U. S. SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-QSB
(Mark One)
[ X ] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended January 31, 1999
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition prior from __________ to __________
Commission File No. 0 21245
Image Systems Corporation
(Exact Name of Small Business Issuer as Specified in its Charter)
Minnesota 41-1620497
(State or Other Jurisdiction (I.R.S. Employer
of Incorporation or Organization) Identification No.)
6103 Blue Circle Drive, Minnetonka, Minnesota 55343
(Address of Principal Executive Offices)
(612) 935-1171
(Issuer's Telephone Number, Including Area Code)
Check whether the issuer (1) filed all reports required
to be filed by Section 13 or 15(d) of the Exchange Act during the
past 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes _X_ No ____
As of February 15, 1999, there were 4,452,597 shares of
Common Stock, no par value per share, outstanding.
Part 1. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
IMAGE SYSTEMS CORPORATION
BALANCE SHEETS
January 31, April 30,
1999 1998
ASSETS (Unaudited) (Audited)
- ------ ----------- ---------
CURRENT ASSETS:
Cash $60,133 $57,577
Accounts receivable, net 1,540,491 1,068,286
Inventory 2,062,510 2,411,966
Prepaid expenses 25,899 12,448
Income tax receivable 4,684 43,629
Deferred tax asset 101,454 197,825
--------- ---------
Total current assets 3,795,171 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 accumuluated depreciation (408,744) (319,644)
---------- ----------
Net property and equipment 1,833,995 1,923,095
---------- ----------
$5,629,166 $5,714,826
========== ==========
LIABILITIES AND STOCKHOLDERS' INVESTMENT
- ----------------------------------------
CURRENT LIABILITIES:
Accounts payable $467,552 $373,034
Accured liabilities 467,631 351,808
Bank line of credit 260,000 310,000
Current maturities of long-term debt 66,895 44,823
--------- ---------
Total current liabilities 1,262,078 1,079,665
LONG-TERM DEBT 682,351 941,332
--------- ---------
Total liabilities 1,944,429 2,020,997
--------- ---------
STOCKHOLDERS' INVESTMENT:
Undesignated stock, 5,000,000 shares
authorized; no shares issued and
outstanding 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 2,580,448 2,589,540
---------- ----------
Total stockholders' investment 3,684,737 3,693,829
---------- ----------
$5,629,166 $5,714,826
========== ==========
See Accompanying Notes To Financial Statements
IMAGE SYSTEMS CORPORATION
STATEMENT OF OPERATIONS
(Unaudited)
For the Nine
For the Qtrs Ended Months Ended
1-31-99 1-31-98 1-31-99 1-31-98
---------- ---------- ---------- ----------
NET SALES $2,040,112 $2,071,159 $5,111,097 $6,731,934
COST OF PRODUCTS SOLD 1,512,504 1,438,731 3,668,128 4,344,563
---------- ---------- ---------- ----------
Gross Profit 527,608 632,428 1,442,969 2,387,371
OPERATING EXPENSES
Product development 175,869 202,358 521,530 555,268
Selling 202,359 207,687 514,354 654,063
Administrative 121,977 142,419 360,646 396,375
---------- ---------- ---------- ----------
Total Operating
Expenses 500,205 552,464 1,396,530 1,605,706
---------- ---------- ---------- ----------
Operating Income 27,403 79,964 46,439 781,665
INTERST INCOME 1,592 19 4,406 16,039
INTEREST EXPENSE (18,092) (28,508) (64,621) (79,455)
---------- ---------- ----------- ----------
Net Income (Loss)
Before Income Taxes 10,903 51,475 (13,776) 718,249
BENEFIT (PROVISION) FOR
INCOME TAXES (3,707) (18,530) 4,684 (258,570)
---------- ---------- ---------- ----------
NET INCOME (LOSS) $7,196 $32,945 ($9,092) $459,679
========== ========== ========== ==========
BASIC NET INCOME
PER SHARE $0.00 $0.01 $0.00 $0.10
========== ========== ========== ==========
DILUTED NET INCOME
PER SHARE $0.00 $0.01 $0.00 $0.10
========== ========== ========== ==========
BASIC WEIGHTED AVERAGE
SHARES OUTSTANDING 4,452,597 4,452,597 4,452,597 4,451,800
========== ========== ========== ==========
DILUTED WEIGHTED AVERAGE
SHARES OUTSTANDING 4,452,597 4,506,636 4,452,597 4,546,254
========== ========== ========= ==========
See Accompanying Notes To Financial Statements
IMAGE SYSTEMS CORPORATION
STATEMENT OF CASH FLOWS
(Unaudited)
For the Nine Months Ended
January 31, January 31,
1999 1998
---------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ($9,092) 459,679
Adjustments to reconcile net income
to cash from operating activities:
Depreciation 89,100 76,600
Changes in current operating items:
Accounts receivable (472,205) (167,602)
Inventory 349,456 (1,178,112)
Prepaid expenses (13,451) 7,879
Accounts payable 94,518 87,711
Accrued liabilties 115,823 88,197
Income taxes payable 0 (43,430)
Income taxes receivable 38,945 0
Deferred tax asset 96,371 0
---------- ------------
Net cash provided by (used for)
operating activities 289,465 (669,078)
---------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Buildings 0 (63,514)
Furniture and equipment additions 0 (93,384)
---------- ------------
Net cash used for
investing acitvities 0 (156,898)
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings from bank line of credit 1,295,000 1,775,000
Repayments to bank line of credit (1,345,000) (1,380,000)
