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, 1998
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)
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) (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, 1998
were $8,185,011.
As of July 15, 1998, 4,452,597 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 Nasdaq
Stock Market, Inc.) was $2,689,305. 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") 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
digital x-ray systems, there is a greater need for high bright,
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 30-40 footLamberts of
brightness. The Company's monitors provide 65-100 footlambers,
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, Silicon Graphics, and IBM.
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 $10,000 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 $7,000 to $25,000.
Competition
The computer monitor industry is highly competitive. The
Company's monitors compete with large, well-established
companies such as Siemens and Barco, but they are generally more
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 expenses were $734,884 in
1998 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 90kHz to 190kHz. 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 from
VGA to 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. A rugged version of the FP1610 is also available
for such applications as factory automation as well as military
requirements.
Customers
The Company had no customers which accounted for 10% of net
sales for the year ended April 30, 1998. During the prior
fiscal year, one customer accounted for 12% of net sales.
Backlog
The dollar amount of the Company's backlog of orders considered
to be firm at April 30, 1998 was approximately $1.8 million.
The Company expects that nearly all orders considered to be firm
at April 30, 1998, will be filled during the 1999 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, 1998, the Company had 37 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
The Company moved into a new 30,000 square foot office,
production and warehouse facility during February, 1997 in the
Opus Industrial Park located in Minnetonka, Minnesota. The cost
of the new facility was $1.3 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
The Company is a party to ongoing legal and tax proceedings
arising in the ordinary course of business. In the opinion of
management, the resolution of these matters will not have a
material adverse effect on the Company's consolidated financial
position or results of operations.
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, 1998.
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. The Company's Common stock began trading near the end
of October, 1991. 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 Nasdaq Stock Market,
Inc. Such quotations represent interdealer prices, without
retail markup, markdown or commission, and do not necessarily
represent actual transactions.
Fiscal year ended April 30, 1996 Low Bid High Bid
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
Fiscal year ended April 30, 1998
Quarter ended July 31, 1997 2 1/4 4 1/8
Quarter ended October 31, 1997 2 5/8 4 1/4
Quarter ended January 31, 1998 2 3 1/4
Quarter ended April 30, 1998 1 6 5/16
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, 1998 there were
approximately 435 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.
RESULTS OF OPERATIONS
Year Ended April 30, 1998 Versus April 30, 1997
Net sales for the year ended April 30, 1998 increased $92,274 or
1.1% over the year ended April 30, 1997. The Company
experienced a 13.5% gain in net sales during the first three
quarters but a slow fourth quarter reduced the year end to a
modest 1.1% increase. Sales were impacted by the Asian
financial crisis, by the significant decline of flat panel
prices, by the sluggish air traffic control market and by delays
in the requested the delivery dates in the medical imaging
contracts. The Company has maintained its product visibility by
displaying its monitors a the RSNA (Radiological Society of
North America) conference during November 1997, at the SPIE
medical imaging conference during February 1998, and at the Air
Traffic Control Association show in October of 1997.
Gross profit decreased $463,908 or 15.2% for the year ended
April 30, 1998 compared to the year ended April 30, 1997. The
gross profit percentage decreased from 37.7% to 31.6%. The
decrease was affected by the decline in flat panel prices which
necessitated an inventory write down, by the decline in units
sold resulting in less efficient levels of production, and by
increases in material costs.
Product research and development costs for the year ended April
30, 1998 increased $233,565 or 46.6% compared to the year ended
April 30, 1997. The increase is due to the addition of an
engineer, increased personnel costs, increased travel costs, and
increased activity in the following areas:
1. The development of a new M20L monitor.
2. Evaluation of CRTs for screen quality, performance levels,
and light and focus quality.
3. Evaluation of yokes for temperature control and focus
ability.
4. Evaluation of high voltage power supplies in order to
identify power supplies with higher levels of reliability and performance.
5. Update documentation and testing requirements to meet US,
Asian, and European regulations. This included the ability to apply the CE
mark to meet testing standards established by the European Community.
This concentrated effort is focused on developing higher quality
and more reliable monitors.
Selling expenses for the year ended April 30, 1998 increased
$33,528 or 4.2% compared to the previous year. The increase is
due primarily to additional travel costs, increased
participation in tradeshows and the addition of a sales support
person.
