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 January 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 February 15, 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
Jan 31, April 31,
1998 1997
(Unaudited) (Audited)
ASSETS
CURRENT ASSETS:
Cash 100,493 486,540
Accounts receivable, net 1,358,840 1,191,238
Inventory 2,765,566 1,587,454
Prepaid expenses 8,587 16,466
Income tax receivable 7,059 0
Deferred tax asset 98,825 98,825
Total current assets 4,339,370 3,380,523
PROPERTY AND EQUIPMENT:
Land 396,043 396,043
Building 1,310,062 1,246,548
Furniture and Equipment 229,612 191,751
Production equipment 313,440 257,917
Less accumulated depreciation (288,324) (211,724)
6,300,203 5,261,058
LIABILITIES AND STOCKHOLDERS' INVESTMENT
CURRENT LIABILITIES
Checks issued not
yet presented for payment 0 117,160
Accounts payable 585,638 380,767
Accrued liabilities 417,910 329,713
Income tax payable 0 36,371
Bank line of credit payable 395,000 0
Current maturities
of long-term debt 43,829 20,469
Total current
liabilities 1,442,377 884,480
LONG-TERM DEBT,
less current maturities 953,217 933,523
Total liabilities 2,395,594 1,818,003
STOCKHOLDERS' INVESTMENT:
Undesignated stock, 5,000,000
shares authorized
no shares issued and outstanding
Common stock, no par value,
5,000,000 authorized,
4,452,597 and 4,451,347
shares issued and
outstanding respectively 1,104,289 1,102,414
Retained earnings 2,800,320 2,340,641
Total stockholders' investment 3,904,609 3,443,055
6,300,203 5,261,058
See Accompanying Notes To Financial Statements
IMAGE SYSTEMS CORPORATION
STATEMENT OF OPERATIONS
(Unaudited)
For Qtrs Ended For Nine Mos Ended
Jan 31, Jan 31, Jan 31, Jan 31,
1998 1997 1998 1997
NET SALES 2,071,159 2,110,714 6,731,934 5,929,344
COST OF PRODUCTS SOLD 1,438,731 1,337,992 4,344,563 3,686,264
Gross Profit 632,428 772,722 2,387,371 2,243,080
OPERATING EXPENSES
Product development 217,558 122,497 570,468 357,722
Selling 207,687 199,513 654,063 551,767
Administrative 127,219 120,602 381,175 332,087
Total Operating Exp 552,464 442,612 1,605,706 1,241,576
Operating Income 79,964 330,110 781,665 1,001,504
INTEREST INCOME 19 12,428 16,039 34,320
INTEREST EXPENSE (28,508) (13) (79,455) (4,960)
Net Income Before Taxes 51,475 342,525 718,249 1,030,864
PROVISION FOR
INCOME TAXES 18,530 130,165 258,570 391,735
NET INCOME 32,945 212,360 459,679 639,129
BASIC NET INCOME
PER SHARE .01 .05 .10 .15
DILUTED NET INCOME
PER SHARE .01 .05 .10 .14
BASIC WEIGHTED AVERAGE
SHARES OUTSTANDING 4,452,597 4,434,811 4,451,800 4,391,347
DILUTED WEIGHTED AVERAGE
SHARES OUTSTANDING 4,506,636 4,571,739 4,546,254 4,532,804
See Accompanying Notes To Financial Statements
IMAGE SYSTEMS CORPORATION
STATEMENT OF CASH FLOWS
(Unaudited)
For The Nine Months Ended
Jan 31, Jan 31,
1998 1997
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income 459,679 639,129
Adjustments to reconcile
net income to cash
from operating activities-
Depreciation 76,600 38,070
Changes in current operating items
Accounts receivable (167,602) 162,532
Inventory (1,178,112) (272,427)
Prepaid expenses 7,879 (6,167)
Accounts payable 87,711 118,163
Accrued liabilities 88,197 84,981
Income taxes payable (43,430) (371,870)
Net cash from (used for)
operating activities (669,078) 392,411
CASH FLOWS FROM INVESTING ACTIVITES:
Land 0 (396,043)
Buildings (63,514) (953,116)
Furniture and
equipment additions (93,384) (89,073)
Net cash used for investing
activities (156,898) (1,438,232)
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment to bank
equipment loan 0 (9,131)
Borrowings from
bank line of credit 395,000 0
Borrowings from bank
real estate loan 43,054 953,992
Exercise of stock
options/warrants 1,875 128,438
Net cash from
financing activities 439,929 1,073,299
Net increase (decrease)
in cash (386,047) 27,478
CASH AT BEGINNING OF PERIOD 486,540 686,432
CASH AT END OF PERIOD 100,493 713,910
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid 78,755 38,943
Taxes paid 302,000 763,605
See Accompanying Notes To Financial Statements
IMAGE SYSTEMS CORPORATION
NOTES TO FINANCIAL STATEMENTS
January 31, 1998 and January 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 nine months
ended January 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, 1997.
