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 October 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 December 1, 1999, there were 4,452,597 shares of Common
Stock, no par value per share, outstanding.
<PAGE>
Part 1. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
IMAGE SYSTEMS CORPORATION
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BALANCE SHEETS
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October 31, April 30,
1999 1999
--------------- ---------
(Unaudited) (Audited)
<S> <C> <C>
ASSETS
- -----------
CURRENT ASSETS:
Cash $512,044 $232,636
Accounts receivable, net 904,651 1,242,963
Inventory 1,777,151 1,921,345
Prepaid expenses 31,198 21,215
Deferred tax asset 177,025 177,025
-------------- ---------
Total current assets 3,402,069 3,595,184
-------------- ---------
PROPERTY AND EQUIPMENT:
Land 396,043 396,043
Building 1,310,062 1,310,062
Furniture and fixtures 246,011 231,060
Production equipment 323,724 323,724
Less accumulated depreciation (487,577) (429,577)
------------- ----------
Net property and equipment 1,788,263 1,831,312
------------- ----------
$5,190,332 $5,426,496
============= ==========
LIABILITIES AND STOCKHOLDERS'
INVESTMENT
- ------------------------------
CURRENT LIABIITIES:
Current maturities of long-term debt
82,128 69,605
Accounts payable 385,731 413,065
Accrued expenses 373,716 425,591
Income taxes payable 76,405 80,642
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Total current liabilities 917,980 988,903
LONG-TERM DEBT 515,351 663,131
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Total liabilities 1,433,331 1,652,034
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STOCKHOLDERS' INVESTMENT:
Undesignated stock, 5,000,000 shares
authorized; no shares issued and outstanding
-- --
Common stock, no par value, 5,000,000
shares authozied; 4,452,597 issued and
outstanding respectively 1,104,289 1,104,289
Retained earnings 2,652,712 2,670,173
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Total stockholders' investment 3,757,001 3,774,462
------------- ----------
$5,190,332 $5,426,496
============= ==========
See Accompanying Notes to Financial Statements
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
IMAGE SYSTEMS CORPORATION
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STATEMENT OF OPERATIONS
- ------------------------
(Unaudited)
For the Quarters Ended For the Six Months Ended
October 31,October 31, October 31,October 31,
1999 1998 1999 1998
---------- ----------- ----------- ------------
<S> <C> <C> <C> <C>
NET SALES $1,503,336 $1,606,963 $2,867,869 $3,070,985
COST OF PRODUCTS
SOLD 1,059,188 1,153,253 2,001,756 2,155,624
---------- ----------- ----------- -------------
Gross Profit 444,148 453,710 866,113 915,361
OPERATING EXPENSES
Product
development 137,315 183,335 279,618 345,661
Selling 170,948 151,654 347,962 311,995
Administrative 119,406 119,706 235,827 238,669
---------- ----------- ----------- -------------
Total Operating
Expenses 427,669 454,695 863,407 896,325
---------- ----------- ----------- -------------
Operating Income16,479 (985) 2,706 19,036
INTERST INCOME 3,770 2,791 6,295 2,814
INTEREST EXPENSE(13,782) (21,349) (30,399) (46,529)
---------- ----------- ----------- -------------
Net Income(Loss) Before
Income Taxes 6,467 (19,543) (21,398) (24,679)
BENEFIT (PROVISION) FOR
INCOME TAXES (1,681) 6,593 3,937 8,391
---------- ----------- ----------- -------------
NET INCOME (LOSS)$4,786 ($12,950) ($17,461) ($16,288)
========== =========== =========== =============
BASIC NET INCOME
PER SHARE $0.00 $0.00 $0.00 $0.00
========== =========== =========== =============
DILUTED NET INCOME
PER SHARE $0.00 $0.00 $0.00 $0.00
========== =========== =========== =============
BASIC WEIGHTED
AVERAGE SHARES
OUTSTANDING 4,452,597 4,452,597 4,452,597 4,452,597
========== =========== =========== =============
DILUTED WEIGHTED
AVERAGE SHARES
OUTSTANDING 4,452,597 4,452,597 4,452,597 4,452,597
========== =========== =========== =============
See Accompanying Notes To Financial Statements
</TABLE>
<PAGE>
<TABLE>
CAPTION>
IMAGE SYSTEMS CORPORATION
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STATEMENT OF CASH FLOWS
- -----------------------
Unaudited
For the Six Months Ended
October 31, October 31,
1999 1998
--------------- ---------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (Loss) ($17,461) ($16,288)
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation 58,000 59,400
Changes in current operating items:
Accounts receivable 338,312 99,956
Inventory 144,194 217,713
Prepaid expenses (9,983) (17,999)
Account payable (27,334) 207,971
Accrued liabilities (51,875) 32,041
Income taxes receivable (4,237) 35,238
Deferred tax asset 0 96,371
-------------- --------------
Net cash provided by
operating activities 429,616 714,403
-------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Furniture and
equipment additions (14,951) 0
-------------- --------------
Net cash used for
investing activities (14,951) 0
-------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings from bank
line of credit 90,000 790,000
Repayments to bank