Administrative expenses for the year ended April 30, 1998
increased $56,137 or 11.1% compared to the year ended April 30,
1997. The addition of office personnel, increased public
relation expenses and increased office equipment operating lease
expenses are the reasons for the increase.
Interest income for the year ended April 30, 1998 decreased
$26,313 or 62.1% compared to the previous year. Cash used for
the building, inventory and new equipment has depleted the cash
in the government trust account resulting in decreased interest
income.
Interest expense for the year ended April 30, 1998 increased to
$103,872 from 19,632 for the year ended April 30, 1997. The
increase of $84,240 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 $41,323 was capitalized during the year ended April
30, 1997.
The provision for income taxes is $123,000 for the year ended
April 30, 1998 compared to $443,000 for the year ended April 30,
1997. The decrease of $320,000 is due primarily to the decrease
in net income before taxes and to the effective tax rate
decrease from 35% to 33% due to the credit allowance for
research and development expenses.
Liquidity and Capital Resources
Cash used for operating activities totaled $613,163 for the year
ended April 30, 1998 compared to $518,155 cash generated from
operating activities for the year ended April 30, 1997. Cash
used increased $1,131,318 due to additional cash used for
inventory totaling $555,664, additional cash used for accounts
payable totaling $332,075 and a lower net income totaling
$577,691 offset by lower payments for income taxes payable
totaling $349,234. 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 $159,838 for the year
ended April 30, 1998 compared to $1,801,346 cash used for the
year ended April 30, 1997. The $1,801,346 is due to land
purchased for $391,043 during June 1996 for the new building
site, to $1,246,866 spent on the new building, and to $163,437
spent for production equipment and office furniture. The
$159,838 is a result of $63,514 used for the new building and
$96,324 used for additional production equipment and office
furniture.
Cash provided by financing activities for the year ended April
30, 1998 totaled $344,038 compared to $1,083,299 for the year
ended April 30, 1997. The $344,038 is due primarily to $310,000
of cash provided by the bank line of credit to aid in financing
inventory. The $1,083,299 is due to net cash provided by the
real estate loan for a net $944,861 and the exercise of stock
options and warrants totaling $138,438.
The Company's primary source of liquidity at April 30, 1998 is
cash of $57,577, the bank line of credit of $1,000,000 (of which
$690,000 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 expires on August 25,
1998. The Company expects to renew this line of credit at a
similar amount on the expiration date. The capital equipment
term loan, which matures on June 14, 2001, has not been
utilized. The Company belives 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 is in the process of modifying its computer systems
to accomodate the year 2000 and currently expects to complete
this modification sufficiently in advance of the year 2000 so as
not to adversely affect its operations. The Company does not
expect to incur costs in connection with these year 2000
modifications.
ITEM 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS Page
Report of Independent Public Accountants 9
Balance Sheets as of April 30, 1998 and 1997 10
Statements of Operations for the Years Ended 11
April 30, 1998 and 1997
Statements of Stockholders' Investment for the Years
Ended April 30, 1998 and 1997 12
Statements of Cash Flows for the Years Ended
April 30, 1998 and 1997 13
Notes to Financial Statements 14-19
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.
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, 1998 and
1997, and the related statements of operations, stockholders'
investment and cash flows for the years 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 conduct 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 sopporting
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, 1998 and 1997, 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 12, 1998
IMAGE SYSTEMS CORPORATION
Balance Sheets
As of April 30
ASSETS 1998 1997
CURRENT ASSETS:
Cash and cash equivalents 57,577 486,540
Accounts receivable, net allowance for
doubtful accounts of $75,000
and $50,000 1,068,286 1,191,238
Inventories 2,411,966 1,587,454
Prepaid expenses and other 12,448 16,466
Income taxes receivable 43,629 0
Deferred tax asset 197,825 98,825
Total current assets 3,791,731 3,380,523
PROPERTY AND EQUIPMENT:
Land 396,043 396,043
Building 1,310,062 1,246,548
Furniture and fixtures 227,669 191,751
Production equipment 308,965 257,917
Less- Accumulated depreciation (319,644) (211,724)
Net property and equipment 1,923,095 1,880,535
5,714,826 5,261,058
LIABILITIES AND STOCKHOLDERS' INVESTMENT
CURRENT LIABILITIES:
Checks issued not yet presented
for payment 0 117,160
Current maturities of long-term debt 44,823 20,469
Line of credit 310,000 0
Accounts payable 373,034 380,767
Accrued expenses 351,808 329,713
Income taxes payable 0 36,371
Total current liabilities 1,079,665 884,480
LONG-TERM DEBT 941,332 933,523
Total liabilities 2,020,997 1,818,003
COMMITMENTS AND CONTINGENCIES (Note 4)
STOCK HOLDERS' INVESTMENT:
Undesignated stock, 5,000,000 shares
authorized; none issued or outstanding 0 0
Common stock, no par value, 5,000,000
shares authorized:4,452,597 and 4,451,347
issued and outstanding 1,104,289 1,102,414
Retained earnings 2,589,540 2,340,641
Total stockholders' investment 3,693,829 3,443,055
5,714,826 5,261,058
The accompanying notes are an integral part of these balance
sheets.
