U. S. SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

 

 

FORM 10-QSB

 

(Mark One)

ý  QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended October 31,2002

 

OR

 

o  TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition prior from __________ to __________

 

Commission File No. 021245

 

Image Systems Corporation

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

 

 

 

6103 Blue Circle Drive, Minnetonka, Minnesota 55343

(Address of Principal Executive Offices)

 

(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  ý   No  o

 

                As of  November 15, 2002 there were 4,452,597 shares of Common Stock, no par value per share, outstanding.

 

 

Part 1.  FINANCIAL INFORMATION

Item 1.  FINANCIAL STATEMENTS

 

IMAGE SYSTEMS CORPORATION

BALANCE SHEETS

 

		October 31,2002			April 30,2002
		(Unaudited)			(Audited)
ASSETS
CURRENT ASSETS:
Cash		$	37,424		$	44,876
Accounts Receivable, Net		510,561			460,337
Inventory		1,310,004			1,496,101
Prepaid Expenses		35,352			18,049
Income Tax Receivable		—			274,000
Total Current Assets		1,893,341			2,293,363
PROPERTY AND EQUIPMENT
Land		396,043			396,043
Building		1,310,062			1,310,062
Furniture and Fixtures		263,567			260,198
Production Equipment		344,036			344,036
Less Accumulated Depreciation		(735,837		)	(703,470		)
Net Property and Equipment		1,577,871			1,606,869
Total Assets		$	3,471,212		$	3,900,232
LIABILITIES AND STOCKHOLDERS’ INVESTMENT
CURRENT LIABILITIES
Note Payable-Bank		$	270,000		$	280,000
Accounts Payable		136,061			229,406
Accrued Liabilities		315,143			355,264
Total Current Liabilities		721,204			864,670
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		1,645,719			1,931,273
Total Stockholders’ Investment		2,750,008			3,035,562
Total Liabilities and Stockholders’ Investment		$	3,471,212		$	3,900,232

 

See Accompanying Notes To Financial Statements

 

 

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Image Systems Coporation

 

STATEMENT OF OPERATIONS

(Unaudited)

 

		For the Second Quarter Ended						For the  Six Months Ended
		October 31, 2002			October 31,2001			October 31, 2002			October 31,2001
NET SALES		$	915,748		$	1,135,099		$	1,553,950		$	2,150,925
COST OF PRODUCTS SOLD		665,088			844,824			1,158,301			1,576,673
Gross Profit		250,660			290,275			395,649			574,252
OPERATING EXPENSES
Product Development		109,422			99,216			232,127			222,754
Selling		121,470			116,901			241,470			238,848
Administrative		93,655			72,200			200,650			170,125
Total Operating Expenses		324,547			288,317			674,247			631,727
Operating Income(Loss)		(73,887		)	1,958			(278,598		)	(57,475		)
INTEREST INCOME		—			6			—			16
INTEREST EXPENSE		(2,742		)	(6,210		)	(6,956		)	(11,781		)
Net(Loss) Before Income Taxes		(76,629		)	(4,246		)	(285,554		)	(69,240		)
(PROVISION FOR) INCOME TAXES		—			—			—			(1,000		)
NET(LOSS)		$	(76,629	)	$	(4,246	)	$	(285,554	)	$	(70,240	)
NET(LOSS)PER SHARES
Basic		$	(0.02	)	$	(0.00	)	$	(0.06	)	$	(0.02	)
Diluted		$	(0.02	)	$	(0.00	)	$	(0.06	)	$	(0.02	)
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING:
Basic		4,452,597			4,452,597			4,452,597			4,452,597
Diluted		4,452,597			4,452,597			4,452,597			4,452,597

 

 

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IMAGE SYSTEMS CORPORATION

 

STATEMENT OF CASH FLOWS

(Unaudited)

 

