**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

**Form 10-QSB**

 

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

 

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

**Commission File Number 0-11518**

 

**PPT VISION, INC.**

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

 

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

 

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

 

Shares of $.10 par value common stock outstanding at March 1, 2004:11,803,801

 

 

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INDEX

 

PPT VISION, INC.

 
| Part I.   | Financial Information                                                                      |   |
|-----------|--------------------------------------------------------------------------------------------|--------|
|      |                                                                                       |   |
| Item 1.   | Financial Statements                                                                       |   |
|      |                                                                                       |   |
|      | Balance  Sheets as of January 31, 2004 and October 31, 2003                                |   |
|      |                                                                                       |   |
|      | Statements of Operations for the Three  Months Ended January 31, 2004 and January 31, 2003 |   |
|      |                                                                                       |   |
|      | Statements of Cash Flows for the Three  Months Ended January 31, 2004 and January 31, 2003 |   |
|      |                                                                                       |   |
|      | Notes to Condensed Financial Statements –  January 31, 2004                           |   |
|      |                                                                                       |   |
| Item 2.   | Management’s  Discussion and Analysis or Plan of Operation                            |   |
|      |                                                                                       |   |
| Item 3.   | Controls and Procedures                                                                    |   |
|      |                                                                                       |   |
| Part  II. | Other  Information                                                                         |   |
|      |                                                                                       |   |
| Item 1.   | Legal  Proceedings                                                                         |   |
|      |                                                                                       |   |
| Item 2.   | Changes  in Securities                                                                     |   |
|      |                                                                                       |   |
| 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

 

 
|                                            |   | **January  31, 2004** |      | **October  31, 2003** |       |
|-------------------------------------------------|--------|-----------------------|-----------|-----------------------|------------|
|                                            |   | **(unaudited)**       |      | **(audited)**         | ** ** |
| ASSETS                                          |   |                  |      |                  |       |
| Cash and cash equivalents                       |   | $                     | 1,806,000 |                  | $          | 2,086,000 |   |
| Accounts receivable, net                        |   | 2,307,000             |      | 2,118,000             |       |
| Inventories:                                    |   |                  |      |                  |       |
| Manufactured and purchased parts                |   | 831,000               |      | 728,000               |       |
| Work-in-process                                 |   | 203,000               |      | 202,000               |       |
| Finished goods                                  |   | 57,000                |      | 91,000                |       |
| Total inventories, net                          |   | 1,091,000             |      | 1,021,000             |       |
| Other current assets                            |   | 265,000               |      | 319,000               |       |
| Total current assets                            |   | 5,469,000             |      | 5,544,000             |       |
|                                            |   |                  |      |                  |       |
| Fixed assets, net                               |   | 601,000               |      | 708,000               |       |
| Intangible assets, net                          |   | 2,053,000             |      | 2,141,000             |       |
| Other assets                                    |   | 53,000                |      | 53,000                |       |
| Total assets                                    |   | $                     | 8,176,000 |                  | $          | 8,446,000 |   |
|                                            |   |                  |      |                  |       |
| LIABILITIES AND SHAREHOLDERS’ EQUITY       |   |                  |      |                  |       |
| Accounts payable and accrued expenses           |   | $                     | 1,261,000 |                  | $          | 1,201,000 |   |
| Deferred revenue – customer advances       |   | 581,000               |      | 565,000               |       |
| Total current liabilities                       |   | 1,842,000             |      | 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                             |   | (29,926,000           | )         | (29,580,000           | )          |
| Total shareholders’ equity                 |   | 6,334,000             |      | 6,680,000             |       |
| Total liabilities and shareholders’ equity |   | $                     | 8,176,000 |                  | $          | 8,446,000 |   |

 

See accompanying notes to condensed financialstatements

 

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PPT VISION, INC.

