** **

**U. S.SECURITIES AND EXCHANGE COMMISSION**

**Washington,D. C. 20549**

** **

**FORM 10-KSB**

** **

**ý ANNUAL REPORT UNDERSECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED] Forthe Fiscal year ended April 30, 2002**

** **

**OR**

** **

**o TRANSITION REPORTUNDER SECTION 13 OR 15(d) OF THE SECURITIES**

**EXCHANGEACT OF 1934 [NO FEE REQUIRED] For the transition period from _______ to ______**

** **

## **Commission File No. 021245**

** **

**IMAGE SYSTEMS CORPORATION**

(Name of Small BusinessIssuer 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**                                       |
| (Issuer’s telephone  number, including area code) |

 

Securities registered under Section 12(b) of the Act: **None**

Securities registered under Section 12(g) of the Act: **Common Stock**

 

 

Check whether the Issuer (1) filed all reportsrequired to be filed by Section 13 or 15(d) of the Exchange Act during the past12 months (or for such shorter period that the Registrant was required to filesuch reports), and (2) has been subject to such filing requirements for thepast 90 days.  Yes ý  No o

 

Check if there is no disclosure of delinquent filersin response to Item 405 of Regulation S-B contained herein, and no disclosurewill be contained, to the best of Registrant’s knowledge, in definitive proxyor information statements incorporated by reference in Part III of this Form10-KSB or any amendment to this form 10-KSB. ý

 

     The Issuer’s revenues forthe fiscal year ended April 30, 2002 were $4,322,640.

 

     As of July 15, 2002,4,452,597 shares of the Issuer’s Common Stock were outstanding.  The aggregate market value of the CommonStock held by non-affiliates of the Issuer on such date (based on the low bidfor such shares as reported by the Metro Data company, a computer servicebureau, that collects quotations from local market makes) was $314,423.  Such quotations represent interdealerprices, without retail markup, markdown or commission, and do not necessarilyrepresent actual transactions.  Forpurposes of this computation, affiliates of the Issuer are deemed only to bethe Issuer’s officers and directors.

 

 

 

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### **PART 1**

 

ITEM 1.                             BUSINESS

 

Image Systems Corporation (the “Company”) designs, develops,manufactures and markets large high-bright high-resolution monitors in both CRTand flat panel formats.  The Company’smonitors provide high brightness and high resolution which are needed inapplications such as medical imaging, scientific analysis and image processing.

 

The last decade has seen an explosion in the use of computersthroughout the world.  The aftermath ofthis explosion has been rapid technological changes in the size, capacity anduses of the computers.  These changeshave affected both hardware and software. Computers have become more powerful, capable of performing morecomplicated tasks and use more sophisticated, yet less expensive hardware.  Software applications have also become morepowerful.  With the advent of digitalx-ray systems, there is a greater need for high bright, high resolutionmonitors.

 

The accumulation of information in hard copy form, combined with theexpense and logistical difficulty of storage and retrieval, have created anopportunity for practical, affordable, solutions to working withinformation.  These applications are thedriving force behind the need for larger displays with higher resolutions.  Information for analysis, diagnostics andresearch (for example patient records or X-rays) that previously was difficultto locate and time consuming to analyze, can now be retrieved quickly andeasily.

 

The primary market for the Company’s monitors is the medical field,particularly radiology.  The growingtechnology of Picture Archiving and Communications Systems (PACS) andtechnology in hospitals and clinics, allows x-rays, magnetic resonance imagesand other tests to be displayed on a computer monitor.  Electronic storage, retrieval, display andtransmission of these images can be less costly and more expedient forconsultation and diagnosis by the medical staff than film basedapplications.  The images can betransmitted electronically to remote diagnostic stations for multipleparticipant consultation.  The largesize, high resolution and brightness of the Company’s monitors are well-suitedfor this market.

 

Secondary markets are Military, Air Traffic Control (ATC) andruggedized flat panel displays. Military and ATC require many of the sameattributes as the medical marketplace; large size, high contrast and highresolution with the additional capability of sunlight readability.  Ruggedized flat panels require all of theabove plus MIL standards for shock and vibration.

