UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended December 31, 1996
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [NO FEE REQUIRED]
For the transition period from _____________ to _____________
Commission file number 0-26056
IMAGE SENSING SYSTEMS, INC.
(Name of small business issuer in its charter)
MINNESOTA 41-1519168
State or other jurisdiction of I.R.S. Employer Identification No.
incorporation of organization
1600 UNIVERSITY AVE. W., #500, ST. PAUL, MN 55104 (612) 603-7700
Address of principal executive offices Issuer's telephone number
Securities registered under Section 12(b) of the Exchange act:
NONE
Title of each class
Securities registered under Section 12(g) of the Exchange Act:
NONE
Title of each class
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12
months (or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days. Yes [X] No [ ]
Check if there is no disclosure of delinquent filers in response to
Items 405 of Regulation S-B in this form, and no disclosure will be contained,
to the best of the registrant's 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. [X]
The registrant's revenues for the fiscal year ended December 31, 1996
totaled $3,192,000.
Based on the closing bid price at March 19, 1997, the aggregate market
value of the voting stock held by nonaffiliates of the registrant was
$3,512,500.
The number of shares outstanding of the registrant's $.01 par value
common stock, as of March 19, 1996, was 2,475,000 shares.
Transitional Small Business Issuer Format: Yes [ ] No [X]
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the annual shareholders report for the year ended December 31, 1996
are incorporated by reference into Parts I and II.
Portions of the registrant's Proxy Statement for its May 12, 1997 Annual Meeting
which was filed on March 25, 1997, are incorporated by reference in Part III.
PART I
ITEM 1. DESCRIPTION OF BUSINESS
GENERAL
ISS was founded in 1984 to develop and market products using video
image processing technology for use in advanced traffic management systems and
traffic data collection. Video image processing, also known as machine vision or
artificial vision, is a technology that analyzes video images through computer
programs and special purpose hardware. By using video cameras and computers to
emulate the function of the human eye, machine vision has been used in a variety
of industrial applications. ISS has combined its proprietary machine vision
technology, consisting of complex algorithms, software, and special purpose
hardware with commercially available computer hardware and video cameras, to
create a system that collects, processes and analyzes video images.
The Company's first product, the Autoscope(R) Vehicle Detection System,
converts video images of a traffiC scene into digitized traffic data that may be
transmitted to local or remote locations for real-time traffic management or
stored for later analysis. The Autoscope system is modular, flexible, and
expandable and has a variety of current and potential applications in
intersection control, freeway traffic management, and traffic data collection.
Automated vehicle detection for traffic management has traditionally been
performed with inductive wire loops buried in the pavement. The Autoscope system
is easier to install, remove, and maintain than these embedded loop detectors;
is non-destructive to road surfaces; and is capable of wide-area vehicle
detection with a single camera, thus enabling one camera to do the work of many
loops. The Company believes that the Autoscope system is superior to loop
detectors or most other commercially available vehicle detection systems in its
current range of applications and its ability to support new applications for
advanced technology solutions to traffic management problems.
In 1987, the University of Minnesota, utilizing the technology
underlying the Autoscope system, demonstrated the first working traffic
application of image processing technology. The Autoscope system was first
marketed and sold commercially in 1991. In 1993, the Company began to market the
Autoscope system outside of North America through distributor arrangements, and
the Company intends to continue to increase its marketing efforts in foreign
countries. The Company currently has twenty-four distributors covering countries
primarily in Europe and southeast Asia.
The U.S. patent for certain aspects of the technology underlying the
Autoscope system was issued in 1989, to the University of Minnesota. The Company
has an exclusive worldwide license from the University of Minnesota for that
technology and the patent and pays royalties to the University of Minnesota in
exchange for such license. The Company has sublicensed the exclusive right to
manufacture and market the Autoscope system in North America and the Caribbean
to Econolite Control Products, Inc. of Anaheim, California and receives
royalties from Econolite on sales of the Autoscope system in those territories.
Econolite also manufactures the Autoscope system on a non-exclusive basis for
direct sales by the Company outside of North America and the Caribbean.
TECHNOLOGY
The electronic imaging industry utilizes technology that converts real
world "scenic" information into digital electronic signals for processing by
computer. Electronic imaging has a number of industrial applications. For
example, electronic imaging technology is used for quality control in
manufacturing processes. An image of a manufactured product can be fed by video
into a computer and analyzed to determine if that finished product satisfies
production standards that have been programmed into the computer. The defense
industry has used electronic imaging in a number of applications. For example,
"smart" bombs use video imaging technology to identify targets through the use
of special optic sensors that feed scenic information into sophisticated
computer programs that process the scenic information into target location
coordinates.
Through the use of its sophisticated proprietary technology, the
Company has been able to apply electronic imaging technology to traffic
management problems. The Company's technology was initially developed by Dr.
Panos Michalopoulos, Chairman of the Board and Chief Scientific Advisor of ISS
and a Professor at the University of Minnesota, and was further developed at the
University of Minnesota from 1985 to 1991 with involvement by Dr. Michalopoulos.
The technology uses standard video and computer equipment, combined with
proprietary technology, including complex detection algorithms, computer
software, special purpose hardware, a "Windows(R)" based graphic user interface,
and a camera adaptation formula that enables standard video cameras to work with
the Autoscope system.
THE AUTOSCOPE SYSTEM
The Autoscope system generally consists of one to four video cameras, a
flexible modular microprocessor with specialized software and circuitry, and a
supervisor computer with a video monitor, keyboard, and mouse. The Autoscope
microprocessor accepts scenic input from the video cameras and, through a series
of complex algorithms and computer software, converts the scenic data into
digitized data. This data can then be used for traffic control, research,
management, and planning purposes and other applications. Most brands of
commercially available personal computers with standard configurations can be
used as the supervisor computer in the system.
