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Previous: AXP NEW DIMENSIONS FUND INC /MN/, 485BPOS, EX-99.(12)-OPINION, 2000-07-31 |
Next: IMAGE SYSTEMS CORPORATION, 10KSB40, EX-27, 2000-07-31 |
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, 2000 |
|
| OR |
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| / / |
TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED] |
| For the transition period from to |
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| |
|
Commission File No. 021245
IMAGE SYSTEMS CORPORATION
(Name of Small Business Issuer in its charter)
| Minnesota (State or other jurisdiction of incorporation or organization) |
41-1620497 I.R.S. Employer Identification No.) |
|
| 6103 Blue Circle Drive, Minnetonka, Minnesota (Address of principal executive offices) |
|
55343 (Zip Code) |
| 952-935-1171 (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, 2000 were $6,090,601.
As of July 15, 2000, 4,452,597 shares of the Issuer's Common Stock were outstanding. The aggregate market value of the Common Stock held by no-affiliates of the Issuer on such date (based on the low bid for such shares as reported by the NASDAQ Stock Market, Inc.) was $1,248,718. 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 1
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 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 and use 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 Military, Air Traffic Control (ATC) and ruggedized flat panel displays. Military and ATC require 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, HRMS™ (Hi-Res Multi-Sweep™) enables the autosynchronous monitors to adjust dynamically to numerous display boards and standards. HRMS™ provides compatibility with high resolution display controllers for many computer platforms, including PCs, and workstation level systems, such as SUN, HP, and Silicon Graphics.
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
2
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, an 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 more than $10,000. 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.
Competition
The computer monitor industry is highly competitive. The Company's monitors compete with large well-established companies such as Siemens and Barco, whose products are generally more expensive. The Company also competes with Data Ray and Clinton, 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 $556,761 in 2000 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 80 kHz, from 48 kHz to 108 kHz and from 90 kHz to 200 kHz. Image Systems' High Resolution Multi-Sweep (TM) (HRMS [TM]) 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. Grayscale 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.
Customers
The Company had no customers which accounted for 10% of net sales for the year ended April 30, 1999, and had one customer which accounted for 19% of net sales for the year ended April 30, 2000.
3
Backlog
The dollar amount of the Company's backlog of orders considered to be firm at April 30, 2000 was approximately $600,000. The Company expects that nearly all orders considered to be firm at April 30, 2000 will be filled during the 2001 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, 2000, the Company had 35 full time employees and 3 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
None.
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, 2000.
4
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 no not necessarily represent actual transactions.
| |
Low Bid |
High Bid |
|||||
|---|---|---|---|---|---|---|---|
| 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 |
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| 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 | |||||
| Fiscal Year ended April 30, 2000 |
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| Quarter ended July 31, 1999 | 1 | 1/8 | 1 | 1/2 | |||
| Quarter ended October 31, 1999 | 23/32 | 3/4 | |||||
| Quarter ended January 31, 2000 | 1 | 1/4 | 1 | 3/8 | |||
| Quarter ended April 30, 2000 | 3/4 | 1 | |||||
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 July 15, 2000, there were approximately 650 record holders of the Company's Common Stock.
5
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 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.
The Company designs, assembles and markets high bright, high contrast monitors.
Year Ended April 30, 2000 Versus April 30, 1999
Net sales decreased $1,124,626 or 15.6% for the year ended April 30, 2000 compared to the year ended April 30, 1999. Selling a lower quantity of monitors is the primary reason for the decrease. The decline is attributable to additional market competition. To maintain product visibility the Company continues to display its monitors at several medical and air traffic control trade shows in Asia, Europe and the United States.
Gross profit for the year ended April 30, 2000 decreased $462,217 or 22.2% compared to the year ended April 30, 1999. The gross profit percentage decreased from 28.8% to 26.6%. The decrease is due to the fixed effect of overhead expenses, to the higher cost of inventory reserve, and to less efficient production levels during the fourth quarter ended April 30, 2000.
