U. S. SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-KSB
[ X ] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 [FEE REQUIRED] For the fiscal year ended April 30, 1997
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from__________ to __________
Commission File No. 0 21245
Image Systems Corporation
(Name of Small Business Issuer in its charter)
41-1620497
(I.R.S. Employer Identification No.)
Minnesota
(State or other jurisdiction of incorporation or organization)
6103 Blue Circle Drive, Minnetonka, Minnesota
(Address of principal executive offices)
55343
(Zip Code)
(612) 935-1171
(Issuer's telephone number, including area code)
Securities registered under Section 12(b) of the Act: None
Securities registered under Section 12(g) of the Act: Common Stock
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), and (2)
has been subject to such filing requirements for the past 90 days.
Yes X No
Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B contained herein, and no disclosure will be contained, to
the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. [ X ]
The Issuer's revenues for the fiscal year ended April 30, 1997 were
$8,092,737.
As of July 10, 1997, 4,451,347 shares of the Issuer's Common Stock were
outstanding. The aggregate market value of the Common Stock held by
non-affiliates of the Issuer on such date (based on the low bid for such shares
as reported by the Metro Data Company, Minneapolis, Minnesota, a computer
service bureau that collects quotations from local marketmakers) was $4,457,955.
Such quotations represent interdealer prices, without retail markup, markdown or
commission, and do not necessarily represent actual transactions. For purposes
of this computation, affiliates of the Issuer are deemed only to be the
Issuer's officers and directors.
PART I
ITEM 1. BUSINESS
Image Systems Corporation (the "Company") was incorporated in the State of
Minnesota on September 1, 1988. The Company designs, develops, manufactures
and markets large high bright high resolution monitors. The Company's
monitors provide high brightness and high resolution which are needed in
applications such as medical imaging, scientific analysis, image processing and
electronic and mechanical design.
The last decade has seen an explosion in the use of computers throughout the
world. The aftermath of this explosion of use has been rapid technological
changes in the size, capacity and uses of the computers. These changes have
affected both hardware and software. Computers have become more powerful,
capable of performing more complicated tasks using more sophisticated, yet less
expensive hardware. Software applications have also become more powerful. With
the advent of windowing systems (MS WindowsR, X-WindowsR) the user may display
several applications at a time WHICH DRIVES THE NEED FOR LARGER HIGH RESOLUTION
MONITORS.
The accumulation of information in hard copy form, combined with the expense and
logistical difficulty of storage and retrieval have created an opportunity for
practical, affordable solutions to working with information. These applications
are the driving force behind the need for larger displays with higher
resolutions. Information for analysis, diagnostics and research (for example
patient records or X-rays) that previously was difficult to locate and time
consuming to analyze, can now be retrieved quickly and easily.
The primary market for the Company's monitors is the medical field, particularly
radiology. The growing technology of Picture Archiving and Communications
Systems (PACS) and technology in hospitals and clinics, allows x-rays, magnetic
resonance images and other tests to be displayed on a computer monitor.
Electronic storage, retrieval, display and transmission of these images can be
less costly and more expedient for consultation and diagnosis by the medical
staff than film based applications. The images can be transmitted
electronically to remote diagnostic stations for multiple participant
consultation. The large size, high resolution and brightness of the Company's
monitors are well-suited for this market.
The Company's secondary market is Air Traffic Control (ATC). ATC requires many
of the same attributes as the medical marketplace; large size, high contrast
and high resolution with the additional capability of sunlight readability.
The Company has responded to these opportunities by concentrating on the
technically sophisticated end of the product spectrum. The Company's high
bright, high resolution displays are both computer platform and video board
independent. High resolution and brightness combine to give a clear, sharp,
easily readable display which reduces eye strain. There are many companies
selling into the standard VGA monitor market. The current standard VGA
provides a resolution of 640 x 480 or 1024 x 768. The Company's monitors
provide 3 to 10 times that resolution. The typical monitor provides 20-30
footLamberts of brightness. The Company's monitors provide 65-100
footLamberts, at least twice as bright as standard monitors.
the modular design of the Company's circuitry has greatly reduced the amount of
parts and wiring. The modular format allows the monitors to be serviced
on-site by computer service personnel, which minimizes downtime. The four key
components of the Company's monitors: deflection board, video board, interface
board and the power supply can easily be removed and replaced. Parts, rather
than entire monitors can be stocked by the Company's resellers, reducing
inventory costs, downtime costs and other costs related to product repair. The
Company maintains a toll free phone number for technical support. The
Company's monitors have a one year limited warranty.
The Company's circuitry, HRMSTM (Hi-Res Multi-SweepTM) enables the
autosynchronous monitors to adjust dynamically to numerous display boards and
standards. HRMSTM provides compatibility with high resolution display
controllers for many computer platforms, including PCs, Apple Macintosh and
workstation level systems such as Sun, HP/Apollo, Silicon Graphics and DEC.