STATEMENTS OF OPERATIONS

(UNAUDITED)

 

 
|                                        |   | **Three  Months Ended  January 31,** |      |
|---------------------------------------------|--------|--------------------------------------|-----------|
|                                        |   | **2004**                             |      | **2003** |   |
| Revenue:                                    |   |                                 |      |   |   |
| Product Revenue                             |   | $                                    | 2,022,000 |   | $ | 1,807,000 |   |
| Service Revenue                             |   | 409,000                              |      | 317,000 |   |
| Total Revenue                               |   | 2,431,000                            |      | 2,124,000 |   |
|                                        |   |                                 |      |   |   |
| Cost of Sales                               |   | 1,120,000                            |      | 947,000 |   |
| Gross profit                                |   | 1,311,000                            |      | 1,177,000 |   |
|                                        |   |                                 |      |   |   |
| Expenses:                                   |   |                                 |      |   |   |
| Sales and marketing                         |   | 634,000                              |      | 863,000 |   |
| General and administrative                  |   | 362,000                              |      | 423,000 |   |
| Research and development                    |   | 667,000                              |      | 1,084,000 |   |
| Total Expenses                              |   | 1,663,000                            |      | 2,370,000 |   |
|                                        |   |                                 |      |   |   |
| Loss from operations                        |   | (352,000                             | )         | (1,193,000 | ) |
|                                        |   |                                 |      |   |   |
| Interest Income                             |   | 2,000                                |      | 5,000 |   |
| Other Income, Net                           |   | 4,000                                |      | 1,000 |   |
| Net loss                                    |   | $                                    | (346,000  | ) | $ | (1,187,000 | ) |
| Per share data:                             |   |                                 |      |   |   |
| Weighted average basic shares outstanding   |   | 11,803,000                           |      | 10,068,000 |   |
| Weighted average diluted shares outstanding |   | 11,803,000                           |      | 10,068,000 |   |
| Basic and diluted loss per common share     |   | $                                    | (0.03     | ) | $ | (0.12 | ) |

 

See accompanying notes to condensed financialstatements

 

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PPT VISION, INC.

STATEMENTS OF CASH FLOWS

(UNAUDITED)

 

 
|                                                                         |   | **Three  Months  Ended  January 31, 2004** |      | **Three  Months  Ended  January 31, 2003** |   |
|------------------------------------------------------------------------------|--------|--------------------------------------------|-----------|--------------------------------------------|--------|
| Net loss                                                                     |   | $                                          | (346,000  | )                                          | $      | (1,187,000 | ) |
| Adjustments to reconcile net loss to net  cash used in operating activities: |   |                                       |      |                                       |   |
| Depreciation and amortization                                                |   | 228,000                                    |      | 316,000                                    |   |
| Stock based compensation                                                     |   | —                                     |      | —                                     |   |
| Loss on disposal of assets                                                   |   | —                                     |      | —                                     |   |
|                                                                         |   |                                       |      |                                       |   |
| Change in assets and liabilities:                                            |   |                                       |      |                                       |   |
| Accounts receivable                                                          |   | (189,000                                   | )         | (668,000                                   | )      |
| Inventories                                                                  |   | (70,000                                    | )         | 98,000                                     |   |
| Other assets                                                                 |   | 54,000                                     |      | 10,000                                     |   |
| Accounts payable and accrued expenses                                        |   | 60,000                                     |      | 50,000                                     |   |
| Deferred revenue - customer advances                                         |   | 16,000                                     |      | 24,000                                     |   |
| Total adjustments                                                            |   | 99,000                                     |      | (170,000                                   | )      |
| Net cash used in operating activities                                        |   | (247,000                                   | )         | (1,357,000                                 | )      |
|                                                                         |   |                                       |      |                                       |   |
| Cash flows from investing activities:                                        |   |                                       |      |                                       |   |
| Purchase of fixed assets                                                     |   | (31,000                                    | )         | (110,000                                   | )      |
| Net investment in other long-term assets                                     |   | (2,000                                     | )         | (11,000                                    | )      |
| Net cash provided by (used in) investing  activities                         |   | (33,000                                    | )         | (121,000                                   | )      |
|                                                                         |   |                                       |      |                                       |   |
| Cash flows from financing activities:                                        |   |                                       |      |                                       |   |
| Proceeds from the issuance of common stock                                   |   | —                                     |      | —                                     |   |
| Net cash provided by financing activities                                    |   | —                                     |      | —                                     |   |
|                                                                         |   |                                       |      |                                       |   |
| Net (decrease) in cash and cash equivalents                                  |   | (280,000                                   | )         | (1,478,000                                 | )      |
|                                                                         |   |                                       |      |                                       |   |
| Cash and cash equivalents at beginning of  year                              |   | 2,086,000                                  |      | 2,932,000                                  |   |
| Cash and cash equivalents at end of period                                   |   | $                                          | 1,806,000 |                                       | $      | 1,454,000 |   |