For the year ended April 30, 2000 product development and research expenses decreased 17.8% or $120,695 compared to the year ended April 30, 1999. A reduction in the engineering staff, decreased travel expenses and using fewer inventory items are the reasons for the decrease. The research activity includes evaluation of image quality, focus and reliability, of supplier quality and cost, of new product design and of cost-effective shipment packaging. They also verify that the Company's product lines meet government regulations.
Selling expenses increased $35,283 from $725,104 for the year ended April 30, 1999 to $760,387 for the year ended April 30, 2000. The increase of 4.9% is due to increased personnel expenses, and an increase in travel and tradeshow expenses.
Compared to the year ended April 30, 1999, administrative expenses increased 1% for the year ended April 30, 2000.
Interest income increased from $5,289 for the year ended April 30, 1999 to $15,146 for the year ended April 30, 2000. The increase is due to interest earned from excess cash deposited into the government trust account.
Interest expense decreased 38.6% from $82,932 for the year ended April 30, 1999 to $50,956 for the year ended April 30, 2000. Less usage of the bank's line of credit and the decrease in the real estate loan are the reasons for the decrease.
Income taxes decreased $154,400 from a provision for income taxes of $8,400 for the year ended April 30, 1999 to a benefit from income taxes of $146,000 for the year ended April 30, 2000. The income tax benefit is due to the net loss before taxes and to the carryback of research and development tax credits.
6
Liquidity and Capital Resources
Cash provided by operating activities decreased from $756,628 for the year ended April 30, 1999 to $598,271 for the year ended April 30, 2000. Decreases in cash flows from net income (loss), accounts receivable, income tax receivable and payable, accounts payable and accrued expenses are mostly offset by an increase in cash flow from accounts receivable which results in the net decrease of $158,357. The increase in cash flow of $734,407 from the reduced accounts receivable balance is a result of lower sales for the fourth quarter ended April 30, 2000.
Cash used for investing activities totaled $34,883 for the year ended April 30, 2000 compared to $18,150 for the year ended April 30, 1999. The $34,883 was used to purchase computer equipment for a Year 2000 upgrade and to purchase production equipment.
Cash used for financing activities decreased from $563,419 for the year ended April 30, 1999 to $379,547 for the year ended April 30, 2000. The decrease of $183,872 resulted from a net decrease of $310,000 from the bank line of credit offset by a net increase of $126,128 to the real estate loan. The increase from the real estate loan is due to increased principal amounts applied from the real estate loan payments as the loan decreases.
The Company's primary source of liquidity on April 30, 2000 is cash of $416,477 and the bank line of credit. The bank line of credit was renewed for $500,000 on October 29, 1999 for one year. In addition, the Company has the option to utilize a second mortgage for $1,000,000 on the real estate loan. The Company believes that cash, cash from operations, the bank line of credit and existing bank loans are adequate to meet the anticipated short term liquidity and capital resource requirements of its business.
Year 2000
Since entering the Year 2000, the Company has not experienced any major disruptions to its business nor is it aware of any significant Year 2000 disruptions affecting its customers and suppliers. The Company can provide no assurance that all supplier and customer Year 2000 compliance plans were successfully completed in a timely manner, although it is not currently aware of any problems that would significantly impact its operations.
7
ITEM 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
| |
Page |
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|---|---|---|
| Report of Independent Public Accountants | 9 | |
| Balance Sheets as of April 30, 2000 and 1999 | 10 | |
| Statements of Operations for the Years Ended April 30, 2000 and 1999 | 11 | |
| Statements of Stockholders Investment for the Years Ended April 30, 2000 and 1999 | 12 | |
| Statements of Cash Flows for the Years Ended April 30, 2000 and 1999 | 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.
8
[LOGO]
Business Consultants • Certified Public Accountants
INDEPENDENT AUDITOR'S REPORT
Board of Directors
Image Systems Corporation
Minnetonka, Minnesota
We have audited the balance sheet of Image Systems Corporation (a Minnesota corporation) as of April 30, 2000, and the related statements of operations, stockholders' investment, and cash flows for the year 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 audit. The financial statements of Image Systems Corporation as of April 30, 1999, were audited by other auditors whose report dated June 4, 1999, expressed an unqualified opinion on those statements.