Manufacturing
The Company's components and subassemblies are produced by subcontractors whose
primary task is building reliable and economical subassemblies. Final assembly
and quality assurance are performed by the Company at its corporate facility.
Components are obtained from a number of sources. Some components are shelf
items and readily available. Other components are custom made for the Company.
The printed circuit boards, designed by the Company, are "stuffed" for the
Company by custom suppliers within close proximity of Company facilities.
After assembly each monitor is "burned in" for a period of 72 hours to ensure
exacting quality standards are met. The monitors are then subject to final
inspection where final adjustments are made prior to shipment.
Marketing
The Company's promotion strategy is to increase product and corporate name
recognition through a variety of means, including: ongoing market research,
advertising, product press releases, product reviews, listing in buyer's
guides, magazine articles, distribution of printed materials, lead tracking and
trade shows. The Company believes that trade shows have provided the Company's
products with significant exposure.
The Company's pricing strategy is to establish competitive pricing for products
that are marketed and designed for the technologically sophisticated end of the
product spectrum. Monitors are designed and priced to be favorably positioned
between the high-end expensive monitors and the low-end commodity-type
monitors. Early in the Company's development management determined that it
would not be a mass producer of monitors, rather it would produce monitors for
smaller niche markets such as medical imaging, high-end document imaging,
simulation and sunlight readable monitors for Air Traffic Control. Management
believed that it would be difficult to compete on the basis of price in the
mass market with the foreign manufacturers. The Company's monitors are priced
from $1,795 to $12,000 retail. Industry accepted discounts are given to VARs,
OEMs and Resellers. These are appropriate prices for customers who need to be
cost effective in an industry that continues to be more and more sophisticated.
This customer is looking for monitors that fit in between commodity products
that are priced between $250 and $1,000 and are 12" to 19" in size, and those
products that range in price from $4,000 to $25,000.
Competition
The computer monitor industry is highly competitive. The Company's 21" color
and greyscale monitors compete with large, well-established companies such as
Hitachi, NEC and Sony. These monitors do not provide as high a resolution, or
as bright a monitor as the Company's monitors, but they are generally less
expensive. The Company also competes with Data Ray and Megascan, which
provide large, high resolution monitors, but the Company's products are
generally less expensive with comparable performance.
The Company has engaged in research and development since its inception.
Research and development operating expenses were $526,077 in 1996 and
$501,319 in 1997.
Products
The Company's gray scale monitors range in size from 9" to 24" in landscape
mode. The 21" and the 24" are also available in portrait mode. Versions of
these monitors operate between NTSC and 80KHz, from 48KHz to 108KHz and from
85KHz to 170KHz. Image Systems' High Resolution Multi-SweepTM (HRMSTM)
circuitry enables the monitors to sweep these frequencies and display, on the
low end, TV images and on the high end, 4 to 5 million pixel images. However,
pixel count alone is not sufficient and must be coupled with high brightness
and high contrast.
The Company's newest product is the FP1610HBMAX, a 16.1" flicker-free, high
resolution, high brightness and contrast landscape flat panel color display.
The monitor operates at VGA and 1280 X 1024 pixels with 100 footLamberts
brightness. Greyscale integrity is excellent and the FP1610HB is an ideal
display for such areas as cath labs and surgical suites which have space
constraints as well as high bright, high contrast requirements.
Customers
The Company had one customer which accounted for 12% of net sales for the year
ended April 30, 1997. During the prior fiscal year, one customer accounted for
15% of net sales.
Backlog
The dollar amount of the Company's backlog of orders considered to be firm at
April 30, 1997 was approximately $2.1 million. The Company expects that nearly
all orders considered to be firm at April 30, 1997, will be filled during
the 1998 fiscal year. The Company does not believe that its backlog at anytime
is necessarily indicative of annual sales. The business of the Company is not
subject to significant seasonal variations.
Intellectual Property
Certain equipment, processes, information and knowledge generated by the Company
and utilized in the manufacture of its products are regarded as propriety by
the Company and are believed to be protectable by applicable trade secret and
unfair competition laws. The Company seeks to achieve protection almost
entirely through such trade secret and unfair competition laws rather than
through patents. The Company follows this policy to avoid public disclosure
inherent in the application for and perfection of patents. In the absence of
judicial determination, there can be no certainty as to the degree of
protection afforded by the aforesaid practices of the Company in this regard.
Employees
As of May 1, 1997, the Company had 36 full time and 4 part time employees.
None are represented by a labor union. The Company believes its employee
relations are satisfactory.
ITEM 2. PROPERTIES
During June, 1996 the Company acquired land for $396,043 in the Opus Industrial
Park located in Minnetonka, MN. Construction of a new 30,000 square foot
office, production and warehouse facility began during August 1996.
