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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-QSB
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QUARTERLY REPORT FILED PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarter ended Commission File Number
December 31, 1998 0-15520
--------------------- ----------------------
INDUSTRIAL IMAGING CORPORATION
(Name of Small Business
Issuer As Specified In Its Charter)
Delaware 05-0396504
- ------------------------------- ----------------------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification Number)
847 Rogers Street, Lowell, Massachusetts 01852
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(Address of Principal Executive Offices, Zip Code)
(978) 937-5400
----------------
(Issuer's Telephone Number, Including Area Code)
Check whether the issuer: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), (2) and
has been subject to such filing requirements for the past 90 days.
Yes X No
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As of January 31, 1999, the Company had outstanding 10,890,201 shares of
Common Stock, $.01 par value per share.
Transitional Small Business Disclosure Format: Yes No X
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<PAGE>
INDUSTRIAL IMAGING CORPORATION
INDEX
<TABLE>
<CAPTION>
PART 1 - FINANCIAL INFORMATION PAGE NUMBER
-----------
Item 1. Financial Statements
<S> <C>
Balance Sheets at December 31, 1998 and March 31, 1998 1
Statements of Operations for the three months and nine months
ended December 31, 1998 and 1997 2
Statements of Cash Flows for the nine months ended
December 31, 1998 and 1997 3
Notes to Financial Statements 4
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 5
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 9
Item 2. Changes in Securities 9
Item 3. Default Upon Senior Securities 9
Item 4. Submission of Matters to a Vote of Security Holders 9
Item 5. Other Information 9
Item 6. Exhibits and Reports on Form 8-K 9
Signatures 10
</TABLE>
<PAGE>
INDUSTRIAL IMAGING CORPORATION
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, March 31,
1998 1998
ASSETS ------------ ---------
Current assets:
<S> <C> <C>
Cash $88,005 $671,195
Accounts receivable, net of allowance for doubtful accounts of $29,153 at
December 31, 1998 and $31,000 at March 31, 1998 793,219 214,450
Inventory 1,312,207 1,995,194
Prepaid expenses 49,109 75,282
-------------- --------------
Total current assets 2,242,540 2,956,121
Property and equipment, net 245,474 59,150
Other assets 49,848 7,600
-------------- --------------
Total assets $2,537,862 $3,022,871
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Notes payable 784,032 $715,334
Accounts payable 1,211,037 599,785
Deferred revenue 273,898 342,705
Accrued expenses 948,897 834,212
-------------- --------------
Total current liabilities 3,217,864 2,492,036
Notes payable -- long-term portion 296,653 152,217
-------------- --------------
Total liabilities 3,514,517 2,644,253
Commitments and contingencies -- --
Shareholders' deficit:
Common stock, par value $.01 per share, authorized 20,000,000 shares, 108,902 108,902
10,890,201 shares issued and outstanding at December 31, 1998
and March 31, 1998
Series A Preferred Stock, par value $.01 per share, authorized 1,000,000 shares,
0 shares issued and outstanding at December 31, 1998 and March 31, 1998 -- --
Series B Preferred Stock, par value $.01 per share, authorized 300,000 shares,
0 shares issued and outstanding at December 31, 1998 and March 31, 1998 -- --
Additional paid-in capital 10,794,439 10,794,439
Accumulated deficit (11,754,996) (10,399,723)
-------------- --------------
(851,655) 503,618
Note Receivable (125,000) (125,000)
-------------- --------------
Total shareholders' equity (deficit) (976,655) 378,618
-------------- --------------
Total liabilities and shareholders' equity (deficit) $2,537,862 $3,022,871
========= =========
</TABLE>
The accompanying notes are an integral part of the statements
1
<PAGE>
INDUSTRIAL IMAGING CORPORATION
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
DECEMBER 31, DECEMBER 31,
1998 1997 1998 1997
---- ---- ---- ----
Revenues:
<S> <C> <C> <C> <C>
Product $518,600 $421,499 $2,950,060 $1,828,677
Service 81,338 119,683 283,420 326,275
-------------- -------------- -------------- --------------
599,938 541,182 3,233,480 2,154,952
Cost of revenues:
Product 507,610 447,443 2,345,053 1,963,373
Service 181,582 69,046 344,775 219,870
-------------- -------------- -------------- --------------
689,192 516,489 2,689,828 2,183,243
Gross profit (loss) (89,254) 24,693 543,652 (28,291)
Operating expenses:
Engineering 129,554 106,258 542,070 329,457
Sales and marketing 157,730 176,338 675,093 396,652
General and administrative 164,281 210,829 564,304 665,876