We conducted our audit 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 significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides 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, 2000, and the results of its operations and its cash flows for the year then ended in conformity with generally accepted accounting principles.
/s/
Larson, Allen, Weishair & Co., LLP
LARSON, ALLEN, WEISHAIR & CO., LLP
Minneapolis,
Minnesota
May 26, 2000
9
IMAGE SYSTEMS CORPORATION
BALANCE SHEETS
APRIL 30, 2000 AND 1999
| |
2000 |
1999 |
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|---|---|---|---|---|---|---|---|---|
| ASSETS | ||||||||
| CURRENT ASSETS |
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| Cash and Cash Equivalents | $ | 416,477 | $ | 232,636 | ||||
| Accounts Receivable, Net of Allowance for Doubtful Accounts of $40,000 and $60,000, Respectively | 683,233 | 1,242,963 | ||||||
| Inventories | 1,629,911 | 1,921,345 | ||||||
| Prepaid Expenses and Other | 25,402 | 21,215 | ||||||
| Income Taxes Receivable | 65,657 | — | ||||||
| Deferred Tax Asset | 177,025 | 177,025 | ||||||
| Total Current Assets | $ | 2,997,705 | $ | 3,595,184 | ||||
| PROPERTY AND EQUIPMENT | ||||||||
| Land | $ | 396,043 | $ | 396,043 | ||||
| Building | 1,310,062 | 1,310,062 | ||||||
| Furniture and Fixtures | 249,024 | 231,060 | ||||||
| Production Equipment | 340,643 | 323,724 | ||||||
| Total | $ | 2,295,772 | $ | 2,260,889 | ||||
| Less: Accumulated Depreciation | 529,209 | 429,577 | ||||||
| Net Property and Equipment | $ | 1,766,563 | $ | 1,831,312 | ||||
| Total Assets | $ | 4,764,268 | $ | 5,426,496 | ||||
| LIABILITIES AND STOCKHOLDERS' INVESTMENT |
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| CURRENT LIABILITIES |
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| Current Maturities of Long-Term Debt | $ | 105,496 | $ | 69,605 | ||||
| Accounts Payable | 376,031 | 413,065 | ||||||
| Accrued Expenses | 365,718 | 425,591 | ||||||
| Income Taxes Payable | — | 80,642 | ||||||
| Total Current Liabilities | $ | 847,245 | $ | 988,903 | ||||
| LONG-TERM DEBT |
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247,693 |
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663,131 |
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| Total Liabilities | $ | 1,094,938 | $ | 1,652,034 | ||||
| COMMITMENTS AND CONTINGENCIES |
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| STOCKHOLDERS' INVESTMENT |
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| Undesignated Stock, 5,000,000 Shares Authorized; None Issued or Outstanding | $ | — | $ | — | ||||
| Common Stock, No Par Value, 5,000,000 Shares Authorized; 4,452,597 Issued and Outstanding | 1,104,289 | 1,104,289 | ||||||
| Retained Earnings | 2,565,041 | 2,670,173 | ||||||
| Total Stockholders' Investment | $ | 3,669,330 | $ | 3,774,462 | ||||
| Total Liabilities and Stockholders' Investment | $ | 4,764,268 | $ | 5,426,496 | ||||
See accompanying Notes to Financial Statements.
