal 2002, the Company issued warrants to purchase 2,242,000 shares of theCompany’s common stock in connection with a shareholder rights offering.  At April 30, 2003, options to purchase1,122,950 shares and warrants to purchase 2,267,000 shares of the Company’scommon stock were not considered in the calculation of diluted earnings pershare.  At April 30, 2002, options topurchase 660,000 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 lossfor both periods, the inclusion of the aforementioned shares would have beenanti-dilutive.

 

NOTEE – CUSTOMER GEOGRAPHIC DATA

 

The following table sets forth the percentage of theCompany’s net revenues (including sales delivered through internationaldistributors) by geographic location for the quarter ended April 30, 2003 andfor the same period in fiscal year 2002:

 

| **Quarter Ended April 30,** |   | **2003** |   | **2002** |   |
|-----------------------------|--------|----------|--------|----------|--------|
| United States               |   | 32       | %      | 66       | %      |
| Europe and Canada           |   | 25       | %      | 4        | %      |
| Asia-Pacific                |   | 43       | %      | 23       | %      |
| South America               |   | 0        | %      | 7        | %      |

 

NOTE F – STOCK-BASED COMPENSATION

 

InDecember 2002, the Financial Accounting Standards Board issued Statement ofFinancial Accounting Standard (SFAS) No. 148, “Accounting for Stock-BasedCompensation—Transition and Disclosure—an amendment of FASB Statement No.123.”  The Company intends to continuewith its current practice of applying the recognition and measurement principlesof APB No. 25, “Accounting for Stock Issued to Employees.”  The Company will adopt the disclosurerequirements of SFAS No. 148 in its discussion of stock based employeecompensation but will not implement the alternative transition options made availableby the standard.

 

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The intrinsic valuemethod is used to account stock-based compensation plans.  If compensation expense had been determinedbased on the fair value method with pro forma compensation expense reflectedover the vesting period, net income (loss) and earnings per share (loss) forthe three and six month periods ended April 30, 2003 and 2002 would have beenadjusted to the pro forma amounts indicated below:

 

| **Three Months EndedApril 30,** |   |        |   | **2003** |      | **2002** |   |
|--------------------------------------|--------|-------------|--------|----------|-----------|----------|--------|
| Net  loss                            |   | As reported |   | $        | 1,770,000 |     | $      | 1,612,000 |   |
|                                 |   | Pro forma   |   | $        | 1,812,000 |     | $      | 1,690,000 |   |
|                                 |   |        |   |     |      |     |   |
| Basic  and diluted (loss) per share  |   | As reported |   | $        | (0.18     | )        | $      | (0.29 | ) |
|                                 |   | Pro forma   |   | $        | (0.18     | )        | $      | (0.31 | ) |

 

| **Six Months Ended  April 30,** |   |        |   | **2003** |      | **2002** |   |
|--------------------------------------|--------|-------------|--------|----------|-----------|----------|--------|
| Net  loss                            |   | As reported |   | $        | 2,957,000 |     | $      | 3,192,000 |   |
|                                 |   | Pro forma   |   | $        | 3,086,000 |     | $      | 3,345,000 |   |
|                                 |   |        |   |     |      |     |   |
| Basic  and diluted (loss) per share  |   | As reported |   | $        | (0.29     | )        | $      | (0.58 | ) |
|                                 |   | Pro forma   |   | $        | (0.31     | )        | $      | (0.61 | ) |

 

NOTEG – RESTRUCTURING AND OTHER COSTS

 

Duringthe second quarter, PPT implemented a restructuring plan designed tospecifically focus the Company on its traditional core competencies, improvethe efficiency of its product development and marketing efforts, andsignificantly reduce the Company’s operating cost structure.  The restructuring plan includes the closureof the Microelectronics Systems group which primarily involves the eliminationof the PPT861TM inspection product. In addition PPT has consolidatedcertain product development and engineering functions, and implemented certainother cost reduction actions within the Company.  The result of these combined actions has been to reduce the sizeof the workforce by 24% and to reduce annual operating expenses byapproximately $1.8 million. Some of these actions occurred in May, 2003 andaccordingly those costs are not included in these financial statements.