The Autoscope system permits a user to draw detection zones on a video
screen displaying the traffic scene and derive traffic data from the portion of
the image specified by the detection zones displayed on the screen. The system
analyzes virtual detection zones that appear only on the video screen, not on
the roadway. Each detection zone represents an area in the field of view of the
camera that the system user wishes to analyze for determining the presence of
vehicles or extracting other pertinent traffic data. Over 100 detection zones
can be programmed into the system. The system user determines the detection
zones by drawing them on a video monitor with a mouse. Different types of
detection zones can be selected and may be placed anywhere in any orientation
within the field of view of the cameras using the system's unique interactive
graphics. The detection zones can be changed simply by using the mouse to
resize, reshape, or relocate the detection zones on the video monitor. Once a
new detection configuration has been created, the supervisor computer system can
display the detection zones on its own video monitor, together with the live
video image, to monitor the system in operation. When a vehicle is under the
detection zone, the detection zone changes in color or intensity, thereby
providing visual verification of correct system operation. Measured traffic data
may be displayed on the video monitor of the supervisor computer in numeric
format. The traffic data may be transmitted to another host computer via modem
and dial-up telephone lines, private cable, fiber optic network, direct cable
connection, or various other wireless communications equipment. Vehicle
detection output can also be selectively routed to intersection signal
controllers. A detection signal is generated each time a vehicle crosses one of
the virtual detection zones, thus enabling the system to accumulate measured
traffic data in user-selected categories, such as volume, average speed, time
occupancy (percent of time the detection zone is occupied), headways (time
interval between vehicles), flow rate (vehicles per hour per lane), and vehicle
length. Information from the system can be processed in real-time or stored for
later analysis.
The Autoscope system is modular, flexible, and expandable. The
Autoscope supervisor computer and video monitor may be disconnected once the
detection zone configuration has been transferred to the microprocessor. The
system can then operate independently, providing detection zone outputs and
storing traffic data in the microprocessor's internal memory. The same portable
supervisor computer and video monitor may be used with multiple Autoscope
systems. New detection zone configurations can be saved to diskette, and
previously saved detection zone configurations can be retrieved from diskette
for downloading into each system. The same Autoscope microprocessor can be used
with multiple cameras, each with its own detection zone configuration.
The current price to the end user of one Autoscope system ranges from
$24,000 to $50,000, depending on the options included in the system, including
the hardware configurations and the number of cameras used.
CURRENT APPLICATIONS AND INSTALLATIONS
The current Autoscope system may be used in a number of applications.
The primary applications of the Autoscope system are currently intersection
applications, freeway applications and traffic count stations. In addition, the
Company has identified a number of potential traffic and non-traffic related
applications for the system that it intends to pursue.
INTERSECTION APPLICATIONS. The Autoscope system can be installed at an
intersection to provide traffic detection information as required by an
intersection signal controller. An intersection signal controller is essentially
a set of sophisticated computer programs, separate from the vehicle detection
system, that use the traffic detection information to control the green, yellow
and red lights for each of the turning or through lanes to provide for safe and
efficient movement of vehicles through the intersection. More sophisticated
intersection signal controllers use detection information to maximize the
efficient flow of traffic through one or more intersections. The extent to which
a signal controller is successful is dependent not only on the level of
sophistication of the controller but also on the quality and reliability of the
detection system and the type of traffic data provided.
The Autoscope system can be programmed to provide data with respect to
vehicle presence, traffic volume, time occupancy (percent of time the detection
zone is occupied), vehicle speed, turning movements, stopped vehicles, vehicles
direction and vehicle length or indicate that conditions indicative of a traffic
incident have occurred. This information is then routed to the intersection
signal controller to control the flow of traffic at the intersection or provide
alarms at centralized traffic control centers. For example, the Autoscope system
can determine that a queue has developed at a stoplight and route that
information to the intersection controller so that the signal times can be
adjusted appropriately or a left turn signal phase can be engaged if a line
develops at the left turn lane. The system can be used to detect vehicles that
are caught in the intersection during the yellow light phase and feed that
information to the intersection controller so that the controller can adjust the
yellow light phase to allow the driver sufficient time to clear the
intersection. In addition, selected detection zones in the Autoscope system can
be programmed so that they only detect cars moving in one direction. This
capability can be used to prevent undesired detections, such as a left turning
vehicle that has turned too sharply and is momentarily driving in the wrong
lane. This capability can also be used to detect cars going the wrong way on a
one way street or the wrong way on a freeway exit-ramp. A majority of all
commercially installed Autoscope systems are currently being used for
intersection control applications.
The largest installation of the Autoscope system for intersection
applications is in Oakland County, Michigan in an Intelligent Transportation
Systems (ITS) project known as FAST-TRAC (Faster and Safer Travel through
Traffic Routing and Advanced Controls), that combines advanced traffic
management systems with advanced traveler information systems. To the Company's
knowledge, this is the largest installation of a video vehicle detection system
for fully adaptive intersection control in the world. Adaptive intersection
control regulates traffic by linking communications between multiple
intersection controllers. In such a system, the Autoscope interfaces directly
with local intersection controllers and the local controllers are connected via
direct phone lines to a regional computer that hosts the timing algorithms for
use in synchronizing the timing of the signal lights at many intersections.
Adaptive intersection control can be used for a few intersections or for an
entire region. The FAST-TRAC project deploys one multi-camera Autoscope system
per intersection. Thus far, FAST-TRAC has deployed over 200 Autoscope systems in
Oakland County. Some of the first commercially available Autoscope systems were
deployed in Oakland County and have been in operation for over three years.
Based on discussions with FAST-TRAC project administrators and the Autoscope
system distributor for Oakland County, the Company believes that the FAST-TRAC
system will continue to expand to an additional 44 intersections by the end of
1997.
FREEWAY APPLICATIONS. For freeway applications, Autoscope can provide
information for traffic management analysis, ramp control, incident detection
and automated surveillance. Typical traffic information provided by the system
includes traffic volumes, time occupancy, vehicle speeds and vehicle counts of
three different vehicle classes based on length. The system could also be used
to signal an alarm if it detects stopped vehicles or the sudden onset of
congestion in a detection zone indicating a traffic incident on the highway.
Using a video camera next to a freeway on-ramp, the Autoscope system can detect
traffic movement on a freeway on-ramp or in the merging area on the freeway, and
the resulting data can be used to prevent a queue from developing on a side
street, to control on-ramp traffic signals or to determine the capacity of a
merge area for planning and control purposes.
An example of an Autoscope freeway application can be seen in Atlanta,
Georgia. In preparation for the 1996 Olympics, the Georgia Department of
Transportation (the "GDOT") upgraded its traffic management capabilities for
both freeways and arterial corridors for the city of Atlanta. GDOT purchased and
installed 57 multi-camera Autoscope systems on Atlanta freeways. The cameras
were installed with a complementary video surveillance system over a fiber-optic
network. The video and data output of the Autoscope systems are being routed to
a central traffic management system. The traffic data is networked to several
locations for managing and controlling freeways and archived for design,
planning and simulation purposes. All of the Autoscope systems are initially
being used as traditional freeway count stations measuring vehicle volumes, time
occupancy and speed. The local distributor of Autoscope systems in Atlanta
believes the system will be expanded by 50 or more Autoscope units by the end of
1997.