 

The Company has responded to these opportunities by concentrating onthe technically sophisticated end of the product spectrum.  The Company’s high bright, high resolutiondisplays are both computer platform and video board independent.  High resolution and brightness combine togive a clear, sharp, easily readable display which reduces eye strain.  The typical monitor provides 30-40Footlamberts of brightness.  TheCompany’s monitors provide 65-100 Footlamberts, at least twice as bright asstandard monitors.

 

The Company’s circuitry, HRMSä (Hi-Res Multi-Sweepä)enables the autosynchronous monitors to adjust dynamically to numerous displayboards and standards.  HRMSäprovides compatibility with high resolution display controllers for manycomputer platforms, including PCs, and workstation level systems, such as SUN,HP, and Silicon Graphics and it facilitates the replacement of older legacydisplays located through a hospital enterprise.

 

 

2

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**Manufacturing**

 

The Company’s components and subassemblies are produced bysubcontractors whose primary task is building reliable and economicalsubassemblies.  Final assembly andquality assurance are performed by the Company at its corporate facility.  Components are obtained from a number ofsources.  Some components are shelfitems and readily available.  Othercomponents are custom made for the Company. The printed circuit boards, designed by the Company, are “stuffed” forthe Company by custom suppliers within close proximity of Companyfacilities.  The monitors are subject tofinal inspection where final adjustments are made prior to shipment.

 

**Marketing**

 

The Company’s promotion strategy is to increase product and corporatename recognition through a variety of means including: ongoing market research,advertising, product press releases, product reviews, listing in buyer’sguides, magazine articles, distribution of printed materials, lead tracking, aninternet site and trade shows.  TheCompany believes that trade shows have provided the Company’s products withsignificant exposure.

 

The Company’s pricing strategy is to establish competitive pricing forproducts that are marketed and designed for the technologically sophisticatedend of the product spectrum.  Early inthe Company’s development management determined that it would not be a massproducer of monitors.  Rather it wouldproduce monitors for smaller niche markets such as medical imaging, photointerpretation, simulation and sunlight readable monitors.  Management believed that it would be difficultto compete on the basis of price in the mass market with the foreignmanufacturers.  The Company’s monitorsare priced from $1,800 to more than $10,000. Industry accepted discounts are given to VARs, OEMs and Resellers.  These are appropriate prices for customerswho need to be cost effective in an industry that continues to be more and moresophisticated.

 

The Company markets primarily two product lines — CRT’s and FlatPanels.  The amount of sales for CRT’samounted to $3,393,525 and $4,869,718 for respective years ending April 30,2002 and April 30, 2001.  Flat Panelssales were $929,115 for the year ended April 30, 2002 and $116,245 for the yearended April 30, 2001.

 

**Competition**

 

The computer monitor industry is highly competitive.  The Company’s CRT monitors compete withlarge well-established companies such as Siemens and Barco, whose products aregenerally more expensive.  The companyalso competes with Dome, Barco and other smaller players in the high-resolution,grayscale LCD monitor segment. The rugged monitor market is fragmented withmany smaller companies providing product offerings.

 

The Company has engaged in research and development since itsinception.  Research and developmentexpenses were $557,834 in 2001 and $510,111 in 2002.

 

**Products,**

 

The Company’s gray scale monitors range in size from 9” to 24” inlandscape mode.  The 21” and the 24” arealso available in portrait mode. Versions of these monitors operate between 

 

 

3

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NTSC and 80 kH,z, from 48 kHz to 108 kHz and from 90 kHz to 200kHz.  Image Systems’ High ResolutionMulti-Sweep (TM) (HRMS [TM]) circuitry enables the monitors to sweep thesefrequencies 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 brightnessand high contrast.

 

The Company’s newest products are ruggedized flat panels with highbrightness and high contrast.  Grayscaleintegrity is excellent and in non-ruggedized format is an ideal display forsuch areas as cath labs and surgical suites which have space constraints aswell as high bright, high contrast requirements.

 

**Customers**

 

The Company had three customers - Richardson $657,764, General ElectricMedical $988,936 and Marconi $593,278 - which accounted for 44% of net salesfor the year ended April 30, 2001 and had two customers - Heartlab $799,615 andRichardson $542,711 - which accounted for 31% of net sales for the year endedApril 30, 2002.