The Company moved into the new facility and officially took possession
February 17, 1997. Cost of the new facility is $1.2 million. Prior to the move
the Company was leasing a 11,000 square foot one story building at a rental cost
of $7,771 per month.
ITEM 3. LEGAL PROCEEDINGS
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to security holders during the quarter
ended April 30, 1997.
PART II
ITEM 5. MARKET FOR THE REGISTRANTS COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
Prior to February 21, 1997 the Company's Common Stock was listed on the OTC
Bulletin Board in the Minneapolis/St. Paul, Minnesota market. On February 21,
1997 and thereafter the price per share is quoted on the NASDAQ Small Cap
Market under the symbol "IMSG." The following table sets forth, for the
quarter indicated, the low and high bid prices per share for the Company's
Common Stock as reported by the Metro Data Company, a Minneapolis computer
service bureau that collects quotations from local marketmakers. Such
quotations represent interdealer prices, without retail markup, markdown or
commission, and do not necessarily represent actual transactions. The Company's
common stock began trading near the end of October, 1991.
Fiscal year ended April 30, 1995 Low Bid High Bid
Quarter ended July 31, 1994 $2 1/8 $3
Quarter ended October 31, 1994 1 3/8 2 1/2
Quarter ended January 31, 1995 1 3/8 1 5/8
Quarter ended April 30, 1995 1 1/2 1 1/2
Fiscal year ended April 30, 1996
Quarter ended July 31, 1995 1 1/2 1 3/4
Quarter ended October 31, 1995 1 1/2 1 3/4
Quarter ended January 31, 1996 1 3/8 2 5/8
Quarter ended April 30, 1996 2 1/8 3 1/8
Fiscal year ended April 30, 1997
Quarter ended July 31, 1996 3 1/8 4 1/8
Quarter ended October 31, 1996 3 1/4 3 7/8
Quarter ended January 31, 1997 3 5/8 3 7/8
Quarter ended April 30, 1997 3 7/16 4 1/4
The Company has never paid cash dividends on its Common Stock. The Company
currently intends to retain earnings for use in its operations and does not
anticipate paying cash dividends in the foreseeable future. As of June 30,
1997, there were approximately 398 record holders of the Company's Common Stock.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The Company designs, assembles and markets high bright, high contrast monitors
for use with computers.
RESULTS OF OPERATIONS
Year Ended April 30, 1997 Versus April 30, 1996
Net sales for the year ended April 30, 1997 increased $155,297 or a modest 2.0%
over the year ended April 30, 1996. The Company experienced a flat first
quarter and an even flow of units sold during the last three quarters for the
year ended April 30, 1997. Anticipated revenue growth in the air traffic
control area did not develop as planned. A retired air traffic controller has
been hired to give the Company better insight into requirements for the FAA.
The Company has also formed a relationship with IBM to market a high bright,
large flat panel display to the medical and air traffic areas. Shipments are
scheduled to begin during the current year's second quarter. The Company will
also begin production of a new digital CRT display during the second quarter of
the new year. This product greatly reduces the number of adjustments required
in the manufacturing process and gives the customer greater control over image
quality. The Company attended several trade shows during the fiscal year to
display its monitors and to obtain contacts and leads to new customers. The
trade shows also enable the Company to maintain its relations with current
customers.
Gross profit for the year ended April 30, 1997 decreased $46,603 or 1.5%
compared to the year ended April 30, 1996. The gross margin percentage
decreased from 39.0% to 37.7%. The decrease was a result of increased wages
and production expenses. Product development expenses decreased $24,758 or
4.7% for the year ended April 30, 1997 compared to the prior fiscal year.
Expenses are continually incurred for redesigning monitor boards and for
changing through hole boards to surface mounted boards. These expenses are
concentrated on upgrading the standard monitor models and the high bright
higher pixel monitor models. Development costs are also incurred to monitor
new model CRT tubes and other new electrical technological parts. Research
time was involved in evaluating the Company's monitor to meet the emission,
safety and immunity standards required by markets outside of the United States.
For the year ended April 30, 1997 selling expenses increased $40,582 or 5.4%
compared to the year ended April 30, 1996. Additional personnel costs are the
primary reason for the increase.
Administrative expenses for the year ended April 30, 1997 increased $174,794 or
52.8% compared to the previous year. The increase is due to additional
personnel costs, moving expenses to the new building, additional bad debt
expenses, expenses involved in applying for and being registered on NASDAQ, and
the rental buyout. The lease on the rental property expires during August
1997. The Company reached an agreement with the landlord to buyout the lease
for $24,000.
Interest income for the year ended April 30, 1997 increased to $42,393 from
$2,540 for the year ended April 30, 1996. Cash generated from operations has
allowed the Company to deposit excess cash in government trust funds with
suitable interest income rates.
For the year ended April 30, 1997 interest expense increased to $19,632 compared
to $4,778 for the previous year. The increase is due to interest incurred on
the real estate loan after the new building construction had been completed on
February 17, 1997. Interest of $41,323 incurred on the real estate loan while
the building was under construction has been capitalized as part of the
building cost.
