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, 1998
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 41-1620497
(State or Other Jurisdiction (I.R.S. Employer
of Incorporation or Organization) 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, 1998, 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
10-31-98 4-30-98
ASSETS (Unaudited) (Audited)
CURRENT ASSETS:
Cash 245,195 57,577
Accounts receivable, net 968,330 1,068,286
Inventory 2,194,253 2,411,966
Prepaid expenses 30,447 12,448
Income tax receivable 8,391 43,629
Deferred tax asset 101,454 197,825
Total current assets 3,548,070 3,791,731
PROPERTY AND EQUIPMENT:
Land 396,043 396,043
Building 1,310,062 1,310,062
Furniture and fixtures 227,669 227,669
Production equipment 308,965 308,965
Less accumulated depreciation (379,044) (319,644)
Net property and equipment 1,863,695 1,923,095
5,411,765 5,714,826
LIABILITIES AND STOCKHOLDERS' INVESTMENT
CURRENT LIABILITIES:
Accounts payable 581,005 373,034
Accrued liabilities 383,849 351,808
Bank line of credit 5,000 310,000
Current maturities of long-term debt 65,051 44,823
Total current liabilities 1,034,905 1,079,665
LONG-TERM DEBT, less current maturities 699,319 941,332
Total liabilities 1,734,224 2,020,997
STOCKHOLERS' INVESTMENT:
Undesignated sotck, 5,000,000 shares
authorized; no shares issued and
outstanding -- --
Common stock, no par value, 5,000,000
shares authorized; 4,452,597 issued
and outstanding respectively 1,104,289 1,104,289
Retained earnings 2,573,252 2,589,540
Total stockholders' investment 3,677,541 3,693,829
5,411,765 5,714,826
See Accompanying Notes to Financial Statements
IMAGE SYSTEMS CORPORATION
STATEMENT OF OPERATIONS
(Unaudited)
For the Qtrs Ended For the Six Mos Ended
10-31-98 10-31-97 10-31-98 10-31-97
NET SALES 1,606,963 2,537,439 3,070,985 4,660,775
COST OF PRODUCTS SOLD 1,153,253 1,543,270 2,155,624 2,905,832
Gross Profit 453,710 994,169 915,361 1,754,943
OPERATING EXPENSES
Product development 183,335 182,110 345,661 352,910
Selling 151,654 249,326 311,995 446,376
Administrative 119,706 132,763 238,669 253,956
Total Operating Expenses454,695 564,199 896,325 1,053,242
Operating Income(Loss) (985) 429,970 19,036 701,701
INTEREST INCOME 2,791 5,314 2,814 16,020
INTEREST EXPENSE (21,349) (23,656) (46,529) (50,947)
Net Income (Loss) Before
\
Income Taxes (19,543) 411,628 (24,679) 666,774
BENEFIT (PROVISION)
FOR INCOME TAXES 6,593 (148,187) 8,391 (240,040)
NET INCOME (LOSS) (12,950) 263,441 (16,288) 426,734
BASIC NET INCOME (LOSS)
PER SHARE 0.00 0.06 0.00 0.10
DILUTED NET INCOME (LOSS)
PER SHARE 0.00 0.06 0.00 0.09
BASIC WEIGHTED AVERAGE
SHARES OUTSTANDING 4,452,597 4,451,456 4,452,597 4,451,401
DILUTED WEIGHTED AVERAGE
SHARES OUTSTANDING 4,452,597 4,566,666 4,452,597 4,556,062
See Accompanying Notes to Financial Statements
IMAGE SYSTEMS CORPORATION
STATEMENT OF CASH FLOWS
(Unaudited)
For the Six Months Ended
10-31-98 10-31-97
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income (16,288) 426,734
Adjustments to reconcile net
income to net cash provided by
operating activities:
Depreciation 59,400 48,000
Changes in current operating items:
Accounts receivable 99,956 (345,566)
Inventory 217,713 (1,125,393)
Prepaid expenses (17,999) 2,550
Accounts payable 207,971 226,460
Accrued liabilities 32,041 64,719
Income taxes payable - 123,040
Income taxes receivable 35,238 -
Deferred tax asset 96,371 -
Net cash provided by (used for) operating
activities 714,403 (579,456)
CASH FLOW FROM INVESTING ACTIVITES:
Building - (53,514)
Furniture and equipment - (76,214)
Net cash used for investing
activites - (129,728)
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings from bank
line of credit 790,000 555,000
Repayments to bank
line of credit (1,095,000) (355,000)
Borrowings from real
estate loan - 266,008
Repayments to bank real
estate loan (221,785) (212,798)
Exercise of stock options - 1,875
Net cash provided by (used for) financing
activities (526,785) 255,085
Net increase (decrease) in cash 187,618 (454,099)
CASH AT BEGINNING OF PERIOD 57,577 486,540
CASH AS END OF PERIOD 245,195 32,441
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid 45,170 50,330
Taxes paid - 117,000
See Accompanying Notes to Financial Statements
Item 1. FINANCIAL STATEMENTS
IMAGE SYSTEMS CORPORATION
NOTES TO FINANCIAL STATEMENTS
October 31, 1998 and 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 for a fair statement of the results for the interim
periods presented. The operating results for the six months
ended October 31, 1998 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, 1998.