line of credit (90,000) (1,095,000)
Repayments to bank
real estate loan (135,257) (221,785)
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Net cash (used for)
financing activities (135,257) (526,785)
------------- ---------------
Net increase in cash 279,408 187,618
CASH AT BEGINNING OF PERIOD 232,636 57,577
-------------- ---------------
CASH AT END OF PERIOD $512,044 $245,195
============== ===============
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid $31,265 $45,170
============== ===============
Taxes paid $0 $0
============== ===============
See Accompanying Notes To Financial Statements
</TABLE>
<PAGE>
tem 1. FINANCIAL STATEMENTS
IMAGE SYSTEMS CORPORATION
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NOTES TO FINANCIAL STATEMENTS
- -----------------------------
October 31, 1999 and October 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 for a fair statement of the results for the interim
periods presented. The operating results for the six months
ended October 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, 1999.
2. EARNINGS PER SHARE
Basic earnings per share is computed by dividing net income by
the weighted average number of shares of common stock
outstanding during the year. Diluted earnings per common share
is similar to the computation of basic earnings per share,
except that the denominator is increased for the assumed
exercise of dilutive options using the treasury stock method.
The denominator is not affected if there is a loss during the
period. The components of the earnings per share denominator
are as follows:
<TABLE>
<CAPTION>
For the Quarter Ending For the Six Months Ending
Oct 31, Oct 31, Oct 31, Oct 31,
1999 1998 1999 1998
<S> <C> <C> <C> <C>
Weighted average
common shares
outstanding for basic
earnings per share 4,452,597 4,452,597 4,452,597 4,452,597
--------------------------------------------
Weighted average common
shares issuable
under the exercise of
options -- -- -- --
--------------------------------------------
Shares used in diluted
earnings per share 4,452,597 4,4525,597 4,452,597 4,452,597
============================================
</TABLE>
3. 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 quarters presented.
SFAS No. 131, "Disclosures about Segments of an Enterprise and
Related Information," establishes standards for the way the
public business enterprises report information about operating
segments in annual financial statements and has been adopted by
the Company in fiscal year 1999. The
statement requires business segment financial information be
reported in the financial statements utilizing the management
approach. The management approach is defined as the manner in
which management organizes the segments within the organization
for making operating decisions and assessing performance. The
adoption of SFAS No. 131 does not impact the financial
statements or the disclosures contained therein.
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Certain statements contained herein are forward-looking
statements within the meaning of the Securities Act of 1933 and
the Securities Exchange Act of 1934 that involve a number of
risks and uncertainities. Such forward-looking information may
be indicated by words such as will, may be, expects or
anticipates. In addition to the factors discussed herein, among
the other factors that could cause actual results to differ
materially are the following: business conditions and growth in
the personal computer industry and the general economy;
competitive factors such as rival computer and peripheral
product sellers and price pressures; availability of vendor
products at reasonable prices; inventory risks due to shifts in
market demand; and risks presented from time to time in reports
filed by the Company with the Securities and Exchange
Commission, including but not limited to the annual report on
Form 10KSB for the year ended April 30, 1999.
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 October 31, 1999 Versus October 31, 1998
- ------------------------------------------------------------
Net sales for the quarter ended October 31, 1999 was $1,503,336
compared to net sales of $1,606,963 for the quarter ended
October 31, 1998, resulting in a decrease of 6.4%. Selling a
lower quantity of monitors is the reason for the decrease.
During the last month of the second quarter ended October 31,
1999, the customer orders increased which created a backlog that
will carry over into the next two quarters.
Gross profit decreased 2.1% from $453,710 for the quarter ended
October 31, 1998 to $444,148 for the quarter ended October 31,
1999. The gross profit margin increased from 28.2% to 29.5%.
Lower material costs resulted in a higher gross profit margin.
Product research and development expenses for the quarter ended
October 31, 1999 decreased $46,020 or 25.1% compared to the same
quarter ended in 1998. The decrease is due to a reduction in
the engineering staff. The research and development department
focused on projects including the evaluation of reliability,
focus control, CRT quality, new video boards and new products.
