U. S. SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-KSB
ý ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED] For the Fiscal year ended April 30, 2002
OR
o TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED] For the transition period from _______ to ______
IMAGE SYSTEMS CORPORATION
(Name of Small Business Issuer in its charter)
Minnesota |
|
41-1620497 |
(State or other jurisdiction |
|
(I.R.S. Employer |
of incorporation or organization) |
|
Identification No.) |
|
|
|
6103 Blue Circle Drive, Minnetonka, Minnesota |
|
55343 |
(Address of principal executive offices) |
|
(Zip Code) |
|
|
|
952-935-1171 |
||
(Issuers 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 ý No o
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 Registrants 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. ý
The Issuers revenues for the fiscal year ended April 30, 2002 were $4,322,640.
As of July 15, 2002, 4,452,597 shares of the Issuers Common Stock were outstanding. The aggregate market value of the Common Stock held by non-affiliates of the Issuer on such date (based on the low bid for such shares as reported by the Metro Data company, a computer service bureau, that collects quotations from local market makes) was $314,423. 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 Issuers officers and directors.
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 Companys 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 Companys 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 Companys 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 Companys 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 Companys monitors provide 65-100 Footlamberts, at least twice as bright as standard monitors.
The Companys circuitry, HRMSä (Hi-Res Multi-Sweepä) enables the autosynchronous monitors to adjust dynamically to numerous display boards and standards. HRMSä provides compatibility with high resolution display controllers for many computer platforms, including PCs, and workstation level systems, such as SUN, HP, and Silicon Graphics and it facilitates the replacement of older legacy displays located through a hospital enterprise.
2
Manufacturing
The Companys components and subassemblies are produced by subcontractors whose primary task is building reliable and economical subassemblies. Final assembly and quality assurance are performed by the Company at its corporate facility. Components are obtained from a number of sources. Some components are shelf items and readily available. Other components are custom made for the Company. The printed circuit boards, designed by the Company, are stuffed for the Company by custom suppliers within close proximity of Company facilities. The monitors are subject to final inspection where final adjustments are made prior to shipment.
Marketing
The Companys 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 buyers guides, magazine articles, distribution of printed materials, lead tracking, an internet site and trade shows. The Company believes that trade shows have provided the Companys products with significant exposure.
The Companys 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 Companys 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 Companys monitors are priced from $1,800 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.
The Company markets primarily two product lines CRTs and Flat Panels. The amount of sales for CRTs amounted to $3,393,525 and $4,869,718 for respective years ending April 30, 2002 and April 30, 2001. Flat Panels sales were $929,115 for the year ended April 30, 2002 and $116,245 for the year ended April 30, 2001.
Competition
The computer monitor industry is highly competitive. The Companys CRT monitors compete with large well-established companies such as Siemens and Barco, whose products are generally more expensive. The company also competes with Dome, Barco and other smaller players in the high-resolution, grayscale LCD monitor segment. The rugged monitor market is fragmented with many smaller companies providing product offerings.
The Company has engaged in research and development since its inception. Research and development expenses were $557,834 in 2001 and $510,111 in 2002.
Products,
The Companys 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
3
NTSC and 80 kH,z, 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 Companys 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 three customers - Richardson $657,764, General Electric Medical $988,936 and Marconi $593,278 - which accounted for 44% of net sales for the year ended April 30, 2001 and had two customers - Heartlab $799,615 and Richardson $542,711 - which accounted for 31% of net sales for the year ended April 30, 2002.
The Company had foreign sales totaling $573,528 for the year ended April 30, 2002 compared to $672,239 for the year ended April 30, 2001.
Backlog
The dollar amount of the Companys backlog of orders considered to be firm at April 30, 2002 was approximately $380,000. The Company expects that nearly all orders considered to be firm at April 30, 2002 will be filled during the 2003 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, 2002, the Company had 19 full time employees and 4 part time employees. None are represented by a labor union. The Company believes its employee relations are satisfactory.
ITEM 2. PROPERTIES
The Company moved into a new 30,000 square foot office, production and warehouse facility during February, 1997 in the Opus Industrial Park located in Minnetonka, Minnesota. The cost of the new facility was $1.3 million.
4
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, 2002.
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 Companys 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.