		For The Six Months Ended
		October 31, 2002			October 31, 2001
OPERATING ACTIVITIES
Net (Loss)		$	(285,554	)	$	(70,240	)
Adjustments to Reconcile Net (Loss) to Net Cash
Provided by Operating Activities:
Depreciation		32,367			41,327
Change in Operating Items:
Accounts Receivable		(50,224		)	324,636
Inventory		186,097			(43,284		)
Prepaid Expenses		(17,303		)	16,114
Accounts Payable		(93,345		)	637
Accrued Liabilities		(35,106		)	(9,902		)
Deferred Income		(5,015		)	—
Income Tax Receivable		274,000			—
Net Cash Provided by Operating Activities		5,917			259,288
INVESTING ACTIVITIES:
Furniture and Equipment Additions		$	(3,369	)	$	(3,661	)
FINANCING ACTIVITIES
Borrowed from Line of Credit		1,055,000			1,250,000
Repayment to Line of credit		(1,065,000		)	(1,525,000		)
Net Cash Used by Financing Activities		(10,000		)	(275,000		)
Net Decrease in Cash		(7,452		)	(19,373		)
CASH AT BEGINNING OF PERIOD		44,876			63,423
CASH AT END OF PERIOD		$	37,424		$	44,050
SUPPLEMENTAL DISCLOSURES
Interest Paid		$	6,710		$	13,008
Taxes Paid		$	—		$	1,000

 

See Accompanying Notes to Financial Statements

 

 

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Item 1.  FINANCIAL STATEMENTS

 

IMAGE SYSTEMS CORPORATION

 

NOTES TO FINANCIAL STATEMENTS

 

October 31 2002 and October 31, 2001

(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, 2002 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, 2002.

 

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:

 

		For the Second Quarter				For the Six Months
		Ending				Ending
		October 31,		October 31,		October 31,		October 31,
		2002		2001		2002		2001
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		4,452,597		4,452,597		4,452,597

 

3.             INVENTORY

 

Breakdown of inventory is as follows:

 

		October 31,2002			April 30, 2002
		(Unaudited)			(Audited)
Finished Goods		$	275,510		$	370,311
Work in Process		41,394			18,715
Components		1,142,100			1,293,075
Inventory Reserve		(149,000		)	(186,000		)
Total Inventory		$	1,310,004		$	1,496,101

 

 

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Item 2. MANAGEMENT’S DISCUSSION AND ANALYSUIS 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, 2002.

 

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, 2002 Versus October 31, 2001

 

Net sales for the three months ended October 31, 2002 decreased $219,351 or 19.3% compared to the three months ended October 31, 2001.  The primary reason for the decrease is selling fewer quantity of monitors.

 

Gross profit percentage increased from 25.6% for the three months ended October 31, 2001 to 27.4% for the three months ended October 31, 2002.  The increase is due to sales of higher margin monitors.

 

For the three months ended October 31, 2002 development and research expenses increased $10,206 compared to the three months ended October 31, 2001.  The primary reason for the increase is development and research for new product.

 

Selling expenses increased from $116,901 for the three months ended October 31, 2001 to $121,470 for the three months ended October 31, 2002.  The increase of $4,569 or 3.9% is due to additional commission expenses.

 

Administrative expenses increased from $72,200 for the three months ended October 31, 2001 to $93,655 for the three months ended October 31, 2002. An increase of professional fees and an increase of personnel expenses due to corporate reorganization are the primary reasons for the $21,455 or 29.7% increase.

 

Interest expense decreased $3,468 or 55.8% for the three months ended October 31, 2002 compared to the three months ended October 31, 2001. The decrease in the usage of the bank line of credit is the primary reason for the decrease.

 

 

6

 

The provision for income taxes decreased from $1,000 for the three months ended October 31, 2001 to no provision for income taxes for the three months ended October 31, 2002.  No benefits from income taxes will be recorded until the Company determines that the recoverability of additional tax benefits is more likely than not.

 

Six Months Ended October 31, 2002 Versus October 31, 2001

 

Net sales decreased $596,975 or 27.8% for the six months ended October 31, 2002 compared to the six months ended October 31,2001.  This is due to selling fewer quantities of monitors.

