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, 1999
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,
1999 were $7,215,227.
As of July 15, 1999, 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 $1,965,261. 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 in both CRT and flat panel formats. The Company's
monitors provide high brightness and high resolution which are
needed in applications such as medical imaging, scientific
analysis and image processing.
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.
Secondary markets are Air Traffic Control (ATC) and ruggedized
flat panel displays. 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. Ruggedized flat panels require all of the above
plus MIL standards for shock and vibration.
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. The typical
monitor provides 30-40 Footlamberts of brightness. The
Company's monitors provide 65-100 Footlamberts, at least twice
as bright as standard monitors.
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
internet site 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.
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, photo interpretation, simulation and sunlight readable
monitors. 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.
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 $677,456 in 1999.
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 NTSC
up to the high end of 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 products are ruggedized flat panels with
high brightness and high contrast. Greyscale integrity is
excellent and in non-ruggedized format 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.
The ruggedized version meets MIL Spec S-901D for shock and
MIL-STD-167, type 1 for vibration.
Customers
The Company had no customers which accounted for 10% of net
sales for the year ended April 30, 1998 and for the year ended
April 30, 1999.
Backlog
The dollar amount of the Company's backlog of orders considered
to be firm at April 30, 1999 was approximately $800,000. The
Company expects that nearly all orders considered to be firm at
April 30, 1999, will be filled during the 2000 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 proprietary 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, 1999, 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.
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, 1999
PART II
ITEM 5. MARKET FOR THE REGISTRANTS COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
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, 1997 Low Bid High Bid
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
Fiscal year ended April 30, 1999
Quarter ended July 31, 1998 1 1/2 4
Quarter ended October 31, 1998 5/8 1 5/8
Quarter ended January 31, 1999 5/8 1 1/2
Quarter ended April 30, 1999 3/4 2
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, 1999 there were
approximately 375 record holders of the Company's Common Stock.
ITEM 6. 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 uncertainties. Such forward-looking information may
be indicated by works 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 periphal 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.
The Company designs, assembles and markets high bright, high
contrast monitors.
RESULTS OF OPERATIONS
Year Ended April 30, 1999 Versus April 30, 1998
Net sales for the year ended April 30, 1999 decreased $969,784
or 11.8% compared to the year ended April 30, 1998. Selling a
lower quantity of monitors is the primary reason for the
decline. The decline is attributable to additional market
competition and to a reduction of shipments to overseas markets.
To maintain product visibility the Company continues to display
its products at several medical and air traffic control trade
shows in the United States and Japan.
For the year ended April 30, 1999 gross profit decreased
$506,954 or 19.6% compared to the year ended April 30, 1998.
The gross profit percentage decreased from 31.6% to 28.8%. The
decrease is due to selling lower margin monitors, to the fixed
effect of overhead expenses, and to less efficient production
levels.
Product development and research for the year ended April 30,
1999 decreased $57,428 or 7.8% compared to the year ended April
30, 1998. Lower personnel expenses, decreased travel expenses,
and using fewer inventory items are the reasons for the
decrease. The Company's research activity concentrates on
creating a quality high bright, high resolution monitor on a
cost effective basis.
The research process includes evaluation of image quality,
focus, reliability, new product design, supplier quality and
cost, astigmatism, shipment packaging, and government
requirements.
Compared to the year ended April 30, 1998 selling expenses
decreased $106,687 or 12.8% for the year ended April 30, 1999.
The decrease is due to a reduction of the sales staff, reduced
commissions due to lower sales, and decreases in travel and
trade show expenses.
Administrative expenses for the year ended April 30, 1999
decreased $49,824 or 8.9% compared to the year ended April 30,
1998. Lower personnel expenses and reduced public relations
and relocation expenses are the reasons for the decrease.
Interest income decreased from $16,080 to $5,289 for the year
ended April 30, 1999 compared to the year ended April 30, 1998.
Excess cash used for inventory during the second and third
quarters for the fiscal year ended April 30, 1998 reduced cash
in the government trust account causing interest income to
decline.
For the year ended April 30, 1999 interest expense decreased
$20,940 or 20.2% compared to the year ended April 30, 1998.
Less usage of the bank line of credit to finance inventory and
the decrease in the real estate loan are the reasons for the
decrease in interest expense.
The provisions for the income taxes is $8,400 for the year ended
April 30, 1999 compared to $123,000 for the year ended April 30,
1998. The decrease of $114,600 is due primarily to the decrease
in net income before taxes and to the credit allowance for
research and development expenses.