2. EARNINGS PER SHARE
Basic earnings per share is computed by dividing net income by
the weighted average number of shares of common stock
outstanding during the year. Diluted earnings per common share
is similar to the computation of basic earnings per share,
except that the denominator is increased for the assumed
exercise of dilutive options using the treasury stock method.
The denominator is not affected if there is a loss during the
period. The components of the earnings per share denominator
are as follows:
Qrtr Ending Six Mos Ending
Oct 31, Oct 31, Oct 31, Oct 31,
1998 1997 1998 1997
Weighted average common
sharesoutstanding for
basic earnings per share4,452,597 4,451,456 4,452,597 4,451,401
Weighted average common
shares issuable
under the exercise of
options -- 115,210 -- 114,661
Shares used in diluted
earnings per
share 4,452,597 4,566,666 4,452,597 4,566,062
3. RECENT PRONOUNCEMENTS
SFAS No. 131, "Disclosures about Segments of an Enterprise and
Related Information," establishes standards for the way the
public business enterprises report information about operating
segments in annual financial statements and will be adopted by
the Company in fiscal year 1999. The statement requires
business segment financial information be reported in the
financial statements utilizing the management approach. The
management approach is defined as the manner in which management
organizes the segments within the organization for making
operating decisions and assessing performance. Management
believes that the adoption of SFAS No. 131 will not have a
material impact on the financial statements or the disclosures
contained therein.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Certain statements contained herein are forward-looking
statements within the meaning of the Securities Act of 1933 and
the Securities Exchange Act of 1934 that involve a number of
risks and uncertainities. Such forward-looking information may
be indicated by words such as will, may be, expects or
anticipates. In addition to the factors discussed herein, among
the other factors that could cause actual results to differ
materially are the following: business conditions and growth in
the personal computer industry and the general economy;
competitive factors such as rival computer and peripheral
product sellers and price pressures; availability of vendor
products at reasonable prices; inventory risks due to shifts in
market demand; and risks presented from time to time in reports
filed by the Company with the Securities and Exchange
Commission, including but not limited to the annual report on
Form 10KSB for the year ended April 30, 1998.
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, 1998 Versus October 31, 1997
Net sales decreased 36.7% from $2,537,439 for the quarter ended
October 31, 1997 to $1,606,963 for the quarter ended October 31,
1998. The primary reasons for the decrease are the sale of
lower revenue monitors and the decline in orders which resulted
in a lower quantity of units sold. This decline is attributable
to additional market competition and to a reduction of shipments
to overseas markets. During the second quarter the backlog of
orders increased which will carry over to third and fourth
quarter shipments.
Gross profit decreased 54.4% from $994,169 for the quarter ended
October 31, 1997 to $453,710 for the quarter ended October 31,
1998. The gross profit percentage dropped from 39.2% to 28.2%.
Fixed overhead expenses, higher material costs, and lower levels
of production resulted in a lower gross profit.
Product research and development expenses only increased $1,225
or .7% for the quarter ended October 31, 1998 compared to the
same quarter in 1997. The Company's research activity is
concentrated on:
1. Making geometric and focus improvements.
2. Designing a new M21P chassis.
3. Evaluating suppliers for improved quality and material
costs.
4. Implementing new packaging to improve shipping reliability
and to reduce packaging costs.
5. Improving the reliability testing in the quality control
area.
6. Developing a ruggedized flat panel monitor.
7. Developing a higher speed video amplifier.
8. Developing a higher quality resolution and focus monitor.
Selling expenses for the quarter ended October 31, 1998
decreased $97,672 or 39.2% compared to the same quarter in 1997.
