**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

**Form 10-QSB**

 

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

**OFTHE SECURITIES EXCHANGE ACT OF 1934**

 

**For the Quarterly Period Ended July 31, 2003**

**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  Noo

 

Shares of $.10 par value common stock outstanding at September 1, 2003:10,114,091

 

 

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INDEX

 

PPT VISION, INC.

 
| Part I.  | Financial Information                                                                         |
|----------|-----------------------------------------------------------------------------------------------|
|     |                                                                                          |
| Item 1.  | Financial Statements                                                                          |
|     |                                                                                          |
|     | Balance  Sheets as of July 31, 2003 and October 31, 2002                                      |
|     |                                                                                          |
|     | Statements of Operations for the Three and  Nine Months Ended July 31, 2003 and July 31, 2002 |
|     |                                                                                          |
|     | Statements of Cash Flows for the Nine  Months Ended July 31, 2003 and July 31, 2002           |
|     |                                                                                          |
|     | Notes to Condensed Financial Statements –  July 31, 2003                                 |
|     |                                                                                          |
| 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

 
|                                            |   | **July 31,  2003** |      | **October  31, 2002** |   |
|-------------------------------------------------|--------|--------------------|-----------|-----------------------|--------|
|                                            |   | **(unaudited)**    |      | **(audited)**         |   |
| ASSETS                                          |   |               |      |                  |   |
| Cash and cash equivalents                       |   | $                  | 745,000   |                  | $      | 2,932,000 |   |
| Accounts receivable, net                        |   | 2,353,000          |      | 1,843,000             |   |
| Inventories:                                    |   |               |      |                  |   |
| Manufactured and purchased parts                |   | 870,000            |      | 1,338,000             |   |
| Work-in-process                                 |   | 193,000            |      | 450,000               |   |
| Finished goods                                  |   | 74,000             |      | 65,000                |   |
| Total inventories, net                          |   | 1,137,000          |      | 1,853,000             |   |
| Other current assets                            |   | 257,000            |      | 294,000               |   |
| Total current assets                            |   | 4,492,000          |      | 6,922,000             |   |
|                                            |   |               |      |                  |   |
| Fixed assets, net                               |   | 834,000            |      | 1,417,000             |   |
| Intangible assets, net                          |   | 2,284,000          |      | 2,545,000             |   |
| Other assets                                    |   | 53,000             |      | 53,000                |   |
| Total assets                                    |   | $                  | 7,663,000 |                  | $      | 10,937,000 |   |
|                                            |   |               |      |                  |   |
| LIABILITIES AND SHAREHOLDERS’ EQUITY       |   |               |      |                  |   |
| Accounts payable and accrued expenses           |   | $                  | 1,255,000 |                  | $      | 1,269,000 |   |
| Deferred revenue – customer advances       |   | 625,000            |      | 24,000                |   |
| Total current liabilities                       |   | 1,880,000          |      | 1,293,000             |   |
|                                            |   |               |      |                  |   |
| Shareholders’ equity:                      |   |               |      |                  |   |
| Common stock                                    |   | 1,011,000          |      | 1,007,000             |   |
| Capital in excess of par value                  |   | 34,137,000         |      | 34,094,000            |   |
| Accumulated deficit                             |   | (29,365,000        | )         | (25,457,000           | )      |
| Total shareholders’ equity                 |   | 5,783,000          |      | 9,644,000             |   |
|                                            |   |               |      |                  |   |
| Total liabilities and shareholders’ equity |   | $                  | 7,663,000 |                  | $      | 10,937,000 |   |

 

See accompanying notes to condensed financialstatements

 