 

The Company had foreign sales totaling $573,528 for the year endedApril 30, 2002 compared to $672,239 for the year ended April 30, 2001.

 

**Backlog**

 

The dollar amount of the Company’s backlog of orders considered to befirm at April 30, 2002 was approximately $380,000.  The Company expects that nearly all orders considered to be firmat April 30, 2002 will be filled during the 2003 fiscal year.  The Company does not believe that itsbacklog at anytime is necessarily indicative of annual sales.  The business of the Company is not subjectto significant seasonal variations.

 

**Intellectual Property**

 

Certain equipment, processes, information and knowledge generated bythe Company and utilized in the manufacture of its products are regarded asproprietary by the Company and are believed to be protectable by applicabletrade secret and unfair competition laws. The Company seeks to achieve protection almost entirely through suchtrade secret and unfair competition laws rather than through patents.  The Company follows this policy to avoidpublic disclosure inherent in the application for and perfection ofpatents.  In the absence of judicialdetermination, there can be no certainty as to the degree of protectionafforded 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 parttime employees.  None are represented bya labor union.  The Company believes itsemployee relations are satisfactory.

 

ITEM 2.                             PROPERTIES

 

The Company moved into a new 30,000 square foot office, production andwarehouse facility during February, 1997 in the Opus Industrial Park located inMinnetonka, Minnesota.  The cost of thenew facility was $1.3 million.

 

 

4

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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 quarterended April 30, 2002.

 

#####  

##### **PARTII**

 

ITEM 5.                             MARKET FOR THE REGISTRANTS COMMON EQUITYAND RELATED

                                                                        STOCKHOLDER MATTERS

 

On February 21, 1997 and thereafter the price per share is quoted onthe NASDAQ Small Cap Market under the symbol “IMSG.”  The following table sets forth, for the quarter indicated, thelow and high bid prices per share for the Company’s Common Stock as reported byThe NASDAQ Stock Market, Inc.  Suchquotations represent interdealer prices, without retail markup, markdown orcommission, 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 retainearnings for use in its operations and does not anticipate paying cashdividends in the foreseeable future.  Asof July 15, 2002, there were approximately 420 record holders of the Company’sCommon Stock.

 

 

5

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ITEM 6.                             MANAGEMENT’S DISCUSSION AND ANALYSIS OFFINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

Certain statements contained herein are forward-looking statementswithin the meaning of the Securities Act of 1933 and the Securities ExchangeAct of 1934 that involve a number of risks and uncertainties.  Such forward-looking information may beindicated 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 materiallyare the following: business conditions and growth in the personal computerindustry and the general economy; competitive factors such as rival computerand peripheral product sellers and price pressures; availability of vendorproducts 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 theSecurities and Exchange Commission.

 

The Company designs, assembles and markets high bright, high contrastmonitors.

 

RESULTS OF OPERATIONS

 

#### YearEnded April 30, 2002 Versus April 30, 2001

 

##### Netsales decreased $663,323 or 13.3% for the year ended April 30, 2002 compared tothe year ended April 30, 2001. The decrease is due to selling a lesser quantityof monitors.

 

Gross profit increased $292,021 for the year endedApril 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 marginmonitors and reduced production expenses.

 

For the year ended April 30, 2002 product development and researchexpenses 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 April30, 2002. The primary reasons for the decreases are lower personnel and travelexpenses.

 

Administration expenses increased from $407,092 for the year endedApril 30, 2001 to $420,811 for the year ended April 30, 2002.  The use of outside consultants duringJanuary 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 duringDecember 2000 and as a result minimal interest has been earned since December2000.

 

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 loanand the bank line of credit.

 

 

 

6

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Early in 2002 the federal government passed income tax regulationswhich increased the loss carry back period from two to five years.  Consequently, in fiscal 2002, the Companywas able to carry back its net operating losses and recover income taxes paidin prior years of $274,000.  This incometax benefit was offset by the write-off of the Company’s net deferred tax assetin fiscal 2002.