TRAFFIC INFORMATION GATHERING AND ANALYSIS. The Autoscope system is also used
for basic traffic information gathering and analysis on intersections, freeways
and other roadways. Traffic planners can use the traffic data collected by the
Autoscope system to design roadway changes, define signal timing plans, approve
commercial development plans and define the environmental impacts of traffic
congestion. The Autoscope system can be used in temporary or semi-permanent
configurations as a portable detection system during road repairs, construction
or resurfacing and for special studies, such as traffic data collection by a
planning department, a traffic consultant or a university. The Autoscope system
can capture vast amounts of traffic data in its own memory or on a hard disk or
the supervisor computer for later off-line graphing and analysis. Further
flexibility is gained with the ability to videotape a section of roadway with a
portable video camera and measure the traffic data off-line with the Autoscope.
POTENTIAL PRODUCT APPLICATIONS AND ENHANCEMENTS. The Company is engaged in a
continuous effort to increase the number of applications and develop
enhancements for the Autoscope system. Enhancements to the system are often a
result of responses to needs identified by customers in the field. The Company
has been involved in a number of consulting arrangements in which the Company
has been engaged to manage the deployment of custom applications of the
Autoscope system.
In 1995, ISS won a competitive Federal Highway Administration (FHWA)
R&D project to develop advanced traffic parameter measurements for improved
adaptive traffic management. In this project ISS developed an experimental
Autoscope prototype, called 2004.X, that consists of some enhancements of
existing software to track vehicles and directly measure queue length, approach
stops, turning movement, ramp parameters, freeway deceleration and lane changes.
In a preliminary test on field data Autoscope 2004.X demonstrated excellent
performance potential in field deployment. Measurements such as queue length and
approach stops are known as Measures of Effectiveness (MOE) that are essential
ingredients of advanced traffic control strategy such as RT-TRACS (Real Time
Traffic Adaptive Control System) and are also essential to calibrating the
degree of improvement, and consequently cost-effectiveness, in traffic
congestion that is of direct interest to the end customer, the traveler. These
MOEs can also be used in estimating vehicular emission on surface streets
contributing to environmental pollution. Because direct measurements of such
MOEs are not currently available, software such as RT-TRACS uses indirect
estimations of these parameters in its traffic control logic. Providing low
cost, direct measurement of these MOEs enables the traffic control software to
be more accurate and effective.
Measurement of intersection turning movements is also a very important
parameter used by planners and designers in designing new roadway intersections
and in upgrading traffic patterns at existing intersections. Currently, traffic
authorities collect such data by deploying personnel at intersections to count
individual vehicles one-at-a-time over a statistically significant period of
time and then moving these personnel from intersection to intersection of an
arterial roadway at a significant cost. The newly developed turning movement
software will provide the measurement with no additional hardware deployment at
every intersection where Autoscope is already deployed for intersection control.
Also available in a portable platform that can be moved from intersection to
intersection, this software can provide turning movement measurement at a
significantly lower cost at intersections that do not currently have Autoscope
installed for traffic control.
The ramp parameter measurements developed as a part of the prototype
consist of ramp queue length, ramp presence demand, ramp passage, and on-off
ramp flow rate. Because of the wide area detection capability of Autoscope, all
of these measurements at a ramp can be performed by a single Autoscope camera.
The Autoscope system can be used not only in ramp meter operation but also in
displaying the dynamic ramp queue delay to travelers approaching the ramp via a
variable message sign (VMS). Additionally, this ramp queue data can be made
available to the travelers over the internet through traveler information
centers.
Freeway deceleration and lane changes are additional parameters that
can be used to improve incident/traffic alarm detection and prediction.
In 1996,the Company completed the development of a software package
called "ScopeServer". The ScopeServer software communicates with one or more
Autoscope systems, manages the data generated by them in real-time, and runs
concurrent applications based on this data. The user is able to write custom
applications which use the output from the Autoscope system to control specific
pieces of equipment, such as changeable message signs, or to manage traffic
signals and ramps.
The Company has also developed an automated incident detection
algorithm (known as "AIDA") for use on freeways. Using AIDA as an added feature,
the Autoscope system is able to monitor a variety of traffic parameters to
determine when conditions, or changes in conditions, indicate a probability that
an incident (such as a traffic accident) has occurred. The AIDA feature can be
used with the Autoscope to alert freeway operations personnel of an incident,
thus allowing a more rapid response to that incident to minimize its impact.
This automated incident detection system has been field installed for evaluation
and performance enhancements at test sites in Minnesota for more than four
years. Additional projects in the U.S. and internationally are in progress to
install and evaluate the performance of AIDA. Evaluation projects have typically
been part of the initial trial phase of much larger, area wide deployments of
the Autoscope system.
In addition to AIDA, the Company has developed a second form of
incident detection for use with the Autoscope system that will detect stopped
vehicles. Strategic placement of stopped vehicle detection zones make it
possible to identify vehicles on the shoulder of a highway, identify localized
traffic slowdowns and adjust for such slowdowns without constant monitoring by
an operator. The ScopeServer can then be used to collect information from
multiple Autoscope microprocessors with that feature and route that information
to a traffic control computer for real-time control applications, surveillance
or analysis.
In 1996, the Company introduced significant software enhancements to
the Autoscope system, including several new detector types for better traffic
control, improved algorithms for better count accuracy, improved system
diagnostics, and a user-friendly on-line help system for operator efficiency.
Further enhancements are planned with two additional software releases in 1997.
The Company intends to continue development of a system enhancement
that can measure the number of vehicles in a traffic queue. Currently, the
Autoscope can estimate queues using multiple detection zones; however, to the
Company's knowledge no vehicle detection system has been deployed that can
actually measure the number of vehicles in a traffic queue at specific time
intervals. That information could be used by traffic planners to measure traffic
delays and provide the real-time feedback on the effectiveness of traffic
control strategies. The queue information can also be used to infer energy
consumption and vehicle emissions. The Company believes the queue measurement
will be an enabling technology for the next generation of adaptive traffic
control.
While the Company believes that it will be able to develop and
commercialize these product enhancements and applications, there can be no
assurance that it will be able to do so or that offering such enhancements or
applications will provide the Company any unique competitive advantage over
existing or developed technology.