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PPT VISION,INC.STATEMENTS OF OPERATIONS(UNAUDITED)
|                                        |   | **Three  Months Ended  July 31,** |      | **Nine  Months Ended  July 31,** |   |
|---------------------------------------------|--------|-----------------------------------|-----------|----------------------------------|--------|
|                                        |   | **2003**                          |      | **2002**                         |   | **2003** |   | **2002** |   |
| Net revenues                                |   | $                                 | 2,019,000 |                             | $      | 2,027,000 |   | $ | 6,380,000 |   | $ | 5,290,000 |   |
| Cost of revenues                            |   | 904,000                           |      | 1,007,000                        |   | 3,133,000 |   | 2,748,000 |   |
| Gross profit                                |   | 1,115,000                         |      | 1,020,000                        |   | 3,247,000 |   | 2,542,000 |   |
|                                        |   |                              |      |                             |   |   |   |   |   |
| Expenses:                                   |   |                              |      |                             |   |   |   |   |   |
| Sales and marketing                         |   | 742,000                           |      | 945,000                          |   | 2,407,000 |   | 2,594,000 |   |
| General and administrative                  |   | 387,000                           |      | 424,000                          |   | 1,335,000 |   | 1,269,000 |   |
| Restructuring and other                     |   | 126,000                           |      | —                           |   | 488,000 |   | — |   |
| Research and development                    |   | 820,000                           |      | 1,157,000                        |   | 2,956,000 |   | 3,414,000 |   |
| Total expenses                              |   | 2,075,000                         |      | 2,526,000                        |   | 7,186,000 |   | 7,277,000 |   |
|                                        |   |                              |      |                             |   |   |   |   |   |
| Loss from operations                        |   | (960,000                          | )         | (1,506,000                       | )      | (3,939,000 | ) | (4,735,000 | ) |
|                                        |   |                              |      |                             |   |   |   |   |   |
| Interest and other income                   |   | 10,000                            |      | 14,000                           |   | 31,000 |   | 51,000 |   |
| Net loss                                    |   | $                                 | (950,000  | )                                | $      | (1,492,000 | )  | $ | (3,908,000 | )  | $ | (4,684,000 | )  |
| Per share data:                             |   |                              |      |                             |   |   |   |   |   |
| Weighted average basic shares outstanding   |   | 10,099,000                        |      | 9,361,000                        |   | 10,078,000 |   | 6,809,000 |   |
| Weighted average diluted shares outstanding |   | 10,099,000                        |      | 9,361,000                        |   | 10,078,000 |   | 6,809,000 |   |
| Basic and diluted loss per common share     |   | $                                 | (0.09     | )                                | $      | (0.16 | ) | $ | (0.39 | ) | $ | (0.69 | ) |

 

See accompanying notes to condensed financialstatements

 

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PPT VISION,INC.STATEMENTS OF CASH FLOWS(UNAUDITED)
| ** **

                                                            |   | **Nine  MonthsEnded  July 31, 2003** |        | **Nine  MonthsEnded  July 31, 2002** |   |
|------------------------------------------------------------------------------|--------|--------------------------------------|-------------|--------------------------------------|--------|
| Net loss                                                                     |   | $                                    | (3,908,000) |                                 | $      | (4,684,000 | ) |
| Adjustments to reconcile net loss to net  cash used in operating activities: |   |                                 |        |                                 |   |
| Depreciation and amortization                                                |   | 876,000                              |        | 999,000                              |   |
| Stock option expense                                                         |   | 18,000                               |        | —                               |   |
| Loss on disposal of fixed assets and other                                   |   | 141,000                              |        | —                               |   |
| Realized loss on sale of investments                                         |   | —                               |        | (12,000                              | )      |
| Change in assets and liabilities:                                            |   |                                 |        |                                 |   |
| Accounts receivable                                                          |   | (510,000                             | )           | 462,000                              |   |
| Inventories                                                                  |   | 716,000                              |        | (141,000                             | )      |
| Other assets                                                                 |   | 37,000                               |        | (60,000                              | )      |
| Accounts payable and accrued expenses                                        |   | (14,000                              | )           | (53,000                              | )      |
| Deferred revenue - customer advances                                         |   | 601,000                              |        | (99,000                              | )      |
| Total adjustments                                                            |   | 1,860,000                            |        | 1,096,000                            |   |
| Net cash used in operating activities                                        |   | (2,048,000)                          |        | (3,588,000                           | )      |
|                                                                         |   |                                 |        |                                 |   |
| Cash flows from investing activities:                                        |   |                                 |        |                                 |   |
| Purchase of fixed assets                                                     |   | (145,000                             | )           | (124,000                             | )      |
| Sales and maturities of investments                                          |   | —                               |        | 502,000                              |   |
| Net investment in other long-term assets                                     |   | (24,000                              | )           | (35,000                              | )      |
| Net cash provided by (used in) investing  activities                         |   | (169,000                             | )           | 343,000                              |   |
|                                                                         |   |                                 |        |                                 |   |
| Cash flows from financing activities:                                        |   |                                 |        |                                 |   |
| Proceeds from the issuance of common stock                                   |   | 30,000                               |        | 4,413,000                            |   |
| Net cash provided by financing activities                                    |   | 30,000                               |        | 4,413,000                            |   |
|                                                                         |   |                                 |        |                                 |   |
| Net increase (decrease) in cash and cash  equivalents                        |   | (2,187,000)                          |        | 1,168,000                            |   |
|                                                                         |   |                                 |        |                                 |   |
| Cash and cash equivalents at beginning of  year                              |   | 2,932,000                            |        | 2,805,000                            |   |
| Cash and cash equivalents at end of period                                   |   | $                                    | 745,000     |                                 | $      | 3,973,000 |   |

 

See accompanying notes to condensed financialstatements

 

5

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PPT VISION, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS

(UNAUDITED)

July 31, 2003

 

NOTE A – DESCRIPTION OF BUSINESS

 

PPT VISION,Inc. develops and markets 2D and 3D machine vision-based automated inspectionsystems for manufacturing applications. Machine vision-based systems enable manufacturers to realize significanteconomic paybacks by increasing the quality of manufactured parts and improvingthe productivity of manufacturing processes. The Company’s 2D and 3D machinevision 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 SpeedScan 3DTM sensor product incorporates PPT VISION’spatented high-speed Scanning Moiré InterferometryTM technology.