 

 The gross profit decreased from $574,252 for the six months ended October 31,2001 compared to $395,649 for the six months ended October 31, 2002.  The decrease is due to selling fewer quantities of monitors and to the fixed effect of overhead expenses.

 

For the six months ended October 31,2002 product research and development expenses increased $9,373or 4.2% compared to the six months ended October 31, 2001.The increase is due to the additional costs associated with new product development.

 

Selling expenses increased $2,622 or 1.1% for the six months ended October 31, 2002 compared to the six months ended October 31,2001. The primary reason for the increase is an increase in travel expense.

 

Administrative expenses increased from $170,125 for the six months ended October 31, 2001 to $200,650 for the six months ended October 31 2002. An increase of professional fees and an increase of personnel expenses due to corporate reorganization are the primary reasons for the 17.9% increase.

 

Interest expense decreased from $ 11,781 for the six months ended October, 2001 to $ 6,956

for the six months ended October 31,2002. The decrease in the usage of the bank line of credit is the primary reason for the decrease.

 

The provision for income taxes decreased from $1,000 for the six months ended October 31,

2001 to no provision for income taxes for the six months ended October 31, 2002.  No benefits from income taxes will be recorded until the Company determines that the recoverability of additional tax benefits is more likely than not.

 

 

7

 

Liquidity and Capital Resources

 

Cash provided by operations totaled $5,917 for the six months ended October 31, 2002 compared to $259,288 provided by operations for the six months ended October 31, 2001.  The $253,371 decrease of cash provided is due primarily to decreased cash flow from net loss, accounts receivable and accounts payable offset partially by increased cash flow from income tax receivable and inventory.

 

Cash used for investing activities totaled $3,369 for the six months ended October 31, 2002 compared to $3,661 used for the six months ended October 31, 2001.

 

Cash used for financing activities totaled $10,000 for the six months ended October 31, 2002 compared to $275,000 for the three months ended October 31, 2002. An income tax refund provided cash for operations that reduced the need to use the Company’s bank line of credit.

 

The Company’s primary source of liquidity on October 31, 2002 is the bank line of credit of $1,000,000.  The bank revolving line of credit of $1,000,000 expired December 1, 2002.  The revolving line of credit balance on October 31, 2002 is $270,000.  The bank has extended the revolving line of credit to March 1, 2003. The Company is in the process of obtaining a line of credit beyond March 1, 2003.  The Company believes that cash available from the revolving line of credit and the anticipated line of credit beyond March 1, 2003 will 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 December 7, 2001 for change in Board positions and membership.

 

 

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/ Don Volbrecht		By: /s/ David Sorensen
	Don Volbrecht , Controller and		David Sorensen, President and
	Chief Financial Officer		Principal Executive Officer

 

Dated December 11, 2002

 

 

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CERTIFICATIONS*

I, Donald Volbrecht, certify that:

1. I have reviewed this quarterly report on Form 10-QSB of Image Systems Corp.

2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;

4. The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:

a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

b) evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and

c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

5. The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):

a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and

b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

6. The registrant’s other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

Date: 11-12-02.....

 

 

10

 

CERTIFICATIONS*

I, David Sorensen, certify that:

1. I have reviewed this quarterly report on Form 10-QSB of Image Systems Corp.

2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;

4. The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:

a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

b) evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and

c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

5. The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):

a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and

b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

6. The registrant’s other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

Date: 11-12-02.....

 

 

11

 

CERTIFICATION UNDER SECTION 906

OF THE SARBANES-OXLEY ACT OF 2002

 

                Pursuant to section 906 of the Sarbanes-Oxley act of 2002, each of the undersigned certifies that this periodic report fully complies with the requirements of section 13(a) or 15(d) of the Security Exchange Act of 1934 and that information contained in this periodic report fairly presents, in all material respects, the financial condition and results of operations of Image Systems Corporation, Inc.

 

	By: /s/ Don Volbrecht		By: /s/ David Sorensen
	Don Volbrecht , Controller and		David Sorensen, President and
	Chief Financial Officer		Principal Executive Officer

 

Dated December 11, 2002

 

 

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