RESEARCH AND DEVELOPMENT
The Company is engaged in continued research and development in order
to lower manufacturing unit costs, develop less expensive system configurations,
and improve product quality. The Company's research and development activities
also are focused on broadening the applications of the Company's system and
developing product enhancements. New applications and product enhancements are
often a result of research and development in response to needs identified by
customers in the field.
In August 1995, the Company began development of an integrated video
imaging processor which generally can be used for more narrowly defined traffic
management environments than the current Autoscope product. In January of 1997,
the Company agreed to provide this new product to the Minnesota Department of
Transportation (Mn/DOT) for deployment in the Minneapolis central business
district. Prototype testing is scheduled for June 1997, with first deployment in
late fall. The contract with Mn/DOT calls for up to 146 new image sensors to be
installed. The Company expects to receive $795,000 for the image sensors and
associated hardware and related engineering services and support.
The Company's research and development staff presently numbers twelve
individuals, of whom five hold Ph.D. or other advanced degrees. The Company's
research and development expenditures totaled approximately $834,000 in 1996 and
$630,000 in 1995. The Company expects its research and development staff and
expenditures to decrease marginally in 1997.
MARKETS
Urban traffic congestion is a major global problem. Consequently, in
the United States and in many developed countries throughout the world, there is
a growing demand for traffic management and control technology. In the U.S.
local and national government agencies continuously seek new solutions to
traffic congestion. Traffic planners can build new roads or develop mass
transit. However, both of these options are expensive, time consuming, and in
many situations not feasible. In this era of governmental budgetary constraints,
traffic planners are increasingly seeking solutions that will maximize the
efficiency and utilization of the existing roadways.
The costs due to congestion, including wasted fuel, increased
accidents, and time lost, are substantial. In a report to Congress, the U.S.
Secretary of Transportation estimated that lost productivity due to urban
traffic congestion for the twenty-five largest U.S. metropolitan areas is
approximately $34 billion per year and approximately $100 billion per year for
the entire country. In an effort to reduce these costs, the U.S. Congress, in
1991, enacted the Intermodal Surface Transportation Efficiency Act ("ISTEA"),
the purpose of which is to develop economically efficient and environmentally
sound solutions to transportation system problems in the U.S. As part of ISTEA
Congress endorsed a national transportation initiative known as Intelligent
Transportation Systems ("ITS") and appropriated substantial funding for ITS
projects. Under ISTEA the U.S. Department of Transportation must report to
Congress periodically regarding the progress of ITS projects.
ITS represents a new and growing area of interest within the
transportation industry, dedicated to the application of advanced technology to
meet the increased demands on the nation's transportation systems. One central
principal of the ITS program is that solutions to transportation problems in the
U.S. should focus on more efficient use of the current roads and systems, rather
than merely increasing the quantity of roads and systems. ITS encourages
technological developments that will improve highway safety, system operating
efficiency, environmental quality, or energy utilization in transportation
through improved interactions between roads, vehicles, and their drivers. ITS is
an interdisciplinary initiative composed of a number of technologies, including
those developed and used in the defense industry, information processing,
communications, control, and electronics. With funding and oversight from the
U.S. Department of Transportation, the Federal Highway Administration, and the
state departments of transportation, the ITS program seeks to develop and
implement a variety of transportation user services. ITS currently has over 100
projects in development or deployment stage throughout the U.S. in such areas as
travel and traffic management, public transportation management, electronics
toll payment, commercial vehicle operations, emergency management, and advanced
vehicle safety systems. For the one-year period ending September 30, 1996, the
U.S. Congress appropriated approximately $235 million for ITS-related programs.
The Company is involved in several ITS programs that are funded through these
appropriations.
The Company believes that implementation of advanced traffic management
schemes envisioned by ITS requires collection of real-time traffic conditions
including traffic volume, roadway occupancy, traffic speed, stopped vehicles,
vehicle direction, vehicle length, and traffic incidents. Loop detectors are
generally too expensive to install and maintain in the large quantities required
for implementing some of the more aggressive ITS programs.
The Company is aware that other countries are initiating or
contemplating initiating programs similar to ITS. For example, the European
Community has a program called ERTICO, which is attempting to manage traffic
with advanced technology. To date the Company has not generated any significant
revenues from involvement in any foreign ITS-type programs. However, the Company
believes that, once market acceptance increases in such countries, the
utilization of the Autoscope system for freeway applications in such programs
may increase.
CUSTOMERS
The customers for Autoscope are primarily federal, state, city, and
county departments of transportation; road commissions; and port, turnpike, and
other transportation authorities. The decision makers within these government
entities are typically traffic planners and government engineers, who in turn
often rely on consulting firms that perform planning and feasibility studies for
those entities. Most Autoscope systems deployed as part of an ITS program are
ordered as components of major construction contracts, under subcontracts to
system integrators or other suppliers of systems and services. Otherwise, state
and local government agencies often install and maintain their own equipment. In
order to increase sales of the Autoscope system, the Company must increase
product and technology awareness within these customer groups. To date, the
majority of Autoscope installations have been for evaluation testing by such
governmental entities or for federal or state funded ITS programs.
COMPETITION
Competition in the area of advanced traffic management and surveillance
is growing, due in part to the increased federal funding of advanced
technologies under the ITS program. Some of the companies that may compete with
the Company in the business of developing and implementing traffic control
systems include companies that have substantially more financial, technological,
marketing, personnel, and research and development resources than the Company.
The Company's products will compete not only with conventional methods of
vehicle detection and traffic control, such as embedded loop detectors, but also
with new technologies that may be applied to problems of urban traffic
congestion. New technologies or applications in traffic control systems may
provide the Company's customers with alternatives to the Autoscope system.
Various technologies have been used as traffic sensing devices in the past and
will continue to be developed for application to traffic management. These
technologies include embedded loop detectors, pressure plates, pneumatic tubes,
radars, lasers, magnetometers, acoustics, and microwaves. The Company estimates
that over 95% of the detector systems currently in use in the U.S. are embedded
loop detectors. Embedded loop detectors are relatively easy to manufacture and
are currently manufactured by numerous companies throughout the world.
The Company is aware of several companies that are developing traffic
management devices using machine vision technology or other advanced technology.