 

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, 2002 has been derived from theCompany’s audited financial statements for the fiscal year ended October 31,2002 but does not include all of the information and footnotes required byaccounting principles generally accepted in the United States of America forcomplete financial statements.

 

For further information, refer to the financial statements andfootnotes thereto included in the Company’s annual report on Form 10-KSB forthe year ended October 31, 2002.

 

NOTE C – LIQUIDITY AND CAPITAL RESOURCES

 

The Company has incurred net losses andnegative cash flows from operating activities in each of the past three yearsand has an accumulated deficit of $29.4 million at July 31, 2003. During fiscalyear 2002, the Company raised approximately $4.3 million through itsShareholder Rights Offering to provide for these capital needs and asof July 31, 2003, the Company had $745,000 of cash, $2.6 million ofworking capital and no long-term debt. The Company expects to continue to incurlosses and negative cash flows during fiscal 2003 and the

 

6

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continued execution of the Company’sbusiness plan is dependent upon raising sufficient capital to support futureoperations.

 

In order to address the need for additionalcapital, the Company recently lowered the exercise price of the 2.242 millionoutstanding warrants that were issued in connection with the Company’s 2002Shareholder Rights Offering to $0.70 per share.   The Company believes that it is in the best interest of theCompany to lower the exercise price to a level close to current market price inorder to encourage exercise of the warrants. Additionally, in January 2003, the Company obtained a letter ofcommitment from a shareholder to provide up to $750,000 in either debt orequity financing through April 2004 depending on the needs of the Company.

 

The Company believes that other sources offinancing may also be available to fund future operations including sales ofits common or preferred stock, external borrowing, customer or vendorfinancing, customer sponsored research and development projects or investmentsby strategic partners.

 

There can be no assurance, however, thatother sources of financing or capital will be available on acceptable terms orat all for the next twelve months, or that the repriced warrants will beexercised. The failure to obtain additional capital as needed may have anadverse effect on the Company’s ability to continue to operate at currentlevels and may not allow the Company to take advantage of future opportunitiesor respond to competitive pressures or unanticipated requirements, which couldseriously harm its business, financial position, results of operations and cashflows.

 

NOTE D – 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.  At July31, 2003, options to purchase 1,116,500 shares and warrants to purchase2,267,000 shares of the Company’s common stock were not considered in thecalculation of diluted earnings per share. At July 31, 2002, options to purchase 851,200 shares and warrants topurchase 2,267,000 shares of the Company’s common stock were not considered inthe calculation of diluted earnings per share. As the Company had a net loss for both periods, the inclusion of theaforementioned shares would have been anti-dilutive.

 

NOTE E – CUSTOMER GEOGRAPHIC DATA

 

The followingtables set forth the percentage of the Company’s net revenues (including salesdelivered through international distributors) by geographic location for thethree and nine months ended July 31, 2003 and for the same periods in fiscalyear 2002:

 
| **Three  Months Ended July 31,** |   | **2003** |   | **2002** |   |
|----------------------------------|--------|----------|--------|----------|--------|
|                             |   |     |   |     |   |
| United States                    |   | 64       | %      | 69       | %      |
| Europe and Canada                |   | 15       | %      | 19       | %      |
| Asia-Pacific                     |   | 21       | %      | 12       | %      |
| South America                    |   | 0        | %      | 0        | %      |

 

7

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| **Nine  Months Ended July 31,** |   | **2003** |   | **2002** |   |
|---------------------------------|--------|----------|--------|----------|--------|
|                            |   |     |   |     |   |
| United States                   |   | 53       | %      | 65       | %      |
| Europe and Canada               |   | 19       | %      | 12       | %      |
| Asia-Pacific                    |   | 27       | %      | 19       | %      |
| South America                   |   | 1        | %      | 4        | %      |

 

NOTE F –STOCK-BASED COMPENSATION

 

In December 2002, the Financial AccountingStandards Board (FASB) issued Statement of Financial Accounting Standard (SFAS)No. 148, “Accounting for Stock-Based Compensation–Transition and Disclosure-anamendment of FASB Statement No. 123.” The Company intends to continue with its current practice of applyingthe recognition and measurement principles of APB No. 25, “Accounting for StockIssued to Employees.”  The Company willadopt the disclosure requirements of SFAS No. 148 in its discussion of stockbased employee compensation but will not implement the alternative transitionoptions made available by the standard.

