U. S. SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-QSB
(Mark One)
[ X ] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended October 31, 1997
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition prior from __________ to __________
Commission File No. 0 21245
Image Systems Corporation
(Exact Name of Small Business Issuer as Specified in its Charter)
Minnesota
(State or Other Jurisdiction of Incorporation or Organization)
41-1620497
(I.R.S. Employer Identification No.)
6103 Blue Circle Drive, Minnetonka, Minnesota 55343
(Address of Principal Executive Offices)
(612) 935-1171
(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), and (2) has been subject to such
filing requirements for the past 90 days. Yes _X_ No ____
As of December 1, 1997, there were 4,452,597 shares of Common
Stock, no par value per share, outstanding.
Part 1. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
IMAGE SYSTEMS CORPORATION
BALANCE SHEETS
Oct 31, April 30,
1997 1997
ASSETS (Unaudited) (Audited)
CURRENT ASSETS:
Cash $32,441 $486,540
Accounts receivable, net 1,536,804 1,191,238
Inventory 2,712,847 1,587,454
Prepaid expenses 13,916 16,466
Deferred tax asset 98,825 98,825
Total current assets 4,394,833 3,380,523
PROPERTY AND EQUIPMENT:
Land 396,043 396,043
Building 1,300,062 1,246,548
Furniture and fixtures 212,442 191,751
Production equipment 313,440 257,917
Less accumulated depreciation (259,724) (211,724)
$6,357,096 $5,261,058
LIABILITIES AND STOCKHOLDERS' INVESTMENT
CURRENT LIABILITIES:
Checks issued not yet
presented for payment $0 $117,160
Accounts payable 724,387 380,767
Accrued liabilities 394,432 329,713
Income taxes payable 159,411 36,371
Current maturities of
long-term debt 42,837 20,469
Bank line of credit 200,000 0
Total current liabilities 1,521,067 884,480
LONG-TERM DEBT,
less current maturities 964,365 933,523
Total liabilities 2,485,432 1,818,003
STOCKHOLERS' INVESTMENT:
Undesignated stock,
5,000,000 shares authorized;
no shares issued and outstanding
Common stock, no par value,
5,000,000 shares authorized;
4,452,597 and 4,451,347 issued
and outstanding respectively 1,104,289 1,102,414
Retained Earnings 2,767,375 2,340,641
Total stockholders' investment 3,871,664 3,443,055
6,357,096 5,261,058
See Accompanying Notes to Financial Statements
IMAGE SYSTEMS CORPORATION
STATEMENT OF OPERATIONS
(Unaudited)
For the Quarters Ended For the Six Months Ended
Oct 31, Oct 31, Oct 31, Oct 31,
1997 1996 1997 1996
NET SALES $2,537,439 $2,234,675 $4,660,775 $3,818,630
COST OF
PRODUCTS SOLD 1,543,270 1,343,630 2,905,832 2,348,272
Gross Profit 994,169 891,045 1,754,943 1,470,358
OPERATING EXPENSES
Product
development 182,110 114,286 352,910 235,225
Selling 249,326 192,275 446,376 352,254
Administrative 132,763 104,088 253,956 211,485
Total Operating
Expenses 564,199 410,649 1,053,242 798,964
Operating
Income 429,970 480,396 701,701 671,394
INTEREST INCOME 5,314 10,595 16,020 21,892
INTEREST
EXPENSE (23,656) (67) (50,947) (4,947)
Net Income
Before
Income Taxes 411,628 490,924 666,774 688,339
PROVISIONS
FOR
INCOME TAXES 148,187 186,550 240,040 261,570
NET INCOME $263,441 $304,374 $426,734 $426,769
NET INCOME
PER SHARE $0.06 $0.07 $0.10 $0.10
WEIGHTED
AVERAGE SHARES
OUTSTANDING 4,451,456 4,397,661 4,451,401 4,369,580
See Accompanying Notes to Financial Statements
IMAGE SYSTEMS COPORATION
STATEMENT OF CASH FLOWS
(Unaudited)
For the Six Months Ended
October 31, October 31,
1997 1997
CASH FLOWS FROM OPEARING ACTIVITES:
Net income $426,734 $426,769
Adjustments to reconcile net
income to net cash provided
by operating activites:
Depreciation 48,000 25,380
Changes in current operating items
Accounts receivable (345,566) 158,689
Inventory (1,125,393) (256,151)
Prepaid expenses 2,550 778
Accounts payable 226,460 299,742
Accured liabilities 64,719 8,058
Income taxes payable 123,040 (257,035)
Net cash from (used for)
operating activities (579,456) 406,230
CASH FLOWS FROM INVESTING ACTIVITIES:
Land 0 (391,043)
Building (53,514) (588,769)
Furniture and equipment (76,214) (54,025)
Net cash used for
investing activities (129,728) (1,033,837)
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment to bank equipment loan 0 (9,131)
Borrowings from bank
real estate loan 266,008 953,992
Repayment to bank
real estate loan (212,798) 0
Borrowings from bank
line of credit 200,000 0
Exercise of stock options 1,875 120,938
Net cash from
financing activities 255,085 1,065,799
Net increase
(decrease) in cash (454,099) 438,192
CASH AT BEGINNING OF PERIOD 486,540 686,432
CASH AT END OF PERIOD $32,441 $1,124,624
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid $50,330 $14,894
Taxes paid $117,000 $518,605
See accompanying notes to financial statements.