 

See accompanying notes to condensed financialstatements

 

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PPT VISION, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS

(UNAUDITED)

January 31, 2004

 

 

NOTE A – DESCRIPTION OF BUSINESS

 

PPT VISION, Inc.designs, manufactures, markets, and integrates 2D and 3D machine vision-basedautomated inspection systems for manufacturing applications. Machinevision-based inspection systems enable manufacturers to increase the quality ofmanufactured parts and improve the productivity of manufacturing processes. TheCompany’s 2D machine vision product line is sold on a global basis toend-users, system integrators, distributors and original equipmentmanufacturers (OEM’s) primarily in the electronic and semiconductor component,automotive, medical device, and packaged goods industries. The Company’sSpeedScan 3DTM sensor, incorporating the Company’s patentedhigh-speed Scanning Moiré InterferometryTM technology is sold tooriginal equipment manufacturers for specific applications targeted atinspection of leaded and bumped components in the semiconductor back-end manufacturingprocess, inspection of surface-mount electronic connectors, and inspection ofcomponents used in hard disk drives.

 

 

NOTE B - BASIS OF PRESENTATION

 

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

 

The Balance Sheet at October 31, 2003 has been derived from the Company’saudited financial statements for the fiscal year ended October 31, 2003 butdoes not include all of the information and footnotes required by accountingprinciples generally accepted in the United States of America for completefinancial statements.

 

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

 

 

NOTE C – REVENUE RECOGNITION AND COST OF SALES

 

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

 

 

NOTE D – LIQUIDITY AND CAPITAL RESOURCES

 

During fiscal year 2003, the Company raisedapproximately $1.1 million through the exercise of warrants that were issued aspart of its fiscal 2002 Shareholder Rights Offering. As of January 31,2004, the Company had $1.8 million of cash, $3.6 million of working capital andno long-term debt.

 

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

 

 

NOTE E – EARNINGS PER SHARE

 

In fiscal 2002, the Company issued warrantsto purchase 2,242,000 shares of the Company’s common stock in connection with aShareholder Rights Offering.  Warrantsto purchase 1.6 million shares of stock were exercised by the expiration dateof September 30, 2003.  The remainingwarrants expired.  At January 31, 2004,options to purchase 1,047,750 shares and warrants to purchase 25,000 shares ofthe Company’s common stock were not considered in the calculation of dilutedearnings per sharer.  At January 31,2003, options to purchase 1,116,500 shares and warrants to purchase 2,267,000shares of the Company’s common stock were not considered in the calculation ofdiluted earnings per share.  As theCompany had a net loss for both periods, the inclusion of outstanding optionsand warrants would have been anti-dilutive.

 

 

NOTE F –STOCK-BASED COMPENSATION

 

The Company uses theintrinsic value method prescribed by Accounting Principles Board Opinion No.25, “Accounting for Stock Issued to Employees,” and related interpretations inaccounting for employee stock options. Under the

 

7

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

 

In December 2002, the 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-basedemployee compensation and also provides required additional disclosures aboutthe method of accounting for stock-based employee compensation. TheCompany adopted the annual disclosure provision of SFAS No. 148 during the yearended October 31, 2003.  The Companychose to not adopt the voluntary change to the fair value based method ofaccounting for stock-based employee compensation, pursuant to SFAS No. 148.