Liquidity and Capital Resources
Cash provided by operating activities totaled $756,628 for the
year ended April 30, 1999 compared to $613,163 cash used by
operating activities for the year ended April 30, 1998. Cash
provided increased $1,369,791 due primarily to the change in
cash provided by inventory totaling $1,315,133. The sales of
flat panel monitors and reduced sales are the primary reasons
for the inventory decrease.
Cash used for investing activities for the year ended April 30,
1999 totaled $18,150 compared to $159,838 cash used for the year
ended April 30, 1998. The $18,150 was used for office furnitrue
and production equipment.
Cash used for financing activities totaled $563,419 for the year
ended April 30, 1999 compared to $344,038 cash provided for the
year ended April 30, 1998. Cash provided by operating
activities allowed the Company to repay the $310,000 bank line
of credit and to reduce the bank building loan by $253,419.
The Company's primary source of liquidity at April 30, 1999 is
cash of $232,636, 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 expries on August
25, 1999. The Company expects to renew this line of credit on
the expiration date. 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 has analyzed its Management Information Systems and
its Industrial Equipment Systems. The Company estimates a
maximum payout of $50,000 to replace outdated computers and to
be Y2K compliant. The Company is also surveying strategic
suppliers to determine their Y2K compliance. Approximately 50%
of strategic suppliers have been evaluated and no critical Y2K
problems have been identified. The Company believes the risks
associated with Y2K issues have ben mitigated with the Year 2000
compliance plan. The Company is evaluating contingency plans
in the event the Y2K plan fails in any way.
ITEM 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS
Page
Report of Independent Public Accountants 9
Balance Sheets as of April 30, 1999 and 1998 10
Statements of Operations for the Years Ended 11
April 30, 1999 and 1998
Statements of Stockholders' Investment for the Years 12
Ended April 30, 1999 and 1998
Statements of Cash Flows for the Years Ended 13
April 30, 1999 and 1998
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, 1999 and
1998, 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 conducted 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 supporting
the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and
signficant 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, 1999 and 1998, 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 4, 1999
IMAGE SYSTEMS CORPORATION
Balance Sheets
As of April 30
ASSETS 1999 1998
CURRENT ASSETS:
Cash and cash equivalents $232,636 $57,577
Accounts receviable, net allowance
for doubtful accounts of $60,000
and $75,000 1,242,963 1,068,286
Inventories 1,921,345 2,411,966
Prepaid expenses and other 21,215 12,448
Income taxes receivable 0 43,629
Deferred tax asset 177,025 197,825
Total current assets 3,595,184 3,791,731
PROPERTY AND EQUIPMENT:
Land 396,043 396,043
Building 1,310,062 1,310,062
Furniture and fixtures 231,060 227,669
Production equipment 323,724 308,965
Less- Accumulated depreciation (429,577) (319,644)
Net property and equipment 1,831,312 1,923,095
$5,426,496 $5,714,826
LIABILITIES AND STOCKHOLDERS' INVESTMENT
CURRENT LIABILITIES:
Current maturities of long-term debt $69,605 $44,823
Line of credit 0 310,000
Accounts payable 413,065 373,034
Accrued expenses 425,591 351,808
Income taxes payable 80,642 0
Total current liabilities 988,903 1,079,665
LONG-TERM DEBT 663,131 941,332
Total liabilities 1,652,034 2,020,997
COMMITMENTS AND CONTINGENCIES (Note 4)
STOCKHOLDERS' 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 issued and outstanding 1,104,289 1,104,289
Retained earnings 2,670,173 2,589,540
Total stockholders' investment 3,774,462 3,693,829
$5,426,496 $5,714,826
The accompanying notes are an integral part of these balance
sheets.
IMAGE SYSTEMS CORPORATION
Statement of Operations
For the Years Ended April 30
1999 1998
NET SALES $7,215,227 $8,185,011
COST OF PRODUCTS SOLD 5,133,974 5,596,804
Gross profit 2,081,253 2,588,207
OPERATING EXPENSES:
Product development 677,456 734,884
Selling 725,104 831,791
Administrative 512,017 561,841
1,914,577 2,128,516
Operating income 166,676 459,691
INTEREST INCOME 5,289 16,080
INTEREST EXPENSE (82,932) (103,872)
Income before income taxes 89,033 371,899
PROVISION FOR INCOME TAXES 8,400 123,000
NET INCOME $80,633 $248,899
NET INCOME PER COMMON SHARE:
Basic $.02 $.06
Diluted $.02 $.05
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING:
Basic 4,452,597 4,451,994
Diluted 4,453,628 4,532,621
The accompanying notes are an integral part of these financial
statements.