Fiscal Year ended April 30, 2000 |
|
Low Bid |
|
High Bid |
|
||
Quarter ended July 31, 1999 |
|
$ |
1.125 |
|
$ |
1.500 |
|
Quarter ended October 31, 1999 |
|
.719 |
|
.750 |
|
||
Quarter ended January 31, 2000 |
|
1.250 |
|
1.375 |
|
||
Quarter ended April 30, 2000 |
|
.750 |
|
1.000 |
|
||
Fiscal Year ended April 30, 2001 |
|
|
|
|
|
Quarter ended July 31, 2000 |
|
.625 |
|
1.094 |
|
Quarter ended October 31, 2000 |
|
.313 |
|
.813 |
|
Quarter ended January 31, 2001 |
|
.260 |
|
.330 |
|
Quarter ended April 30, 2001 |
|
.180 |
|
.313 |
|
Fiscal Year ended April 30, 2002 |
|
|
|
|
|
Quarter ended July 31, 2001 |
|
.180 |
|
.320 |
|
Quarter ended October 31, 2001 |
|
.180 |
|
.310 |
|
Quarter ended January 31, 2002 |
|
.200 |
|
.350 |
|
Quarter ended April 30, 2002 |
|
.180 |
|
.450 |
|
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, 2002, there were approximately 420 record holders of the Companys Common Stock.
5
ITEM 6. MANAGEMENTS 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.
RESULTS OF OPERATIONS
Gross profit increased $292,021 for the year ended April 30, 2002 compared to year ended April 30, 2001. The gross profit percentage increased from 19.6% to 29.4%. The increase is due to selling higher margin monitors and reduced production expenses.
For the year ended April 30, 2002 product development and research expenses decreased $47,723 or 8.6% compared to the year ended April 30, 2001. Decreased personnel expense is the primary reason for the decrease.
Selling expenses decreased $160,943 or 24.4% for the year ended April 30, 2002. The primary reasons for the decreases are lower personnel and travel expenses.
Administration expenses increased from $407,092 for the year ended April 30, 2001 to $420,811 for the year ended April 30, 2002. The use of outside consultants during January and February 2002 is the reason for the increase.
Interest income decreased from $11,430 for the year ended April 30, 2001 to $17 for the year ended April 30, 2002. Excess cash was depleted during December 2000 and as a result minimal interest has been earned since December 2000.
Interest expense decreased from $25,933 for the year ended April 30, 2001 to $14,034 for the year ended April 30, 2002. The decrease is due to the decline of the real estate bank loan and the bank line of credit.
6
Early in 2002 the federal government passed income tax regulations which increased the loss carry back period from two to five years. Consequently, in fiscal 2002, the Company was able to carry back its net operating losses and recover income taxes paid in prior years of $274,000. This income tax benefit was offset by the write-off of the Companys net deferred tax asset in fiscal 2002.
Cash provided by operating activities totaled $34,515 for the year ended April 30, 2002 compared to $316,746 used for operating activities for the year ended April 30, 2001. The increase of $351,261 is due primarily to the increased cash flow from accounts receivable, deferred income taxes and the reduced net loss amount offset by cash used for inventory, income tax receivables, and accounts payable.
Cash used for investing activities totaled $14,680 for the year ended April 30, 2002 compared to $1,501 for the year ended April 30, 2001.
Cash used for financing activities increased nominally from $34,807 for the year ended April 30, 2001 to $38,382 for the year ended April 30, 2002.
The Companys primary source of liquidity on April 30, 2002 is the bank line of credit of $1,000,000. The bank line of credit for $500,000 expired on October 29, 2000. The Company obtained a bank revolving line of credit of $1,000,000 effective December 1, 2000 for two years. The Company intends to renew the bank line of credit on December 1, 2002. The Company used the revolving line of credit to pay off the real estate loan of $285,086. The revolving line of credit balance on April 30, 2002 is $280,000. The Company believes that cash available from the line of credit is adequate to meet anticipated short term liquidity and capital requirements of its business.
