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 July 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 September 1, 1998, there were 4,452,597 shares of
Common Stock, no par value per share, outstanding.
Item 1. FINANCIAL STATEMENTS
IMAGE SYSTEMS CORPORATION
NOTES TO FINANCIAL STATEMENTS
July 31, 1998 and July 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 three months
ended July 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 denomnator are
as follows:
For the Quarter Ending
July 31, July 31,
1998 1997
Weighted average common shares
outstanding for basic earnings per share4,452,597 4,451,347
Weighted average common shares issuable
under the exercise of options -- 114,112
Shares used in diluted earnings per
share 4,452,597 4,565,459
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.
Part 1. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
IMAGE SYSTEMS CORPORATION
BALANCE SHEETS
7-31-98 4-30-98
(Unaudited) (Unaudited)
ASSETS:
Current Assets
Cash 87,363 57,577
Account receivable, net 918,263 1,068,286
Inventory 2,164,256 2,411,966
Prepaid expenses 24,086 12,448
Income tax receivable 45,427 43,629
Deferred tax asset 197,825 197,825
Total current assets 3,437,220 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 (349,344) (319,644)
Net property
and equipment 1,893,395 1,923,095
5,330,615 5,714,826
LIABILITES AND STOCKHOLDERS INVESTMENT:
Current Liabilities
Accounts payable 270,099 373,034
Accrued liabilities 394,763 351,808
Line of credit 0 310,000
Current maturities of
long-term debt 45,850 44,823
Total current
liabilities 710,712 1,079,665
Long-Term Debt, less current maturities 929,412 941,332
Total liabilities 1,640,124 2,020,997
STOCKHOLDERS' INVESTMENT
Undesignated stock, 5,000,000
shares authorized; no shares
issued andoutstanding 0 0
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 2,586,202 2,589,540
Total stockholders'
investment 3,690,491 3,693,829
5,330,615 5,714,826
See accompanying notes to financial statements.
IMAGE SYSTEMS CORPORATION
STATEMENTS OF OPERATION
(UNAUDITED)
For the First Qtr Ended
7-31-98 7-31-97
NET SALES 1,464,022 2,123,336
COST OF PRODUCTS SOLD 1,002,371 1,362,562
Gross profit 461,651 760,774
OPERATING EXPENSES:
Product development 162,326 170,800
Selling 160,341 197,050
Administrative 118,963 121,193
Total operating expenses441,630 489,043
Operating income 20,021 271,731
INTEREST INCOME 23 10,706
INTEREST EXPENSE (25,180) (27,291)
Net income (loss) before
income taxes (5,136) 255,146
PROVISION FOR INCOME TAXES 1,798 (91,853)
NET INCOME (LOSS) (3,338) 163,293
NET INCOME (LOSS) PER COMMON SHARE
Basic 0.00 0.04
Diluted 0.00 0.04
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING
Basic 4,452,597 4,451,347
Diluted 4,452,597 4,565,459
See accompanying notes to financial statements.
IMAGE SYSTEMS CORPORATION
STATEMENTS OF CASH FLOWS
UNAUDITED
For The First Qtr Ended
7-31-98 7-31-97
OPERATING ACTIVITES:
Net income (3,338) 163,293
Adjustments to reconcile net income to net
cash provided by operating acitivites:
Depreciation 29,700 24,000
Change in operating items:
Accounts receivable 150,023 60,514
Invenotry 247,710 (53,288)
Prepaid expenses (11,638) (7,014)
Accounts payable (102,935) 94,208
Accrued liabilities 42,955 24,127
Income taxes payable 0 91,853
Income taxes receivable (1,798) 0
Net cash provided by operating activities350,679 397,693
INVESTING ACTIVITIES
Buildings 0 (8,514)
Furniture 0 (18,596)
Net cash used for investing activities 0 (27,1100
FINANCING ACTIVITES:
Borrowings from bank line of credit 745,000 185,000
Repayments to bank line of credit (1,055,000) (185,000)
Borrowings from bank real estate loan 0 266,008
Repayments to bank real estate loan (10,893) (203,570)
Net cash provided by (used for) financing
activities (320,893) 62,438
Net increase in cash 29,786 433,021
CASH AT BEGINNING OF PERIOD 57,577 486,540
CASH AT END OF PERIOD 87,363 919,561
SUPPLEMENTAL DISCLOSURES:
Interest paid 22,836 26,313
Taxes paid 0 0
See accompanying notes to financial statements.