Selling expenses for the three months ended October 31, 1999
increased $19,294 or 12.7% compared to the three months ended
October 31, 1998. The increase is due to the addition of
personnel to the sales department and increased travel expenses
for customer visits.
For the quarter ended October 31, 1999, administrative expenses
decreased from $119,706 to $119,406 compared to the quarter
ended October 31, 1998. This decrease was a minimal $300.
Interest income increased from $2,791 for the quarter ended
October 31, 1998 to $3,770 for the same quarter ended in 1999.
The 35.1% increase is due to excess cash deposited into the
government trust account.
Interest expense decreased $7,567 for the quarter ended October
31, 1999 compared to the quarter ended October 31, 1998. The
decrease is due to the decline in the real estate loan used to
finance the building and a decrease in using the bank line of
credit.
Income taxes increased from a benefit of $6,593 for the quarter
ended October 31, 1998 to a provision of $1,681 for the quarter
ended October 31, 1999. The increase is due to an increase in
net income before taxes.
<PAGE>
Six Months Ended October 31, 1999 versus October 31, 1998
- ----------------------------------------------------------
Net sales decreased $203,116 or 6.6% from $3,070,985 for the six
months ended October 31, 1998 to $2,867,869 for the same six
months ended in 1999. The decrease is primarily due to a
decline in the quantity of monitors sold.
For the six months ended October 31, 1999, gross profit
decreased $49,248 or 5.4% compared to the same period ended in
1998. The gross profit margin increased from 29.8% to 30.2%
which is primarily due to lower material costs.
Product research and development decreased $66,043 or 19.1% from
$345,661 for the six months ended October 31, 1998 to $279,618
for the six months ended October 31, 1999. The decrease is due
to a reduction in our engineering staff and a decrease in
inventory use in the research and development department.
Selling expenses increased $35,967 from $311,995 for the six
months ended October 31, 1998 to $347,962 for the six months
ended October 31, 1999. The increase is due to additional
tradeshow participation and the addition of personnel to our
sales staff.
For the six months ended October 31, 1999, administrative
expenses decreased a minimal $2,842 or 1.2% compared to the six
months ended October 31, 1998.
Interest income increased $3,481 from $2,814 for the six months
ended October 31, 1998 to $6,295 for the six months ended
October 31, 1999. The increase is due to interest gained from
excess cash deposited into the government trust account.
Interest expense decreased $16,130 for the six months ended
October 31, 1999 compared to the six months ended October 31,
1998. The decrease is due to the decrease in the real estate
loan and a decline in use of our bank line of credit.
The income tax benefit decreased $4,454 for the six months ended
October 31, 1999 compared to the six months ended OActober 31,
1998. The increase is due to an increase in net income before
taxes.
<PAGE>
Liquidity and Capital Resources
- --------------------------------------
Cash provided by operating activities for the six months ended
October 31, 1999 was $429,616 compared to $714,403 for the six
months ended October 31, 1998. The decrease of $284,787
resulted primarily from a decrease in cash provided by
inventory, accounts payable, accrued liabilities and deferred
tax asset offset by an increase in cash provided by accounts
receivable.
Cash used for investing activities for the six months ended
October 31, 1999 was $14,951, compared to no cash used for the
six months ended October 31, 1998. $14,951 was used to purchase
computer equipment needed for a year 2000 upgrade.
Cash used for financing activities decreased from $526,785 for
the six months ended October 31, 1998 to $135,257 for the six
months ended October 31, 1999. A decrease in use of the bank
line of credit and the reduction of the building loan resulted
in lower cash used for financing activities.
The Company's primary source of liquidity on October 31, 1999 is
the cash of $512,044 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 martgage 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
- ---------
The Company has analyzed and updated its Management Information
Systems and its Industrial Equipment Systems. These systems are
now Year 2000 compliant. Approximately 70% of strategic
suppliers have been evaluated and no critical Year 2000 problems
have been identified. Contingencies include identification of
second sources and the selective addition of inventory of
critical parts.
<PAGE>
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
On November 22, 1999, Image Systems Corporation announced that
the Company will acquire certain assets of the Imaging
Technologies Division of Nortech Systems. Terms of the
agreement are expected to be completed by December 15, 1999.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
None
SIGNATURE
In accordance with the requirements of the Securities Exchange
Act of 1934, the registrant caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Image systems Corporation
- -------------------------
Registrant
By: /s/
- --------
Dean Scheff, Chief Executive Officer
and Chief Financial Officer
(Principal Executive Officer and
Principal Financial Officer)
Dated December 10, 1999