Among the companies that are expected to provide direct competition to the
Company's Autoscope system in the use of machine vision technology in traffic
management are Traficon N.V ("Traficon"), Kortrijk, Belgium; EVA, Incorporated,
San Francisco, California; Siemens AG, Munich, Germany; Peek Traffic, Inc.,
Jacksonville, Florida; Rockwell International, Anaheim, California; and Odetics,
Anaheim, California. To the Company's knowledge, Traficon, Odetics, and Peek
have working installations of their machine vision systems in the U.S. and other
parts of the world. However, these companies do not have as many installations
as ISS. To the Company's knowledge, machine vision systems are also being
developed by the other competitors listed above. The Company is also aware of
other companies that are developing vehicle detection systems based on
technology other than machine vision. Electronic Integrated Systems, Inc. of
Toronto, Ontario is developing a system based on microwave sensors; and AT&T is
developing a system based on acoustic sensors. The Company is aware that these
and other companies will continue to develop technologies for use in traffic
management and surveillance. One or more of these technologies could in the
future provide increased competition for the Autoscope system. Nevertheless, the
Company believes that its product has undergone more extensive field testing and
is at a more advanced stage of development than any of its competitors'
products.
MARKETING AND MANUFACTURING
Marketing and manufacturing of the Autoscope system in North America
and the Caribbean is performed by Econolite Control Products, Inc. of Anaheim,
California pursuant to a Manufacturing, Distributing and Technology License
Agreement (the "Econolite Agreement"). Pursuant to that agreement, ISS has
appointed Econolite as its licensee to make, have made, use, license, distribute
and sell the Autoscope system and related technology in North American and the
Caribbean. Econolite has agreed to use its best efforts to promote the sale of
the Autoscope system and not to distribute products that compete with the
Autoscope system. Econolite pays to ISS a royalty on all revenue derived by
Econolite from sales of the Autoscope system. Econolite has over 62 years of
experience in the traditional traffic intersection control industry.
ISS may terminate the Econolite Agreement if certain minimum sales
levels are not met. The minimum sales levels that must be reached is $4,000,000
for 1996 and each year thereafter. The initial term of the Econolite Agreement
is fifteen years, ending in 2007, automatically renewable thereafter for
additional one year periods unless terminated by either party on sixty days
notice prior to the end of the initial term or any extension term. The Agreement
may be terminated by ISS if Econolite shall have (i) been declared insolvent or
bankrupt, (ii) violated the confidentiality provisions in the Econolite
Agreement, (iii) failed to pay the specified royalties under the Econolite
Agreement , (iv) failed to meet the minimum sales requirements under the
Econolite Agreement, or (v) breached a material term or condition of the
agreement and fails to cure such condition within 60 days of receiving notice of
the breach. The Agreement may be terminated by Econolite if ISS shall have (i)
been declared insolvent or bankrupt, (ii) violated the confidentiality
provisions in the Econolite Agreement, (iii) failed to maintain the patent
rights on the licensed products in accordance with the terms of the Econolite
Agreement, or (iv) breached a material term or condition of the agreement and
fails to cure such condition within 60 days of receiving notice of the breach.
The Econolite Agreement grants a license to Econolite that encompasses
any knowledge, information, know-how, software or devices relating to vehicle
detection, whether patentable or not, that is licensed to ISS pursuant to the
License Agreement with the University of Minnesota described below under
"Patents and Proprietary Rights," and any knowledge, information, know-how,
software or devices relating to vehicle detection owned or licensable by ISS.
Econolite has a first negotiation right for extension of the license granted in
the Econolite Agreement to include rights in countries outside North America and
the Caribbean. Currently, Econolite has agreed to manufacture, on a
non-exclusive basis, the Autoscope systems sold outside North America and the
Caribbean. Econolite has agreed to indemnify and hold harmless ISS from and
against any losses, damages or expenses arising out of the products made or sold
by Econolite pursuant to the Econolite Agreement. All marketing decisions
regarding the products covered by the Econolite Agreement are in the sole
discretion of Econolite.
Econolite provides a one year warranty on the current Autoscope system
and must provide all service required under such warranty. Some of the component
hardware incorporated in the Autoscope system, such as the supervisor computer
and the video monitor, are standard computer hardware products that are
available from multiple sources and can be purchased by Econolite for use in the
system. Other parts, such as the cameras and the microprocessor are manufactured
to certain specifications by third party vendors for integration into the
system. While current vendors of components for the Autoscope system are meeting
Econolite's and the Company's quality and performance expectations, the Company
believes alternative component vendors are available should the necessity arise.
Nevertheless, shortages of parts or the need to change vendors could adversely
affect Econolite's ability to manufacture the Autoscope system, which could, in
turn, adversely affect the Company's business.
Econolite employs various quality control procedures in manufacturing
and assembling the Autoscope system, including a nine step test procedure upon
final assembly of the Autoscope system. The test procedures include individual
testing of components and electrical specifications, as well as an overall
system operation test. Econolite uses a "total quality management" approach to
quality control and employs a quality assurance manager who is responsible for
implementing and maintaining total quality management at Econolite. In addition,
Econolite is in the process of attempting to comply with ISO 9000, a set of
international standards used for quality assurance. The Company has not
experienced any quality control problems with Econolite's manufacturing and
assembly of the Autoscope system.
The Company continues to strengthen its sales and marketing effort by
investing in promotional activities to support Econolite's marketing efforts in
North America and the Caribbean. As part of this effort, ISS and Econolite have
an integrated marketing communications program. This program attempts to
increase market awareness of the Company's technology and its product. ISS and
Econolite have engaged in directed mailings of Autoscope brochures, manuals and
videos to potential customers.
ISS is establishing a direct sales and marketing capability in
countries outside North America and the Caribbean. The Company currently has
distributor agreements with twenty-four distributors covering foreign countries
primarily in Europe and southeast Asia. Under the distributor agreements each
distributor agrees to use its best efforts to market and sell the Autoscope
system and to purchase one demonstration system of the Autoscope for use in its
marketing efforts.
The Company employs a business development director to manage and
expand the distribution network in Europe, Asia Pacific and Latin America.
PATENTS AND PROPRIETARY RIGHTS
The Company intends to actively protect its intellectual property
assets and will actively seek, when appropriate, protection for owned or
licensed products and proprietary information by means of U.S. and foreign
patents, trademarks, and contractual arrangements. In addition, the Company
relies upon trade secrets and contractual arrangements to protect certain of its
proprietary information. The Company has a federally registered trademark right
to "Autoscope."
The technology underlying the Autoscope system was initially developed
by Dr. Panos Michalopoulos, Chairman of the Board and Chief Scientific Advisor
of ISS and a Professor at the University of Minnesota, and was further developed
at the University of Minnesota from 1985 to 1991 with involvement by Dr.