 

The intrinsic value method is used to account for stock-basedcompensation plans.  If compensationexpense had been determined based on the fair value method with pro formacompensation expense reflected over the vesting period, net loss and loss pershare for the three and nine month periods ended July 31, 2003 and 2002 wouldhave been adjusted to the pro forma amounts indicated below:

 
| **Three Months Ended July 31,** |   |        |   | **2003** |     | **2002** |   |
|--------------------------------------|--------|-------------|--------|----------|----------|----------|--------|
| Net loss                             |   | As reported |   | $        | (950,000 | )        | $      | (1,492,000 | ) |
|                                 |   | Pro forma   |   | $        | (970,000 | )        | $      | (1,494,000 | ) |
| Basic and diluted loss per share     |   | As reported |   | $        | (0.09    | )        | $      | (0.16 | ) |
|                                 |   | Pro forma   |   | $        | (0.10    | )        | $      | (0.16 | ) |
| Stock based compensation             |   | As reported |   | $        | —   |     | $      | — |   |
|                                 |   | Pro forma   |   | $        | (20,000  | )        | $      | (2,000 | ) |

 
| **Nine Months EndedJuly 31,** |   |        |   | **2003** |       | **2002** |   |
|------------------------------------|--------|-------------|--------|----------|------------|----------|--------|
| Net loss                           |   | As reported |   | $        | (3,908,000 | )        | $      | (4,684,000 | ) |
|                               |   | Pro forma   |   | $        | (3,951,000 | )        | $      | (4,693,000 | ) |
| Basic and diluted loss per share   |   | As reported |   | $        | (0.39      | )        | $      | (0.69 | ) |
|                               |   | Pro forma   |   | $        | (0.39      | )        | $      | (0.69 | ) |
| Stock based compensation           |   | As reported |   | $        | —     |     | $      | — |   |
|                               |   | Pro forma   |   | $        | (43,000    | )        | $      | (9,000 | ) |

 
| **For All Periods Ended  July 31,** |   | **2003** |   | **2002** |   |
|------------------------------------------|--------|----------|--------|----------|--------|
| Risk free interest rates                 |   | 4.0      | %      | 4.0      | %      |
| Expected lives                           |   | 6.0      |   | 6.0      |   |
| Expected volatility                      |   | 115      | %      | 115      | %      |
| Expected dividends                       |   | 0        | %      | 0        | %      |

 

8

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NOTE G - RESTRUCTURING AND OTHER COSTS

 

During the second and third quarters, PPTimplemented a restructuring plan designed to specifically focus the Company onits traditional core competencies, improve the efficiency of its productdevelopment and marketing efforts, and significantly reduce the Company’soperating cost structure.  In the secondquarter of fiscal 2003, the Company announced the closure of theMicroelectronics Systems group which primarily involves the elimination of thePPT861TM inspection product. In addition, PPT consolidated certainproduct development and engineering functions. In the third quarter the Companyeliminated a number of positions and took other cost reduction actions thattouched all areas of the Company. The result of these combined actions has beento reduce the size of the workforce by 24% and to reduce annual operatingexpenses by approximately $1.8 million.

 

The expenses incurred in the second quarterassociated with the decision to discontinue the development, sale andmanufacture of the PPT 861 product line totaled $591,000 and include severancecosts of $129,000, inventory valuation adjustments, account receivable reservesand equipment write downs. The amounts related to inventory adjustments areincluded in cost of goods sold and approximate $249,000.  The accounts receivable write down of $77,000has been included in general and administrative expenses. An additional cost ofthe restructuring plan, related to the realignment of our research anddevelopment department, totaled $97,000 of severance.

 

In the third quarter, the Company completedits restructuring plan by eliminating 13 additional positions within thebusiness.  Severance costs of $126,000were recorded in the quarter as a result of these actions and are included inrestructuring costs in our results of operations.

 

A summary of the restructuring costs is asfollows:

 
|                   |   | **Quarter Ended**  |    |
|------------------------|--------|--------------------|---------|
|                   |   | **April 30, 2003** |    | **July 31, 2003** |   |
|                   |   |               |    |   |   |
| Severance              |   | $                  | 226,000 |   | $ | 126,000 |   |
| Equipment  Write-downs |   | 136,000            |    | — |   |
| Total                  |   | $                  | 362,000 |   | $ | 126,000 |   |

 

The severance costs included $20,000 ofnon-cash charges. Cash payments related to these severance costs were asfollows:

 
|               |   | **April 30, 2003** |    | **July 31, 2003** |   |
|--------------------|--------|--------------------|---------|-------------------|--------|
|               |   |               |    |              |   |
| Beginning  Balance |   | $                  | —  |              | $      | 131,000 |   |
| Severance  Accrual |   | 226,000            |    | 126,000           |   |
| Non-cash  charges  |   | (20,000            | )       | —            |   |
| Cash  Payments     |   | (75,000            | )       | (219,000          | )      |
| Ending  Balance    |   | $                  | 131,000 |              | $      | 38,000 |   |

 

The balance remaining at July 31, 2003 willbe paid in the fourth quarter.