 

Thecosts associated with the decision to discontinue the development, sale andmanufacture of the PPT 861 product line totaled $591,000 and include severancecosts related to 5 positions, inventory and equipment write downs andreductions in the value of certain receivables associated with this division.The amounts related to inventory adjustments are included in cost of goods soldand approximate $249,000.  The accountsreceivable write down of $77,000 has been included in general andadministrative expenses. In addition, severance costs related to thereorganization of our research and development activities and the eliminationof 2 positions, totaled $97,000. An analysis of the restructuring costsrecorded in the quarter is as follows:

 
| Severance             |   | $       | 226,000 |   |
|-----------------------|--------|---------|---------|--------|
| Equipment Write-downs |   | 136,000 |    |
| Total                 |   | $       | 362,000 |   |

 

8

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Paymentsmade in the quarter related to the severance costs were $75,000, leaving aliability balance of $151,000 at April 30, 2003. This amount will be paid overthe next four months.

 

NOTEH – NEW ACCOUNTING PRONOUNCEMENTS

 

EffectiveNovember 1, 2002, the Company adopted Statement of Financial AccountingStandards (SFAS) No. 144, “Accounting for Impairment of Long-LivedAssets”.  SFAS No. 144, effective forfinancial statements for fiscal years beginning after December 15, 2001,addresses issues relating to the implementation of SFAS No. 121, “Accountingfor the Impairment of Long-Lived Assets and for Long-Lived Assets to beDisposed Of,” and develops a single accounting model for long-lived assets tobe disposed of by sale, whether previously held and used or newlyacquired.  The adoption of SFAS No. 144on November 1, 2002, did not have a material impact on the Company’s financialposition or results of operations.

 

InJuly 2002, the Financial Accounting Standards Board issued Statement ofFinancial Accounting Standards No. 146, “Accounting for Costs Associated withExit or Disposal Activities.”  Thisstandard reviews the accounting for certain exit costs and disposal activitiescurrently set forth in Emerging Issues Task Force issue No. 94-3, “LiabilityRecognition for Certain Employee Termination Benefits and Other Costs to Exitan Activity (including Certain Costs Incurred in a Restructuring).” Theprincipal change relates to the requirements necessary for recognition of aliability for a cost associated with an exit or disposal activity.  The new statement requires that a liabilityfor a cost associated with an exit or disposal activity be recognized when theliability is incurred versus the date of commitment to an exit plan.  This statement was effective for exit anddisposal activities initiated after December 31, 2002.  The new standard principally affects theCompany’s ultimate timing of when charges are recorded as opposed to the amountof the ultimate charge.

 

InNovember 2002, the Financial Accounting Standards Board issued FASBInterpretation No. 45, “Guarantor’s Accounting and Disclosure Requirements forGuarantees, Including Indirect Guarantees of Indebtedness of Others.” This interpretationelaborates on the disclosures to be made by a guarantor in its interim andannual financial statements about its obligations under certain guarantees thatit has issued.  It also clarifies (forguarantees issued after January 1, 2003) that a guarantor is required torecognize, at the inception of a guarantee, a liability for the fair value ofthe obligations undertaken in issuing the guarantee.  At April 30, 2003, the Company does not have any significantguarantees or required disclosures under FASB Interpretation No. 45.

 

InJanuary 2003, the Financial Accounting Standards Board issued FASBInterpretation No. 46, “Consolidation of Variable Interest Entities.”  This interpretation addresses therequirements for business enterprises to consolidate related entities in whichthey are determined to be the primary beneficiary as a result of their variableeconomic interests.  The interpretationis intended to provide guidance in judging multiple economic interests in anentity and in determining the primary beneficiary.  The interpretation outlines disclosure requirements for variableinterest entities in existence prior to January 31, 2003, and outlinesconsolidation requirements for variable interest entities created after January31, 2003.  The Company has reviewed itsmajor commercial relationships and its overall economic interests

 

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withother companies.  The review has notresulted in a determination that the Company would be judged to be the primaryeconomic beneficiary in any material relationships, or that any materialentities would be judged to be variable interest entities of the Company.

 

Item2

 

MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF

OPERATIONS

 

Critical AccountingPolicies and Estimates

 

Management’s discussionand analysis of its financial condition and results of operations are based onthe Company’s accompanying unaudited condensed financial statements, which havebeen prepared in accordance with generally accepted accounting principles 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 generally acceptedaccounting principles for complete financial statements.  In the opinion of management, alladjustments (consisting of normal recurring accruals) considered necessary fora fair presentation have been included.