10
IMAGE SYSTEMS CORPORATION
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED APRIL 30, 2000 AND 1999
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2000 |
1999 |
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|---|---|---|---|---|---|---|---|---|---|
| NET SALES | $ | 6,090,601 | $ | 7,215,227 | |||||
| COST OF PRODUCTS SOLD |
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4,471,565 |
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5,133,974 |
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| GROSS PROFIT |
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$ |
1,619,036 |
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$ |
2,081,253 |
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| OPERATING EXPENSES | |||||||||
| Product Development | $ | 556,761 | $ | 677,456 | |||||
| Selling | 760,387 | 725,104 | |||||||
| Administrative | 517,210 | 512,017 | |||||||
| Total Operating Expenses | $ | 1,834,358 | $ | 1,914,577 | |||||
| OPERATING INCOME (LOSS) |
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$ |
(215,322 |
) |
$ |
166,676 |
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| INTEREST INCOME |
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15,146 |
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5,289 |
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| INTEREST EXPENSE |
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(50,956 |
) |
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(82,932 |
) |
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| INCOME (LOSS) BEFORE INCOME TAXES |
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$ |
(251,132 |
) |
$ |
89,033 |
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| PROVISION FOR (BENEFIT FROM) INCOME TAXES |
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(146,000 |
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8,400 |
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| NET INCOME (LOSS) |
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$ |
(105,132 |
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$ |
80,633 |
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| NET INCOME (LOSS) PER COMMON SHARE |
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| Basic | $ | (0.02 | ) | $ | 0.02 | ||||
| Diluted |
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$ |
(0.02 |
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$ |
0.02 |
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| WEIGHTED AVERAGE COMMON SHARES OUTSTANDING |
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| Basic | 4,452,597 | 4,452,597 | |||||||
| Diluted |
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4,452,597 |
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4,453,628 |
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See accompanying Notes to Financial Statements.
11
IMAGE SYSTEMS CORPORATION
STATEMENTS OF STOCKHOLDERS' INVESTMENT
FOR THE YEARS ENDED APRIL 30, 2000 AND 1999
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Common Stock |
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Retained Earnings |
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Shares |
Amount |
Total |
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| 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 | |||||||
| Net Loss | — | — | (105,132 | ) | (105,132 | ) | ||||||||
| BALANCE, APRIL 30, 2000 | 4,452,597 | $ | 1,104,289 | $ | 2,565,041 | 3,669,330 | ||||||||
See accompanying Notes to Financial Statements.
12
IMAGE SYSTEMS CORPORATION
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED APRIL 30, 2000 AND 1999
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2000 |
1999 |
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|---|---|---|---|---|---|---|---|---|---|---|---|
| CASH FLOWS FROM OPERATING ACTIVITIES | |||||||||||
| Net Income (Loss) | (105,132 | ) | 80,633 | ||||||||
| Adjustments to Reconcile Net Income (Loss) to Net Cash Provided by Operating Activities: | |||||||||||
| Depreciation | 99,632 | 109,933 | |||||||||
| Deferred Tax Benefit | — | 20,800 | |||||||||
| (Increase) Decrease in Current Assets: | |||||||||||
| Accounts Receivable | 559,730 | (174,677 | ) | ||||||||
| Inventories | 291,434 | 490,621 | |||||||||
| Prepaid Expenses and Other | (4,187 | ) | (8,767 | ) | |||||||
| Income Taxes Receivable | (65,657 | ) | 43,629 | ||||||||
| Increase (Decrease) in Current Liabilities: | |||||||||||
| Accounts Payable | (37,034 | ) | 40,031 | ||||||||
| Accrued Expenses | (59,873 | ) | 73,783 | ||||||||
| Income Taxes Payable | (80,642 | ) | 80,642 | ||||||||
| Net Cash Provided by Operating Activities | $ | 598,271 | $ | 756,628 | |||||||
| CASH FLOWS FROM INVESTING ACTIVITIES | |||||||||||
| Property and Equipment Additions | $ | (34,883 | ) | $ | (18,150 | ) | |||||
| CASH FLOWS FROM FINANCING ACTIVITIES | |||||||||||
| Borrowings on Line of Credit | $ | 225,000 | $ | 1,735,000 | |||||||
| Repayments on Line of Credit | (225,000 | ) | (2,045,000 | ) | |||||||
| Repayments on Long-Term Debt | (379,547 | ) | (253,419 | ) | |||||||
| Net Cash Used for Financing Activities | $ | (379,547 | ) | $ | (563,419 | ) | |||||
| NET INCREASE IN CASH AND CASH EQUIVALENTS | $ | 183,841 | $ | 175,059 | |||||||
| Cash and Cash Equivalents—Beginning of Year | 232,636 | 57,577 | |||||||||
| CASH AND CASH EQUIVALENTS—END OF YEAR | $ | 416,477 | $ | 232,636 | |||||||
| SUPPLEMENTAL DISCLOSURES | |||||||||||
| Interest Paid | $ | 53,874 | $ | 80,411 | |||||||
See accompanying Notes to Financial Statements.