Borrowings from bank real estate loan 0 266,008
Repayments to bank real estate loan (236,909) (222,954)
Exercise of stock options/warrants 0 1,875
----------- -------------
Net cash provided by (used for)
financing activities (286,909) 439,929
----------- -------------
Net increase(decrease) in cash 2,556 (386,047)
CASH AT BEGINNING OF PERIOD 57,577 486,540
----------- -------------
CASH AT END OF PERIOD $60,133 $100,493
=========== =============
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid $66,277 $78,755
=========== =============
Taxes paid $0 $302,000
=========== =============
See Accompanying Notes To Financial Statements
Item 1. FINANCIAL STATEMENTS
IMAGE SYSTEMS CORPORATION
NOTES TO FINANCIAL STATEMENTS
January 31, 1999 and January 31, 1998
(Unaudited)
1. ORGANIZATION AND ACCOUNTING POLICIES:
- ----------------------------------------
The unaudited interim financial statements furnished herein
reflect all adjustments which are, in the opinion of management,
necessary to a fair statement of the results for the interim
periods presented. The operating results for the nine months
ended January 31, 1999 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.
Certain amounts reflected in the nine months ended January 31,
1998 have been reclassified to conform to the nine months ended
January 31, 1999. These reclassifications had no impact on
previously reported net income or stockholders' investments.
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 components of the earnings per share denominator are as
follows:
For the Qtrs Ending For the 9 Mos Ending
Jan. 31, Jan. 31, Jan. 31, Jan. 31,
1999 1998 1999 1998
---------- ---------- ----------- ---------
Weighted average
common shares outstanding
for basic earnings
per share 4,452,597 4,452,597 4,452,597 4,451,800
Weighted average common
shares issuable under the
exercise of options 0 54,039 0 94,454
---------- ---------- ---------- ----------
Shares used in diluted
earnings per share 4,452,597 4,506,636 4,452,597 4,546,254
========== ========== ========== ==========
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. The statement requires
business segments 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. The Company
believes the adoption of SFAS No. 131 in its year end financial
statements will have no impact on the reported disclosures.
In fiscal 1999 the Company adopted SFAS No.130, "Reprting
Comprehensive Income." Statement No.130 establishes standards
for reporting and display of comprehensive income and its
components in financial statements; howerever, the adoption of
this Statement had no impact on the Company's net income (loss)
or shareholders' equity. Statement No. 130 requires minimum
pension liability adjustments, unrealized gains or losses on
available-for-sale securities and foreign currency translation
adjustments, which prior to adoption were reported separately in
shareholders' equity, to be included in other comprehensive
income. There were no differences between net income (loss) and
comprehensive income for any periods presented in the
accompanying 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 uncertainties. 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 January 31, 1999 Versus January 31, 1998
- -----------------------------------------------------------
Net sales for the three months ended January 31, 1999 decreased
$31,047 or 1.5% compared to the three months ended January 31,
1998. Selling a lower quantity of monitors is the primary
reason for the decrease. This decline is attributable to
additional market competition and to a reduction of shipments to
overseas markets.
Gross profit decreased $104,820 or 16.6% for the three months
ended January 31, 1999 compared to the quarter ended January 31,
1998. The gross profit percentage decreased from 30.5% to
25.9%. Selling lower margin monitors and increased material
costs resulted in the lower gross margin.
For the quarter ended January 31, 1999 product research and
development expenses decreased $26,489 or 13.1% compared to the
quarter ended January 31, 1998. Lower personnel expenses and
using fewer inventory items are the reasons for the decrease.
Selling expenses for the quarter ended January 31, 1999
decreased $5,328 or 2.6% compared to the quarter ended January
31, 1998. The decrease is due to a reduction of the sales staff.
Administrative expenses decreased $20,442 or 14.4% for the three
months ended January 31, 1999 compared to the quarter ended
January 31, 1998. Relocation expense incurred in 1998 did not
occur in 1999 which is the reason for the decrease.
Interest income increased from $19 for the quarter ended January
31, 1998 to $1,592 for the quarter ended January 31, 1999.
Excess cash available for the government trust account resulted
in the interest income increase.
For the quarter ended January 31, 1999 interest expense
decreased $10,416 or 36.5% compared to the three months ended
January 31, 1998. Reduced use of the bank line of credit to
finance inventory and the decrease in the real estate loan for
financing the building are the reasons for the interest expense
decrease.