 

#### Liquidityand Capital Resources

 

Cash provided by operating activities totaled $34,515 for the yearended April 30, 2002 compared to $316,746 used for operating activities for theyear ended April 30, 2001. The increase of $351,261 is due primarily to theincreased cash flow from accounts receivable, deferred income taxes and thereduced net loss amount offset by cash used for inventory, income taxreceivables, and accounts payable.

 

Cash used for investing activities totaled $14,680 for the year endedApril 30, 2002 compared to $1,501 for the year ended April 30, 2001.

 

Cash used for financing activities increased nominally from $34,807 forthe year ended April 30, 2001 to $38,382 for the year ended April 30, 2002.

 

The Company’s primary source of liquidity on April 30, 2002 is the bankline of credit of $1,000,000.  The bankline of credit for $500,000 expired on October 29, 2000.  The Company obtained a bank revolving lineof credit of $1,000,000 effective December 1, 2000 for two years. The Companyintends to renew the bank line of credit on December 1, 2002.  The Company used the revolving line ofcredit to pay off the real estate loan of $285,086. The revolving line ofcredit balance on April 30, 2002 is $280,000. The Company believes that cash available from the line of credit isadequate to meet anticipated short term liquidity and capital requirements ofits business.

 

 

7

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ITEM 7.                             FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

 

INDEX TO FINANCIALSTATEMENTS

** **
|                                                                               |   | **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 forwhich provision is made in the applicable accounting regulations of theSecurities and Exchange Commission have been omitted as not required, notmaterial or the information required has been included elsewhere in thefinancial statements and related notes.

 

 

8

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**INDEPENDENTAUDITOR’S REPORT**

Board of Directors

Image Systems Corporation

Minnetonka, Minnesota

 

We have audited the balance sheets of ImageSystems Corporation (a Minnesota corporation) as ofApril 30, 2002 and2001, and the related statements of operations, stockholders’ investment, andcashflows for the years then ended. These financialstatements are the responsibilityof the Company’smanagement. Our responsibility is to express an opinionon these financial statements based on our

audits.

 

We conducted our audits in accordance withU.S. generally accepted auditing standards. Thosestandards requirethat we plan and perform the audit to obtain reasonable assurance about whetherthefinancial statements are free ofmaterial misstatement. An audit includes examining, on a test basis,evidencesupporting the amounts and disclosures in the financialstatements. An audit also includesassessing theaccounting principles used and significant estimates made by management, aswell asevaluating the overall financial statement presentation. We believe thatour audits provide a reasonablebasis for ouropinion.

 

In our opinion, the financial statementsreferred to above present fairly, in all material respects, the financialpositionof Image Systems Corporation as of April 30, 2002 and 2001, and the results ofits operations andits 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

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**IMAGESYSTEMS CORPORATION**

**BALANCESHEETS**

**APRIL 30,2002 AND 2001**
|                                                                                                               |   | **2002**  |      | **2001**  |   |
|--------------------------------------------------------------------------------------------------------------------|--------|-----------|-----------|-----------|--------|
| **ASSETS**                                                                                                         |   |      |      |      |   |
| **CURRENT ASSETS**                                                                                                 |   |      |      |      |   |
| Cash                                                                                                               |   | $         | 44,876    |      | $      | 63,423 |   |
| Accounts Receivable, Net  of Allowance for Doubtful Accountsof $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   |      | 3⁄4    |   |
| 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 Payable3⁄4Bank                                                                                             |   | $         | 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 SharesAuthorized; 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

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**IMAGESYSTEMS CORPORATION**

**STATEMENTSOF OPERATIONS**

**FOR THEYEARS 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

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**IMAGESYSTEMS CORPORATION**

**STATEMENTSOF STOCKHOLDERS’ INVESTMENT**

**FOR THEYEARS 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                    |   | 3⁄4           |   | 3⁄4     |      | (532,111              | )      | (532,111 | ) |
|                        |   |             |   |       |      |                  |   |   |   |
| **BALANCE, APRIL 30, 2001** |   | 4,452,597        |   | $          | 1,104,289 |                  | $      | 2,032,930 |   | $ | 3,137,219 |   |
|                        |   |             |   |       |      |                  |   |   |   |
| Net Loss                    |   | 3⁄4           |   | 3⁄4     |      | (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.*