 

The preparation of thesefinancial statements requires management to make certain estimates andassumptions that affect the reported amounts of assets and liabilities as ofthe date of the financial statements and the reported revenues and expensesduring the reporting period.  Managementbases its estimates on historical experience and various other assumptions thatare believed to be reasonable under the circumstances, the results of whichform the basis for making judgments about the carrying values of assets andliabilities.  Actual results coulddiffer from these estimates.

 

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

 

•                  revenuerecognition;

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

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

 

The Company typicallyrecognizes revenue on product sale upon shipment to the end user customers ifcontractual obligations have been substantially met and title and risk of losshave passed to the customer, which is generally the case for sales of 2Dmachine vision systems, spare parts, accessories and 3D machine vision sensorsand systems. The Company also recognizes revenue on products sold todistributors upon shipment because contracts with distributors do not includepost-shipment obligations or any right of return provisions and pricing isfixed at the time of sale.  Revenuerelated to application engineering, product development and customer trainingservices is recognized when the services are performed.

 

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

 

Management establishes valuationreserves on inventory for estimated excess and obsolete inventory equal to thedifference between the cost of inventory and its estimated market value basedon assumptions about future product demand and market conditions.  In view of the rapid pace of technologicalchange in the machine vision industry, the Company generally considersinventory that has had no usage for one year to be obsolete.  In addition, changes in the Company’sproduct offerings or those of the Company’s competitors, may also result inexcess or obsolete inventory levels. Accordingly, these factors will also be considered in the determinationof the market value of inventory.

 

The Company reviews itslong-lived assets for impairment whenever events or changes in circumstancesindicate that the carrying amount of an asset may not be recoverable.  Recoverability of assets to be held and usedis measured 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 increased39% to $2,237,000 for the three-month period ended April 30, 2003, compared tonet revenues of $1,607,000 for the same period in fiscal 2002.  For the six-month period ended April 30,2003, revenues increased 34% to $4,361,000 from $3,263,000 for the same periodin fiscal 2002. Revenues increased 5% as compared with the immediatelypreceding quarter.

 

Unit sales of theCompany’s machine vision systems increased to 139 for the second quarter offiscal 2003 versus 41 for the same period in fiscal 2002. Unit sales for thefirst half of fiscal 2003 increased to 212 from 90 in the first half of fiscal2002.  The increase in revenues reflectsa gradual improvement in the economic conditions of the businesses in theCompany’s core markets.  The decreasingtrend of the average selling price of our equipment is in part the result of alarge sale in the second quarter of fiscal 2003 of our older analogue productsto an OEM customer who was provided a discount due to the quantitypurchased.  In addition we haveexperienced increasing sales of our new Impact 2D machine vision system, whichhas a lower average selling price than our DSL products.

 

Sales to customersoutside the United States represented 68% of gross revenues for the threemonths ended April 30, 2003, compared to 30% for the same period in fiscal2002.  This is primarily the result ofthe shipment of product to a significant OEM customer in the quarter.

 

In view of these resultsand other trends in business activity, we are cautiously optimistic that anupturn is slowly emerging in our key markets. However, the return to more normal capital spending levels in themanufacturing

 

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sector is progressingslowly and unevenly.  Accordingly, weanticipate that revenues will remain at approximately these levels or perhapsincrease gradually over the course of fiscal 2003.

 

While the sales andshipment process is slower than normal, we are experiencing an increase ininterest in our new 2D machine vision products and in our 3D visiontechnology.  Since introducing our newIMPACTTM machine vision micro-system in September 2002, we have nowsold over 68 units, including several to key existing PPT customers and severalimportant new system integration partners. Additionally, we have recently entered into a distribution agreementwith Power/mation Division, Inc., one of the largest distributors of industrialcontrol products in the upper Midwest. We believe that this relationship will help us expose our core 2Dproducts to more potential customers.

 

We have also recentlyannounced a new OEM agreement with Ismeca Europe S.A., a world leading supplierof automation solutions targeted at the semiconductor back-end manufacturingprocess.  PPT will provide both 3D and2D machine vision inspection solutions for incorporation into Ismeca’s new LTMTMseries tray -to-tray and tray-to-tape scanning machines.  This agreement provides for minimum orderquantities of these vision systems over the course of calendar years 2003 and2004.