Michalopoulos. Additional system developments were funded, in part, by the
Minnesota Department of Transportation and the Federal Highway Administration
from 1985 to 1989. The U.S. patent for certain aspects of the technology
underlying the Autoscope system was issued in 1989 to the University of
Minnesota. The University of Minnesota has filed to perfect related patents in
France, Germany, the United Kingdom, and Japan. Dr. Michalopoulos has assigned
all of his rights in such technology to the Company or to the University of
Minnesota. The Company entered into a License Agreement (the "License
Agreement") with the University of Minnesota in 1991.
Under the License Agreement, the Company has been granted an exclusive,
worldwide license, with a right to grant sublicenses, to make, have made, use,
sell, and lease any product that incorporates knowledge, information, know-how,
software and devices, whether patentable or not, in the possession of the
University and related to a video vehicle detection system developed by the
University of Minnesota, solely or jointly with the Company, including certain
improvements made to such technology. In exchange for that license, the Company
pays to the University of Minnesota (i) a royalty of 3% of the net sales of
licensed products, (ii) 50% of all site license revenue, and (iii) 10% of all
sublicensing revenue. For purposes of the License Agreement, net sales means the
gross amount collected for sales, leases or licenses of licensed products.
Licensed products include any manufactured product that incorporates the
technology or improvements covered by the License Agreement. Site license
revenue equals all revenue collected by the Company and specifically allocable
to the Company for granting a license to use the licensed products at a specific
location or by a specific user. Sublicensing revenue equals all revenue
collected by the Company from parties to whom the Company grants sublicense
rights to make or sell the licensed products. The University of Minnesota has
retained a nonexclusive and nontransferable right to use the licensed technology
for educational and research purposes. The License Agreement terminates at the
termination of the patent covering the technology. The University of Minnesota
may terminate the License Agreement if the royalties due thereunder are unpaid,
if there is a material breach of the agreement by the Company or if the Company
fails to use best efforts to effect commercial sales of the licensed products.
The Company has agreed to indemnify the University of Minnesota against all
liabilities or losses arising from (i) manufacture, use, lease or sale of a
licensed product by the Company or a sublicensee of the Company, or (ii) a third
party's use of a licensed product purchased from the Company or a sublicensee of
the Company or (iii) a third party's manufacture of a licensed product at the
request of the Company.
The Company has sublicensed certain of its rights in the Autoscope
technology to Econolite pursuant to the Econolite Agreement. See "Marketing and
Manufacturing" above.
The Company's technology is dependent upon the knowledge, experience,
and skills of its key scientific and technical personnel. To protect its rights
to its proprietary know-how and technology, Company policy requires all
employees and consultants to execute confidentiality agreements that prohibit
the disclosure of confidential information to anyone outside the Company. These
agreements also require disclosure and assignment to the Company of any
discoveries and inventions made by such persons while devoted to Company
activities.
EMPLOYEES
As of March 15, 1997, the Company had twenty-six full time employees,
of which twelve were engaged in research and development; six in product and
customer support; three in sales and marketing; and five in administration,
finance, and human resources. No employee is represented by a union. The Company
believes its employee relations are good.
LIABILITY INSURANCE
Econolite currently maintains $10,000,000 of product liability
insurance, and ISS maintains $1,000,000 of product liability insurance. In
addition, Econolite has agreed to indemnify and hold harmless ISS from and
against any losses, damages, or expenses arising out of the products made or
sold by Econolite pursuant to the Econolite Agreement.
There can be no assurance that the Company or Econolite will be able to obtain
adequate insurance in the future or that claims will not be made in excess of
any insurance coverage obtained.
ITEM 2. DESCRIPTION OF PROPERTY
The Company currently leases approximately 10,000 square feet
of office space in St. Paul, Minnesota. The lease expires in June 1998.
Aggregate annual lease payments under the lease are approximately $132,000. The
Company believes its facilities are sufficient for its current needs.
ITEM 3. LEGAL PROCEEDINGS
During 1996, the Company was not involved in any legal
proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders
during the fourth quarter of the calendar year covered by this report.
PART II
ITEM 5. MARKET PRICE OF COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
MARKET INFORMATION
Price Range of Common Stock on page 20 of the annual shareholder report
for the year ended December 31, 1996, is incorporated herein by reference.
HOLDERS
As of March 18, 1997, the Company had approximately 41 holders of
record of its Common Stock and approximately 900 shareholders.
DIVIDENDS
The Company has never declared or paid a cash dividend on its Common
Stock. The Company currently intends to retain earnings for use in the operation
and expansion of its business; and therefore, it does not anticipate paying any
dividends in the foreseeable future.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Management's Discussion and Analysis of Financial Condition
and Results of Operations on pages 8 and 9 of the annual shareholders report for
the year ended December 31, 1996 are incorporated herein by reference.
ITEM 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The report of independent auditors and financial statements
included on pages 10 through 19 of the annual shareholders report for the year
ended December 31, 1996 are incorporated herein by reference.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
<PAGE>
PART III
ITEM 9. DIRECTORS AND OFFICERS OF THE REGISTRANT
The information contained on pages 2 and 3 of Image Sensing
Systems, Inc.'s Proxy Statement dated March 25, 1997, with respect to directors
and executive officers of the Company, is incorporated herein by reference in
response to this item.
ITEM 10. EXECUTIVE COMPENSATION
The information contained on pages 4 and 5 of Image Sensing
Systems, Inc.'s Proxy Statement dated March 25, 1997, with respect to executive
compensation and transactions, is incorporated herein by reference in response
to this item.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information contained on pages 6 and 7 of Image Sensing
Systems, Inc.'s Proxy Statement dated March 25, 1997, with respect to security
ownership or certain beneficial owners and management, is incorporated herein by
reference in response to this item.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None.