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 July 31, 1998 Versus July 31, 1997
Net sales for the three months ended July 31, 1998 decreased
$659,314 or 31.1% compared to the quarter ended July 31, 1997.
The primary reason for the decrease is the decline in orders
which resulted in a lower level of units sold. This decline is
attributable to additional market competition, a reduction of
shipments to the Asian market, customers requesting delayed
delivery dates, and to the decline in flat panel prices.
Compared to the first quarter, he order level has recently
increased and the Company is anticipating higher sales for the
second quarter.
Gross profit decreased $299,123 or 39.3% for the quarter ended
July 31, 1998 compared to the quarter ended July 31, 1997. The
gross profit percentage decreased from 35.8% to 31.5%. The
decrease in gross profit is a result of lower levels of
production due to a decline in monitors sold and to the fixed
nature of overhead expenses.
For the quarter ended July 31, 1998 product research and
development expenses decreased $8,474 or 5.0% compared to the
quarter ended July 31, 1997. The decrease is due to fewer
inventory items used in the development process. The research
activity is concentrating on:
1. Developing a new M20L monitor.
2. Researching a new board to give maximum focus with use of a
micro controller.
3. Researching a power supply unit to meet higher medical
standards.
4. Researching a higher image quality CRT.
Selling expenses for the quarter ended July 31, 1998 decreased
$36,709 or 18.6% compared to the quarter ended July 31, 1997.
The decrease is primarily due to a decrease in commissions
because of a lower sales volume and a decrease in marketing and
travel expenses.
Administrative expenses decreased $2,230 or 1.8% for the quarter
ended July 31, 1998 compared to the quarter ended July 31, 1997.
Reduced public relations expense is the primary reason for the
decrease.
Interest income decreased from $10,706 for the quarter ended
July 31, 1997 to $23 for the quarter ended July 31, 1998. Cash
used for the new building, equipment, and inventory has depleted
the excess cash in the government trust account resulting in
decreased interest income.
For the quarter ended July 31, 1998 interest expense decreased
$2,111 or 7.7% compared to the quarter ended July 31, 1997. The
decrease is due primarily to the decrease in the real estate
loan for financing the new building.
The provision for income taxes decreased $93,651 for the quarter
ended July 31, 1998 compared to the quarter ended July 31, 1997.
The decrease is due to the decrease in net income before taxes.
Liquidity and Capital Resources
Cash provided by operating activities totaled $350,679 for the
quarter ended July 31, 1998 compared to $397,693 cash provided
for the quarter ended July 31, 1997. Cash provided by a
reduction in accounts receivable and inventory was offset by the
cash used for accounts payable, income taxes payable, and net
income.
No cash was used for investing activities during the quarter
ended July 31, 1998 compared to $27,110 cash used for the
quarter ended July 31, 1997. The $27,110 was used for the final
completion of the new building, production equipment, and office
furniture.
Cash used for financing activities totaled $320,893 for the
quarter ended July 31, 1998 compared to $62,438 cash provided
for the quarter ended July 31, 1997. The $320,893 is due
primarily to $310,000 used to pay the balance of the bank line
of credit. The $62,438 was cash provided by the bank real
estate loan to pay for the final construction of the new
building.
The Company's primary source of liquidity at July 31, 1998 is
cash of $87,363, the bank line of credit of $1,000,000 (of which
$1,000,000 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, 1998 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.
Year 2000
The Company is in the process of modifying its computer systems
to accommodate 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 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
Officer)
Dated September 11, 1998