 

# Expenses

 

During the secondquarter, PPT implemented a number of actions to reduce the current level ofoperating costs and future working capital requirements. After a careful evaluation of our product offeringsas compared with the traditional core competencies of PPT Vision and ouravailable financial resources, PPT implemented a restructuring plan thatresulted in the following actions:

 

First,the elimination of the turnkey PPT 861TM inspection system from our productline.

 

Second,a consolidation of product development and engineering functions within theCompany.

 

Third,certain other operating cost reductions that have touched all areas of theCompany.

 

Takentogether, this restructuring effort has resulted in a 24% reduction in the sizeof PPT’s workforce and a $1.8 million reduction in annual operating expenses.As a result, our quarterly revenue requirement to break even on a cash basis isnow approximately $2.7 million. PPT recorded approximately $688,000 of chargesin the quarter primarily related to severance and asset impairment write-downsrelated to these actions.  Approximately$591,000 of these costs related to the elimination of the PPT 861 product linewith the remaining costs of $97,000 related to severance charges associatedwith the realignment of our research and development activities.  The inventory adjustments related to the decisionto terminate production of the PPT 861 product totaled $249,000 and wererecorded in costs of goods sold.  Allremaining costs were recorded in operating costs.

 

Gross profit increased19% to $956,000 for the three-month period ended April 30, 2003, compared to$802,000 for the same period in fiscal 2002. For the six-month period ended April 30, 2003, gross profit increased40% to $2,132,000 from

 

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$1,523,000 for the sameperiod in fiscal 2002.  As a percentageof net revenues, the gross profit for the second quarter of fiscal 2003decreased to 43% compared to 50% in the same period in fiscal 2002.  For the six month period, gross profit as apercentage of net revenues increased slightly to 49% from 47% for the sameperiod in fiscal 2002.  The increase ingross profit in absolute dollars is the direct result of the increase inrevenues realized in fiscal 2003 over fiscal 2002.  The decrease in gross profit on a percentage basis for thethree-month period ended April 30, 2003 is attributed to the non-recurringcharges related to our decision to shutdown our PPT 861 product line. Theamount of the PPT 861 product shutdown charges included in cost of goods soldwere $249,000.  This charge had an 11%and 6% impact on gross margins for the three month and six month periods endedApril 30, 2003, respectively.

 

Sales and marketingexpenses decreased 2% to $803,000 for the three-month period ended April 30,2003, compared to $823,000 for the same period in fiscal 2002.  For the six-month period ended April30,2003, sales and marketing expenses increased slightly to $1,666,000 from$1,649,000 for the same period in fiscal 2002. As a percentage of net revenues, sales and marketing expenses decreasedto 36% for the second quarter of fiscal 2003 compared to 51% for the sameperiod in fiscal 2002.  For thesix-month period ended April 30,2003, sales and marketing expenses as apercentage of net revenues decreased to 38% compared to 51% in the same periodin fiscal 2002.  The Company expectssales and marketing expenses in absolute dollars to decrease slightly on aquarterly basis during the second half of fiscal 2003 as a result of the costreduction actions that were recently implemented. Increases in sales andmarketing expenditures beyond this current expectation may occur to the extentthat revenue growth is achieved.

 

General andadministrative expenses increased 22% to $525,000 for the three-month periodended April 30, 2003, compared to $432,000 for the same period in fiscal2002.  For the six-month period endedApril 30,2003, general and administrative expenses increased to $948,000 ascompared to $845,000 in the same period in fiscal 2002. As a percentage of netrevenues, general and administrative expenses decreased to 23% for the secondquarter of fiscal 2003 versus 27% for the same period in fiscal 2002. For thesix-month period ended April 30,2003, general and administrative expenses as apercentage of net revenues decreased to 22% from 26% in the same period infiscal 2002.  General and administrativeexpenses in this quarter included $77,000 related to the write-down of accountsreceivables related to the shutdown of our PPT 861 product.  The Company expects general andadministrative expenses to stay relatively the same during the remainder of fiscal2003.

 

Research and developmentexpenses decreased 10% to $1,052,000 for the three-month period ended April 30,2003, compared to $1,165,000 for the same period in fiscal 2002. For thesix-month period ended April 30,2003, research and development expensesdecreased 5% to $2,135,000 from $2,258,000 in the same period in fiscal2002.  As a percentage of net revenues,research and development expenses decreased to 47% for the second quarter offiscal 2003, compared to 72% for the second quarter of fiscal 2002. For thesix-month period ended April 30,2003, research and development expenses as apercentage of net revenues decreased to 49% from 69% in the same period infiscal 2002. The Company expects that research and development costs willdecrease further on a quarterly basis over the second half of fiscal 2003 asthe effect of the cost reduction efforts recently implemented are fullyrecognized.