 

 

 

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**IMAGESYSTEMS CORPORATION**

**STATEMENTSOF CASH FLOWS**

**FOR THEYEARS 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                                                          |   | 3⁄4   |       | 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  Payable3⁄4Bank                                                   |   | $        | (38,382    | )        | $          | 33,296 |   |
| Repayments on Long-Term  Debt                                                           |   | 3⁄4   |       | (68,103  | )          |
| Net Cash Used by  Financing Activities                                                  |   | $        | (38,382    | )        | $          | (34,807 | ) |
|                                                                                    |   |     | ** ** |     | ** ** |
| **NET DECREASE IN CASH**                                                                |   | $        | (18,547    | )        | $          | (353,054 | ) |
|                                                                                    |   |     |       |     |       |
| Cash3⁄4Beginning of  Year                                                            |   | 63,423   |       | 416,477  |       |
|                                                                                    |   |     | ** ** |     | ** ** |
| **CASH****3⁄4****END 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

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**IMAGESYSTEMS CORPORATION**

**NOTES TOFINANCIAL STATEMENTS**

**APRIL 30,2002 AND 2001**

** **

**NOTE 1****               ****ORGANIZATION OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES**

 

Image Systems Corporation (the Company), aMinnesota corporation, designs, assemblesand markets large,high-resolution computer monitors. All production and subassemblyworkis performed by subcontractors. Final assembly and quality assurance areperformedby the Company. Sales of the Company’s products are primarily in thedomestic market.

** **

**Cash**

The Company’s cash balances are maintainedat high quality financial institutions. At timesthese cashbalances may exceed FDIC insured limits.

 

**Inventories**

 

Inventories are stated at the lower offirst-in, first-out cost or market and are summarized asfollows:

 
|               |   | **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 onthe straight-linemethod over the estimated useful lives of the respective assets. Majorrepairs,refurbishments and improvements which significantly extend the useful lives oftherelated assets are capitalized. Maintenance and repairs, supplies andaccessories arecharged to expense as incurred. Depreciation is provided over thefollowing useful lives:

 

| Building                |   | 39 Years    |   |
|-------------------------|--------|-------------|--------|
| Furniture and  Fixtures |   | 5 - 7 Years |   |
| Production  Equipment   |   | 5 - 7 Years |   |

** **

**Revenue Recognition**

 

Revenue from product sales is recognizedupon shipment to customer, title passing and allobligations of theCompany have been satisfied. Provisions for discounts and rebates tocustomers,and returns and other adjustments are provided for in the same period therelatedsales are recorded.

** **

**Research and Development Costs**

 

The Companycharges all research and development costs to operations in the periodincurred.During the years ended April 30, 2002 and 2001, the Company incurred $255,187and$258,732, respectively, of research and development costs.

 

 

14

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**Warranty Costs**

 

The Company warrants its products againstdefects in materials and workmanship undernormal use and forservice for 18 months. The reserve for warranty costs of $140,000 as ofApril30, 2002 and 2001 has been established to cover estimated costs of warrantyclaims.

** **

**Income Taxes**

 

Deferred tax assets and liabilities arerecognized for the future tax consequencesattributable todifferences between the financial statement carrying amount of existingassetsand liabilities and their respective tax bases. Deferred tax assets andliabilities aremeasured using enacted tax rates expected to apply to taxable income inthe years inwhich those temporary differences are expected to be recovered orsettled. The effect ondeferred tax assets and liabilities of achange in tax rates is recognized in income in theperiod thatincludes the enactment date. Deferred tax assets are subject to a valuationallowancebased on the estimated realization of these assets.

 

**Net Income (Loss) Per Share**

 

Basic earnings (losses) per share (EPS) iscomputed by dividing net income (loss) by theweighted averagenumber of shares outstanding during the year. Diluted EPS is computedbyincluding dilutive common stock equivalents with the basic weighted averagesharesoutstanding. Common stock equivalents were anti-dilutive at April 30,2002 and 2001.

** **

**Financial Instruments**

 

For most instruments, including receivables,accounts payable and accruals, the carryingamountapproximates fair value as these instruments are short-term in nature. The fairvalueof the Company’s long-term debt, based on the quoted market prices for the sameorsimilar issues or on the current rates offered to the Company for debtof the sameremaining maturities, approximates carrying value as of April 30, 2002and 2001.