-------------- -------------- -------------- --------------
Total operating expenses 451,565 493,425 1,781,467 1,391,985
Loss from operations 540,819 468,732 1,237,815 1,420,276
Other expense (income):
Interest expense, net 46,075 32,422 119,416 131,288
Other expense (income), net 1,186 140,115 (1,958) 145,335
-------------- -------------- -------------- --------------
Other expense (income), net 47,261 172,537 117,458 276,623
Loss before income taxes 588,080 641,269 1,355,273 1,696,899
Provision for income taxes -- -- -- --
Net loss $588,080 $641,269 $1,355,273 $1,696,899
======== ======== ======== =========
Net loss per common share - Basic and Diluted (Note 2) $0.05 $0.07 $0.12 $0.23
===== ===== ===== =====
Weighted average common shares outstanding 10,890,201 8,976,861 10,890,201 7,266,867
========= ========= ========= =========
</TABLE>
The accompanying notes are an integral part of the statements
2
<PAGE>
INDUSTRIAL IMAGING CORPORATION
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
DECEMBER 31,
1998 1997
---- ----
Cash flows from operating activities:
<S> <C> <C>
Net loss ($1,355,273) ($1,696,899)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation 67,476 9,992
Amortization -- 61,979
Compensation expense 125,000
Changes in assets and liabilities:
Accounts receivable (578,769) 140,057
Inventory 682,987 388,208
Prepaid expenses 26,173 (36,694)
Other assets (42,248) (1,476)
Accounts payable 611,252 (564,606)
Deferred revenue (68,807) 95,084
Accrued expenses 114,685 (59,841)
-------------- --------------
Net cash used in operating activities (542,524) (1,539,196)
Cash flows from investing activities:
Capital expenditures (253,800) --
------------- -------------
Net cash used in investing activities (253,800) --
Cash flows from financing activities:
Principal payments on nonconvertible debt (27,866) (50,707)
Proceeds from issuance of nonconvertible debt 16,000 76,771
Proceeds from capital lease 250,000 --
Payments on capital lease (25,000) --
Proceeds from issuance of stock (net) -- 3,086,749
------------- -------------
Net cash provided from financing activities 213,134 3,112,813
------------- -------------
Net increase (decrease) in cash (583,190) 1,573,617
------------- -------------
Cash, beginning of period 671,195 62,103
------------- -------------
Cash, end of period $88,005 $1,635,720
======= =======
Supplemental cash flows information:
Cash paid during the period for interest $60,482 $42,902
Noncash items:
Debt and accrued interest converted to equity during the period -- $1,536,847
Warrants exercised for promissory note -- 125,000
</TABLE>
The accompanying notes are an integral part of the statements
3
<PAGE>
INDUSTRIAL IMAGING CORPORATION
NOTES TO FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The financial statements of Industrial Imaging Corporation (the "Company")
included herein have been prepared pursuant to the rules of the Securities and
Exchange Commission for quarterly reports on Form 10-QSB and do not include all
of the information and footnote disclosures required by generally accepted
accounting principles. These statements should be read in conjunction with the
financial statements and notes thereto for the year ended March 31, 1998
included in the Company's Form 10-KSB and Form 10-KSB/A filed with the
Securities and Exchange Commission.
The financial statements and notes herein are unaudited, except for the
balance sheet as of March 31, 1998, but in the opinion of management, include
all the adjustments (consisting only of normal, recurring adjustments) necessary
to present fairly the financial position, results of operations and cash flows
of the Company.
The results of operations for the reported 1998 periods are not necessarily
indicative of the results to be achieved for any future period or for the entire
year ended March 31, 1999.
2. EARNINGS PER SHARE CALCULATION
In the last quarter of fiscal 1998, the Company adopted SFAS No. 128,
Earnings per Share ("EPS"). Basic EPS is calculated by dividing net income
(loss) by the weighted-average number of common shares outstanding for the
period. Diluted EPS is calculated the same as basic except, if not antidilutive,
stock options are included using the treasury stock method to the extent that
the average share trading price exceeds the exercise price. As of December 31,
1998 and 1997, assumed exercise of options and warrants are not included in the
calculation of diluted EPS since the effect would be antidilutive. The
implementation of this standard did not have an effect on EPS in the period
ended December 31, 1997 and, therefore, did not require restatement. Basic and
diluted EPS were equal for the three months and nine months ended December 31,
1998 and 1997; therefore, no reconciliation between basic and diluted EPS is
required.