13
IMAGE SYSTEMS CORPORATION
NOTES TO FINANCIAL STATEMENTS
APRIL 30, 2000 AND 1999
NOTE 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:
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2000 |
1999 |
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|---|---|---|---|---|---|---|---|
| Finished Goods | $ | 155,783 | $ | 130,556 | |||
| Work in Process | 52,551 | 26,137 | |||||
| Components | 1,421,577 | 1,764,652 | |||||
| Total Inventories | $ | 1,629,911 | $ | 1,921,345 | |||
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 one customer that accounted for 19% of net sales for the year ended April 30, 2000. No customers accounted for more than 10% of net sales for the year ended April 30, 1999.
Research and Development Costs
The Company charges all research and development costs to operations in the period incurred.
14
Warranty Costs
The Company warrants its products against defects in materials and workmanship under normal use and for service for 18 months. The reserve for warranty costs of $140,000 and $160,000 as of April 30, 2000 and 1999, respectively, has been established to cover estimated costs of warranty claims.
Income Taxes
Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amount of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Deferred tax assets are subject to a valuation allowance based on the estimated realization of these assets.
Net Income (Loss) Per Share
Basic earnings (losses) per share (EPS) is computed by dividing net income (loss) 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:
| |
2000 |
1999 |
|||
|---|---|---|---|---|---|
| Weighted Average Common Shares Outstanding—Basic | 4,452,597 | 4,452,597 | |||
| Dilutive Effect of Stock Options | — | 1,031 | |||
| Weighted Average Common Shares Outstanding—Dilutive | 4,452,597 | 4,453,628 | |||
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 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, 2000 and 1999.
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.
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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 25% of outstanding accounts receivable as of April 30, 2000, and two customers accounted for 33% of outstanding accounts receivable at April 30, 1999.
Segment Reporting
The Company adopted Statement of Financial Accounting Standards ("SFAS") No. 131, Disclosure about Segments of an Enterprise and Related Information, which establishes annual and interim reporting standards for reporting information about an enterprise's operating segments and related disclosures about its products, services, geographic areas, and major customers. The Company has only one reportable segment.
Recent Pronouncements
In June 1999, the Financial Accounting Standards Board issued Statement of Financial Accounting Standard No. 137 "Accounting for Derivative Instruments and Hedging Activities—Deferral of the Effective Date of FASB No. 133" ("SFAS 137"). SFAS 137 defers for one year the implementation date of Statement of Financial Accounting Standard No. 133 ("SFAS 133") which addressed a comprehensive and consistent standard for the recognition and measurement of derivatives and hedging activities. As amended, SFAS 133 is effective for all quarters of all fiscal years beginning after June 15, 2000. Earlier adoption is permitted. Management does not anticipate that the adoption of SFAS 137 will have a material effect on the Company's results of operations or financial position.
NOTE 2 REVOLVING CREDIT AGREEMENT AND LONG-TERM DEBT
In October 1999, the Company reduced their credit on a revolving credit agreement from $1,000,000 to $500,000; all other terms of the agreement remained the same. The Agreement expires in October 2000. Borrowings bear interest at the bank's reference rate (9.0% at April 30, 2000). Borrowings are collateralized outstanding under the line of credit. At April 30, 2000 and 1999, the Company had no borrowings outstanding under the line of credit.
At April 30, 2000 and 1999, the Company had a balance of $353,189 and $732,736, respectively, 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.
