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IMAGE SYSTEMS CORPORATION
10QSB, 2000-09-13
PHOTOGRAPHIC EQUIPMENT & SUPPLIES

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U.S. SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

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FORM 10-QSB

(Mark One)

/x/	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended July 31, 2000
or

/ /	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition prior from                to               

Commission File No. 021245

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Image Systems Corporation
(Exact Name of Small Business Issuer as Specified in its Charter)

(952) 935-1171
(Issuer's Telephone Number, Including Area Code)

    Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes /x/  No / /

    As of September 1, 2000, there were 4,452,597 shares of Common Stock, no par value per share, outstanding.

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Part 1. FINANCIAL INFORMATION

Item 1. FINANCIAL STATEMENTS

IMAGE SYSTEMS CORPORATION
BALANCE SHEETS

				July 31, 2000			April 30, 2000
				(Unaudited)			(Audited)
ASSETS
CURRENT ASSETS:
	Cash			$	306,827		$	416,477
	Accounts Receivable, Net				460,569			683,233
	Inventory				1,710,915			1,629,911
	Prepaid Expenses				33,327			25,402
	Income Taxes Receivable				65,657			65,657
	Deferred Tax Asset				177,025			177,025
		Total Current Assets			2,754,320			2,997,705
PROPERTY AND EQUIPMENT:
	Land				396,043			396,043
	Building				1,310,062			1,310,062
	Furniture and Fixtures				249,024			249,024
	Production Equipment				342,144			340,643
	Less Accumulated Depreciation				(552,077	)		(529,209	)
		Net Property and Equipment			1,745,196			1,766,563
LONG TERM ASSET
	Deferred Income Taxes				63,700			—
	Total Assets			$	4,563,216		$	4,764,268
LIABILITIES AND STOCKHOLDERS' INVESTMENT
CURRENT LIABILITIES:
	Accounts Payable			$	372,771		$	376,031
	Accrued Liabilities				384,314			365,718
	Current Maturities of Long-Term Debt				107,845			105,496
		Total Current Liabilities			864,930			847,245
LONG-TERM DEBT					220,083			247,693
		Total Liabilities			1,085,013			1,094,938
STOCKHOLDERS' INVESTMENT:
	Undesignated Stock, 5,000,000 Shares Authorized; No Shares 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				2,373,914			2,565,041
	Total Stockholders' Investment				3,478,203			3,669,330
	Total Liabilities and Stockholders' Investment			$	4,563,216		$	4,764,268

See Accompanying Notes To Financial Statements

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IMAGE SYSTEMS CORPORATION
STATEMENT OF OPERATIONS
(Unaudited)

				For the First Quarter Ended
				July 31, 2000			July 31, 1999
NET SALES				$	1,180,282		$	1,364,533
COST OF PRODUCTS SOLD					973,114			942,568
	Gross Profit				207,168			421,965
OPERATING EXPENSES
	Product Development				143,209			142,303
	Selling				195,445			177,014
	Administrative				119,953			116,421
		Total Operating Expenses			458,607			435,738
	Operating (Loss)				(251,439	)		(13,773	)
INTEREST INCOME					4,858			2,525
INTEREST EXPENSE					(8,246	)		(16,617	)
	Net (Loss) Before Income Taxes				(254,827	)		(27,865	)
BENEFIT FROM INCOME TAXES					63,700			5,618
NET (LOSS)				$	(191,127	)	$	(22,247	)
NET (LOSS) PER SHARE:
	Basic			$	(0.04	)	$	0.00
	Diluted			$	(0.04	)	$	0.00
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:
	Basic				4,452,597			4,452,597
	Diluted				4,452,597			4,452,597

See Accompanying Notes To Financial Statements

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IMAGE SYSTEMS CORPORATION
STATEMENT OF CASH FLOWS
(Unaudited)

				For the Three Months Ended
				July 31, 2000			July 31, 1999
OPERATING ACTIVITIES:
	Net (Loss)			$	(191,127	)	$	(22,247	)
	Adjustments to Reconcile Net (Loss) To Net Cash Provided by Operating Activities:
		Depreciation			22,868			28,800
	Change in Operating Items:
		Accounts Receivable			222,664			173,672
		Inventory			(81,004	)		172,406
		Prepaid Expenses			(7,925	)		(3,657	)
		Accounts Payable			(3,260	)		(226,536	)
		Accrued Expenses			23,468			(30,173	)
		Income Taxes Payable			—			(5,574	)
		Deferred Income Taxes			(63,700	)		—
		Deferred Income			(4,872	)		—
	Net Cash Provided by (Used for) Operating Activities				(82,888	)		86,691
INVESTING ACTIVITIES
	Furniture and Equipment Additions				(1,501	)		—
		Net Cash Used for Investing Activities			(1,501	)		—
FINANCING ACTIVITIES:
	Borrowings from Line of Credit				205,000			50,000
	Repayments to Line of Credit				(205,000	)		(50,000	)
	Repayments to Bank Real Estate Loan				(25,261	)		(116,699	)
		Net Cash Used for Financing Activities			(25,261	)		(116,699	)
		Net Decrease in Cash			(109,650	)		(30,008	)
CASH AT BEGINNING OF PERIOD					416,477			232,636
CASH AT END OF PERIOD				$	306,827		$	202,628
SUPPLEMENTAL DISCLOSURES
	Interest Paid			$	8,136		$	16,564
	Taxes Paid			$	0.00		$	0.00