IMAGE SYSTEMS CORPORATION
Statement of Operations
For the Years Ended April 30
1998 1997
NET SALES 8,185,011 8,092,737
COST OF PRODUCTS SOLD 5,596,804 5,040,622
Gross profit 2,588,207 3,052,115
OPERATING EXPENSES:
Product development 734,884 501,319
Selling 831,791 798,263
Administrative 561,841 505,704
Total operating expenses 2,128,516 1,805,286
Operating income 459,691 1,246,829
INTEREST INCOME 16,080 42,393
INTEREST EXPENSE (103,872) (19,632)
Income before income taxes 371,899 1,269,590
PROVISION FOR INCOME TAXES 123,000 443,000
NET INCOME 248,899 826,590
NET INCOME PER COMMON SHARE
Basic .06 .19
Diluted .05 .18
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING
Basic 4,451,994 4,403,950
Diluted 4,532,621 4,543,470
The accompanying notes are an integral part of these financial
statements.
IMAGE SYSTEMS CORPORATION
Statements of Stockholders' Investment
For the Years Ended April 30, 1998 and 1997
Common Retained
Stock
Shares Amount Earnings Total
BALANCE,4-30-96 4,333,222 963,976 1,514,051 2,478,027
Exercise of
stock options 18,125 18,438 0 18,438
Exercise of
stock warrants 100,000 120,000 0 120,000
Net income 0 0 826,590 826,590
BALANCE,4-30-97 4,451,347 1,102,414 2,340,641 3,443,055
Exercise of
stock options 1,250 1,875 0 1,875
Net income 0 0 248,899 248,899
BALANCE,4-30-98 4,452,597 1,104,289 2,589,540 3,693,829
The accompanying notes are an integral part of these financial
statements.
IMAGE SYSTEMS CORPORATION
Statements of Cash Flows
For the Years Ended April 30
1998 1997
OPERATING ACTIVITIES:
Net income 248,899 826,590
Adjustments to reconcile net income
to net cash provided by
(used for) operating activities-
Depreciation 117,278 69,006
Deferred tax benefit (99,000) (65,000)
Change in operating items:
Accounts receivable 122,952 93,658
Inventories (824,512) (268,848)
Prepaid expenses and other 4,018 (10,234)
Income taxes receivable (43,629) 0
Accounts payable and checks issued not
yet presented for payment (124,893) 207,182
Accrued expenses 22,095 51,406
Income taxes payable (36,371) (385,605)
Net cash provided by (used for)
operating activities (613,163) 518,155
INVESTING ACTIVITES
Property and equipment additions (159,838) (1,801,346)
FINANCING ACTIVITIES:
Borrowings on line of credit 2,925,000 0
Repayments on line of credit (2,615,000) 0
Proceeds from issuance of
long-term debt 266,008 1,483,992
Repayments on long-term debt (233,845) (539,131)
Exercise of stock options and warrants 1,875 138,438
Net cash provided by
financing activites 344,038 1,083,299
Net decrease in cash (428,963) (199,892)
CASH AND CASH EQUIVALENTS, 486,540 686,432
beginning of year
CASH AND CASH EQUIVALENTS end of year 57,577 486,540
SUPPLEMENTAL DISCLOSURES:
Interest paid 103,869 54,831
Income taxes paid 302,000 893,605
The accompanying notes are an integral part of these financial
statements.
IMAGE SYSTEMS CORORATION
Notes to Financial Statements
April 30, 1998 and 1997
1. Organization of Business and Significant Accounting Policies
Image Systems Corporation (the Company), a Minnesota
corporation, designs, assembles and markets large,
high-resolution computer monitors. All production and
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.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents are highly liquid investments with
original maturities of three months or less. Cash equivalents
are carried at amortized cost, which approximates fair value,
and consist primarily of a short-term investment fund.