7
ITEM 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS
|
|
Page |
|
|
|
Report of Independent Public Accountants |
|
9 |
|
|
|
Balance Sheets as of April 30, 2002 and 2001 |
|
10 |
|
|
|
Statements of Operations for the Years Ended April 30, 2002 and 2001 |
|
11 |
|
|
|
Statements of Stockholders Investment for the Years Ended April 30, 2002 and 2001 |
|
12 |
|
|
|
Statements of Cash Flows for the Years Ended April 30, 2002 and 2001 |
|
13 |
|
|
|
Notes to Financial Statements |
|
14-20 |
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
INDEPENDENT AUDITORS REPORT
Board of Directors
Image Systems Corporation
Minnetonka, Minnesota
We have audited the balance sheets of Image Systems Corporation (a Minnesota corporation) as of April 30, 2002 and 2001, and the related statements of operations, stockholders investment, and cash flows for the years then ended. These financial statements are the responsibility of the Companys management. Our responsibility is to express an opinion on these financial statements based on our
audits.
We conducted our audits in accordance with U.S. 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 audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Image Systems Corporation as of April 30, 2002 and 2001, and the results of its operations and its cash flows for the years then ended in conformity with U.S. generally accepted accounting principles.
LARSON, ALLEN, WEISHAIR & CO., LLP
Minneapolis, Minnesota
June 14, 2002
9
IMAGE SYSTEMS CORPORATION
BALANCE SHEETS
APRIL 30, 2002 AND 2001
|
|
2002 |
|
2001 |
|
||
ASSETS |
|
|
|
|
|
||
CURRENT ASSETS |
|
|
|
|
|
||
Cash |
|
$ |
44,876 |
|
$ |
63,423 |
|
Accounts Receivable, Net of Allowance for Doubtful Accounts of $24,000 and $40,000 in 2002 and 2001, Respectively |
|
460,337 |
|
799,177 |
|
||
Inventories |
|
1,496,101 |
|
1,410,095 |
|
||
Prepaid Expenses and Other |
|
18,049 |
|
47,794 |
|
||
Income Tax Receivable |
|
274,000 |
|
¾ |
|
||
Total Current Assets |
|
$ |
2,293,363 |
|
$ |
2,320,489 |
|
|
|
|
|
|
|
||
PROPERTY AND EQUIPMENT |
|
|
|
|
|
||
Land |
|
$ |
396,043 |
|
$ |
396,043 |
|
Building |
|
1,310,062 |
|
1,310,062 |
|
||
Furniture and Fixtures |
|
260,198 |
|
247,522 |
|
||
Production Equipment |
|
344,036 |
|
342,032 |
|
||
Total |
|
$ |
2,310,339 |
|
$ |
2,295,659 |
|
Less: Accumulated Depreciation |
|
703,470 |
|
619,932 |
|
||
Net Property and Equipment |
|
$ |
1,606,869 |
|
$ |
1,675,727 |
|
|
|
|
|
|
|
||
OTHER ASSETS |
|
|
|
|
|
||
Deferred Income Taxes |
|
$ |
|
|
$ |
200,000 |
|
|
|
|
|
|
|
||
Total Assets |
|
$ |
3,900,232 |
|
$ |
4,196,216 |
|
|
|
|
|
|
|
||
LIABILITIES AND STOCKHOLDERS INVESTMENT |
|
|
|
|
|
||
|
|
|
|
|
|
||
CURRENT LIABILITIES |
|
|
|
|
|
||
Note Payable¾Bank |
|
$ |
280,000 |
|
$ |
318,382 |
|
Accounts Payable |
|
229,406 |
|
394,531 |
|
||
Accrued Expenses |
|
355,264 |
|
346,084 |
|
||
Total Current Liabilities |
|
$ |
864,670 |
|
$ |
1,058,997 |
|
|
|
|
|
|
|
||
COMMITMENTS AND CONTINGENCIES |
|
|
|
|
|
||
|
|
|
|
|
|
||
STOCKHOLDERS INVESTMENT |
|
|
|
|
|
||
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 |
|
1,931,273 |
|
2,032,930 |
|
||
Total Stockholders Investment |
|
$ |
3,035,562 |
|
$ |
3,137,219 |
|
|
|
|
|
|
|
||
Total Liabilities and Stockholders Investment |
|
$ |
3,900,232 |
|
$ |
4,196,216 |
|
See accompanying Notes to Financial Statements.