 

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NOTE H – NEW ACCOUNTING PRONOUNCEMENTS

 

In April 2003, the FASB issued Statement ofFinancial Accounting Standards (SFAS) No. 149, “Amendment of Statement 133 onDerivative Instruments and Hedging Activities,” effective for contracts enteredinto or modified after June 30, 2003. This amendment clarifies when a contract meets the characteristics of aderivative, clarifies when a derivate contains a financing component and amendscertain other existing pronouncements. The Company believes the adoption of SFAS No. 149 will not have amaterial effect on the Company’s financial statements.

 

In May 2003, the FASB issued SFAS No. 150,“Accounting for Certain Financial Instruments with Characteristics of bothLiabilities and Equity.”  SFAS No. 150is effective for financial instruments entered into or modified after May 31,2003, and otherwise is effective at the beginning of the first interim periodbeginning after June 15, 2003.  SFAS No.150 requires the classification as a liability of any financial instrumentswith a mandatory redemption feature, an obligation to repurchase equity shares,or a conditional obligation based on the issuance of a variable number of itsequity shares.  The Company does nothave any financial instruments as defined by SFAS No. 150.  The Company believes the adoption of SFASNo. 150 will not have a material effect the Company’s financial statements.

 

Item 2

 

MANAGEMENT’S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION

 

Critical Accounting Policies and Estimates

 

Management’s discussion and analysis of its financial condition andresults of operations are based on the Company’s accompanying unaudited condensedfinancial statements, which have been prepared in accordance with accountingprinciples generally accepted in the United States of America for interimfinancial information and with the instructions to Form 10-QSB and Rule 10-01of Regulation S-X.  Accordingly, they donot include all of the information required by accounting principles generallyaccepted in United States of America for complete financial statements.  In the opinion of management, all adjustments(consisting of normal recurring accruals) considered necessary for a fairpresentation have been included.

 

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 reasonable underthe circumstances, the results of which form the basis for making judgmentsabout the carrying values of assets and liabilities.  Actual results could differ from these estimates.

 

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

 

•                  revenuerecognition;

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

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

 

The Company typically recognizes revenue on product sale 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. Revenue related to application engineering, product development andcustomer training services is recognized when the services are performed.

 

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

 

Management establishes valuation reserves on inventory for estimatedexcess and obsolete inventory equal to the difference between the cost ofinventory and its estimated market value based on assumptions about futureproduct demand and market conditions. In view of the rapid pace of technological change in the machine visionindustry, the Company generally considers inventory that has had no usage forone year to be obsolete.  In addition,changes in the Company’s product offerings or those of the Company’scompetitors, may also result in excess or obsolete inventory levels.  Accordingly, these factors will also beconsidered in the determination of the market value of inventory.

 

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.

 

Results of Operations

 

Revenues

 

Net revenues decreased slightly to $2,019,000 for the three-monthperiod ended July 31, 2003, compared to net revenues of $2,027,000 for the sameperiod in fiscal 2002.  For thenine-month period ended July 31, 2003, revenues increased 21% to $6,380,000from $5,290,000 for the same period in fiscal 2002. Revenues decreased 10% ascompared with the immediately preceding quarter.

 

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Unit sales of the Company’s machine vision systems increased to 94 forthe third quarter of fiscal 2003 versus 67 for the same period in fiscal 2002.Unit sales for the nine-month period of fiscal 2003 increased to 306 from 157for the same period in fiscal 2002.  Theincrease in revenues reflects a gradual improvement in the economic conditionsof the businesses in the Company’s core markets.  The decreasing trend of the average selling price of ourequipment generally reflects increasing sales of our new Impact 2D machinevision system, which has a lower average selling price than our DSL products.With respect to the nine-month periods ended July 31, 2003, the lower averageselling price is due in part to  a largesale in the second quarter of fiscal 2003 of our older analog products to anOEM customer who was provided a discount due to the quantity purchased.

 

Sales to customers outside the United States represented 36% of grossrevenues for the three months ended July 31, 2003, compared to 31% for the sameperiod in fiscal 2002. For the nine-month period ended July 31, 2003, sales tocustomers outside the United States represented 47% of gross revenues, comparedto 35% for the same period in fiscal 2002. The increase for the nine-monthperiod is primarily the result of a large shipment of product to a significantinternational OEM customer in the second quarter of fiscal 2003.