INVENTORIES
Inventories are stated at the lower of first-in, first-out cost
or market and are summarized as follows:
1998 1997
Finished goods 128,988 49,894
Work in process 52,502 149,048
Components 2,230,476 1,388,512
Total inventories 2,411,966 1,587,454
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 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. Depreciation is provided over the following useful
lives:
Building 39 years
Furniture and fixtures 5-7 years
Production equipment 5-7 years
REVENUE RECOGNITION
The Company recognizes revenue when the product is shipped to
the customer. The Company had no customers that accounted for
more than 10% of net sales for the year ended April 30, 1998 and
one customer that accounted for 12% of net sales for the year
ended April 30, 1997.
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 as of April 30, 1998
and 1997, has been established to cover estimated costs of
warranty claims.
INCOME TAXES
The Company follows the liability method of accounting for
income taxes, under which taxes are 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 INOME PER SHARE
In fiscal 1998, the Company adopted Statement of Financial
Accounting Standards (SFAS) No.128, "Earnings per Share." As a
results, the Company's reported earnings per share (EPS) for
fiscal 1997 was restated. SFAS No. 128 replaced primary EPS
with basic EPS. Basic EPS is computed by dividing net income by
the weighted average number of shares outstanding during the
year. Diluted EPS is computed by including dilutive common
stock equivalents with the basic weighted average shares
outstanding.
A reconciliation of the shares used in calculating EPS is as
follows:
1998 1997
Weighted average common shares
outstanding-basic 4,451,994 4,403,950
Dilutive effect of stock options 80,627 139,520
Weighted average common shares
outstanding-diluted 4,532,621 4,543,470
FINANCIAL INSTRUMENTS
For most instruments, including receivables, accounts payable
and accruals, the carrying amount approximates fair value as
these instruments are short-term in nature. The fair values of
the Company's long-term debt, based on the quoted market prices
for the same or similar issues or on the current rates offered
to the Company for debt of the same remaining maturities,
approximates carrying value as of April 30, 1998 and April 30,
1997.
USE OF ESTIMATES
The preparation of financial statements in conformity with
generally accepted accounting preinciples requires management to
make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting
period. Ultimate results could differ from those estimates.
CONCENTRATIONS 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 number of
customers with dispersion across different businesses and
geogrpahic regions. As of April 30, 1998, two customers
accounted for 25% of outstanding accounts receivable.
RECENT PRONOUNCEMENTS
SFAS No. 131, "Disclosures about Segments of an Enterprise and
Related Information," establishes standards for the way that
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 disclosure
contained therein.
2. Revolving Credit Agreement and Long-Term Debt:
The Company has a $1,000,000 revolving credit agreement with a
bank which expires in August 1998. Borrowings bear interest at
the bank's reference rate (8.5% at April 30, 1998). Borrowings
are collateralized by accounts receivable and inventory. At
April 30, 1998, the Company had a balance of $310,000
outstanding under the line of credit. The Company had no
borrowings outstanding under this credit agreement as of April
30, 1997.
At April 30, 1998, the Company had a balance of $986,155
outstanding under a note payable to a bank, with interest at
9.0% through April 30, 2002. Beginning on May 1, 2002 the
interest rate will be adjusted to the bank's then-current
reference rate plus .5%. The rate determined on May 1, 2002
will be in effect through the remainder of the agreement.
Payments on the note are due in monthly installments of $11,082
through April 1, 2007. Any remaining balance will be due on May
1, 2007. The note is collateralized by the building and land.
The schedule aggregrate annual maturities under the note payable
as of April 30, 1998 are as follows:
1999 $ 44,823
2000 48,863
2001 53,738
2002 58,854
2003 64,170
Thereafter 715,707
Total 986,155
3. Income Taxes
The provision for income taxes for the yers ended April 30 is
summarized as follows:
1998 1997
Current:
Federal 208,500 468,000
State 13,500 40,000
Total Current 222,000 508,000
Deferred tax benefit (99,000) (65,000)
Total provision 123,000 443,000
The Company had net deferred tax assets of $197,825 and $98,825
as of April 30, 1998 and 1997, 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 in which
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:
1998 1997
Federal statutory rate 34% 34%
State income taxes, net of federal benefit 2 2
Research and development tax credits (3) (1)
33% 35%
4. Commitments and Contingencies:
STOCK OPTIONS
The Company has a stock option plan under which 400,000 common
shares are reserved for grant as either nonqualified or
incentive stock options to officers, directors and key
employees. As of April 30, 1998, 151,250 of the reserved common
shares are available for future grant. The options expire, if
not exercised, six years after the date of grant. The weighted
average fair value of option grants was $2.23 and $2.62 for 1998
and 1997, respectively. Options outstanding at April 30, 1998
have a weighted average remaining contractual life of 3.3 years.