3. INVENTORY
Inventory is stated at the lower of cost (first-in, first-out) or market
and consists of the following:
DECEMBER 31, MARCH 31,
1998 1997
------------ -----------
Raw materials $ 626,207 $ 746,748
Work-in-process 271,814 366,320
Finished goods 414,186 882,126
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$1,312,207 $1,995,194
========== ==========
4. COMPREHENSIVE INCOME
On April 1, 1998, the Company adopted SFAS No. 130, "Reporting
Comprehensive Income", which requires companies to report all changes in equity
during a period, except those resulting from investment by owners and
distribution to owners, in a financial statement for the period in which they
are recognized (" Comprehensive Income"). The Company has no items of
Comprehensive Income requiring disclosure in the accompanying financial
statements for all periods presented.
4
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
Industrial Imaging Corporation (the "Company") designs, manufactures and
markets automated optical, vision and industrial imaging systems for inspection
and identification of defects in PCBs and laser plotters for creation of PCB
artwork and phototools. The Company operates through its subsidiary AOI
International, Inc. and has manufacturing operations based in Lowell,
Massachusetts with customers located in the United States, Europe and Asia.
RESULTS OF OPERATIONS
COMPARISON OF THREE MONTH PERIODS ENDED DECEMBER 31, 1998 AND 1997
Revenues for the three months ended December 31, 1998 ("Interim 1999") were
$599,938 compared to $541,182 for the three months ended December 31, 1997
("Interim 1998"). Product revenues increased by 23% to $518,600 in Interim 1999
from $421,499 for Interim 1998 due primarily to an increase in the number of
units sold. Service revenues decreased from $119,683 for Interim 1998 to $81,338
for Interim 1999. Historically the Company has experienced significant quarterly
fluctuations in operating results due to the relatively small number of high
priced sales in any quarter. Management expects these fluctuations to continue.
Cost of revenues for Interim 1999 was $689,192 compared to $516,489 for
Interim 1998. Primarily as a result of increased service costs, there was a
gross loss for Interim 1999 of $89,254 (14.9% of revenues) compared to a gross
profit percentage of 4.6% ($24,693) for Interim 1998.
Engineering expenses for Interim 1999 of $129,554 increased from $106,258
for Interim 1998. The increase of $23,296 (21.9%) was due primarily to the
increase in staffing and related costs.
Sales and marketing expenses decreased to $157,730 for Interim 1999 from
$176,338 for Interim 1998. The decrease of $18,608 (10.6%) was due primarily to
a decrease in commissions offset by increased staffing and related expenses and
demonstration equipment expenses.
General and administrative expenses decreased to $164,281 for Interim 1999
from $210,829 for Interim 1998. The decrease of $46,548 (22.1%) was due
primarily to decreases in professional fees and amortization.
Interest expense (net) was $46,075 for Interim 1999 compared to $32,422 for
Interim 1998. This was due to interest on the new capital lease during Interim
1999 and a decrease in the interest earned during Interim 1998 on the proceeds
from the issuance of stock during the period as compared with Interim 1999.
Other expense was $1,186 for Interim 1999 (comprised of unfavorable currency
translations) compared to other expense of $140,115 for Interim 1998 made up
primarily of the $125,000 compensation charge relating to warrants exercised at
a discount.
Due to the uncertainty of realizing the tax benefits of net operating loss
carryforwards, no provision for income tax benefit was made for either Interim
1999 or Interim 1998.
As a result of the decreases in operating expenses and other expenses,
offset by the decrease in gross profits, the net loss decreased to $588,080 for
Interim 1999, as compared to $641,269 for Interim 1998.
5
<PAGE>
COMPARISON OF THE NINE MONTH PERIODS ENDED DECEMBER 31, 1998 AND 1997
Net revenues for the nine months ended December 31, 1998 were $3,233,480,
as compared to $2,154,952 for the same period in 1997, an increase of 50%.
Product revenues increased by 61.3% to $2,950,060 for the nine months ended
December 31, 1998 from $1,828,677 for the same period in 1997, due primarily to
the increase in the number of units sold. Service revenues decreased from
$326,275 for the first nine months of fiscal 1998 to $283,420 for the same nine
months in fiscal 1999.
Cost of revenues for the first nine months of fiscal 1999 was $2,689,828
compared to $2,183,243 for the same period in fiscal 1998. Primarily as a result
of the increased revenues covering certain fixed costs, gross profit as a
percent of net revenues for nine months ended December 31, 1998 increased to
16.8% ($543,652) from a gross loss of 1.3% ($28,291) for the same period in
1997.