The provision for income taxes decreased $14,823 for the three
months ended January 31, 1999 compared to the three months ended
January 31, 1998. The decrease is due to the decrease in net
income before taxes.
Nine Months Ended January 31, 1999 versus January 31, 1998
- ----------------------------------------------------------
Net sales for the nine months ended January 31, 1999 decreased
$1,620,837 or 24.1% compared to the nine months ended January
31, 1998. The primary reason for the decrease is selling a
lower quantity of monitors. This decline is attributable to
additional market competition and to a reduction of shipments to
overseas markets. To maintain product visibility the Company
has displayed its product at the Radiological Society of North
America tradeshow held in November 1998 and at the SPIE medical
imaging conference in February 1999.
Gross profit decreased $944,402 or 39.6% for the nine months
ended January 31, 1999 compared to the nine months ended January
31, 1998. The decrease is due to the sale of lower margin
monitors, to lower levels of production, and to higher material
costs.
Product research and development expenses for the nine months
ended January 31, 1999 decreased $33,738 or 6.1% compared to the
nine months ended January 31, 1998. The decrease is due to
fewer inventory items used in the development process. The
Company's research activity is concentrated on:
1. Evaluating yokes and CRTs to improve supplier
quality and reduce supplier costs.
2. Working on video boards to improve image quality
and arc protection.
3. Improving the focus testing in the quality control
area.
4. Evaluating new flat panels.
5. Improving reliability of monitor power supplies.
6. Implementing improved vertical focus on CRT boards.
7. Finalizing auto AC switching to meet UL regulations.
Selling expenses for the nine months ended January 31, 1999
decreased $139,709 or 21.4% compared to the nine months ended
January 31, 1998. The decrease is a result of lower salaries
due to a decrease in sales personnel, a decrease in commissions
because of the lower sales volume, and decreases in travel and
tradeshow expenses.
Administrative expenses decreased $35,729 or 9.0% for the nine
months ended January 31, 1999 compared to the nine months ended
January 31, 1998. The decrease is due to the decrease in public
relations and relocation expenses.
Interest income for the nine months ended January 31, 1999
decreased $11,633 or 72.5% compared to the nine months ended
January 31, 1998. Excess cash used for inventory during fiscal
1998 reduced cash in the government trust account causing
interest income to decline.
Interest expense for the nine months ended January 31, 1999
decreased $14,834 or 18.7% compared to the nine months ended
January 31, 1998. Less usuage of the bank line of credit to
finance inventory and the decrease in the real estate loan are
the reasons for the decrease.
The provisions for income taxes decreased $263,254 for the nine
months ended January 31, 1999 compared to the nine months ended
January 31, 1998. The decrease is due to the decrease in net
income before taxes.
Liquidity and Capital Resources
- -------------------------------
Cash provided by operating activites totaled $289,465 for the
nine months ended January 31, 1999 compared to $669,078 used for
operating activities for the nine months ended January 31, 1998.
Cash provided by decreases in income tax and inventory were
partially offset by cash used for accounts receivable and by the
decrease in net income.
No cash was used for investing activities for the nine months
ended January 31, 1999 compared to $156,898 used during the nine
months ended January 31, 1998. The $156,898 was used for office
furniture, equipment, and the final completion of the new
building.
Cash used for financing activities totaled $286,909 for the nine
months ended January 31, 1999 compared to $439,929 provided by
financing activities for the nine months ended January 31, 1998.
Cash used in fiscal 1999 is primarily due to the $50,000 pay
down of the bank line of credit and a $236,909 payment to reduce
the real estate loan. In fiscal 1998 the $439,929 was provided
by the real estate loan to pay for the final construction of the
new building and by the bank line of credit to finance the
increase in inventory.
The Company's primary source of liquidity at January 31, 1999 is
cash of $60,133 and the bank line of credit of $1,000,000 (of
which $740,000 is available). The Company also has access to,
but has not utilized, the bank term loan for equipment which
matures June 14, 2001. The bank line of credit was renewed on
August 25, 1998 for one year. The Company believes that cash,
cash from operations, the bank line of credit, and existing bank
loans will be adequate to meet the anticipated short term
liquidity and capital resource requirements for 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 does not have any
formal contingency plans as it believes all risks have been
mitigated with the Year 2000 compliance plan.
Part 2. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
None
Item 2. CHANGES IN SECURITIES
None
Item 3. DEFAULTS UPON SENIOR SECURITIES
None
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
Item 5. OTHER INFORMATION
None
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
None
SIGNATURE
In accordance with the requirements of the Exchange Act, the
registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Image Systems Corporation
Registrant
By:/s/
---------------------------------
Dean Scheff, Chief Executive Officer
and Chief Financial Officer
(Principal Executive Officer and
Principal Financial Officer)
Dated March 8, 1999