A summary of plan activity is as follows:
Weighted
Average
Options Price Per Exercise
Outstanding Share Price
April 30, 1996 252,500 $1.00-$2.63 $1.47
Granted 60,000 3.50 3.50
Exercised (18,125) 1.00-1.50 1.02
Forfeited or canceled (50,000) 1.00-1.50 1.45
April 30, 1997 244,375 1.00-3.50 2.01
Granted 95,000 2.25-4.19 3.62
Exercised (1,250) 1.50 1.50
Forfeited or canceled (116,250) 1.00-4.19 2.29
April 30, 1998 221,875 $1.00-$4.13 $2.55
Options exercisable at
April 30, 1998 114,375 $1.38-$3.50 $2.03
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:
1998 1997
Net income:
As reported 248,899 826,590
Pro forma 174,365 797,776
Basic earnings per common share:
As reported .06 .19
Pro forma .04 .18
Diluted earnings per common share:
As reported .05 .18
Pro forma .04 .18
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 summarized below:
1998 1997
Risk-free interest rates 5.54%-6.07% 6.34%-6.74%
Expected life of options
granted 5 years 5 years
Expected volatility of options
granted 70.26% 92.96%
Expected dividend yield None None
In connection with its public offering, 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 $13,300 in 1998 and $115,000 in
1997. Minimum rental commitments under noncancelable operating
leases at April 30, 1998 are as follows:
1999 $13,300
2000 11,600
2001 8,200
2002 7,500
Total $40,600
LITIGATION
The Company is a party to ongoing legal and tax proceedings
arising in the ordinary course of business. In the opinion of
management, the resolution of these matters will not have a
material adverse effect on the Company's consolidated financial
position, results of operations, or its cash flows.
5. Employee Benefit Plan:
The Company has a 401(k) plan under which eligible employees can
make voluntary contributions of up to 15% of their compensation.
There were no contributions to this plan made by the Company in
1998 or 1997.
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 66 President/Director
Diana Scheff 58 Secretary/Director
Marta Scheff Volbrecht 38 Vice President/Director
Laura Sorensen 38 Director
David Sorensen 37 Vice President/Director
Steven Volbrecht 39 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 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. Vice President/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 retired and was
previously 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, 1998 the President, a Vice
President and no employee received compensation in excess of
$100,000. Marta Scheff Volbrecht received total compensation of
$124,571 which consists of a salary of $35,031 plus commissions
of $89,540. The aggregate amount of compensation received by
all executive officers as a group (6 persons) totaled $391,698.
Dean Scheff, the President and CEO of the Company received a
salary of $86,500 plus commissions of $12,605 for the fiscal
year ended April 30, 1997. For the year ended April 30, 1998
Dean Scheff's salary was $97,308 plus sales commissions of
$12,426.
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 June 30, 1998, 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) 748,185(2) 16.8
Diana Scheff (1) 792,685(2) 17.8
Laura Sorensen (1) 628,785 14.1
Marta Volbrecht (1) 627,985 14.1
David Sorensen (2) - -
Steven Volbrecht (2) - -
All officers and directors 2,797,640 62.8
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, 1998.
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 28, 1998 By /S/____________________________
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 7-28-98
Dean Scheff (Principal Executive,
Accounting and Financial
Officer)
/S/________________________Director and Secretary 7-28-98
Diana Scheff
/S/________________________Director and Vice President 7-28-98
Marta Volbrecht
/S/________________________Director 7-28-98
Laura Sorensen
/S/________________________Director and Vice President 7-28-98
David Sorensen
/S/________________________Director 7-28-98
Steve Volbrecht
/S/________________________Director 7-28-98
Dr. Frederick R. Olson
/S/________________________Director 7-28-98
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
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.)