Engineering expenses for the first nine months of fiscal 1999 of $542,070
increased from $329,457 for the same period in fiscal 1998. The increase of
$212,613 (64.5%) was due primarily to the expanding of the engineering staff and
related costs, and additional development costs for the AOI-2500 systems.
Sales and marketing expenses increased to $675,093 for the nine months
ended December 31, 1998 from $396,652 for the first nine months of fiscal 1998.
The increase of $278,441 (70.2%) was due primarily to increased commissions on
the greater sales volume, increases in staffing and related expenses and
demonstration equipment expenses.
General and administrative expenses decreased to $564,304 for the first nine
months of fiscal 1999 from $665,876 for the same period in fiscal 1998. The
decrease of $101,572 (15.3%) was due primarily to decreases in professional fees
and amortization.
Interest expense (net) was $119,416 for the nine months ended December 31,
1998, compared to $131,288 for the same nine month period in 1997. This was due
primarily to the decrease in interest earned on the proceeds from the issuance
of stock from fiscal 1998 to fiscal 1999. Other income was $1,958 for the first
nine months of fiscal 1999 (comprised of favorable currency translations)
compared to other expense of $145,335 for fiscal 1998, made up of state tax
expenses and the $125,000 compensation charge relating to warrants exercised at
a discount offset by favorable currency translations.
Due to the uncertainty of realizing the tax benefits of net operating loss
carryforwards, no provision for income tax benefit was made for either of the
nine month periods ended December 31, 1998 or 1997.
As a result of the increased revenues and the resulting gross profit
reduced by certain increased expenses, the net loss for the first nine months of
fiscal 1999 decreased to $1,355,273, as compared to the net loss of $1,696,899
for the same period in fiscal 1998.
6
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
The Company has incurred operating losses since inception that continued
through December 31, 1998. In addition, the financial statements of the Company
for Fiscal 1998 and 1999 were prepared on the assumption that the Company will
continue as a going concern and do not include any adjustments that would result
if the Company would cease as a going concern. The report of the independent
accountants contains an explanatory paragraph as to the Company's ability to
continue as a going concern. Among the factors cited by the auditors as raising
substantial doubt as to the Company's ability to continue as a going concern is
that the Company has suffered recurring losses from operations, has a net
working capital deficiency and had an accumulated deficit of $11,754,996 as of
December 31, 1998. The Company's operations to date have been funded by equity
investments, borrowing from banks, investors and stockholders, factoring of
accounts receivable, and to a limited extent, cash flow from operations. In
addition, the Company raised $3 million of new equity in November 1997.
At December 31, 1998, the Company had cash of $88,005, and a working
capital deficit of $975,324. During the nine months ended December 31, 1998,
cash used in operating activities was $542,524. The Company entered into a
sale/leaseback transaction during the first nine months of fiscal 1999 to
finance a demonstation system to aid in the pursuit of sales opportunities. The
Company currently has no outstanding material commitments for capital
expenditures.
The Company derives most of its annual revenues from a relatively small
number of sales of products, systems and upgrades, with product prices ranging
from $185,000 to $600,000 per system. As a result, accounts receivable will
likely continue to fluctuate based on the number of systems sold in each period
and the timing of the individual sales within each period. Moreover, any delay
in the recognition of revenue for single products or a delay in shipment to
customers, systems or upgrades would have a material adverse effect on the
Company's results of operations for a given accounting period. In addition, some
of the Company's net sales have been realized near the end of a quarter.
Accordingly, a delay in a customer's acceptance or in a shipment scheduled to
occur near the end of a particular quarter could materially adversely affect the
Company's results of operations for that quarter. The accounts receivable
balance increased from $214,450 at March 31, 1998, to $793,219 at December 31,
1998, due to the increased sales of systems and a slow down in collections
during the first nine months of fiscal 1999. Inventories decreased by $682,987
during the nine months ended December 31, 1998 to $1,312,207.
Accounts payable increased from $599,785 at March 31, 1998 to $1,211,037 at
December 31, 1998, primarily due to an increase in the aging of accounts
payable. Deferred revenue decreased by $68,807 as a result of decreased down
payments from customers.