Income taxes for the year ended April 30, 1997 decreased $129,000 or 22.6%
compared to the previous year. The decrease is a result of a reduction in
income before taxes and to increased credits for research and development
activities.
Liquidity and Capital Resources
Cash provided by operating activities totaled $518,155 for the year ended
April 30, 1997 compared to the $708,908 total for the comparable year ended
April 30, 1996. The decrease of $190,753 is primarily due to additional cash
used for inventory and income taxes offset by cash from improved utilization of
accounts receivable and accounts payable.
For the year ended April 30, 1997 cash used for the investing activities totaled
$1,801,346 compared to $49,098 used for the previous year. The increase is due
to the purchase of land for $391,043 during June, 1996, to the new building
constructed for $1,246,548 including capitalized interest and to the purchase
of additional office, production and warehouse equipment for $163,755. The
Company officially took possession of the new 30,000 square foot warehouse,
production, and office building on February 17, 1997.
Net cash provided by financing activities totaled $1,083,299 for the year ended
April 30, 1997 compared to the total net cash used of $19,453 for the previous
year. Cash from the exercise of stock warrants and cash from the bank loan to
purchase land and construct a building on the land site are the primary
increases for the cash flow. The Company obtained a short term bank loan
commitment of $500,000 during June 1996 to purchase land and for beginning
construction of a new building. The Company's long term real estate loan
commitment totaled $1,220,000. Through May 1, 1997 interest was being accrued
and paid monthly at a variable rate of 1% per annum above the prime rate.
Interest was adjusted on May 1, 1997 to a fixed rate of .5% per annum above the
prime rate. Beginning June 1, 1997 the monthly principal and interest are paid
in equal monthly installments based on a twenty year amortization with a final
balloon payment due on May 1, 2002. However, the Company expects the loan will
be extended an additional five years to May 1, 2007.
The Company's primary source of liquidity on April 30, 1997 are cash of
$486,540, a bank line of credit of $500,000, the option to add $266,008 to the
real estate loan, and the option to add $80,000 to the bank capital equipment
loan. The bank line of credit of $500,000 expires August 23, 1997 and the
Company expects to renew this line of credit. During May 1997 the Company
borrowed an additional $266,008 from the real estate loan bringing the total to
the maximum $1,220,000. During July 1997 the Company paid $200,000 to reduce
the real estate loan principal. The Company has not utilized any of the
Capital equipment loan. During February 1997 the Company was accepted for
listing on the Small Cap NASDAQ Market and began listing its stock under the
symbol "IMSG." The Company believes that cash, cash from operations, a bank
line of credit and existing bank loans will be adequate to meet the anticipated
short term liquidity and capital resource requirements of its business.
ITEM 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS
Page
Report of Independent Public Accountants 9
Balance Sheets as of April 30, 1997 and 1996 10
Statements of Operations for the Years Ended April 30, 1997 and 1996 11
Statements of Stockholders' Investment for the Years
Ended April 30, 1997 and 1996 12
Statements of Cash Flows for the Years Ended April 30, 1997 and 1996 13
Notes to Financial Statements 14-18
All other schedules for which provision is made in the applicable accounting
regulations of the Securities and Exchange Commission have been omitted as not
required, not material or the information required has been included elsewhere
in the financial statements and related notes.
Arthur Andersen LLP
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Image Systems Corporation:
We have audited the accompanying balance sheets of Image Systems Corporation
(a Minnesota corporation) as of April 30, 1997 and 1996, and the related
statements of operations, stockholders' investment and cash flows for the year
then ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Image Systems Corporation as
of April 30, 1997 and 1996, and the results of its operations and its cash
flows for the years then ended in conformity with generally accepted accounting
principles.
ARTHUR ANDERSEN LLP
Minneapolis, Minnesota,
June 5, 1997
IMAGE SYSTEMS
Balance Sheet
As of April 30
ASSETS 1997 1996
CURRRENT ASSEST:
Cash $486,540 $686,432
Accounts receivable, net of allowance for
doubtful accounts of $50,000 and $40,000 1,191,238 1,284,896
Inventories 1,587,454 1,318,606
Prepaid expenses and other 16,466 6,232
Deferred tax asset 98,825 33,825
Total current assets 3,380,523 3,329,991
PROPERTY AND EQUIPMENT:
Land 396,043
Building 1,246,548
Furniture and fixtures 191,751 150,535
Production equipment 257,917 160,080
Less-Accumulated depreciation (211,724) (162,420)
Net property and equipment 1,880,535 148,195
5,261,058 3,478,186
LIABILITIES AND STOCKHOLDERS' INVESTMENT
CURRENT LIABILITIES:
Checks issued not yet presented for payment $117,160
Accounts Payable 380,767 290,745
Accrued expenses 329,713 278,307
Income taxes payable 36,371 421,976
Current maturities of long-term debt 20,469 9,131
Total current liabilities 884,480 1,000,159
LONG-TERM DEBT (Note 2) 933,523
Total liabilites 1,818,003 1,000,159
COMMITMENTS AND CONTINGENCIES (Note 4)
STOCK HOLDERS' INVESTMENT:
Undesignated stock, 5,000,000 shares authorized; no shares issued
and outstanding
Common stock, no par value, 5,000,000 shares authorized;
4,451,347 and 4,333,222 issued and outstanding 1,102,414 963,976
Retained earnings 2,340,641 1,514,051
Total stockholders' investment 3,443,055 2,478,027
Total Assets 5,261,058 3,478,186
The accompanying notes are an integral part of these balance sheets.