** **

**Use of Estimates**

 

The preparation of financial statements in conformity withU.S. generally acceptedaccounting principles requires management tomake estimates and assumptions that affectthe reportedamounts of assets and liabilities and disclosure of contingent assets andliabilitiesat the date of the financial statements and the reported amounts of revenues andexpenses duringthe reporting period. Ultimate results could differ from those estimates.

** **

**Concentrations**

 

The Companytypically sells its products to original equipment manufacturers and systemsintegrators.The Company had two customers that accounted for 31% of net sales for theyearended April 30, 2002 and three customers that accounted for 44% of net salesfor theyear ended April 30, 2001. Credit risk with respect to trade receivablesis generally spreadacross a number of customers with dispersion across different businessesand geographicregions. Two customers accounted for 42% of outstanding accountsreceivable as ofApril 30, 2002, and three customers accounted for 46% of outstandingaccounts receivableas of April 30, 2001.

 

 

15

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**Recent Pronouncements Not Yet Adopted**

 

In July 2001, the Financial AccountingStandards Board (FASB) issued SFAS No. 141(SFAS No. 141), *BusinessCombinations,*and No. 142 (SFAS No.142), *Goodwill and Other**Intangible Asset**s*.SFAS No. 141 requires all business combinations initiated after June 30,2001to be accounted for using the purchase method. SFAS No. 142 replaces therequirementsto amortize intangible assets with indefinite lives and goodwill with arequirementfor an impairment test. SFAS No. 142 also requires an evaluation of intangibleassetsand their useful lives and a transitional impairment test for goodwill andcertainintangible assets upon adoption. After transition, the impairment testswill be performedannually. SFAS No. 142 becomes effective for the first quarter of theyear ended April 30,2003. Management believes that SFAS No. 141 and SFAS No. 142 will haveno significanteffect on the balance sheet, results of operations and cash flows of theCompany.

 

In August 2001, FASB issued SFAS No. 144(SFAS No. 144), *Accounting for Impairment or**Disposalof Long-Lived Asset**s*, which addresses financial accounting and reporting for theimpairmentor disposal of long-lived assets. While SFAS No. 144 supersedes SFAS No.121,*Accounting for the Impairment of Long-Lived Assetsand for Long-Lived Assets to Be**Disposed O**f*,it retains many of the fundamental provisions of that Statement. SFAS No.144is effective for fiscal years beginning after December 15, 2001. As of April30, 2002,management believes that SFAS No. 144 will have no significant effect onthe balancesheet, 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 creditagreement that allows for maximum borrowingsof $1,000,000. Theagreement expires in December 2002. Borrowings bear interest at thebank’sreference rate (4.75% at April 30, 2002). Borrowings are collateralized by theCompany’sland and building. At April 30, 2002 and 2001, the Company had borrowings of$280,000and $318,382, respectively, outstanding under the agreement.

** **

**NOTE 3****               ****INCOME TAXES**

 

The provision (benefit) for income taxes forthe years ended April 30 is summarized asfollows:

 
|                          |   | **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

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Deferred income taxes are the result ofprovisions of the tax laws that either permit orrequire certainitems of income or expense to be reported for tax purposes in differentperiodsthan those in which they are reported for financial reporting. Deferred taxassetsprimarily relate to the tax effect of temporary differences related toreserves and accruals, net operating loss carryforwards, and research anddevelopment tax credit carryforwards.

 

Realization of the deferred tax asset isdependent on generating sufficient taxable incomeprior to theexpiration of the various credits. In 2002, the Company increased the valuationreserveto reduce the deferred tax asset to zero. The valuation allowance was $323,000and$291,000 at April 30, 2002 and 2001, respectively. The increase in thevaluationallowance was $32,000 and $261,000 at April 30, 2002 and 2001,respectively.

 

The Company has state net operating losscarryforwards of approximately $352,000 atApril 30, 2002.These carryforwards begin to expire at April 30, 2015. At April 30, 2002, theCompanyalso has federal and state research and development credit carryforwards ofapproximately$126,000. There is no expiration on these credits.