 

The Company has adopted the disclosure-only provisions of SFAS No. 148,Accounting for Stock-Based Compensation. Accordingly, no compensation cost has been recognized with respect tostock options.  Had compensation 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 EndedJanuary 31,** |   |        |   | **2004** |     | **2003** |   |
|----------------------------------------|--------|-------------|--------|----------|----------|----------|--------|
| Net loss                               |   | As reported |   | $        | (346,000 | )        | $      | (1,187,000 | ) |
|                                   |   | Pro forma   |   | $        | (396,000 | )        | $      | (1,295,000 | ) |
|                                   |   |        |   |     |     |     |   |
| Stock based compensation               |   | As reported |   | $        | —   |     | $      | — |   |
|                                   |   | Pro forma   |   | $        | (50,000  | )        | $      | (108,000 | ) |
|                                   |   |        |   |     |     |     |   |
| Basic and diluted loss per share       |   | As reported |   | $        | (0.03    | )        | $      | (0.12 | ) |
|                                   |   | Pro forma   |   | $        | (0.03    | )        | $      | (0.13 | ) |

 

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

 

 

NOTE G – CUSTOMER AND GEOGRAPHIC DATA

 

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

 
| **Three  Months Ended January 31,2004** |   | **2004** |   | **2003** |   |
|-----------------------------------------|--------|----------|--------|----------|--------|
| United States                           |   | 28       | %      | 63       | %      |
| Europe and Canada                       |   | 34       | %      | 16       | %      |
| Asia-Pacific                            |   | 38       | %      | 17       | %      |
| South America                           |   | 0        | %      | 4        | %      |

 

8

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In the three month period ended January 31,2004, revenues from two customers represented approximately 27% and 18% oftotal revenue, respectively. In the three month period ended January 31, 2003,revenues from three customers accounted for 15%, 12%, and 11% of total revenue,respectively.

 

NOTE H – NEW ACCOUNTING PRONOUNCEMENTS

 

In December 2003, the Financial AccountingStandards Board (FASB) issued FASB Interpretation No. 46 (Revised December2003), “Consolidation of Variable Interest Entities, an Interpretation of ARBNo. 51” (FIN 46R).  This standardreplaces FIN 46, Consolidation of Variable Interest Entities” that was issuedin January 2003.  FIN 46R modifies orclarifies various provisions of FIN 46. FIN 46R addresses the consolidation of business enterprises of variableinterest entities (VIEs), as defined by FIN 46R.  FIN 46R exempts certain entities from its requirements andprovides for special effective dates for entities that have fully or partiallyapplied FIN 46 prior to issuance of FIN 46R. Otherwise, application of FIN 46R is required in financial statements ofpublic entities that have interest in structures commonly referred to asspecial purpose entities for periods ending after December 15, 2003.  FIN 46 had no effect on the Company’sfinancial statements for the quarter ended January 31, 2004, as the Company hadno interests in special purpose entities. Application by the Company for all other types of VIEs is required infinancial statements for periods ending no later than the quarter ended January31, 2005.  The Company does not expectthe adoption of FIN 46R to have a material effect on the Company’s financialstatements.

 

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Item 2

 

MANAGEMENT’S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION

 

# Overview

 

PPT VISION,Inc. develops, manufactures and sells 2D and 3D machine vision-based automatedinspection systems that are used by manufacturers to increase the quality ofmanufactured parts and improve the productivity of manufacturingprocesses.  The Company sells 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 14% to $2,431,000 during the first quarter ended January 31,2004 compared to the prior year’s first quarter and its loss decreased to$346,000 or $.03 a share compared to $1,187,000 or $.12 in the prior year’speriod.  The increase in revenuesresulted from a continuing improvement in the Company’s core market while thedecrease in the net loss resulted from higher level of revenues and a lowerinternal cost structure.

 

During thefiscal 2004 first quarter, revenues from outside the United States accountedfor 74% of revenues compared to 33% in the fiscal 2003 first quarter. Theincrease in international revenues resulted from sales to two importantinternational customers.

 

 

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, theydo 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) considerednecessary 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.