IMAGE SYSTEMS CORPORATION
Statements of Operations
For the Years Ended April 30
1997 1996
NET SALES $8,092,737 $7,937,440
COST OF PRODUCTS SOLD 5,040,622 4,838,722
Gross profit 3,052,115 3,098,718
OPERATING EXPENSES:
Product development 501,319 526,077
Selling 798,263 757,681
Administrative 505,704 330,910
Total operating expenses 1,805,286 1,614,668
Operating income 1,246,829 1,484,050
INTEREST INCOME 42,393 2,540
INTEREST EXPENSE (19,632) (4,778)
Income before income taxes 1,269,590 1,481,812
PROVISION FOR INCOME TAXES 443,000 572,000
NET INCOME 826,590 909,812
NET INCOME PER SHARE .19 .21
WEIGHTED AVERAGE SHARES OUTSTADING 4,403,950 4,333,222
The accompanying notes are an integral part of these financial statements.
IMAGE SYSTEMS CORPORATION
Statement of Stockholders' Investment
For the Years Ended April 30, 1997 and 1996
Common Stock Retained
Shares Amount Earnings Total
BALANCE, April 30, 1995 4,333,222 $963,976 $604,239 $1,568,215
Net income 909,812 909,812
BALANCE, April 30, 1996 4,333,222 963,976 1,514,051 2,478,027
Exercise of stock options 18,125 18,438 18,438
Exercise of stock warrants 100,000 120,000 120,000
Net income 826,590 826,590
BALANCE, April 30, 1997 4,451,347 1,102,414 2,340,641 3,443,055
The accompanying notes are an integral part of these financial statements.
IMAGE SYSTEMS CORPORATION
Statement of Cash Flows
For the Years Ended April 30
1997 1996
OPERATING ACTIVITES:
Net income $826,590 $909,812
Adjustments to reconcile net income to net cash
provided by operating activities
Depreciation 69,006 47,669
Deferred tax benefit (65,000) (19,225)
Change in operating items:
Accounts receivable 93,658 (446,386)
Inventories (268,848) (77,560)
Prepaid expenses and other (10,234) 4,014
Accounts payable and checks issued not
yet presented for payment 207,182 (83,751)
Accrued expenses 51,406 128,360
Income taxes payable (385,605) 245,975
Net cash provided by operating activities 518,155 708,908
INVESTING ACTIVITIES:
Property and equipment additions (1,801,346) (49,098)
FINANCING ACTIVITIES:
Exercise of stock options and warrants 138,438
Proceeds from issuance of long-term debt 1,483,992 1,670,000
Repayments on long-term debt (539,131)(1,689,453)
Net cash provided by (used for) financing activities 1,083,299 (19,453)
Net increase (decrease) in cash (199,892) 640,357
CASH, beginning of year 686,432 46,075
CASH, end of year 486,540 686,432
SUPPLEMENTAL DISCLOSURES:
Interest paid 54,831 4,516
Income taxes paid 893,605 345,250
The accompanying notes are an integral part of these financial statements.
IMAGE SYSTEMS CORPORATION
Notes to Financial Statements
April 30, 1997 and 1996
1. Organization of Business and Significant Accounting Policies:
Image Systems Corporation (the Company), a Minnesota corporation, was formed on
September 1, 1998, to design, assemble and market large, high-resolution
computer monitors. All production ad subassembly work is performed by
subcontractors. Final assembly and quality assurance are performed by the
Company. Sales of the Company's products are primarily in the domestic market.
Inventories
Inventories are stated at the lower of first-in, first-out cost or market and
are summarized as follows:
1997 1996
Finished goods $49,894 $60,235
Work in process 149,048 133,111
Components 1,388,512 1,125,260
Total inventories 1,587,454 1,318,606
Property and Equipment
During fiscal 1997, the Company terminated its building lease and constructed a
new building that was occupied in February 1997.
Property and equipment are stated at cost. Depreciation and amortization for
financial reporting purposes are provided on the straight-line method over the
estimated useful lives of the respective assets. Major repairs, refurbishments
and improvements which significantly extend the useful lives of the related
assets are capitalized. Maintenance and repairs, supplies and accessories are
charged to expense as incurred.