The decrease is a result of lower salaries due to a decrease in
sales personnel, decreased commissions because of the lower
sales volume, and decreases in travel and marketing expenses.
For the three months ended October 31, 1998, administrative
expenses decreased 9.8% or $13,057 compared to the same period
ending October 31, 1997. The reason for this decrease is
primarily a decline in public relations expense.
Interest income decreased $2,523 or 47.5% for the quarter ended
October 31, 1998 compared to the same quarter ended in 1997.
Excess cash used for inventory during the second quarter ended
October 31, 1997 reduced the government trust account which
resulted in lower interest income.
Interest expense decreased $2,307 or 9.8% for the three months
ended October 31, 1998 compared to the three months ended
October 31, 1997. The decrease is primarily due to a decrease
in our real estate loan for financing our building.
The provision for income taxes decreased $154,780 for the
quarter ended October 31, 1998 compared to the quarter ended
October 31, 1997. The decrease is due to the decrease in net
income before taxes.
Six Months Ended October 31, 1998 versus October 31, 1997
Net sales decreased 34.1% from $4,660,775 for the six months
ended October 31, 1997 to $3,070,985 for the six months ended
October 31, 1998. The primary reasons for the decrease are
selling lower revenue monitors and selling a lower quantity of
monitors.
Gross profit decreased 47.8% from $1,754,943 for the six months
ended October 31, 1997 to $915,361 for the six months ended
October 31, 1998. The decrease in gross profit is due to the
fixed nature of overhead expenses, higher cost of materials and
lower levels of production due to lower sales.
Product research and development expense for the six months
ended October 31, 1998 decreased $7,249 or 2.1% over the
comparable 1997 period. The decrease is due to fewer inventory
items used in the development process.
Selling expenses decreased $134,381 or 30.1% for six months
ended October 31, 1998 compared to the six months ended October
31, 1997. The decrease is a result of lower salaries due to a
decrease in the sales personnel, a decrease in commissions
because of the lower sales volume, and decreases in travel and
marketing expenses.
Administrative expenses decreased $15,287 or 6.0% for the six
months ended October 31, 1998 compared to the same period ended
in 1997. The decrease is primarily due to the decrease in
public relations expense.
Interest income decreased $13,206 or 82.4% for the six months
ended October 31, 1998 compared to the six months ended October
31, 1997. Excess cash used for inventory during the second
quarter ended October 31, 1997 has reduced cash in the
government trust account causing interest income to decline.
Interest expense for the six months ended October 31, 1998
decreased $4,418 or 8.7% compared to the same period ended in
1997. The decrease is due to a decrease in our real estate loan.
The provision for income taxes decreased $248,431 for the six
months ended October 31, 1998 compared to the six months ended
October 31, 1997. The decrease is due to the decrease in net
income before taxes.
Liquidity and Capital Resources
Cash provided by operating activities totaled $714,403 for the
six months ended October 31, 1998 compared to cash used for
operating expenses totaling $579,456 for the same six months
ending in 1997. Cash provided by decreases in inventory and
accounts receivable were offset by cash used for the decrease in
income.
No cash was used for investing activities during the six months
ending October 31, 1998 compared to $129,728 used during the six
months ended October 31, 1997. The $129,728 was used for office
furniture, research and development equipment, production
equipment, and the final completion of the new building.
Cash used in financing activities totaled $526,785 for the six
months ended October 31, 1998 compared to the $255,085 provided
by financing activities for the six months ended October 31,
1997. Cash used this year is primarily due to the $300,000 pay
down of our bank line of credit and a $200,000 payment to reduce
the building loan. Last year the $255,085 cash was provided by
the real estate loan to pay for the final construction of the
new building and by the bank line of credit to finance the
increase in operating activities.
The Company's primary source of liquidity at October 31, 1998 is
cash of $245,195 and the bank line of credit of $1,000,000 (of
which $995,000 is available). The Company also has access to,
but has not utilized, the bank term loan for equipment which
matures June 14, 2001. The bank line of credit was renewed on
August 25, 1998 for one year. 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.
Year 2000
The Company has planned to replace the PC's which are not year
2000 compatable during July 1999. The Company has received
verbal notification from its computer software vendor that the
software is year 2000 compliant and is in the process of
obtaining written confirmation. The Company does not expect to
incur significant costs in connection with these year 2000
modifications.
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: /s/___________________________
Dean Scheff, Chief Executive Officer
and Chief Financial Officer
(Principal Executive Officer and
Principal Financial Officer)
Dated December 10, 1998