 

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

 

•      revenue recognition and costof sales;

 

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

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

 

### Revenue Recognition and Costs of Sales

 

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

 

Costs of Sales include the cost of products sold and the cost of thirdparties application engineers who perform certain installation services at ourrequest for customers.  Cost of sales donot include any costs associated with engineering services performed by PPTemployees as these costs are a fixed component of our operating cost structureand an allocation of a portion of these costs to cost of sales would be arbitraryand lead to inconsistent presentation of gross margins and operatingcosts.  All of the costs associated withthese internal activities are included in research and development 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 future productdemand and market conditions.  In viewof the rapid pace of technological change in the machine vision industry, theCompany generally considers inventory that has had no usage for one year to beobsolete.  In addition, changes in theCompany’s product offerings or those of the Company’s competitors, may alsoresult in excess or obsolete inventory levels. Accordingly, these factors will also be considered in the determinationof the market value of inventory.

 

# Long-Lived and IntangibleAssets

 

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 beimpaired, the impairment to be recognized is measured by the amount by whichthe carrying amount of the assets exceeds the fair value of the assets.

 

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Results of Operations

 

  Revenues

 

Net revenues increased 14% to $2,431,000 for the three-month periodended January 31, 2004, compared to net revenues of $2,124,000 for the sameperiod in fiscal 2003. Unit sales of the Company’s machine vision systemsincreased to 193 for the first quarter of fiscal 2004 versus 73 for the sameperiod in fiscal 2003. In the three month period ended January 31, 2004, revenues fromtwo customers represented approximately 27% and 18%, respectively of totalrevenues. In the three month period ended January 31, 2003, revenues from threecustomers accounted for 15%, 12%, and 11% of total revenue, respectively.

 

The increase in revenues reflects a gradual improvement in the economicconditions 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 new Impact 2Dmachine vision system, which has a lower average selling price than our DSLproducts.

 

Sales to customers outside the United States represented 72% of grossrevenues for the three months ended January 31, 2004, compared to 37% for thesame period in fiscal 2003. The large increase of sales outside the UnitedStates is primarily the result of an increase in business with two importantinternational OEM customers Tokyo Weld and Ismeca.

 

This increase in revenues was driven by our 2D business unit, ourhistoric core business.  2D salesincreased 37% in the first quarter of fiscal 2004 over the first quarter offiscal 2003.  This increase reflects gradual improvement of capital spending in themanufacturing sector and positive customer acceptance of our new IMPACT 2Dmachine vision product line.  Thecontraction of 3D revenue was caused by our strategic shift in this past yearto selling our *Speed*Scan 3Dproduct through OEMs and system integrators as opposed to developing andsupporting completely automated turnkey systems.

 

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 11% to $1,311,000 for the three-month periodended January 31, 2004, compared to $1,177,000 for the same period in fiscal2003.    As a percentage of net revenues,the gross profit for the first quarter of fiscal 2004 decreased slightly to 54%compared to 55% for the same period in fiscal 2003.  Our gross profit marginsfor the first quarter were affected by several factors that served to offseteach other and as a result our gross profit margins were very comparable to theprior year.  One factor that

 

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adversely affected our margins in the quarterwas that we began utilizing third-party application engineers to perform someof our system installation services.  As a result, we retain only a portion of the margin on this servicework.    This practice will have aslight adverse effect on the gross margin comparisons on a quarter over quarterbasis.

 

Margins however, were positively affected inthe quarter by the inclusion in revenue of the amounts related to the servicesprovided to Ismeca.  The costs of theengineers performing these services will continue to be included in researchand development expense as these costs are not variable in nature and anyallocation of costs would be arbitrary and lead to an inconsistent presentationof operating costs as compared with prior periods.

 

The increase in gross profit in absolute dollars for the quarter is theresult of increased revenues and a change in the mix of our sales, with anincreasing amount of sales from services.