 

Our revenue levels in the thirdquarter reflected our expectations that the on-going economic recovery would begradual and at times uneven.  However,as evidenced by the year to date revenue totals, which grew 21% over the prioryear, we are continuing to see positive signs of improvement in our markets.Importantly, on a year to date basis, 2D sales, our historic core business,increased 27% over the prior year, while 3D sales remained flat.  This reflects the fact that our corebusiness is recovering, though our new emerging 3D technology, while it hasgreat potential, has not secured a strong market position and is behind ourrevenue expectations.  The return tomore normal capital spending levels in the manufacturing sector, which is asignificant driver of our revenue, is occurring slowly and accordingly, weanticipate that quarterly revenues will remain at approximately these levels orperhaps increase gradually in the fourth quarter of fiscal 2003 and in firsthalf of fiscal 2004.

 

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 to our customers may move from onequarter to another.

 

# Expenses

 

During the second and third quarters of fiscal 2003, PPT implemented anumber of actions to reduce the current level of operating costs and futureworking capital requirements. After a carefulevaluation of our product offerings as compared with the traditional corecompetencies of PPT Vision and our available financial resources, PPTimplemented a restructuring plan that resulted in the following actions:

 

First, the elimination of the turnkey PPT861TM inspection system from our product line.

 

Second, a consolidation of productdevelopment and engineering functions within the Company.

 

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Third, certain other operating costreductions that have touched all areas of the Company.

 

Taken together, this restructuring effort has resulted in a 24%reduction in the size of PPT’s workforce and a $1.8 million reduction in annualoperating expenses. As a result, our quarterly revenue requirement to breakeven on a cash basis is now approximately $2.7 million. PPT recordedapproximately $688,000 of charges in the second quarter primarily related toseverance and asset impairment write-downs related to these actions.  Approximately $591,000 of these costsrelated to the elimination of the PPT 861 product line with the remaining costsof $97,000 related to severance charges associated with the realignment of ourresearch and development activities. The inventory adjustments related to the decision to terminateproduction of the PPT 861 product totaled $249,000 and were recorded in costsof goods sold.  All remaining costs wererecorded in operating costs.  TheCompany recorded approximately $126,000 of severance costs in the third quarterrelated to the elimination of 13 positions.

 

Gross profit increased 9% to $1,115,000 for the three-month periodended July 31, 2003, compared to $1,020,000 for the same period in fiscal2002.  For the nine-month period endedJuly 31, 2003, gross profit increased 28% to $3,247,000 from $2,542,000 for thesame period in fiscal 2002.  As apercentage of net revenues, the gross profit for the third quarter of fiscal2003 increased to 55% compared to 50% in the same period in fiscal 2002.  For the nine-month period, gross profit as apercentage of net revenues increased slightly to 51% from 48% for the sameperiod in fiscal 2002.  The increase ingross profit in absolute dollars for the quarter is the result of changes inthe mix of our product sales, with an increasing amount of sales from ourImpact product which has a higher gross profit.  The increase in dollar terms for the nine month period is due tothe increase in revenues realized in fiscal 2003 over fiscal 2002.  The increase in gross profit on a percentagebasis for the three-month period ended July 31, 2003 is also attributed to thechanges in the mix of our product shipments. The increase in gross profit on a percentage basis for the nine-month periodis due to the higher revenue levels and improved utilization of themanufacturing facility.

 

Salesand marketing expenses decreased 21% to $742,000 for the three-month periodended July 31, 2003, compared to $945,000 for the same period in fiscal2002.  For the nine-month period endedJuly 31,2003, sales and marketing expenses decreased 7% to $2,407,000 from$2,594,000 for the same period in fiscal 2002. As a percentage of net revenues, sales and marketing expenses decreasedto 37% for the third quarter of fiscal 2003 compared to 47% for the same periodin fiscal 2002.  For the nine-monthperiod ended July 31,2003, sales and marketing expenses as a percentage of netrevenues decreased to 38% compared to 49% in the same period in fiscal 2002.  These decreases reflect the effect of theCompany’s cost reduction efforts that were implemented in the second and thirdquarters of fiscal 2003.  The Companyexpects sales and marketing expenses in absolute dollars to decrease slightlyon a quarterly basis in the fourth quarter as the full effect of the costreduction actions are realized. Increases in sales and marketing expendituresbeyond this current expectation may occur to the extent that revenue growth isachieved.

 

General and administrative expensesdecreased 9% to $387,000 for the three-month period ended July 31, 2003,compared to $424,000 for the same period in fiscal 2002.  For the nine-month period ended July 31,2003, general and administrative 

 

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expenses increased 5% to $1,335,000 as comparedto $1,269,000 in the same period in fiscal 2002. As a percentage of netrevenues, general and administrative expenses decreased to 19% for the thirdquarter of fiscal 2003 versus 21% for the same period in fiscal 2002. For thenine-month period ended July 31,2003, general and administrative expenses as apercentage of net revenues decreased to 21% from 24% in the same period infiscal 2002.  The Company expectsgeneral and administrative expenses on a quarterly basis will remain at currentlevels for the remainder of fiscal 2003 and into fiscal 2004.