IMAGE SYSTEMS CORPORATION
Statements of Stockholders' Investment
For the Years Ended April 30
Common Stock Retained
Shares Amount Earnings Total
BALANCE, April 30, 1997 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 248,899 248,899
BALANCE, April 30, 1998 4,452,597 1,104,289 2,589,540 3,693,829
Net income 80,633 80,633
BALANCE, April 30, 1999 4,452,597 $1,104,289 $2,670,173 $3,774,462
The accompanying notes are an integral part of these financial
statements.
IMAGE SYTESM CORPORATION
Statements of Cash Flows
For the Years Ended April 30
1999 1998
OPERATING ACTIVITIES:
Net income $80,633 $248,899
Adjustments to reconcile net income to
net cash provided by (used for)
operating activities-
Depreciation 109,933 117,278
Deferred tax benefit 20,800 (99,000)
Change in operating items:
Accounts receivable (174,677) 122,952
Inventories 490,621 (824,512)
Prepaid expenses and other (8,767) 4,018
Income taxes receivable 43,629 (43,629)
Accounts payable 40,031 (124,893)
Accrued expenses 73,783 22,095
Income taxes payable 80,642 (36,371)
Net cash provided by (used for)
operating activities 756,628 (613,163)
INVESTING ACTIVITES:
Property and equipment additions (18,150) (159,838)
FINANCING ACTIVITIES:
Borrowings on line of credit 1,735,000 2,925,000
Repayments on line of credit (2,045,000) (2,615,000)
Proceeds from issuance of long-term debt0 266,008
Repayments on long-term debt (253,419) (233,845)
Exercise of stock options and warrants 0 1,875
Net cash provided by (used for)
financing activites (563,419) 344,038
Net change in cash and cash equivalents 175,059 (428,963)
CASH AND CASH EQUIVALENTS,
beginning of year 57,577 486,540
CASH AND CASH EQUIVALENTS,
end of year $232,636 $57,577
SUPPLEMENTAL DISCLOSURES:
Interest paid $80,411 $103,869
Income taxes paid $0 $302,000
The accompanying notes are an integral part of these financial
statements.
IMAGE SYSTEMS CORORATION
Notes to Financial Statements
April 30, 1999 and 1998
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
The Company considers all short-term, highly liquid investments
that are readily convertible into cash and have original
maturities of three months or less to be cash equivalents.
INVENTORIES
Inventories are stated at the lower of first-in, first-out cost
or market and are summarized as follows:
1999 1998
Finished goods $130,556 $128,988
Work in process 26,137 52,502
Components 1,764,652 2,230,476
Total inventories $1,921,345 2,411,966
PROPERTY AND EQUIPMENT
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 years ended April 30, 1999
and 1998.
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 of 18 months.
The reserve for warranty costs of $160,000 and $140,000 as of
April 30, 1999 and 1998, respectively, 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
Basic earnings per share (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:
1999 1998
Weighted average common shares
outstanding-basic 4,452,597 4,451,994
Dilutive effect of stock options 1,031 80,627
Weighted average common shares
outstanding-diluted 4,453,628 4,532,621
FINANCIAL INSTRUMENTS
For most instruments, including receivables, accounts payable
and accruals, the carrying amount approximates fair value as
these inctruments are short-term in nature. The fair value 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, 1999 and 1998.
USE OF ESTIMATES
The preparation of financial statements in conformity with
generally accepted accounting principles 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.
CONCENTRATION 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
geographic regions. Two customers accounted for 33% of
outstanding accounts receivable as of April 30, 1999, and two
customers accounted for 25% of outstanding accounts receivable
as of April 30, 1998.
RECENT PRONOUNCEMENTS
Statement of Financial Accounting Standards (SFAS) No. 130,
"Reporting Comprehensive Income," establishes standards for
reporting and display in the financial statements of total net
income and the components of all other nonowner changes in
equity, referred to as comprehensive income. The Company
adopted SFAS No. 130 on May 1, 1998. There is no difference
between the Company's net income reported and the comprehensive
net income for SFAS No. 130 for the years presented.
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. The statement requires
business segment financial information to 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. The Company
adopted SFAS N. 131 in fiscal year 1999. The adoption of SFAS
No. 131 had no impact on the financial statements or the
disclosures contained therein, as there is only one reportable
segment.