IMAGE SYSTEMS CORPORATION
NOTES TO FINANCIAL STATEMENTS
OCTOBER 31, 1997
(Unaudited)
1. ORGANIZATION AND ACCOUNTING POLICIES:
The unaudited interim financial statements furnished herein
reflect all adjustments which are, in the opinion of management,
necessary to a fair statement of the results for the interim
periods presented. The operating results for the six months
ended October 31, 1997 are not necessarily indicative of the
operating results to be expected for the full fiscal year.
These statements should be read in conjunction with the
Company's most recent audited financial statements dated April
30, 1997.
Certain amounts reflected in the six months ended October 31,
1996 have been reclassified to conform to the six months ended
October 31, 1997. These reclassifications had no impact on
previously reported net income or stockholders' investments.
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.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The Company was formed on September 1, 1988 to design, assemble
and market high resolution monitors for use with computers.
RESULTS OF OPERATIONS
Three Months Ended October 31, 1997 Versus October 31, 1996
Net sales for the three months ended October 31, 1997 increased
$302,764 or 13.5% over the comparable 1996 quarter. Selling 11%
more monitors is the primary reason for the increase.
Gross profit increased $103,124 or 11.6% for the three months
ended October 31, 1997 compared to the three months ended
October 31, 1996. The gross profit percentage decreased
slightly from 39.9% to 39.2% or a decrease of .7% Higher
material costs are the primary reason for the decrease.
Product research and development expenses increased $67,824 or
59.3% for the three months ended October 31, 1997 compared to
the same 1996 quarter. The increase is due to the addition of
an engineer, increased activity in the development of a new M20L
monitor, and cost of acquiring American, Canadian and European
emissions, immunity, and safety approvals for the new 17 inch
metal and plastic monitor.
Selling expenses increased 29.7% or $57,051 for the quarter
ended October 31, 1997 compared to the quarter ended October 31,
1996. The increase is due to increased commissions on higher
sales volume and to the addition of sales support personnel.
For the three months ended October 31, 1997 administrative
expenses increased $28,675 or 27.5% over the quarter ended
October 31, 1996. An additional office person and increased
public relations and office expenses are the reasons for the
increase.
Interest income decreased from $10,595 to $5,314 or $5,281 for
the quarter ended October 31, 1997 compared to the quarter ended
October 31, 1996. Cash used for the building, equipment and
inventory has decreased the excess cash in the government trust
account resulting in decreased interest income.
For the quarter ended October 31, 1997 interest expense
increased to $23,656 from $67 for the quarter ended October 31,
1996. The increase is due to the increase in the real estate
loan to finance the new building and due to interest of $12,093
being capitalized during the quarter ended October 31, 1996.
The provision for income taxes decreased $38,363 or 20.6% for
the quarter ended October 31, 1997 compared to the quarter ended
October 31, 1996. The decrease is due primarily to the decrease
in net income before taxes. The effective tax rate also
decreased from 38% to 36% due to the credit for research and
development expenses.
Six Months Ended October 31, 1997 versus October 31, 1996
Net sales for the six months ended October 31, 1997 increased
$842,145 or 22.1% over the comparable 1996 period. The increase
is primarily due to selling 21% more monitors.