 

The difference between the federal statutoryincome tax rate and the Company’s effectivetax rate for theyears ended April 30 was as follows:

 
|                                         |   | **2002** |   | **2001** |   |
|----------------------------------------------|--------|----------|--------|----------|--------|
| Federal Statutory Rate                       |   | (34      | )%     | (34      | )%     |
| Adjustments to Estimated  Income Tax Accrual |   | 3⁄4   |   | (16      | )      |
| Valuation Reserve                            |   | 18       |   | 39       |   |
| Research and Development  Credits            |   | (18      | )      | (5       | )      |
| Other                                        |   | (8       | )      | (4       | )      |
| Total                                        |   | (42      | )%     | (20      | )%     |

 

 

17

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**NOTE 4****               ****COMMITMENTS AND CONTINGENCIES**

** **

**Stock Options**

 

The Company has a stock option plan underwhich 400,000 common shares are reservedfor grant aseither nonqualified or incentive stock options to officers, directors and keyemployees.As of April 30, 2002, 177,500 of the reserved common shares are available forfuturegrant. The options expire, if not exercised, six years after the date of grant.Asummary 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                                                         |   | 3⁄4     |   | 3⁄4                               |   | 20,000 |   | 0.35 |   |
| Exercised                                                       |   | 3⁄4     |   | 3⁄4                               |   | 3⁄4 |   | 3⁄4 |   |
| 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 informationabout fixed stock options outstanding atApril 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   April 30, 2002** |   | **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 Company’s stock options are accountedfor under Accounting Principles Board OpinionNo. 25, underwhich no compensation cost has been recognized. Had compensation costsforthese plans been determined under SFAS No. 123, *Accountingfor Stock-Based**Compensatio**n*,the Company’s net income (loss) and income (loss) per share would havebeenchanged 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 SFASNo. 123 has not been applied to optionsgranted prior toMay 1, 1995, the resulting pro forma compensation cost may not berepresentativeof that to be expected in future years.

 

The fair value of each option grant is estimatedon the date of grant using the Black-Scholesoption pricingmodel with the following weighted average assumptions summarizedbelow:

 
|                                    |   | **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

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**Operating Leases**

 

The Company leases equipment under anoperating lease. The lease requires theCompany to paymaintenance, insurance, taxes and other expenses in addition to minimumannualrent. Rent expense was $7,740 in 2002 and 2001. Minimum rental commitmentsduein 2003 under the noncancelable operating lease is $1,935.

** **

**NOTE 5****               ****EMPLOYEE BENEFIT PLAN**

 

The Company has a401(k) plan under which eligible employees can make voluntarycontributionsof up to 20% of their compensation. The Company made no contributions tothisplan in 2002 or 2001.

 

 

20

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ITEM 8.                             CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON

                                                                        ACCOUNTING AND FINANCIAL DISCLOSURE

 

                                                Form 8K for change in accountants wasfiled July 20, 1999.

 

## **PART III**

 

ITEM 9.                             DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

 

                                                The directors and executive officers ofthe 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 bythe shareholders for a term of one year or until their successors are electedand qualified.

 

                                                *Dean Scheff*.  Chairman ofthe 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 toJanuary, 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 traveland incentives at CPT Corporation for 10 years.   She was a founder of the Company. She has worked for the Companysince 1988 as Director of Marketing.

 

                                                *Marta Scheff Volbrecht*.  Executive VicePresident and Director.  Ms. Volbrechthas a B.A. in International Relations from the University of Minnesota and aMBA from the University of Dallas. She worked for 7 years until 1989 for CPT insales, marketing and international sales support. She has worked for theCompany since 1989 as Vice President of Sales, as Executive Vice Presidentsince 2001.

 

                                                *Laura Sorensen.* Director.  Ms. Sorensen has aB.A. in International Relations from the University of Minnesota. She workedfor 10 years for CPT in Human Resources, Marketing and Training andDevelopment. She has worked for the Company since 1989 as Manager of HumanResources.