 

# All operating expensecategories were positively affected by decisions made last year to change ourstrategy in the 3D area to sell our *Speed*Scan 3D product through OEMs andsystem integrators as opposed to developing and supporting completely automatedturnkey systems.  This change in our 3Dbusiness model, together with certain cost reductions in the past year in our2D business, has resulted in a 30% reduction in our first quarter operatingexpenses, to $1,663,000, in comparison to the prior year.  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.

 

Salesand marketing expenses decreased 26% to $634,000 for the three-month periodended January 31, 2004, compared to $863,000 for the same period in fiscal2003.  As a percentage of net revenues,sales and marketing expenses decreased to 26% for the first quarter of fiscal2004 compared to 41% for the same period in fiscal 2003.  TheCompany expects sales and marketing expenses in absolute dollars to remainrelatively 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 decreased14% to $362,000 for the three-month period ended January 31, 2004, compared to$423,000 for the same period in fiscal 2003. As a percentage of net revenues, general and administrative expensesdecreased to 15% for the first quarter of fiscal 2004 versus 20% for the sameperiod in fiscal 2003.  The Companyexpects general and administrative expenses on a quarterly basis will generallyremain at current levels for the remainder of fiscal 2004.

 

Research and development expenses decreased 38%to $667,000 for the three-month period ended January 31, 2004, compared to$1,084,000 for the same period in fiscal 2003. As a percentage of net revenues, research and development expensesdecreased to 27% for the first quarter of fiscal 2004, compared to 51% for thefirst quarter of fiscal 2003.  Again,research and development expenses should remain at or only slightly above theselevels for the remainder of the fiscal year.

 

Interest and other income remained flat at$6,000 for the three-month period ended January 31, 2004 and fiscal year 2003.

 

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The Company did not record an income taxbenefit or expense for the three-month period ended January 31, 2004 or 2003.

 

The Company’s net loss for the first quarterimproved substantially from year-ago levels, improving to $346,000 or 3 centsper share, as compared with a loss of $1,187,000 or 12 cents per share for the same period in fiscal 2003.   Shares outstanding for the quarterincreased to approximately 11.8 million versus 10.1 million in the firstquarter of last fiscal year reflecting the issuance of stock from the exerciseof warrants that occurred in September of 2003.

 

 

LIQUIDITY AND CAPITALRESOURCES

At January 31, 2004 the Company had cashbalances of $1.8 million, working capital of approximately $3.6 million and nolong term debt.

 

Over the past six months, the Company hassubstantially reduced its quarterly net losses as a result of increased revenueand cost cutting actions.  In the firstquarter of fiscal 2004 the Company incurred a net loss of $346,000 whichincluded non-cash charges related to depreciation and amortization of $227,000.The net loss for the quarter represented an $841,000 improvement from the$1,187,000 loss reported in the first quarter of fiscal 2003.  For the current quarter, the Company had netcash used in operations of $247,000, however, for the six-month period endedJanuary 31, 2004 the Company’s cash used in operations was only $6,000.

 

The Company has been using its existing cashand cash equivalents 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 includingsales of its common or preferred stock, external borrowing, customer or vendorfinancing, customer sponsored research and development projects or investmentsby strategic partners. The avenues that we take to satisfy our potentialcapital requirements will depend in large part on the pace of the growth of ourrevenues, and we will evaluate these alternatives as we obtain bettervisibility of our revenue expectations.

 

The Company believes that its current cashbalances and available sources of capital will enable the Company to meet its operating, working capital andcapital resource obligations through the next twelve months.

 

There can be no assurance that the Company will notincur additional losses for a longer period of time, will generate positivecash flow from it operations, or that the Company will attain or thereaftersustain profitability in any future period. To the extent that the Company continues to incur losses or achievesrevenue growth in the future requiring an increase in working capital, itsoperating and investing activities may use cash and, consequentially, suchlosses or growth will require the Company to obtain additional sources offinancing to provide for these cash needs.

 

As of January 31, 2004, the Company had no outstandingdebt.