Certain amounts reflected in the nine months ended January 31,
1997 have been reclassified to conform to the nine months ended
January 31, 1998. These reclassifications had no impact on
previously reported net income or stockholders' investments.
Earnings per Share
During the quarter ended January 31, 1998 the Company adopted
Statement of Financial Accounting Standards (SFAS) No. 128,
"Earnings per Share," which established a new methodolgy for
calculating 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. All amounts presented have been restated to
conform to the new presentation. The components of the earnings
per share denominator are as follows:
For Qtrs Ending For Nine Mos Ending
Jan 31, Jan 31, Jan 31, Jan 31,
1998 1997 1998 1997
Weighted average
common shares
outstanding for basic
earnings per share 4,452,597 4,434,811 4,451,800 4,391,347
Weighted average
common shares issuable
under the exercise
options 54,039 136,928 94,454 141,457
Share used in diluted
earnings per share 4,506,636 4,571,739 4,546,254 4,532,804
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 January 31, 1998 Versus January 31, 1997
Net sales for the three months ended January 31, 1998 decreased
$39,555 or 1.9% compared to the three months ended January 31,
1997. Selling lower revenue monitors is the primary reason for
the decrease. The number of orders leveled off during the
quarter ended January 31, 1998 resulting in similar units sold
for the comparative third quarters. The Asian financial crisis
has reduced our shipments to the Asian market which resulted in
lower than projected revenue for the third quarter ended January
31, 1998.
Gross profit decreased $140,294 or 18.2% for the quarter ended
January 31, 1998 compared to the quarter ended January 31, 1997.
The gross profit percentage decreased from 36.6% to 30.5%. The
anticipated increase in units sold did not materialize which
resulted in a less efficient level of production.
For the quarter ended January 31, 1998 product research and
development expenses increased $95,061 or 77.6% compared to the
quarter ended January 31, 1997. The increase is due to the
addition of an engineer, increased travel costs, increased
activity in the development of a new M20L moitor, and increased
evaluation of CRTs, power supplies, and yokes.
Selling expenses for the quarter ended January 31, 1998
increased 4.1% or $8,174 over the comparable quarter ended
January 31, 1997. The modest increae is due to increased
personnel costs.
Administrative expenses increased 5.5% or $6,617 for the three
months ended January 31, 1998 compared to the three months ended
January 31, 1997. An additional person and increased public
relations expense are the reasons for the increase.
Interest income decreased from $12,428 for the quarter ended
January 31, 1997 to $19 for the quarter ended January 31, 1998.
Cash used for inventory, the new building and equipment has
depleted the excess cash in the government trust account
resulting in decreased interest income.
For the quarter ended January 31, 1998 interest expense
increased to $28,508 from $13 for the quarter ended January 31,
1997. The increase is due to the increase in the real estate
loan to finance the new building and to the increase in the bank
line of credit to finance the increase in inventory. Also
interest of $24,036 was capitalized during the quarter ended
January 31, 1997.
The provision for income taxes decreased $111,635 or 85.8% for
the three months ended January 31, 1998 compared to the three
months ended January 31, 1997. 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 allowance for
research and development expenses.