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The scheduled aggregate annual maturities under the note payable as of April 30, 2000 are as follows:
| Year Ending April 30, |
Amount |
|||
|---|---|---|---|---|
| 2001 | $ | 105,496 | ||
| 2002 | 115,354 | |||
| 2003 | 132,339 | |||
| Total | $ | 353,189 | ||
NOTE 3 INCOME TAXES
The provision for income taxes for the years ended April 30 is summarized as follows:
| |
2000 |
1999 |
|||||||
|---|---|---|---|---|---|---|---|---|---|
| Current Provision (Benefit): | |||||||||
| Federal | $ | (147,000 | ) | $ | (9,100 | ) | |||
| State | 1,000 | (3,300 | ) | ||||||
| Total Current | $ | (146,000 | ) | $ | (12,400 | ) | |||
| Deferred Tax Provision | — | 20,800 | |||||||
| Total Provision (Benefit) | $ | (146,000 | ) | $ | 8,400 | ||||
The Company had net deferred tax assets of $177,025 as of April 30, 2000 and 1999. 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 temporarily differences related to reserves and accruals, net operating loss carryforwards, and research and development tax credit carryforwards.
Realization of the deferred tax asset is dependent on generating sufficient taxable income prior to the expiration of the various credits. Management believes that it is more likely than not that the deferred tax asset, after consideration of the valuation allowance of $30,000, will be realized through future earnings or tax planning strategies. The amount of the deferred tax asset considered realizable, however, could change in the near future if estimates of future taxable income are changed.
The Company has state net operating loss carryforwards of approximately $110,000 at April 30, 2000. These carryforwards expire at April 30, 2015. At April 30, 2000, the Company also has federal and state research and development credit carryforwards of approximately $20,000. There is no expiration on these credits.
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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:
| |
2000 |
1999 |
||||
|---|---|---|---|---|---|---|
| Federal Statutory Rate | (34 | )% | 15 | % | ||
| State Income Taxes, Net of Federal Benefit | — | 2 | ||||
| Adjustments to Estimated Income Tax Accrual | (17 | ) | — | |||
| Change in Valuation Reserve | (12 | ) | — | |||
| Other | 5 | (8 | ) | |||
| Total | (58 | )% | 9 | % | ||
NOTE 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, 2000, 18,750 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 $0.75 and $0.56 for 2000 and 1999, respectively. Options outstanding at April 30, 2000 have a weighted average remaining contractual life of 4.8 years. A summary of plan activity is as follows:
| |
Options Outstanding |
Price Per Share |
Weighted Average Exercise Price |
|||||||
|---|---|---|---|---|---|---|---|---|---|---|
| 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 | |||||
| Granted | 220,000 | 0.75—0.75 | 0.75 | |||||||
| Exercised | — | — | — | |||||||
| Forfeited or Canceled | (82,500 | ) | 1.50—3.50 | 2.39 | ||||||
| April 30, 2000 | 354,375 | $ | 0.75—$4.13 | $ | 1.32 | |||||
| Options Exercisable at April 30, 2000 | 65,625 | $ | 1.00—$4.13 | $ | 2.70 | |||||
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
18
net income (loss) and earnings (losses) per share would have been changed to the following pro forma amounts:
| |
2000 |
1999 |
|||||
|---|---|---|---|---|---|---|---|
| Net Income (Loss): | |||||||
| As Reported | $ | (105,132 | ) | $ | 80,633 | ||
| Pro Forma | $ | (173,312 | ) | $ | 10,504 | ||
| Basic Earnings (Losses) per Common Share: | |||||||
| As Reported | $ | (0.02 | ) | $ | 0.02 | ||
| Pro Forma | $ | (0.04 | ) | $ | — | ||
| Diluted Earnings (Losses) Per Common Share: | |||||||
| As Reported | $ | (0.02 | ) | $ | 0.02 | ||
| Pro Forma | $ | (0.04 | ) | $ | — | ||
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:
| |
2000 |
1999 |
||
|---|---|---|---|---|
| Risk-Free Interest Rates | 5.54%—6.07% | 5.54%—6.07% | ||
| Expected Life of Options Granted | 5 Years | 5 Years | ||
| Expected Volatility of Options Granted | 59% | 70% | ||
| Expected Dividend Yield | None | None |
Operating Leases
The Company leases equipment under an operating lease. The lease requires the Company to pay maintenance, insurance, taxes and other expenses in addition to minimum annual rent. Rent expense was $12,649 and $13,300 in 2000 and 1999, respectively. Minimum rental commitments under the noncancelable operating lease at April 30, 2000 are as follows:
| Year Ending April 30, |
Amount |
|||
|---|---|---|---|---|
| 2001 | $ | 7,737 | ||
| 2002 | 5,158 | |||
| Total | $ | 12,895 | ||
NOTE 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 2000 or 1999.