Gross profit increased $284,585 or 19.4% for the six months
ended October 31, 1997 as compared to the same 1996 period. The
gross profit percentage decreased from 38.5% to 37.7% or a
decrease of .8%. The primary reason for the decrease is higher
material costs.
Product research and development expenses for the six months
ended October 31, 1997 increased $117,685 or 50.0% over the
comparable 1996 period. The primary reasons for the increase
are the addition of an engineer and the increased activity in
the Research and Development area. Research concentrated in
forming a deflection board from through hole to surface mounted
technology, turning hardware control into software control via
micro controllers, developing a new 17 inch metal and plastic
monitor, and developing a new M20L monitor. Developing the new
monitors also required obtaining emission, immunity and safety
approvals from American, Canadian, and European authorities.
Selling expenses for the six months ended October 31, 1997
increased $94,122 or 26.7% over the six months ended October 31,
1996. The addition of sales support personnel, increased
commissions due to increased sales volume, and increased travel
and marketing expenses are the primary reasons for the increase.
Administrative expenses for the six months ended October 31,
1997 increased $42,471 or 20.1% over the comparable 1996 period.
The primary reasons for the increase are the addition of office
personnel, increased public relations expense, and increased
office expenses as a result of increased sales volume.
Interest income decreased $5,872 for the six months ended
October 31, 1997 compared to the six months months ended October
31, 1996. Cash used for the building, equipment and inventory
has decreased the excess cash in the government trust account
resulting in decreased interest income.
Interest expenses for the six months ended October 31, 1997
increased $46,000 (from $4,947 to $50,947) over the comparable
1996 period. The increase is due to the increase in the real
estate loan to finance the new building and due to interest of
$16,755 being capitalized during the six months ended October
31, 1996.
The provision for income taxes decreased $21,530 for the six
months ended October 31, 1997 compared to the six months ended
October 31, 1996. The primary reasons for the income tax
decrease are the decrease in net income before taxes and the
effective tax rate decrease from 38% to 36% due to the credit
for research and development expenses.
Liquidity and Capital Resources
Cash used for operating activities totaled $579,456 for the six
months ended October 31, 1997 compared to the $406,230 total
cash from operating activities for the six months ended October
31, 1996. Cash used increased $985,686 due to additional cash
used for inventory totaling $869,242 and for accounts receivable
totaling $504,255 offset by additional cash from income taxes
payable of $380,075. The purchase of flat panel monitors, in
anticipation of flat panel orders, is the reason for the
inventory increase.
Cash used for investing activities totaled $129,728 for the six
months ended October 31, 1997 compared to $1,033,837 used for
the six months ending October 31, 1996. The $1,033,837 is
primarily due to land purchased for $391,043 during June 1996
for the new building site and to the partial completion
($588,769) of the new building. The $129,728 is a result of
$53,514 cash used for the new building and $76,214 used for
production equipment and office furniture.
Cash provided by financing activities for the six months ended
October 31, 1997 totaled $255,085 compared to $1,065,799 for the
six months ended October 31, 1996. The $1,065,799 is due
primarily to cash from the bank real estate loan of $953,922 and
the exercise of stock options totaling $120,938. The $255,085
is due primarily to cash of $200,000 provided by the bank line
of credit to aid in financing accounts receivable and inventory.
The Company's primary source of liquidity at October 31, 1997 is
cash of $32,441, the bank line of credit of $1,000,000 (of which
$800,000 is available), and the option to add to the bank term
loan to purchase capital equipment to meet production and
research needs. The bank line of credit was renewed on August
25, 1997 for one year. The capital equipment term loan, which
matures on June 14, 2001, has not been utilized. The Company
believes that cash, cash from operations, the 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.
Part 2. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
None
Item 2. CHANGES IN SECURITIES
None
Item 3. DEFAULTS UPON SENIOR SECURITIES
None
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
Item 5. OTHER INFORMATION
None
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
None
SIGNATURE
In accordance with the requirements of the Securities Exchange
Act of 1934, the registrant caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Image systems Corporation
Registrant
By:___________________________
Dean Scheff,
Chief Executive Officer
and Chief Financial Officer
(Principal Executive Officer and
Principal Financial Officer)
Dated December 10, 1997