Nine Months Ended January 31, 1998 versus January 31, 1997
Net sales for the nine months ended January 31, 1998 increased
$802,590 or 13.5% compared to the nine months ended January 31,
1997. The increase is due to selling more units to a greater
international customer base. However, the Asian financial
crisis has diminished our shipments to the Asian market which in
turn resulted in lower than projected revenue for the third
quarter ended January 31, 1998. Revenue from sales of the high
bright flat panel is also slower than projected. Shipments of
the new M20L monitor began during the third quarter ended
January 31, 1998 and the Company expects the M20L revenue to
increase in future periods. To maintain product visibility the
Company has displayed its products at the Radiological Society
of North America (RSNA) conference held in November 1997 and has
displayed its products at the SPIE medical imaging conference in
February 1998.
Gross profit increased $144,291 or 6.4% for the nine months
ended January 31, 1998 as compared to the nine months ended
January 31, 1997. The gross profit percentage decreased from
37.8% to 35.5%. The primary reason is the decrease from 36.6%
to 30.5% for the comparable third quarters. The anticipated
increase in units sold during the third quarter ended January
31, 1998 did not materialize which resulted in a less efficient
level of production.
Product research and development expenses for the nine months
ended January 31, 1998 increased $212,746 or 59.5% as compared
to the nine months ended January 31, 1997. The increase is due
to the addition of an engineer, increased travel costs, and
increased activity in the following areas:
1. The development of a new M20L monitor.
2. Analysis of power supplies to produce a
lower noise level.
3. Evaluation of CRTs for screen quality,
performance levels, and light and focus quality.
4. Evaluation of yokes for temperature control and
focus ability.
This concentrated effort is focused on developing higher quality
and more reliable monitors.
Selling expenses for the nine months ended January 31, 1998
increased $102,296 or 18.5% over the nine months ended January
31, 1997. The addition of a sales support employee, increased
commissions due to increased sales volume, and increased travel
and trade show expenses are the primary reasons for the increase.
Administrative expenses increased $49,088 or 14.8% for the nine
months ended January 31, 1998 compared to the nine months ended
January 31, 1997. The primary reasons for the increase are the
addition of an office employee and increased public relations
expense.
Interest income for the nine months ended January 31, 1998
decreased $18,281 or 53.3% compared to the nine months ended
January 31, 1997. Cash used for the building, equipment, and
inventory has decreased the excess cash in the government trust
account resulting in decreased interest income.
Interest expense for the nine months ended January 31, 1998
increased $74,495 (from $4,960 to $79,455) over the nine months
ended January 31, 1997. The increase is due to the increase in
the real estate loan to finance the new building and to the
increase in the bank line of credit used to finance the increase
in inventory. Interest of $40,791 was capitalized during the
nine months ended January 31, 1997.
The provision for income taxes decreased $133,165 or 34.0% for
the nine months ended January 31, 1998 compared to the nine
months ended January 31, 1997. The primary reasons for the
decrease are the decrease in net income before taxes and the
effective tax rate decrease from 38% to 36% due to the credit
allowance for research and development expenses.
Liquidity and Capital Resources
Cash used for operating activites totaled $669,078 for the nine
months ended January 31, 1998 compared to $392,411 cash
generated from operating activities for the comparable period
ending January 31, 1997. Cash used increased $1,061,489 due to
additional cash used for inventory totaling $905,685, cash used
for accounts receivable totaling $330,134 and a lower net income
totaling $179,450 offset by lower payments for income taxes
totaling $328,440. 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 $156,898 for the nine
months ended January 31, 1998 compared to $1,438,232 cash used
for the nine months ended January 31, 1997. The $1,438,232 is
primarily due to land purchased for $391,043 during June 1996
for the new building site and to $953,116 spent on the new
building. The $156,898 is a result of $63,514 used for the new
building and $93,384 used for production equipment and office
furniture.
Cash provided by financing activities for the nine months ended
January 31, 1998 totaled $439,929 compared to $1,073,299 for the
comparable nine months ended January 31, 1997. The $439,929 is
due primarily to cash of $395,000 provided by the bank line of
credit to aid in financing inventory and accounts receivable.
The $1,073,299 is due primarily to cash from the bank real
estate loan of $953,992 and the exercise of stock options and
warrants totaling $128,438.
The Company's primary source of liquidity at January 31, 1998 is
cash of $100,493, the bank line of credit of $1,000,000 (of
which $605,000 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 Exchange Act, 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 March 10, 1998