 

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Therestructuring costs reported in the second quarter of $362,000 representseverance charges for employees affected by the elimination of the PPT-861product operations, the reorganization of our research and developmentactivities and the write-off of PPT-861 related equipment. The finalportion of our cost reduction plan was implemented early in the third quarterand accordingly, additional severance related charges will be recognized inthat quarter.

 

Interest and other incomeincreased to $16,000 for the three-month period ended April 30, 2003, comparedto $6,000 for the same period in fiscal 2002. For the six-month period,interest and other income decreased to $22,000 from $37,000 reported in fiscal2002.

 

The Company did notrecord an income tax benefit or expense for either of the three-month or six-monthperiods ended April 30, 2003 or 2002.

 

LIQUIDITY AND CAPITALRESOURCES

 

The Company incurred anet loss of approximately $1.8 million for the quarter ended April 30, 2003 andhas an accumulated deficit of $28.4 million as of April 30, 2003. In addition,the Company expects to incur losses for the next several quarters of thecurrent fiscal year, and the audited financial statements contained in its Form10-KSB for the year ended October 31, 2002 contained a going concern opinionfrom its independent auditor.  TheCompany has been using its existing cash and cash equivalents to fund the cashneeds of its operating activities.  Weare carefully monitoring our cash position and evaluating the need foradditional capital to enable us to achieve our short and long-term objectives.

 

During the secondquarter, the Company implemented several important cost cutting actionsdesigned to significantly reduce our operating costs and to reduce the futurecapital requirements of the business. As a result of the actions taken, the Company reduced annual operatingexpenses by approximately $1.8 million which served to reduce our quarterlyrevenue requirement to achieve “break-even” on a cash basis to approximately$2.7 million.  In addition, we areactively working to sub-lease a substantial portion of our office building tofurther reduce our quarterly cash requirements.  However, the real estate market is very weak and there can be noassurance that we will be able to actually sub-lease any portion of ourbuilding on acceptable terms.

 

The Company also recentlyentered into an OEM agreement with ISMECA Europe, S.A. that calls for PPT toprovide both 3D and 2D machine vision inspection solutions for incorporationinto Ismeca’s new LTMTM series tray-to-tray and tray-to-tape scanningmachines.  This agreement provides forminimum order quantities of these vision systems over the course of calendaryears 2003 and 2004. As part of this agreement, Ismeca provided a cash advanceof $575,000 that will be used to offset a portion of the sales price of theunits sold to Ismeca. These amounts are included in deferred revenue on theBalance Sheet until the units are shipped to the customer.

 

The avenues that we taketo satisfy our potential capital requirements will depend in large part on thepace of the growth of our revenues, and we will evaluate these alternatives aswe obtain better visibility of our revenue expectations over the next severalquarters.  While the Company anticipatesthat it will be able to generate cash from operations in a future period, wehave

 

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considered other measuresto maintain or provide necessary operating capital.  These measures include cost cutting actions, customer advancesand external debt or equity financing. In January 2003, the Company obtained a $750,000 commitment from ashareholder to provide debt or equity financing through April of 2004 dependingon the Company’s needs. In addition, as noted above, we received a significantcash advance from Ismeca in connection with our OEM agreement that strengthenedour working capital position.

 

The Company believes thatother financing alternatives are available including lowering the exerciseprice of the 2.242 million outstanding warrants and the subsequent exercise ofthese warrants, the issuance of additional stock to the public, strategicpartnerships, vendor financing, customer-sponsored research and developmentprojects or external borrowing against our accounts receivable and inventory.  The Company believes that it will be able toraise sufficient funds through these sources so that the Company will be ableto meet its working capital and capital resource obligations through the nexttwelve months.

 

There can be no assurancethat the Company will not incur additional losses for a longer period of time,will generate positive cash flow from it operations, or that the Company willattain or thereafter sustain profitability in any future period.  To the extent that the Company continues toincur losses or achieves revenue growth in the future, its operating andinvesting activities may use cash and, consequentially, such losses or growthwill require the Company to obtain additional sources of financing to providefor these cash needs.  There can be noassurance, however, that additional capital will be available on acceptableterms or at all, and the failure to obtain additional capital as needed mayhave an adverse effect on the Company’s ability to continue to operate atcurrent levels, and may not allow the Company to take advantage of futureopportunities or respond to competitive pressures or unanticipatedrequirements, which could seriously harm its business, financial position,results of operations and cash flows.