 

Research and development expenses decreased29% to $820,000 for the three-month period ended July 31, 2003, compared to$1,157,000 for the same period in fiscal 2002. For the nine-month period endedJuly 31, 2003, research and development expenses decreased 13% to $2,956,000from $3,414,000 in the same period in fiscal 2002.  As a percentage of net revenues, research and developmentexpenses decreased to 41% for the second quarter of fiscal 2003, compared to57% for the second quarter of fiscal 2002. For the nine-month period ended July31,2003, research and development expenses as a percentage of net revenuesdecreased to 46% from 65% in the same period in fiscal 2002. These decreasesare due to the ongoing cost reduction programs put into effect during fiscal2003.  The Company expects that researchand development costs will decrease slightly in the fourth quarter as theeffect of the cost reduction efforts recently implemented are fully recognized.

 

The restructuring costs reported forquarter ended July 31, 2003 of $126,000 relate to severance costs associatedwith the elimination of 13 positions and the realignment of our operations. Forthe nine-month period ended July 31, 2003 restructuring and other cost of$488,000 represent severance charges for employees affected by the eliminationof the PPT-861 product operations, the reorganization of our research anddevelopment activities and the write-off of PPT-861 related equipment whichoccurred during the second quarter.

 

Interest and other income decreased to$10,000 for the three-month period ended July 31, 2003, compared to $14,000 forthe same period in fiscal 2002. For the nine-month period, interest and otherincome decreased to $31,000 from $51,000 reported in fiscal 2002.

 

The Company did not record an income taxbenefit or expense for either of the three-month or nine-month periods endedJuly 31, 2003 or 2002.

 

LIQUIDITY AND CAPITAL RESOURCES

 

The Company incurred a net loss of $950,000for the quarter ended July 31, 2003 and has an accumulated deficit of $29.4million as of July 31, 2003. In addition, the Company expects to incur lossesfor the next quarter of the current fiscal year, and the audited financialstatements contained in its Form 10-KSB for the year ended October 31, 2002contained a going concern opinion from its independent auditor.  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.

 

During the second and third quarter, theCompany implemented several important cost cutting actions designed tosignificantly reduce our operating costs and to reduce the future capitalrequirements of the business.  As aresult of the actions taken, the Company reduced annual operating expenses byapproximately

 

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$1.8 million which served to reduce ourquarterly revenue requirement to achieve “break-even” on a cash basis toapproximately $2.7 million.  Inaddition, we are actively working to sub-lease a substantial portion of ouroffice building to further reduce our quarterly cash requirements.  However, the real estate market is very weakand there can be no assurance that we will be able to actually sub-lease anyportion of our building on acceptable terms.

 

The Company entered into an OEM agreementwith ISMECA Europe, S.A. in the second quarter that calls for PPT to provideboth 3D and 2D machine vision inspection solutions for incorporation intoIsmeca’s new LTMTM series 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. As part of this agreement, Ismeca provided a cash advance of $575,000that will be used to offset a portion of the sales price of the units sold toIsmeca. These amounts are included in deferred revenue on the Balance Sheetuntil the units are shipped to the customer.

 

In order to address our shorter term needsfor additional capital, the Company recently lowered the exercise price of the2.242 million outstanding warrants that were issued in connection with theCompany’s 2002 Shareholder Rights Offering to $0.70 per share.  The Company believes that it is in the bestinterest of the Company to lower the exercise price to a level close to currentmarket price in order to encourage exercise of the warrants. Should all ofthese warrants be exercised, the Company will secure approximately $1.5 millionof additional capital.  In anticipationof our current cash position, in January 2003, the Company obtained a letter ofcommitment from a shareholder to provide up to $750,000 in either debt orequity financing through April 2004 depending on the needs of the Company.

 

The Company believes that other sources offinancing may also be available to supplement cash provided by operations tofund future operating losses including, sales of its common or preferred stock,external borrowing, customer or vendor financing, customer sponsored researchand development projects or investments by strategic partners.

 

The avenues that we take to satisfy ourpotential capital requirements will depend in large part on the pace of thegrowth of our revenues, and we will evaluate these alternatives as we obtainbetter visibility of our revenue expectations.

 

The Company believes that itwill be able to raise sufficient funds through these sources so that theCompany will be able to meet its working capital and capital resourceobligations through the next twelve months.