Management recognizes that the Company needs to obtain additional working
capital to address its immediate and long-term operational needs and to fund the
Company's objective of aggressively pursuing market penetration. In view of the
Company's current financial condition, the Company plans to continue to
aggressively manage its working capital and expenses while pursuing product
sales opportunities as well as strategic or other business relationships. In
addition, the Company is currently seeking bank financing as well as additional
equity investments. There can be no assurance that the Company can attract
additional capital at favorable rates, if at all. In the event the Company is
unable to raise additional capital, it may be required to take additional steps
which could include a merger or sale of the Company, or seeking protection under
bankruptcy laws.
7
<PAGE>
YEAR 2000 DISCLOSURE
The Company has considered the potential problems that may arise
because of the year 2000 as it relates to the Company's internal information
systems. It is the Company's opinion that, having considered the systems that
the Company presently utilizes, the year 2000 should not present material
problems with respect to its own internal information systems. To date, the
Company is unaware of any situations of noncompliance that would materially
adversely affect its operations or financial condition. There can be no
assurance, however, that instances of noncompliance which could have a material
adverse effect on the Company's operations or financial condition will not be
identified; that the systems of other companies with which the Company transacts
business will be corrected on a timely basis; or that a failure by such entities
to correct a Year 2000 problem or a correction which is incompatible with the
Company's information systems would not have a material adverse effect on the
Company's operations or financial condition.
FORWARD LOOKING STATEMENTS
This report contains certain forward-looking statements regarding
anticipated results of operations, liquidity and other matters. These
statements, in addition to statements made in conjunction with the words
"anticipate", "expect", "believe", "intend", "seek," "estimate" and similar
expressions, are forward-looking statements that involve a number of risks and
uncertainties. Such statements are based on management's current expectations
and are subject to a number of factors and uncertainties that could cause actual
results to differ materially from those described in the forward-looking
statements. Such factors and uncertainties include, but are not limited to the
following: business conditions and growth in certain market segments and general
economy; an increase in competition; increased or continued market acceptance of
the Company's products and proposed products; the loss of the services of one or
more of the Company's key employees, which could have a material adverse effect
on the Company; dependence on few customers; the availability of additional
capital to fund expansion on acceptable terms, if at all; Year 2000 problems;
and other risks and uncertainties indicated from time to time in the Company's
filings with the Securities and Exchange Commission.
8
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS. The Company is involved in litigation with an
investor seeking registration rights for common stock the investor acquired from
the Company in 1997. The Company disputes the investor's claims and has filed
counterclaims. The claim was brought in the Supreme Court of the State of New
York by Imprimis Investors, LLC and the plaintiff seeks specific performance and
unspecified monetary damages.
ITEM 2. CHANGES IN SECURITIES. None
ITEM 3. DEFAULT UPON SENIOR SECURITIES. None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. The Company has
temporarily postponed its Annual Meeting of Stockholders and intends to hold a
meeting sometime during the next two quarters.
ITEM 5. OTHER MATTERS. None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits. The following exhibit is filed herewith:
Exhibit
-------
No. Title
--- -----
27 Financial Data Schedule
(b) Reports on Form 8-K. No reports on Form 8-K were filed
during the quarter for which this report is filed.
9
<PAGE>
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
INDUSTRIAL IMAGING CORPORATION
Date: February 16, 1999 By: /s/ Juan J. Amodei, Ph.D.
----------------------------
Juan J. Amodei, Ph.D.
Chairman, Chief Executive Officer
and President
10
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF THE ISSUER AS OF AND FOR THE NINE MONTH PERIOD ENDED
DECEMBER 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> Mar-31-1999
<PERIOD-START> Apr-01-1998
<PERIOD-END> Dec-31-1998
<CASH> 88,005
<SECURITIES> 0
<RECEIVABLES> 822,372
<ALLOWANCES> 29,153
<INVENTORY> 1,312,207
<CURRENT-ASSETS> 2,292,540
<PP&E> 450,086
<DEPRECIATION> 204,612
<TOTAL-ASSETS> 2,537,862
<CURRENT-LIABILITIES> 3,217,864
<BONDS> 0
0
0
<COMMON> 108,902
<OTHER-SE> (1,085,557)
<TOTAL-LIABILITY-AND-EQUITY> 2,537,862
<SALES> 3,233,480
<TOTAL-REVENUES> 3,233,480
<CGS> 2,689,828
<TOTAL-COSTS> 2,689,828
<OTHER-EXPENSES> 1,779,376
<LOSS-PROVISION> 2,091
<INTEREST-EXPENSE> 119,416
<INCOME-PRETAX> (1,355,273)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,355,273)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,355,273)
<EPS-PRIMARY> (.12)
<EPS-DILUTED> (.12)
</TABLE>