 

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The Company leases facilities and equipment undernon-cancelable operating lease agreements. The Company entered into aten-year lease in May 1999 for approximately 59,000 square feet of office andmanufacturing space in Eden Prairie, Minnesota. The lease commenced on June 1,1999 at an initial monthly rate of approximately $51,000. Annual rental andcommon area maintenance (CAM) payment obligations are approximately $1.0million in the aggregate.  The leaseagreement also includes a provision whereby in July 2005, the landlord can, atits option, require the Company to take 17,000 square feet of additional spacein the same building.  Annual rental and common area maintenance payment obligationsare approximately $1.0 million.

 

Working capital decreased slightly to $3,626,000 atJanuary 31, 2004 from $3,778,000 at October 31, 2003.  The Company financed its operations during the first three monthsof fiscal 2004 through existing cash and cash equivalents.  Net cash used in operating activities duringthe first three months of fiscal 2004 was $247,000.  Accounts receivable increased $189,000 and inventories increased$70,000 during the first three months of fiscal 2004.  Accounts payable and accrued expenses increased by $61,000.

 

Net cash used in investing activities was $33,000.  During the first three months ending January31, 2004, fixed asset additions totaled $31,000 in comparison with $110,000 infixed asset additions incurred for the same period in fiscal 2003. The Companyexpects that fixed asset additions for the year will approximate $150,000.

 

The Company does not have relationships withunconsolidated entities or financial partnerships, such as entities oftenreferred to as structured finance or special purpose entities, which would havebeen established for the purpose of facilitating off-balance sheet financialarrangements.  As such, the Company isnot materially exposed to any financing, liquidity, market or credit risk thatcould arise if we had engaged in such arrangements.

 

The Companybelieves it does not have material exposure to quantitative and qualitativemarket risks. The carrying amounts reflected in the balance sheets of cash andcash equivalents, trade receivables and trade payables approximate fair valueat January 31, 2004 due 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 containsforward-looking statements within the meaning of the Private SecuritiesLitigation Reform Act of 1995, including statements regarding the Company’sexpectations, beliefs, intentions and strategies regarding the future.  Forward-looking statements include, withoutlimitation, statements regarding the extent and timing of future revenues andexpenses and customer demand.  Allforward-looking statements included in this document are based on informationavailable to the Company as of the date hereof, and the Company assumes noobligation to update any such forward-looking statements.

 

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The Company’s actualresults are subject to risks and uncertainties and could differ materially fromthose discussed in the forward-looking statements. These statements are basedupon the Company’s expectations regarding a number of factors, including theCompany’s ability to obtain additional working capital if necessary to supportits operations, changes in worldwide general economic conditions, cyclicalityof capital spending by customers, the Company’s ability to keep pace withtechnological developments and evolving industry standards, worldwidecompetition, and the Company’s ability to protect its existing intellectualproperty from challenges from third parties. A detailed description of thefactors that could cause future results to materially differ from the Company’srecent results or those projected in the forward-looking statements arecontained in the section entitled “Description ofBusiness” under the caption “Important Factors Regarding Forward-Looking Statements”contained in its filing with the Securities and Exchange Commission on Form10-KSB for the year ended October 31, 2003 and other reports filed with theSecurities and Exchange Commission.

 

 

Item 3: CONTROLS AND PROCEDURES

 

(a) Evaluation of Disclosure Controls and Procedures.

 

The Company’s Chief ExecutiveOfficer, Joseph C. Christenson and Chief Financial Officer, Timothy C. Claytonhave reviewed the Company’s disclosure controls and procedures as of January31, 2004.  Based upon this review, theseofficers believe that the Company’s disclosure controls and procedures areeffective in ensuring that material information related to the Company is madeknown to them by others within the Company.

 

 

(b) Changes in InternalControl Over Financial Reporting.

 

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

 

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| 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 |
|     |   | None.                                               |
|     |   |                                                |
| 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- 14 and15d-14 of the Exchange Act).

 

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

 

(b)           Reportson Form 8-K.

 

The Company filed a Form 8-K dated December 9, 2003 reporting underItem 12 its results of operations for the quarter and year ended October 31,2003, and filing as an exhibit under Item 7 its press release dated December 9,2003 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: March 12, 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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