Revenue Recognition
The Company recognizes revenue when the product is shipped to the customer. The
Company has one customer which accounted for 12% of net sales for the year
ended April 30, 1997 and one customer which accounted for 15% of net sales for
the year ended April 30, 1996.
Research and Development Costs
The Company charges all research and development costs to operations in the
period incurred.
Warranty Costs
The Company warrants its products against defects in materials and workmanship
under normal use and for service for one year. The reserve for warranty costs
of $140,000 and $100,000 as of April 30, 1997 and 1996, has been established to
cover estimated costs of warranty claims.
Income Taxes
The Company follows the liability method of accounting for income taxes. The
liability method provides that deferred taxes be recorded for differences
between the tax basis of assets and liabilities and their carrying amounts for
financial reporting purposes based on enacted tax rates.
Net Income Per Share
Net income per share is computed by dividing net income by the weighted average
number of shares of common stock (shares actually outstanding) and, to the
extent dilutive, common stock equivalents (shares issuable upon exercise of the
Company's stock option plan).
Financial Instruments
For most instruments, including cash and cash equivalents, receivables, accounts
payable and accruals, the carrying amount approximates fair value as these
instruments are short-term in nature.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclose of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Significant estimates include estimation of warranty reserve requirements. The
ultimate results could differ from those estimates.
Concentration of Credit Risk
The Company typically sells its products to original equipment manufacturers and
systems integrators. Credit risk with respect to trade receivables is
generally spread across a large number of customers with dispersion across
different businesses and geographic regions. As of April 30, 1997, two
customers accounted for 27% of outstanding accounts receivable; however,
these accounts receivable were collected subsequent to April30, 1997.
Recently Issued Accounting Standard
During fiscal 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 128, "Earnings per Share," which
establishes a new methodology for calculating earnings per share. SFAS No. 128
is effective for financial statement periods ending after December 15, 1997.
Management believes that the adoption of SFAS No. 128 will not have a
significant effect on earnings per share.
2. Revolving Credit Agreement and Long-Term Debt:
The Company has a $500,000 revolving credit agreement with a bank which expires
in August 1997. Borrowings bear interest at the bank's reference rate plus
1.0% (9.5% at April 30, 1997). Borrowings are collateralized by accounts
receivable and inventory. The Company had no borrowing outstanding under this
credit agreement as of April 30, 1997 and 1996.
Additional information on the Company's bank borrowings on the revolving line of
credit is as follows for the years ended April 30:
1997 1996
Average balance outstanding $8,800 $16,500
Maximum balance outstanding $100,000 $170,000
Range of interest rates 9.25%-9.5% 9.25%-10.5%
At April 30, 1997, the Company has a balance of $953,992 outstanding under a
note payable to a bank, with interest at 9.25%. Payments on the note are due
in monthly installments of $11,082 beginning June 1, 1997 through April 1,
2002, with one final payment of $820,897 on May 1, 2002. The note is
collateralized by the building and land. In May 1997, the Company borrowed an
additional $266,008 on this note, bringing the total borrowings to $1,220,000.
The schedule aggregate annual maturities under all long-term debt agreements as
of April 30, 1997 are as follows:
1998 $20,469
1999 $24,517
2000 $26,559
2001 $29,377
2002 $32,173
Thereafter $820,897
Total $953,992
3. Income Taxes:
The provision for income taxes for the years ended April 30 is summarized as
follows:
1997 1996
Current:
Federal $468,000 $547,000
State 40,000 44,225
Total current 508,000 591,225
Deferred tax benefit (65,000) (19,225)
Total provision $443,000 $572,000
The Company had net deferred tax assets of $98,825 and $33,825 as of April 30,
1997 and 1996, respectively. Deferred income taxes are the result of
provisions of the tax laws that either permit or require certain items of
income or expense to be reported for tax purposes in different periods than
they are reported for financial reporting. Deferred tax assets primarily
relate to the tax effect of temporary differences related to reserves and
accruals.