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 1999. Borrowings bear interest at
the bank's reference rate (8.25% at April 30, 1999). Borrowings
are collateralized by accounts receivable and inventory. At
April 30, 1999, the Company had no borrowings outstanding under
the line of credit. The Company had borrowings of $310,000
outstanding under this credit agreement as of April 30, 1998.
At April 30, 1999, the Company had a balance of $732,736
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 scheduled monthly installments
of principal and interest through April 1, 2007. Any remaining
balance will be due on May 1, 2007. The note is collateralized
by the building and land. The Company elected to repay
additional principal of $200,000 during fiscal year 1999.
The scheduled aggregate annual maturities under the note payable
as of April 30, 1999 are as follows:
2000 $69,605
2001 76,384
2002 83,549
2003 91,434
2004 100,011
Thereafter 311,753
Total 732,736
3. Income Taxes
The provision for income taxes for the years ended April 30 is
summarized as follows:
1999 1998
Current provision (benefit):
Federal $(9,100) $208,500
State (3,300) 13,500
Total Current (12,400) 222,000
Deferred tax provision (benefit) 20,800 (99,000)
Total provision $8,400 $123,000
The Company had net deferred tax assets of $177,025 and $197,825
as of April 30, 1999 and 1998, 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 those 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:
1999 1998
Federal statutory rate 15% 34%
State income taxes, net of federal benefit 2 2
Research and development tax credits (8) (3)
9% 33%
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, 1999, 156,250 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 $0.56 and $2.23 for 1999
and 1998, respectively. Options outstanding at April 30, 1999
have a weighted average remaining contractual life of 3.4 years.
A summary of plan activity is as follows:
Weighted
Average
Options Price Per Exercise
Outstanding Share Price
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
Granted 65,000 1.00-1.06 1.01
Exercised - - -
Forfeited or canceled (70,000) 1.38-4.13 1.89
April 30, 1999 216,875 $1.00-$4.13 $2.30
Options exercisable at
April 30, 1999 100,725 $1.50-$4.13 $2.51
The Company's stock options are accounted for under Accounting
Principles Board 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:
1999 1998
Net income:
As reported $80,633 $248,899
Pro forma 10,504 174,365
Basic earnings per common share:
As reported $.02 $.06
Pro forma .00 .04
Diluted earnings per common share:
As reported $.02 $.05
Pro forma .00 .04
Because the method of accounting under SFAS No. 123 has not been
applied to options granted prior to May 1, 1995, the resulting
pro forma compensation cost may not be representative of that to
be expected in future years.
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:
1999 1998
Risk-free interest rates 4.57%-4.60% 5.54%-6.07%
Expected life of options granted 5 years 5 years
Expected volatility of options granted 60.53% 70.26%
Expected dividend yield None None
OPERATING LEASES
The Company 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 1999 and 1998.
Minimum rental commitments under noncancelable operating leases
at April 30, 1999 are as follows:
2000 $11,600
2001 8,200
2002 7,500
Total $27,300
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.
The Company made no contributions to this plan in 1999 or 1998.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
Form 8-K for change in accountants was filed July 20, 1999.
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 67 President/Director
Diana Scheff 59 Secretary/Director
Marta Scheff Volbrecht 39 Vice President/Director
Laura Sorensen 39 Director
David Sorensen 38 Vice President/Director
Steven Volbrecht 40 Director
Dr. Frederick R. Olson 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 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
Project Manager, and from 1988 to 1991 as a Projuect Manager for
Landwehr, Inc. In 1991 he rejoined Johnson Bros. as a Project
Manager. He was employed by Hansen Thorp Pellinen Olson, Inc.
as a Staff Engineer from 1996 to 1999. He is currently employed
at Centex as a Land Development Manager.
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.
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
No executive or employee received compensation in excess of
$100,000 during the year ended April 30, 1999. The total
compensation received by all executive officers as a group (6
persons) totaled $331,195.
Dean Scheff, the President and CEO of the Company, received a
salary of $90,485 and no commissions for the year ended April
30, 1999. 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, 1999, 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
Form 8-K filed July 20, 1999.
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 27, 1999 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 July 27, 1999
Dean Scheff (Principal Executive,
Accounting and Financial
Officer)
/s/_____________Director and Secretary July 27, 1999
Diana Scheff
/s/_____________Director and Vice President July 27, 1999
Marta Volbrecht
/s/_____________Director July 27, 1999
Laura Sorensen
/s/_____________Director and Vice President July 27, 1999
David Sorensen
/s/_____________Director July 27, 1999
Steve Volbrecht
/s/_____________Director July 27, 1999
Dr. Frederick R. Olson
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.)