See Accompanying Notes To Financial Statements

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Item 1. FINANCIAL STATEMENTS

IMAGE SYSTEMS CORPORATION
NOTES TO FINANCIAL STATEMENTS
July 31, 2000 and July 31, 1999
(Unaudited)

1.  ORGANIZATION AND ACCOUNTING POLICIES:

    The unaudited interim financial statements furnished herein reflect all adjustments which are, in the opinion of management, necessary for a fair statement of the results for the interim periods presented. The operating results for the three months ended July 31, 2000 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, 2000.

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:

3.  INVENTORY

    Breakdown of inventory is as follows:

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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, 2000.

    The Company was formed on September 1, 1988 to design, assemble and market high resolution monitors for use with computers.

RESULTS OF OPERATIONS

Three Months Ended July 31, 2000 Versus July 31, 1999

    Net sales for the three months ended July 31, 2000 decreased $184,251 or 13.5% compared to the three months ended July 31, 1999. The primary reason for the decrease is selling more lower priced monitors. To maintain and promote product visibility the Company displayed its monitors at four trade shows during June and August, 2000. The Company anticipates that improved product lines will increase sales in future months.

    Gross profit decreased from $421,965 for the three months ended July 31, 1999 to $207,168 for the three months ended July 31, 2000. The decrease is due to sales of lower margin monitors, the fixed effect of overhead expenses, and less efficient production levels.

    For the three months ended July 31, 2000 development and research expenses increased only $906 or 0.6% compared to the three months ended July 31, 1999.

    Selling expenses increased $18,431 or 10.4% from $177,014 for the three months ended July 31, 1999 to $195,445 for the three months ended July 31, 2000. Increased travel and additional personnel expenses are the primary reasons for the increase.

    Administrative expenses increased from $116,421 for the three months ended July 31, 1999 to $119,953 for the three months ended July 31, 2000. The $3,532 or 3.0% increase is due to additional wage expenses.

    Interest income increased $2,333 from $2,525 for the three months ended July 31, 1999 to $4,858 for the three months ended July 31, 2000. The increase is due to interest earned from excess cash deposited into the government trust account.

    Interest expense decreased from $16,617 for the three months ended July 31, 1999 to $8,246 for the three months ended July 31, 2000. The decrease in the real estate bank loan is the primary reason for the decrease.

    The benefit from income taxes increased from $5,618 for the three months ended July 31, 1999 to $63,700 for the three months ended July 31, 2000. The benefit from income tax increase is due to the increased net loss before income taxes.

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Liquidity and Capital Resources

    Cash provided by operations totaled $86,691 for the three months ended July 31, 1999 compared to $82,888 used for operating activities for the three months ended July 31, 2000. The decrease in cash flow of $169,579 is due primarily to the increase in net loss of $168,880. The total cash flow changes in depreciation and operating items are primarily offset.

    Cash used for investing activities totaled $1,501 for the three months ended July 31, 2000 compared to no activity for the three months ended July 31, 1999.

    Cash used for financing activities decreased from $116,699 for the three months ended July 31, 1999 to $25,261 for the three months ended July 31, 2000. The decrease of $91,438 is due primarily to a $100,000 principal payment to the bank real estate loan during July, 1999.

    The Company's primary source of liquidity on July 31, 2000 is cash of $306,827 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.

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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

    Form 8-K filed on July 20, 1999 for change in accountants.

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:	Dean Scheff Chief Executive Officer and Chief Financial Officer (Principal Executive Officer and Principal Financial Officer)

Dated September 1, 2000

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QuickLinks

IMAGE SYSTEMS CORPORATION BALANCE SHEETS
IMAGE SYSTEMS CORPORATION STATEMENT OF OPERATIONS (Unaudited)
IMAGE SYSTEMS CORPORATION STATEMENT OF CASH FLOWS (Unaudited)
IMAGE SYSTEMS CORPORATION NOTES TO FINANCIAL STATEMENTS July 31, 2000 and July 31, 1999 (Unaudited)
OTHER INFORMATION
SIGNATURE

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