10
IMAGE SYSTEMS CORPORATION
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED APRIL 30, 2002 AND 2001
|
|
2002 |
|
2001 |
|
||
NET SALES |
|
$ |
4,322,640 |
|
$ |
4,985,963 |
|
|
|
|
|
|
|
||
COST OF PRODUCTS SOLD |
|
3,053,507 |
|
4,008,851 |
|
||
|
|
|
|
|
|
||
GROSS PROFIT |
|
$ |
1,269,133 |
|
$ |
977,112 |
|
|
|
|
|
|
|
||
OPERATING EXPENSES |
|
|
|
|
|
||
Product Development |
|
$ |
510,111 |
|
$ |
557,834 |
|
Selling |
|
498,851 |
|
659,794 |
|
||
Administrative |
|
420,811 |
|
407,092 |
|
||
Total Operating Expenses |
|
$ |
1,429,773 |
|
$ |
1,624,720 |
|
|
|
|
|
|
|
||
OPERATING LOSS |
|
$ |
(160,640 |
) |
$ |
(647,608 |
) |
|
|
|
|
|
|
||
INTEREST INCOME |
|
17 |
|
11,430 |
|
||
|
|
|
|
|
|
||
INTEREST EXPENSE |
|
(14,034 |
) |
(25,933 |
) |
||
|
|
|
|
|
|
||
LOSS BEFORE INCOME TAXES |
|
$ |
(174,657 |
) |
$ |
(662,111 |
) |
|
|
|
|
|
|
||
BENEFIT FOR INCOME TAXES |
|
(73,000 |
) |
(130,000 |
) |
||
|
|
|
|
|
|
||
NET LOSS |
|
$ |
(101,657 |
) |
$ |
(532,111 |
) |
|
|
|
|
|
|
||
NET LOSS PER COMMON SHARE |
|
|
|
|
|
||
Basic |
|
$ |
(0.02 |
) |
$ |
(0.12 |
) |
|
|
|
|
|
|
||
Diluted |
|
$ |
(0.02 |
) |
$ |
(0.12 |
) |
|
|
|
|
|
|
||
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.
11
IMAGE SYSTEMS CORPORATION
STATEMENTS OF STOCKHOLDERS INVESTMENT
FOR THE YEARS ENDED APRIL 30, 2002 AND 2001
|
|
Common Stock |
|
|
|
|
|
|||||
|
|
Shares |
|
Amount |
|
Retained Earnings |
|
Total |
|
|||
BALANCE, APRIL 30, 2000 |
|
4,452,597 |
|
$ |
1,104,289 |
|
$ |
2,565,041 |
|
$ |
3,669,330 |
|
|
|
|
|
|
|
|
|
|
|
|||
Net Loss |
|
¾ |
|
¾ |
|
(532,111 |
) |
(532,111 |
) |
|||
|
|
|
|
|
|
|
|
|
|
|||
BALANCE, APRIL 30, 2001 |
|
4,452,597 |
|
$ |
1,104,289 |
|
$ |
2,032,930 |
|
$ |
3,137,219 |
|
|
|
|
|
|
|
|
|
|
|
|||
Net Loss |
|
¾ |
|
¾ |
|
(101,657 |
) |
(101,657 |
) |
|||
|
|
|
|
|
|
|
|
|
|
|||
BALANCE, APRIL 30, 2002 |
|
4,452,597 |
|
$ |
1,104,289 |
|
$ |
1,931,273 |
|
$ |
3,035,562 |
|
See accompanying Notes to Financial Statements.