PART III
ITEM 13. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) LIST OF DOCUMENTS FILED AS PART OF THE REPORT:
1. Financial statements referenced in Item 7
2. Exhibits:
EXHIBIT NO. DESCRIPTION
*3.1 Restated Articles of Incorporation of the Company
*3.3 Bylaws of the Company
*4.1 Specimen form of the Company's Common Stock
Certificate
*4.2 1995 Long-Term Incentive and Stock Option Plan and
form of Option Agreement
*10.1 Manufacturing Distributing and Technology License
Agreement dated June 11, 1991, as amended December
15, 1992, between Econolite Control Products, Inc.
and the Company
*10.2 License Agreement dated June 10, 1991 between the
University of Minnesota and the Company
*10.3 Form of Distributor Agreement
*10.4 Employment Agreement dated January 3, 1995 between
the Company and Panos G. Michalopoulos
*10.5 Employment Agreement dated January 3, 1995 between
the Company and Spiro G. Voglis
*10.6 Commercial Note with Norwest Bank Minnesota, N.A.
dated February 16, 1995
*10.7 Form of Data Exchange and Disclosure Agreement
*10.8 Lease Agreement dated January 14, 1994 between the
Company and Bradley Real Estate Trust
*10.9 Assignment from Panos G. Michalopoulos to the Company
dated January 19, 1985
10.10 Office Lease Amendment I dated June 8, 1995, by and
between Spruce Tree Centre L.L.P. and Image Sensing
Systems, Inc.
10.11 Second Lease Amendment dated October 13, 1995, by and
between Spruce Tree Centre L.L.P. and Image Sensing
Systems, Inc.
10.12 Extension of Dr. Spiro Voglis's employment agreement.
10.13 Consulting Agreement dated February 24, 1997, by and
between Arthur J. Bourgeois and Image Sensing
Systems, Inc.
13.1 Annual Report of the Company for the year ended
December 31, 1996, certain portions of which are
incorporated by reference into this Annual Report on
Form 10-K.
23.1 Consent of Ernst & Young LLP
27 Financial data schedule
(b) REPORTS ON FORM 8-K FILED DURING FOURTH QUARTER OF
1996: NONE
* Incorporated by reference to the Company's registration statement on
Form SB-2 (Registration No. 90298C) filed with the Commission on March
14, 1995.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, Image Sensing Systems, Inc. has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized:
IMAGE SENSING SYSTEMS, INC.
___________________________________________ Date: March 25, 1997
By: Spiro G. Voglis, President and CEO
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated. Each person whose
signature to this report on Form 10-KSB appears below hereby constitutes and
appoints Spiro G. Voglis and Arthur J. Bourgeois, and each of them, as his or
her true and lawful attorney-in-fact and agent, with full power of substitution,
to sign on his or her behalf individually and in the capacity stated below and
to perform any acts necessary to be done in order to file all amendments to this
report on Form 10-KSB, and any and all instruments or documents filed as part of
or in connections with this report on Form 10-KSB or the amendments thereto and
each of the undersigned does hereby ratify and confirm all that said
attorney-in-fact and agent, or his substitutes, shall do or cause to be done by
virtue hereof.
Date: March , 1997
By: Panos G. Michalopoulos
Chairman of the Board & Director
Date: March , 1997
By: Spiro G. Voglis
President & Director
(Chief Executive Officer)
Date: March , 1997
By: Richard P. Braun
Director
Date: March , 1997
By: Richard C. Magnuson
Director
Date: March , 1997
By: James Murdakes
Director
Date: March , 1997
By: C. (Dino) Xykis
Director
Date: March , 1997
By: Arthur J. Bourgeois
Chief Financial Officer
Exhibit 10.10
AMENDMENT I
TO OFFICE LEASE AGREEMENT BY AND BETWEEN
Spruce Tree Centre L.L.P.
and
Image Sensing Systems, Inc.
On this 8th day of June 1995 and in consideration of mutual promises and
performances by the parties Spruce Tree Centre L.L.P. (Lessor), successor to
Bradley Real Estate Trust, and Image Sensing Systems, Inc. (Tenant), the parties
hereby amend the Office Lease Agreement (Lease) dated January 14, 1994 between
Lessor and Tenant for Premises at Spruce Tree Centre, 1600 University Avenue,
St. Paul, Minnesota as follows:
1. Page 1, Paragraph 1 of the Lease, entitled Premises and Terms, is
amended to provide that the Premises shall be changed from Suite 500,
containing 5,210 rentable square feet, to Suites 500 and 420,
containing 5,210 rentable square feet and 2,731 rentable square feet
respectively. Page 1, Paragraph 1 of the Lease is amended to provide
that the ten-n of the lease shall be three (3) years commencing on July
1, 1995 and ending on June 30, 1998.
2. Paragraph 3A of the Lease, entitled Base Rent, is amended to provide
that the Base Rent shall include 5,210 rentable square feet in Suite
500 and 2,731 rentable square feet in Suite 420. Accordingly, this new
Base Rent shall be $100,612.47 annually.
3. Lessor shall pay for improvements to Suite 500 in an amount not to
exceed $15,000.00 and to Suite 420 not to exceed $19,800.00 according
to the description and specifications set forth in the
mutually-approved plans attached as Exhibits 1 & 2 and made parts
hereof.
As said Exhibits I & 2 indicate total improvement costs to be
$17,412.00 for Suite 500 and $21,782.00 for Suite 420, Tenant is
responsible for the amounts exceeding Lessor's portion of improvement
costs as defined above.
4. Lessor shall deliver Suite 420 to Tenant on or about July 1, 1995,
after Lessor notifies Tenant that Suite 420 is completed and ready for
occupancy. Tenant shall take possession within 48 hours of this
notification. The revised Base Rent, as defined above in Article 2,
shall commence from the possession of Suite 420 or July 1, 1995,
whichever is later.
5. Should the Tenant refuse to take possession of Suite 420 under the
terms and conditions of this Lease Amendment, such refusal shall be
considered an Event of Default under the Lease and Lessor shall have
all available legal remedies for the legal enforcement of the Lease and
this Lease Amendment including, but not limited to, specific
performance and damages under the Lease as amended.
6. Tenant shall have first right of refusal for Suite 505, containing
2,815 rentable square feet, Suite 510, containing 1,936 rentable square
feet; the vacant bay east of Suite 420 containing 1,050 useable/1,027.5
rentable square feet; and the 94 square feet (useable) adjacent to
Suite 420 in the plans attached as Exhibit 3 and made a part hereof.
Upon written notice, Image Sensing Systems, Inc. shall have ten (10)
business days to advise Spruce Tree Centre L.L.P. of its intention to
lease Suite 505, Suite 5 1 0, the vacant bay east of Suite 420 and/or
the 96 square feet adjacent to Suite 420.
7. Tenant may, at its option, substitute Suite 505 for Suite 420 on or
before December 1, 1995, should Suite 505 become available. Base Rent
for this purpose shall be $12.67 per rentable square foot. An
improvement allowance for this purpose, provided by Lessor, shall be
$8.00 per useable square foot for either Suite 420 or Suite 505.