The difference between the federal statutory income tax rate and the Company's
effective tax rate for the years ended April 30 was as follows:
1997 1996
Statutory rate 34% 34%
State income taxes, net of federal benefit 2 2
Research and development tax credits (1) -
Other, net - 3
35% 39%
4. Commitments and Contingencies:
Stock Options
The Company has a stock option plan under which 400,000 common share are
reserved for grant as either non qualified or incentive stock options to
officers, directors and key employees. As of April 30, 1997, 170,000 of the
reserved common stock shares are available for future grant. The options
expire, if not exercised, six years after the date of grant. A summary of plan
activity is as follows:
Options Price Per
Outstanding Share
April 30, 1995 172,500 $1.00-$2.00
Granted 50,000 1.50
Forfeited or Canceled (10,000) 1.94
April 30, 1996 212,500 1.00-2.00
Granted 60,000 3.50
Exercised (18,125) 1.00-1.50
Forfeited or canceled (50,000) 1.00-1.50
April 30, 1997 204,375 1.00-3.50
Options exercisable at April 30 ,1997 118,750 $1.00-$2.00
The Company's stock options are accounted for under APB Opinion No. 25, under
which no compensation cost has been recognized. Had compensation costs for
these plans been determined under SFAS No. 123, "Accounting for Stock-Based
Compensation," the Company's net income and earnings per share would have been
reduced to the following pro forma amounts:
1997 1996
Net income As reported $826,590 $909,812
Pro forma $783,970 $898,612
Net income per share As reported .19 .21
Pro forma .18 .21
Because the method of accounting under SFAS No. 123 has not been applied to
options granted prior to May 1, 1995, the resulting pro forma compensation cost
may not be representative of that to be expected in future years.
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option pricing model with the following weighted average
assumptions used for grants in fiscal 1997 and 1996, respectively: risk-free
interest rates of 6.34%-6.74% and 6.2%-6.84%; no expected dividends per share;
expected lives of 5 years; and expected volatility of 92.96%.
In connection with its public offering, in August 1991, the Company issued
warrants to purchase 100,000 shares of the Company's common stock to an
underwriter, which were exercised in September 1996 at $1.20 per share.
Operating Leases
The Company leased its former facility through February 1997 and currently
leases certain equipment under operating leases. A majority of these leases
require the Company to pay maintenance, insurance, taxes and other expenses in
addition to minimum annual rent. Rent expense was $115,000 in 1997 and $93,000
in 1996. Minimum rental commitments under noncancelable operating leases at
April 30, 1997 are as follows:
1998 $13,300
1999 13,300
2000 11,600
2001 8,200
2002 8,200
Total $54,600
5. Employee Benefit Plans
The Company has a 401(k) plan for all eligible employees. Employees can make
voluntary contributions of up to 15% of their compensation to the plan. There
were no contributions to this plan made by the Company in 1997 or 1996.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The directors and executive officers of the Company are:
Name Age Position
Dean Scheff 65 President/Director
Diana Scheff 57 Secretary/Director
Marta Volbrecht 37 Vice President/Director
Laura Sorensen 37 Director
David Sorensen 36 Director
Steven Volbrecht 38 Director
Dr. Frederick R. Olson Director
Hilding Nelson Director
The directors of the Company are elected annually by the shareholders for
a term of one year or until their successors are elected and qualified.
Dean Scheff. President and Director. He has a B.A. in Economics from the
University of Minnesota. Mr. Scheff was the founder of CPT Corporation ("CPT")
and its CEO from 1971 to January, 1988, and the Chairman of its Board until
January, 1990. He was a founder of the Company in September, 1988.
Diana Scheff. Secretary and Director. Ms. Scheff has a B.A. in Art and
Music from Gustavus Adolphus College. She worked for CPT Corporation for 18
years in building operations and design, sales incentives, employee recognition
and corporate travel. She was a founder of Image Systems in 1988 and has
worked there since. Her responsibilities include public relations, investor
relations, marketing design and advertising.
Marta Scheff Volbrecht. Vice President and Director. Ms. Volbrecht has a
B.A. in International Relations from the University of Minnesota and a MBA from
the University of Dallas. She worked for 7 years until 1989 for CPT in sales
and marketing. She has worked for the Company since 1989 as Vice President of
Sales.
Laura Sorensen. Director. Ms. Sorensen has a B.A. in International
Relations from the University of Minnesota. She worked for 10 years until 1989
for CPT in Human Resources, Marketing and Training and Development. She has
worked for the Company since 1989 as Manager of Human Resources.
David Sorensen. Director. Mr. Sorensen has a B.S.M.E. in Mechanical
Engineering from the University of Minnesota, and a MBA from University of St.
Thomas. He worked for Honeywell from graduation in 1983 to 1990 when Alliant
Techsystems was spun off from Honeywell. He was employed by Alliant
Techsystems as a Program Manager. He joined the Company on January 1, 1992, as
Director of Manufacturing. During 1994 he took on the additional
responsibilities as VP of Operations.
Steven Volbrecht. Director. Mr. Volbrecht has a B.S.C.E. in Civil
Engineering from the University of Minnesota. He was employed from 1982 to
1988 by Johnson Bros. Corporation as a Project Manager, and from 1988 to 1991
as a Project Manager for Landwehr, Inc. He rejoined Johnson Bros. as a Project
Manager from 1991 to 1996. Currently he is a Staff Engineer with Hansen Thorp
Pellinen Olson Inc.
Dr. Frederick R. Olson. Director. Dr. Olson is a member of the Board and
President of Consulting Radiologists Ltd. and SKI-MD. He currently serves as
technical advisor to Image Systems, AT&T Bell Labs, 3M Corp., Med Vision and
ICON Medical Systems.