12
IMAGE SYSTEMS CORPORATION
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED APRIL 30, 2002 AND 2001
|
|
2002 |
|
2001 |
|
||
CASH FLOWS FROM OPERATING ACTIVITIES |
|
|
|
|
|
||
Net Loss |
|
$ |
(101,657 |
) |
$ |
(532,111 |
) |
Adjustments to Reconcile Net Loss to Net Cash Provided (Used) by Operating Activities: |
|
|
|
|
|
||
Depreciation |
|
83,538 |
|
91,471 |
|
||
Loss on Disposal of Equipment |
|
¾ |
|
866 |
|
||
(Increase) Decrease in Deferred Income Taxes |
|
200,000 |
|
(22,975 |
) |
||
(Increase) Decrease in Current Assets: |
|
|
|
|
|
||
Accounts Receivable |
|
338,840 |
|
(115,944 |
) |
||
Inventories |
|
(86,006 |
) |
219,816 |
|
||
Prepaid Expenses and Other |
|
29,745 |
|
(22,392 |
) |
||
Income Taxes Receivable |
|
(274,000 |
) |
65,657 |
|
||
Increase (Decrease) in Current Liabilities: |
|
|
|
|
|
||
Accounts Payable |
|
(165,125 |
) |
18,500 |
|
||
Accrued Expenses |
|
9,180 |
|
(19,634 |
) |
||
Net Cash Provided (Used) by Operating Activities |
|
$ |
34,515 |
|
$ |
(316,746 |
) |
|
|
|
|
|
|
||
CASH FLOWS FROM INVESTING ACTIVITIES |
|
|
|
|
|
||
Property and Equipment Additions |
|
$ |
(14,680 |
) |
$ |
(1,501 |
) |
|
|
|
|
|
|
||
CASH FLOWS FROM FINANCING ACTIVITIES |
|
|
|
|
|
||
Net Change in Note Payable¾Bank |
|
$ |
(38,382 |
) |
$ |
33,296 |
|
Repayments on Long-Term Debt |
|
¾ |
|
(68,103 |
) |
||
Net Cash Used by Financing Activities |
|
$ |
(38,382 |
) |
$ |
(34,807 |
) |
|
|
|
|
|
|
||
NET DECREASE IN CASH |
|
$ |
(18,547 |
) |
$ |
(353,054 |
) |
|
|
|
|
|
|
||
Cash¾Beginning of Year |
|
63,423 |
|
416,477 |
|
||
|
|
|
|
|
|
||
CASH¾END OF YEAR |
|
$ |
44,876 |
|
$ |
63,423 |
|
|
|
|
|
|
|
||
SUPPLEMENTAL DISCLOSURES |
|
|
|
|
|
||
Interest Paid |
|
$ |
15,070 |
|
$ |
26,588 |
|
|
|
|
|
|
|
||
Noncash Debt Proceeds and Payoffs from Refinancing |
|
$ |
|
|
$ |
285,086 |
|
See accompanying Notes to Financial Statements.
13
IMAGE SYSTEMS CORPORATION
NOTES TO FINANCIAL STATEMENTS
APRIL 30, 2002 AND 2001
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 Companys products are primarily in the domestic market.
Cash
The Companys cash balances are maintained at high quality financial institutions. At times these cash balances may exceed FDIC insured limits.
Inventories
Inventories are stated at the lower of first-in, first-out cost or market and are summarized as follows:
|
|
2002 |
|
2001 |
|
||
Finished Goods |
|
$ |
370,311 |
|
$ |
106,862 |
|
Work in Process |
|
18,715 |
|
53,974 |
|
||
Components |
|
1,107,075 |
|
1,249,259 |
|
||
Total Inventories |
|
$ |
1,496,101 |
|
$ |
1,410,095 |
|
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
Revenue from product sales is recognized upon shipment to customer, title passing and all obligations of the Company have been satisfied. Provisions for discounts and rebates to customers, and returns and other adjustments are provided for in the same period the related sales are recorded.
Research and Development Costs
The Company charges all research and development costs to operations in the period incurred. During the years ended April 30, 2002 and 2001, the Company incurred $255,187 and $258,732, respectively, of research and development costs.
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 as of April 30, 2002 and 2001 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 ondeferred 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. Common stock equivalents were anti-dilutive at April 30, 2002 and 2001.
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 Companys 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, 2002 and 2001.
Use of Estimates
The preparation of financial statements in conformity with U.S. generally acceptedaccounting 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.
Concentrations
The Company typically sells its products to original equipment manufacturers and systems integrators. The Company had two customers that accounted for 31% of net sales for the year ended April 30, 2002 and three customers that accounted for 44% of net sales for the year ended April 30, 2001. 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 42% of outstanding accounts receivable as of April 30, 2002, and three customers accounted for 46% of outstanding accounts receivable as of April 30, 2001.