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ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
Form 8K for change in accountants was filed July 20, 1999.
ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The directors and executive officers of the Company are:
| Name |
Age |
Position |
||
|---|---|---|---|---|
| Dean Scheff | 68 | President/Director | ||
| Diana Scheff | 59 | Secretary/Director | ||
| Marta Scheff Volbrecht | 40 | Vice President/Director | ||
| Laura Sorensen | 40 | Director | ||
| David Sorensen | 39 | Vice President/Director | ||
| Steven Volbrecht | 41 | Director | ||
| Dr. Frederick R. Olson | Director | |||
| Bradley Beard | 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 at 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 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 as a B.S.M.E. in Mechanical Engineering from the University of Minnesota and a MBA from the 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 additional responsibilities as Vice President 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 Project Manager for Landwehr, Inc. In 1991 he rejoined Johnson
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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.
Bradley Beard. Director. Mr. Beard is Vice-President with Fairview Health Services. He is President of National Rehab Resources, Inc., a company which provides educational and consultative services to healthcare organizations. He received his Master's Degree in Healthcare Administration from the University of Minnesota, and B.A. degrees from the Medical College of Georgia and West Chester University.
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
One employee, but no executives, received compensation in excess of $100,000 during the year ended April 30, 2000. The total compensation received by all executive officers as a group (6 persons) totaled $336,258.
Dean Scheff, the President and CEO of the Company, received a salary of $90,000 and no commissions for the year ended April 30, 2000. For the year ended April 30, 1999, Dean Scheff's salary was $90,485 and no commissions.
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, 2000, 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.
| Name |
Number of Shares |
Percent of Class |
||
|---|---|---|---|---|
| Dean Scheff(1) | 758,185 | (2) | 17.0 | |
| Diana Scheff(1) | 792,685 | (2) | 17.8 | |
| Laura Sorensen(1) | 617,985 | 13.9 | ||
| Marta Volbrecht(1) | 618,785 | 13.9 | ||
| David Sorensen(2) | — | — | ||
| Steven Volbrecht(2) | — | — | ||
| All officers and directors as a group (6 persons) | 2,787,640 | 62.6 |
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ITEM 12. CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
None.
ITEM 13. EXHIBITS LIST AND REPORTS ON FORM 8-K
Form 8-K filed July 20, 1999.
22
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, 2000 |
|
By: |
|
/s/ Dean F. 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/ Dean F. Scheff |
Director and President Principal Executive, Accounting and Financial Officer) | July 27, 2000 | ||
| /s/ Diana L. Scheff |
|
Director and Secretary |
|
July 27, 2000 |
| /s/ Marta Scheff Volbrecht |
|
Director and Vice President |
|
July 27, 2000 |
| /s/ Laura Sorensen |
|
Director |
|
July 27, 2000 |
| /s/ David R. Sorensen |
|
Director and Vice President |
|
July 27, 2000 |
| /s/ Steve Volbrecht |
|
Director |
|
July 27, 2000 |
| /s/ Dr. Frederick R. Olson |
|
Director |
|
July 27, 2000 |
| /s/ Bradley Beard |
|
Director |
|
July 27, 2000 |
| |
|
|
|
|
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
23
| Exhibit No. |
Item |
Sequential 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.) |
|
|
24
|
|