 

 

21

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                                                *David Sorensen*.  President,CEO/Director. Mr. Sorensen received a B.S.M.E. in Mechanical Engineering fromthe University of Minnesota and a MBA from the University of St. Thomas.  He worked for Honeywell from 1983 to 1990when Alliant Techsystems was spun off from Honeywell.  He was employed by Alliant Techsystems as a Program Manager from1990-1992.  He joined the Company onJanuary 1, 1992, as Director of Manufacturing. During 1994 he took on additional responsibilities as Vice President ofOperations. In 2001 he became President and CEO.

 

                                                *Steven Volbrecht*. Director.  Mr. Volbrecht has aB.S.C.E. in Civil Engineering from the University of Minnesota.  He was employed from 1982 to 1988 by JohnsonBros. Corporation as Project Manager and from 1988 to 1991 as Project Managerfor Landwehr, Inc.  In 1991 he rejoinedJohnson Bros. as a Project Manager.  Hewas employed by Hansen Thorp Pellinen Olson, Inc. as a Staff Engineer from 1996to 1999.  Since 1999 he has beenemployed at Centex as a Land Development Manager.

 

                                                *Bradley Beard*.  Director.  Mr. Beard isVice-President with Fairview Health Services. He is President of National Rehab Resources, Inc., a company whichprovides educational and consultative services to healthcareorganizations.  He received his Master’sDegree 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 hasa B.S. in Business from Valparaiso University in Indiana. Mr. Volbrecht wasChief Accountant for Cenex Inc from 1970-1982, and from 1988-1993 he wasController with Interstate Express. He has worked for the Company since 1993 asController.

 

                                                Diana Scheff is the wife of DeanScheff.  Marta Scheff Volbrecht andLaura Sorensen are the children of Dean and Diana Scheff.  David Sorensen is the husband of LauraSorensen, and Steven Volbrecht is the husband of Marta Scheff Volbrecht. DonaldVolbrecht is the father of Steven Volbrecht.

 

ITEM 10.                       EXECUTIVE COMPENSATION

 

No executives received compensation in excess of $100,000 during theyear ended April 30, 2002.  The totalcompensation received by all executive officers as a group (6 persons) totaled$308,061.

 

David Sorensen, the President and CEO of the Company, received a salaryof $90,000 and no commissions for the year ended April 30, 2002. For the yearended April 30, 2001, David Sorensen’s salary was $90,000 with commissions of$240.

 

On May 1, 1994 Image Systems implemented a 401K and a Flexible BenefitsPlan for its employees.  The Company hasnot contributed to these plans.  ImageSystems had no long term compensation or other compensation plans.

 

 

22

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ITEM 11.                       SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND

                                                                        MANAGEMENT

 

                                                The following table sets forth as of July1, 2002, the beneficial ownership of each person known by the Company to ownbeneficially 5% or more of the Company’s outstanding shares of Common Stock, ofeach director of the Company, and of all officers and directors as a group.  Except as otherwise indicated, all personsindicated 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 BlueCircle Drive, Minnetonka, Minnesota, 55343.

 

(2)                                  Does not include shares beneficiallyowned by spouse.  Each person disclaimsbeneficial ownership of shares owned by their spouse.

 

ITEM 12.                       CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS

 

                                                None.

 

## **PART IV**

 

ITEM 13.                       EXHIBITS LIST AND REPORTS ON FORM 8-K

 

(a)                          Exhibits

 

3.1                         Articles of Incorporation of theRegistrant.  (Incorporated herein byreference toExhibit 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 Exhibit3.2 toRegistration Statement on Form S-18, as amended, File No. 33-4259C.)

 

(b)                         Reports on Form 8-K

 

Form 8-K filed December7, 2001 for the change in Board positions and membership.

 

 

23

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## **SIGNATURES**

 

                                                In accordance with Section 13 or 15(d) ofthe Exchange Act, the Registrant caused this report to be signed on its behalfby 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, thisreport has been signed below by the following persons on behalf of theRegistrant 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 TOSECTION 15(d) OF THE ACT BY REGISTRANTS WHICH HAVE NOT REGISTERED SECURITIESPURSUANT TO SECTION 12 OF THE ACT

 

 

24

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## **EXHIBITINDEX**

 
| **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.)                  |   |           |

 

 

 

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