Hilding Nelson. Director. Mr. Nelson is Chairman of the Board of Kinnard
Investments. Previously he was Acting President and CEO of Petfood Warehouse
and a member of its Board of Directors; Chairman, President and CEO of Greater
Midwest Leasing and Car City, Inc.; President and CEO of Lund International
and a member of its Board of Directors; President and CEO of Multaplex/Prestige
Electronics Corporation and a member of its Board of Directors.
Diana Scheff is the wife of Dean Scheff. Marta Scheff Volbrecht and Laura
Sorensen are the children of Dean and Diana Scheff. David Sorensen is the
husband of Laura Sorensen, and Steven Volbrecht is the husband of Marta Scheff
Volbrecht.
ITEM 10. EXECUTIVE COMPENSATION
During the year ended April 30, 1997 one officer and no employee received
compensation in excess of $100,000. The one officer received total
compensation of $103,964 which consists of a salary of $37,500 plus commissions
of $66,464. The aggregate amount of compensation received by all executive
officers as a group (6 persons) totaled $356,121.
Dean Scheff, the President and CEO of the Company received a salary of $60,930,
sales commissions of $15,012 and a bonus of $1,500 for the fiscal year ended
April 30, 1996. For the year ended April 30, 1997 Dean Scheff's salary was
$86,500 plus sales commissions of $12,605.
On May 1, 1994 Image Systems implemented a 401K and a Flexible Benefits Plan for
its employees. The Company has not contributed to these plans. Image Systems
had no long term compensation or other compensation plans.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT
The following table sets forth as of May 1, 1997, the beneficial ownership
of each person known by the Company to own beneficially 5% or more of the
Company's outstanding shares of Common Stock, of each director of the Company,
and of all officers and directors as a group. Except as otherwise indicated,
all persons indicated have sole voting and dispositive power over such share
Number Percent
Name of Shares of Class
Dean Scheff (1) 792,685(2) 17.8
Diana Scheff (1) 792,685(2) 17.8
Laura Sorensen (1) 657,685 14.8
Marta Volbrecht (1) 657,685 14.8
David Sorensen (2) - -
Steven Volbrecht (2) - -
All officers and directors 2,900,740 65.2
as a group (6 persons)
(1) The address of such person is 6103 Blue Circle Drive, Minnetonka,
Minnesota, 55343.
(2) Does not include shares beneficially owned by spouse. Each person
disclaims beneficial ownership of shares owned by their spouse.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
None.
PART IV
ITEM 13. EXHIBITS LIST AND REPORTS ON FORM 8-K
(a) Exhibits
3.1 Articles of Incorporation of the Registrant. (Incorporated herein
by reference to Exhibit 3.1 to Registration Statement on Form S-18, File No.
33-4259C.)
3.2 By-Laws of the Registrant. (Incorporated herein by reference to
Exhibit 3.2 to Registration Statement on Form S-18, as amended,
File No. 33-4259C.)
(b) Reports on Form 8-K
None filed for the quarter ended April 30, 1997.
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act,
the Registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
IMAGE SYSTEMS CORPORATION
Dated: July ____, 1997 By ____________________________
Dean Scheff, President
In accordance with the Exchange Act, this report has been signed below by
the following persons on behalf of the Registrant and in the capacities and on
the dates indicated:
Signatures Title Date
/s/________________________ Director and President July ____, 1997
Dean Scheff (Principal Executive,
Accounting and Financial
Officer)
/s/________________________ Director and Secretary July ____, 1997
Diana Scheff
/s/________________________ Director and Vice President July ____, 1997
Marta Volbrecht
/s/________________________ Director July ____, 1997
Laura Sorensen
/s/________________________ Director and Vice President July ____, 1997
David Sorensen
/s/________________________ Director July ____, 1997
Steve Volbrecht
/s/________________________ Director July ____, 1997
Dr. Frederick R. Olson
/s/________________________ Director July ____, 1997
Hilding Nelson
SUPPLEMENTAL INFORMATION TO BE FURNISHED WITH REPORTS FILED PURSUANT TO SECTION
15(d) OF THE ACT BY REGISTRANTS WHICH HAVE NOT REGISTERED SECURITIES PURSUANT
TO SECTION 12 OF THE ACT
Enclosed are four copies of the Registrant's annual report to stockholders
for the year ended April 30, 1997.
EXHIBIT INDEX
Exhibit Sequential
No. Item Page No.
(3) A. Articles of Incorporation of
the Registrant.
(Incorporated herein by
reference to Exhibit 3.1 to
Registration Statement on
Form S-18, as amended,
File No. 33-4259C.)
(3) B. By-Laws of the Registrant.
(Incorporated herein by reference
to Exhibit 3.2 to Registration
Statement on Form S-18, as amended
File No. 33-4259C.)