15
Recent Pronouncements Not Yet Adopted
In July 2001, the Financial Accounting Standards Board (FASB) issued SFAS No. 141 (SFAS No. 141), Business Combinations, and No. 142 (SFAS No. 142), Goodwill and Other Intangible Assets. SFAS No. 141 requires all business combinations initiated after June 30, 2001 to be accounted for using the purchase method. SFAS No. 142 replaces the requirements to amortize intangible assets with indefinite lives and goodwill with a requirement for an impairment test. SFAS No. 142 also requires an evaluation of intangible assets and their useful lives and a transitional impairment test for goodwill and certain intangible assets upon adoption. After transition, the impairment tests will be performed annually. SFAS No. 142 becomes effective for the first quarter of the year ended April 30, 2003. Management believes that SFAS No. 141 and SFAS No. 142 will have no significant effect on the balance sheet, results of operations and cash flows of the Company.
In August 2001, FASB issued SFAS No. 144 (SFAS No. 144), Accounting for Impairment or Disposal of Long-Lived Assets, which addresses financial accounting and reporting for the impairment or disposal of long-lived assets. While SFAS No. 144 supersedes SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, it retains many of the fundamental provisions of that Statement. SFAS No. 144 is effective for fiscal years beginning after December 15, 2001. As of April 30, 2002, management believes that SFAS No. 144 will have no significant effect on the balance sheet, results of operations, and cash flows of the Company.
NOTE 2 REVOLVING CREDIT AGREEMENT AND LONG-TERM DEBT
The Company has a revolving line of credit agreement that allows for maximum borrowings of $1,000,000. The agreement expires in December 2002. Borrowings bear interest at the banks reference rate (4.75% at April 30, 2002). Borrowings are collateralized by the Companys land and building. At April 30, 2002 and 2001, the Company had borrowings of $280,000 and $318,382, respectively, outstanding under the agreement.
NOTE 3 INCOME TAXES
The provision (benefit) for income taxes for the years ended April 30 is summarized as follows:
|
|
2002 |
|
2001 |
|
||
Current Provision (Benefit): |
|
|
|
|
|
||
Federal |
|
$ |
(274,000 |
) |
$ |
(108,000 |
) |
State |
|
1,000 |
|
1,000 |
|
||
Total Current |
|
$ |
(273,000 |
) |
$ |
(107,000 |
) |
Deferred Provision (Benefit) |
|
200,000 |
|
(23,000 |
) |
||
Total Benefit |
|
$ |
(73,000 |
) |
$ |
(130,000 |
) |
16
Deferred income taxes are the result of provisions of the tax laws that either permit or require certain items of income or expense to be reported for tax purposes in different periods than those in which they are reported for financial reporting. Deferred tax assets primarily relate to the tax effect of temporary differences related to reserves and accruals, 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. In 2002, the Company increased the valuation reserve to reduce the deferred tax asset to zero. The valuation allowance was $323,000 and $291,000 at April 30, 2002 and 2001, respectively. The increase in the valuation allowance was $32,000 and $261,000 at April 30, 2002 and 2001, respectively.
The Company has state net operating loss carryforwards of approximately $352,000 at April 30, 2002. These carryforwards begin to expire at April 30, 2015. At April 30, 2002, the Company also has federal and state research and development credit carryforwards of approximately $126,000. There is no expiration on these credits.
The difference between the federal statutory income tax rate and the Companys effective tax rate for the years ended April 30 was as follows:
|
|
2002 |
|
2001 |
|
Federal Statutory Rate |
|
(34 |
)% |
(34 |
)% |
Adjustments to Estimated Income Tax Accrual |
|
¾ |
|
(16 |
) |
Valuation Reserve |
|
18 |
|
39 |
|
Research and Development Credits |
|
(18 |
) |
(5 |
) |
Other |
|
(8 |
) |
(4 |
) |
Total |
|
(42 |
)% |
(20 |
)% |
17
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, 2002, 177,500 of the reserved common shares are available for future grant. The options expire, if not exercised, six years after the date of grant. A summary of plan activity is as follows:
|
|
2002 |
|
2001 |
|
||||||||
|
|
Shares |
|
Weighted-Average Exercise Price |
|
Shares |
|
Weighted-Average Exercise Price |
|
||||
Outstanding at Beginning of Year |
|
316,875 |
|
$ |
1.36 |
|
354,375 |
|
$ |
1.32 |
|
||
Granted |
|
¾ |
|
¾ |
|
20,000 |
|
0.35 |
|
||||
Exercised |
|
¾ |
|
¾ |
|
¾ |
|
¾ |
|
||||
Forfeited or Canceled |
|
(94,375 |
) |
1.88 |
|
(57,500 |
) |
0.75 |
|
||||
Outstanding at End of Year |
|
222,500 |
|
1.14 |
|
316,875 |
|
1.36 |
|
||||
|
|
|
|
|
|
|
|
|
|
||||
Options Exercisable at Year-End |
|
157,917 |
|
1.21 |
|
172,344 |
|
1.84 |
|
||||
|
|
|
|
|
|
|
|
|
|
||||
Weighted-Average Fair Value of Options Granted During the Year |
|
$ |
|
|
|
|
$ |
0.10 |
|
|
|
||
The following table summarizes information about fixed stock options outstanding at April 30, 2002:
|
|
Options Outstanding |
|
Options Exercisable |
|
||||||||
Exercise Prices |
|
Number of Outstanding at April 30, 2002 |
|
Weighted-Average Remaining Contractual Life |
|
Weighted-Average Exercise Price |
|
Number Exercisable at |
|
Weighted-Average Exercise Price |
|
||
0.75 - 1.00 |
|
200,000 |
|
3.3 Years |
|
$ |
0.81 |
|
135,417 |
|
$ |
0.83 |
|
2.04 - 4.13 |
|
22,500 |
|
1.3 Years |
|
$ |
4.03 |
|
22,500 |
|
$ |
4.03 |
|
18
The Companys 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 Companys net income (loss) and income (loss) per share would have been changed to the following pro forma amounts:
|
|
2002 |
|
2001 |
|
||
Net Loss: |
|
|
|
|
|
||
As Reported |
|
$ |
(101,657 |
) |
$ |
(532,111 |
) |
Pro Forma |
|
$ |
(140,671 |
) |
$ |
(594,248 |
) |
|
|
|
|
|
|
||
Basic Losses per Common Share: |
|
|
|
|
|
||
As Reported |
|
$ |
(0.02 |
) |
$ |
(0.12 |
) |
Pro Forma |
|
$ |
(0.03 |
) |
$ |
(0.13 |
) |
|
|
|
|
|
|
||
Diluted Losses Per Common Share: |
|
|
|
|
|
||
As Reported |
|
$ |
(0.02 |
) |
$ |
(0.12 |
) |
Pro Forma |
|
$ |
(0.03 |
) |
$ |
(0.13 |
) |
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:
|
|
2001 |
|
Risk-Free Interest Rates |
|
6.42 |
% |
Expected Life of Options Granted |
|
6 years |
|
Expected Volatility of Options Granted |
|
29 |
% |
Expected Dividend Yield |
|
None |
|
19
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 $7,740 in 2002 and 2001. Minimum rental commitments due in 2003 under the noncancelable operating lease is $1,935.
NOTE 5 EMPLOYEE BENEFIT PLAN
The Company has a 401(k) plan under which eligible employees can make voluntary contributions of up to 20% of their compensation. The Company made no contributions to this plan in 2002 or 2001.
20
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 |
|
70 |
|
Chairman of the Board/ Director |
David Sorensen |
|
41 |
|
President,CEO/ Director |
Diana Scheff |
|
68 |
|
Director |
Marta Scheff Volbrecht |
|
42 |
|
Executive Vice President/ Director |
Laura Sorensen |
|
42 |
|
Secretary/ Director |
Steven Volbrecht |
|
43 |
|
Director |
Bradley Beard |
|
43 |
|
Director |
Don Volbrecht |
|
67 |
|
Controller/ 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. Chairman of the Board and Director. He has a B.A. in Economics from the University of Minnesota. Dean was the founder, president, and CEO of CPT Corporation from 1971 to January, 1988. He is founder of the Company.
Diana Scheff. Director. Ms. Scheff has a B.A. in Art and Music from Gustavus Adolphus College. Diana was director of travel and incentives at CPT Corporation for 10 years. She was a founder of the Company. She has worked for the Company since 1988 as Director of Marketing.
Marta Scheff Volbrecht. Executive 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, marketing and international sales support. She has worked for the Company since 1989 as Vice President of Sales, as Executive Vice President since 2001.
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.
21
David Sorensen. President, CEO/Director. Mr. Sorensen received 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 from 1990-1992. He joined the Company on January 1, 1992, as Director of Manufacturing. During 1994 he took on additional responsibilities as Vice President of Operations. In 2001 he became President and CEO.