 

There can be no assurance that the Company will not incur additionallosses for a longer period of time, will generate positive cash flow from itoperations, or that the Company will attain or thereafter sustain profitabilityin any future period.  To the extentthat the Company continues to incur losses or achieves revenue growth in thefuture, its operating and investing activities may use cash and,consequentially, such losses or growth will require the Company to obtainadditional sources of financing to provide for these cash needs.  There can be no assurance, however, thatadditional capital will be available on acceptable terms or at all, and thefailure to obtain additional capital as needed may have an adverse effect onthe Company’s ability to continue to operate at current levels, and may notallow the Company to take advantage of future opportunities or respond tocompetitive pressures or unanticipated

 

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requirements, which could seriously harm its business, financialposition, results of operations and cash flows.

 

As of July 31, 2003, the Company had no outstanding debt.

 

The Company leases facilities and equipment under non-cancelableoperating lease agreements.  The Companyentered into a ten-year lease for its primary office and manufacturing space inJune of 1999.  Annual rental and commonarea maintenance payment obligations are approximately $1.0 million.

 

Working capital decreased to $2,612,000 at July 31, 2003 from$5,629,000 at October 31, 2002.  TheCompany financed its operations during the first nine months of fiscal 2003through existing cash and cash equivalents. Net cash used in operating activities during the first nine months offiscal 2003 was $2,048,000.  Accountsreceivable increased $510,000 and inventories decreased $716,000 during thefirst nine months of fiscal 2003. Accounts payable and accrued expenses decreased by $14,000.

 

Net cash used in investing activities was $169,000.  During the first nine months ending July 31,2003, fixed asset additions totaled $145,000 in comparison with $124,000 infixed asset additions incurred for the same period in fiscal 2002.  Fixed asset additions in the last quarter offiscal 2003 are expected to be lower than incurred in the first nine months ofthe fiscal year.

 

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

 

The Company believes it does not havematerial exposure to quantitative and qualitative market risks. The carryingamounts reflected in the balance sheets of cash and cash equivalents, tradereceivables and trade payables approximate fair value at July 31, 2003 due tothe short maturities of these instruments.

 

NEW ACCOUNTING PRONOUNCEMENTS

 

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

 

FORWARD LOOKING STATEMENTS

 

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

 

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The Company’s actual results are subject to risks and uncertainties andcould differ materially from those discussed in the forward-lookingstatements.  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, the success of the Company’s new IMPACT machine visionmicro-system, 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 and the Company’s ability to continueto have its common stock quoted on the NASDAQ Small Cap Market.  A detailed description of the factors thatcould cause future results to materially differ from the Company’s recentresults or those projected in the forward-looking statements are contained inthe section entitled “Description of Business” under the caption “ImportantFactors Regarding Forward-Looking Statements” contained in its filing with theSecurities and Exchange Commission on Form 10-KSB for the year ended October31, 2002 and other reports filed with the Securities and Exchange Commission.

 

Item 3:   CONTROLSAND PROCEDURES

 

(a) Evaluationof Disclosure Controls and Procedures.

 

The Company’s Chief ExecutiveOfficer, Joseph C. Christenson and Chief Financial Officer, Timothy C. Claytonhave reviewed the Company’s disclosure controls and procedures as of July 31,2003.  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.

 

PART II.                                                 OtherInformation

 

Item 1:                                                             LEGAL PROCEEDINGS

None.

 

Item 2:                                                             CHANGES IN SECURITIES

On July 31, 2003, the Company announced thatit had lowered the exercise price on its warrants expiring September 30, 2003from $2.50 to $.70.  As of July 31,2003, the Company had 2,242,000 warrants outstanding.

 

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Item 3:                                                             DEFAULTS UPON SENIOR SECURITIES

Not Applicable

 

Item 4:                                                             SUBMISSION OF MATTERS TO A VOTE OFSECURITY HOLDERS

None.

 

Item 5:                                                             OTHER INFORMATION

None.

 

Item 6:                                                             EXHIBITS AND REPORTS ON FORM 8-K

 

(a)                                The following exhibitsare included herein:

 

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

 

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

 

32                                    Certificationspursuant Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. §1350).

 

(b)                               Reports on Form 8-K.

 

The Company filed a Form 8-K dated May 22,2003 reporting under Item 12 its results of operations for the quarter endedApril 30, 2003, and filing as an exhibit under Item 7 its press release datedMay 22, 2003 reporting these results.

 

The Company filed a Form 8-K dated July 1,2003 reporting under Item 4 that it has dismissed PricewaterhouseCoopers LLP asits independent accountants and engaged Virchow, Krause & Company, LLP asits new independent public accountant and filed as an exhibit under Item 7 acopy of the letter from PricewaterhouseCoopers LLP.

 

The Company filed a Form 8-K dated August 15,2003, reporting under Item 12 its results of operations for the quarter endedJuly 31, 2003, and filing as an exhibit under Item 7 its press release datedAugust 15, 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: September 12, 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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