 

As of April 30, 2003, theCompany had no outstanding debt.

 

The Company leasesfacilities and equipment under non-cancelable operating lease agreements.  The Company entered into a ten-year leasefor its primary office and manufacturing space in June of 1999.  Annual rental and common area maintenancepayment obligations are approximately $1.0 million.

 

Working capital decreasedto $3,283,000 at April 30, 2003 from $5,629,000 at October 31, 2002.  The Company financed its operations duringthe first six months of fiscal 2003 through existing cash and cashequivalents.  Net cash used in operatingactivities during the first six months of fiscal 2003 was $1,267,000.  Accounts receivable increased $486,000.  Inventories decreased $665,000 during thefirst six months of fiscal 2003.  Accountspayable and accrued expenses increased by $59,000. A significant source of cashfor the quarter was the increase in Deferred Revenues due to the receipt ofadvances from customers for product that is expected to be shipped in futurequarters.

 

Net cash used ininvesting activities was $153,000. During the first six months ending April 30, 2003, fixed asset additionstotaled $133,000 in comparison with $98,000 in fixed asset additions realizedfor the same period in fiscal 2002. Fixed asset additions in the second half of fiscal 2003 are expected tobe lower than incurred in the first six months of the fiscal year.

 

The Company does not haverelationships with unconsolidated entities or financial partnerships, such asentities often referred to as structured finance

 

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or special purposeentities, which would have been established for the purpose of facilitatingoff-balance sheet financial arrangements. As such, the Company is not materially exposed to any financing,liquidity, market or credit risk that could arise if we had engaged in sucharrangements.

 

TheCompany believes it does not have material exposure to quantitative andqualitative market risks. The carrying amounts reflected in the balance sheetsof cash and cash equivalents, trade receivables and trade payables approximatefair value at April 30, 2003 due to the short maturities of these instruments.

 

NEW ACCOUNTINGPRONOUNCEMENTS

 

Information regarding newaccounting pronouncements is included in the Notes to Interim FinancialStatements.

 

FORWARD LOOKINGSTATEMENTS

 

ThisForm 10-QSB contains forward-looking statements within the meaning of Section27A of the Securities Act of 1933 and Section 21E of the Securities ExchangeAct of 1934, including statements regarding the Company’s expectations,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.

 

TheCompany’s actual results are subject to risks and uncertainties and coulddiffer materially from those discussed in the forward-looking statements.  These statements are based upon theCompany’s expectations regarding a number of factors, including the Company’sability to obtain additional working capital if necessary to support itsoperations, changes in worldwide general economic conditions, cyclicality ofcapital spending by customers, the Company’s ability to keep pace withtechnological developments and evolving industry standards, worldwidecompetition, and the Company’s ability to protect its existing intellectualproperty from challenges from third parties. A detailed description of 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 “ImportantFactors Regarding Forward-Looking Statements” on Form 10-KSB for the year endedOctober 31, 2002, filed with the SEC.

 

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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 within 90 daysprior to the filing of this report. Based upon this review, these officers believe that the Company’sdisclosure controls and procedures are effective in ensuring that materialinformation related to the Company is made known to them by others within theCompany.

 

(b) Changes in InternalControls.

 

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

 

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PART II.                    OtherInformation

 

Item1:           LEGAL PROCEEDINGS

 

None.

 

Item2:           CHANGES IN SECURITIES AND USE OFPROCEEDS

 

None.