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 Bros. as a Project Manager. He was employed by Hansen Thorp Pellinen Olson, Inc. as a Staff Engineer from 1996 to 1999. Since 1999 he has been employed at Centex as a Land Development Manager.
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 Masters Degree in Healthcare Administration from the University of Minnesota, and B.A. degrees from the Medical College of Georgia and West Chester University.
Donald Volbrecht. Controller and Director Mr. Volbrecht has a B.S. in Business from Valparaiso University in Indiana. Mr. Volbrecht was Chief Accountant for Cenex Inc from 1970-1982, and from 1988-1993 he was Controller with Interstate Express. He has worked for the Company since 1993 as Controller.
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. Donald Volbrecht is the father of Steven Volbrecht.
ITEM 10. EXECUTIVE COMPENSATION
No executives received compensation in excess of $100,000 during the year ended April 30, 2002. The total compensation received by all executive officers as a group (6 persons) totaled $308,061.
David Sorensen, the President and CEO of the Company, received a salary of $90,000 and no commissions for the year ended April 30, 2002. For the year ended April 30, 2001, David Sorensens salary was $90,000 with commissions of $240.
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.
22
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The following table sets forth as of July 1, 2002, the beneficial ownership of each person known by the Company to own beneficially 5% or more of the Companys 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) |
|
758,285 |
(2) |
17.3 |
|
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) |
|
2,787,740 |
|
62.8 |
|
(1) The address of such person is 6103 Blue Circle Drive, Minnetonka, Minnesota, 55343.
(2) Does not include shares beneficially owned by spouse. Each person disclaims beneficial ownership of shares owned by their spouse.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
None.
ITEM 13. EXHIBITS LIST AND REPORTS ON FORM 8-K
(a) Exhibits
3.1 Articles of Incorporation of the
Registrant. (Incorporated herein by
reference to
Exhibit 3.1 to Registration Statement on Form S-18, File No. 33-4259C.)
3.2 By-Laws of the Registrant. (Incorporated herein by reference to Exhibit
3.2 to
Registration Statement on Form S-18, as amended, File No. 33-4259C.)
(b) Reports on Form 8-K
Form 8-K filed December 7, 2001 for the change in Board positions and membership.
23
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 22, 2002 |
|
|
|
|
|
By |
/s/ |
David Sorensen |
|
|
|
|
|
|
|
|
David Sorensen, 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/ David Sorensen |
|
Director and President and CEO |
|
July 22, 2002 |
David Sorensen |
|
|
|
|
|
|
|
|
|
/s/ Dean Scheff |
|
Director and Chairman of Board |
|
July 22, 2002 |
Dean Scheff |
|
|
|
|
|
|
|
|
|
/s/ Diana Scheff |
|
Director |
|
July 22, 2002 |
Diana Scheff |
|
|
|
|
|
|
|
|
|
/s/ Marta Scheff Volbrecht |
|
Director and Ex Vice President |
|
July 22, 2002 |
Marta Scheff Volbrecht |
|
|
|
|
|
|
|
|
|
/s/ Laura Sorensen |
|
Director and Secretary |
|
July 22, 2002 |
Laura Sorensen |
|
|
|
|
|
|
|
|
|
/s/ Steve Volbrecht |
|
Director |
|
July 22, 2002 |
Steve Volbrecht |
|
|
|
|
|
|
|
|
|
/s/ Donald Volbrecht |
|
Director and Controller |
|
July 22, 2002 |
Donald Volbrecht |
|
|
|
|
|
|
|
|
|
/s/ Bradley Beard |
|
Director |
|
July 22, 2002 |
Bradley Beard |
|
|
|
|
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
24
Exhibit |
|
|
|
Sequential |
No. |
|
Item |
|
Page No. |
|
|
|
|
|
(3) A. |
|
Articles of Incorporation of the Registrant.(Incorporated herein by reference to Exhibit 3.1 to Registration Statement on Form S-18, as amended, File No. 33-4259C.) |
|
|
|
|
|
|
|
(3) B. |
|
By-Laws of the Registrant. (Incorporated herein by reference to Exhibit 3.2 to Registration Statement on Form S-18, as amended, File No. 33-4259C.) |
|
|
25