 

Item3:           DEFAULTS UPON SENIOR SECURITIES

 

Not Applicable

 

Item4:           SUBMISSION OF MATTERS TO A VOTE OFSECURITY HOLDERS

 

On March 13, 2003, theCompany held its Annual Meeting of Shareholders.  At the meeting, the following actions were taken:

 

Election of Directors

 

The following personswere elected to the Company’s Board of Directors, receiving the votes set forthopposite their names:

 
|                   |   | **For**   |   | **Withheld** |   |
|------------------------|--------|-----------|--------|--------------|--------|
|                   |   |      |   |         |   |
| Joseph  C. Christenson |   | 9,326,953 |   | 416,736      |   |
| Robert  W. Heller      |   | 9,333,257 |   | 410,432      |   |
| David  C. Malmberg     |   | 9,333,014 |   | 410,675      |   |
| Peter  R. Peterson     |   | 9,328,575 |   | 415,114      |   |
| Benno  G. Sand         |   | 9,329,014 |   | 414,675      |   |

 

Amendments to the 2000Stock Option Plan

 

Amendments to the 2000Stock Option Plan to (i) increase the number of shares issuable under the Planfrom 500,000 to 1,100,000 shares and (ii) increase the maximum number ofoptions that can be granted to a person in one fiscal year from 50,000 to100,000 shares were approved by the following vote:

 
| For              |   | 6,197,690 |   |
|------------------|--------|-----------|--------|
| Against          |   | 1,164,355 |   |
| Abstain          |   | 15,047    |   |
| Broker  Non-Vote |   | 2,366,597 |   |

 

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Amendment to the EmployeeStock Purchase Plan

 

An amendment to theEmployee Stock Purchase Plan to increase the number of shares issuable underthe Plan from 150,000 shares to 300,000 shares was approved by the followingvote.

 
| For              |   | 6,692,819 |   |
|------------------|--------|-----------|--------|
| Against          |   | 646,816   |   |
| Abstain          |   | 37,457    |   |
| Broker  Non-Vote |   | 2,366,597 |   |

 

Item5:           OTHER INFORMATION

 

None.

 

Item6:           EXHIBITS AND REPORTS ON FORM 8-K

 

(a)               Exhibits:

None.

 

(b)              Reports on Form 8-K

None.

 

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SIGNATURES

 

Pursuant to therequirements of the Securities Exchange Act of 1934, the registrant has dulycaused this report to be signed on its behalf by the undersigned thereunto dulyauthorized.

 
|                |   | PPT VISION, INC.                               |
|---------------------|--------|------------------------------------------------|
|                |   |                                           |
| Date: June 13, 2003 |   |                                           |
|                |   |                                           |
|                |   | /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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**CERTIFICATIONS**

 

I,Joseph C. Christenson, certify that:

 

1.   Ihave reviewed this quarterly report on Form 10-QSB of PPT Vision, Inc.

 

2.   Basedon my knowledge, this quarterly report does not contain any untrue statement ofa material fact or omit to state a material fact necessary to make thestatements made, in light of the circumstances under which such statements weremade, not misleading with respect to the period covered by this quarterlyreport;

 

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

 

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

 

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

 

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

 

c)   presentedin this quarterly report our conclusions about the effectiveness of thedisclosure controls and procedures based on our evaluation as of the EvaluationDate;

 

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

 

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

 

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

 

6.   Theregistrant’s other certifying officer and I have indicated in this quarterlyreport whether or not there were significant changes in internal controls or inother factors that could significantly affect internal controls subsequent tothe date of our most recent evaluation, including any corrective actions withregard to significant deficiencies and material weaknesses.

 
| Date:  | June 13, 2003 |                             |
|--------|---------------|----------------------------------|
|   |          | /s/ Joseph C. Christenson   |   |
|   |          | Joseph C. Christenson, President |

 

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I,Timothy C. Clayton, certify that:

 

1.   Ihave reviewed this quarterly report on Form 10-QSB of PPT vision, Inc.

 

 2.  Basedon my knowledge, this quarterly report does not contain any untrue statement ofa material fact or omit to state a material fact necessary to make thestatements made, in light of the circumstances under which such statements weremade, not misleading with respect to the period covered by this quarterlyreport;

 

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

 

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

 

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

 

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

 

c)   presentedin this quarterly report our conclusions about the effectiveness of thedisclosure controls and procedures based on our evaluation as of the EvaluationDate;

 

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

 

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

 

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

 

6.   Theregistrant’s other certifying officer and I have indicated in this quarterlyreport whether or not there were significant changes in internal controls or inother factors that could significantly affect internal controls subsequent tothe date of our most recent evaluation, including any corrective actions withregard to significant deficiencies and material weaknesses.

 
| Date:  June 13, 2003 |   |
|--------------------------------|--------|
|                           |   |   |
|                           |   | /s/ Timothy C. Clayton |   |
|                           |   | Timothy C. Clayton, Chief Financial Officer |

 

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