8. To the extent not specifically amended or modified above, all terms and
conditions of the Lease shall remain in full force and effect.
The Exhibits attached to this Lease Amendment (Exhibit 1, consisting of
three pages; Exhibit 2, consisting of three pages; and Exhibit 3,
consisting of two pages) are hereby declared to be part of this Lease
Amendment to the same extent and in the same manner as if the
provisions thereof were actually embodied in this Lease Amendment.
IN WITNESS WHEREOF, the Lessor and Tenant have duly signed and sealed
these presents the day and year first hereinbefore written.
LESSOR:
Spruce Tree Centre L.L.P.
By: /s/ Michael A. Koch
Its: Agent
TENANT:
Image Sensing Systems, Inc.
By: signature illegible
Its: Vice President
By: ________________________
Its: _______________________
Exhibit 10.11
SECOND AMENDMENT TO OFFICE LEASE AGREEMENT
BY AND BETWEEN
SPRUCE TREE CENTRE, L.L.P. (LESSOR)
AND
IMAGE SENSING SYSTEMS, INC. (LESSEE)
Whereas, it is the desire of Lessee to add to its space in the leased
premises identified as Suite 420 at Spruce Tree Centre and,
Whereas, it is the desire of the Lessor to promote such expansion,
Now Therefore, the parties agree that:
The additional premises of 2018 rentable square feet, as identified in Exhibit
1, herein, shall become part of Suite 420, Spruce Tree Centre and the rental for
such expansion space shall be $13.25 per rentable square foot, which shall be
payable in the same manner and upon the same terms as set forth in the lease
dated January 14, 1994 between Lessee and Bradley Real Estate Trust, predecessor
of the present Lessor and as amended by Amendment 41 dated June 8, 1995 by and
between Lessor and Lessee. The term of this Amendment shall be from November 1,
1995 and ending June 30, 1998.
The addition of the 2018 rentable square feet at $13.25 per square foot, per
annum adds to the annual base rent of Suites 420 and 500 in the amount of
$26,738.50 Accordingly, the new base rent for Suites 420 and 500 shall be
$127,350.97. It is acknowledged that the existing 2,731 rentable square feet in
Suite 420 and 5210 rentable square feet in Suite 500 are under the original
lease and Amendment at an annual base rental rate of $100,612.47
Lessor shall pay for improvements within the additional square footage of Suite
420 in amount not to exceed $20,411 according to the description and
specifications set forth in the mutually approved plans attached hereto as
Exhibit I and Exhibit 2 and made a part hereof.
Lessor shall deliver the additional space in 420 to tenant on or about November
1, 1995. Lessor shall notify tenant of the completion of the addition to Suite
420 and its readiness for occupancy. Tenant shall take possession of said
expansion within 48 hours of this notification. The revised annual base rent of
$127,350.97 as outlined above in article II shall commence from the possession
of the addition or November 1, 1995 , whichever is later.
So long as Lessee is not in default under any lease or Amendment, tenant shall
have the first right of refusal for Suite 505 containing 2,815 rentable square
feet; Suite 510 containing 1,936 square feet and the 94 square feet (usable)
adjacent to Suite 420 as identified in the plans attached as Exhibit I and made
a part hereof. This right of first refusal shall be in effect during the term of
this Amendment and may be exercised only to acquire the use of additional space
and not to substitute for space already leased by Lessee. Upon written notice,
Image Sensing System shall have 10 business days to advise Spruce Tree Centre,
L.L.P of its intention to lease Suite 505, Suite 5 1 0 and the 94 square feed
adjacent to Suite 420.
To the extent not specifically amended or modified above, all terms and
conditions of the lease and Amendment I shall remain in full force and effect.
The exhibits attached to tills lea-se Amendment, Exhibit I consisting of 1 page,
Exhibit 2 consisting of 2 pages are hereby declared to be a part of this lease
Amendment to the same extent and in the same manner as if the provisions thereof
were actually embodied in this lease Amendment.
In Witness Whereof, Lessor and tenant have duly signed and sealed this
document on this 13th day of October 1995.
LESSOR
Spruce Tree Centre L.L.P.
By: Michael A. Koch
Its: Agent
TENANT
Image Sensing Systems, Inc.
By: signature illegible
Its: Chief Financial Officer
EXHIBIT 10.12
On August 24, 1996, the Board of Directors of Image Sensing Systems,
Inc. ("The Company") approved the Compensation Committee's recommendation of the
following changes to the terms of employment of Dr. Spiro Voglis, the Company's
Chief Executive Officer and President:
1. Extend Dr. Voglis's current employment agreement by one year to end
December 31, 1998.
2. Beginning January 1, 1998, increase Dr. Voglis's base salary by
$10,000.
3. By extending Voglis employment agreement through 1998, we hereby grant
an option for Dr. Voglis to purchase an additional 16,200 shares of the
Company's common stock on or after January 1, 1999, but no later than
December 31, 1001. The terms and conditions will be as stated in his
current employment agreement, except that the option price is to be the
price of the stock on the day of grant.
4. Modify item 6 (non-compete) in his current employment agreement to be
inclusive of all countries in the world.
5. Grant a non-incentive stock option for 24,000 shares to include vesting
provisions based on previously discussed threshold stock prices.
6. The price of the common stock in item 5 (above) to be the price on the
day of grant.
7. The Board will recommend to the shareholders of the Company that Dr.
Voglis continue as a member of the Board for two years following his
tenure as President and CEO.
8. Dr. Voglis will prepare and present to the Board a Succession Plan no
later than October 1, 1997.
9. The Company will agree to a two year Consulting Agreement with Dr.
Voglis following his tenure as President and CEO with terms to be
agreed upon at that time.
Exhibit 10.13
ARTHUR J. BOURGEOIS
February 24, 1997 1168 Amble Drive
Arden Hills, MN 55112
Office: (612) 349-9513
Home: (612) 636-0725
Dr. Spiro G. Voglis
Image Sensing Systems, Inc.
1600 University Avenue W. Suite 500
St. Paul, Mn. 55104
Dear Spiro:
This letter sets forth my proposal to provide consulting services to Image
Sensing Systems, Inc. for the period March 1, 1997 through February 28, 1998.
As a consultant I will report directly to you and be responsible for the
following:
* internal and external financial reporting
* supervision of all accounting activities
* preparation and filing of quarterly SEC Forms 10-QSB
* preparation and submission of quarterly press releases
announcing quarterly financial results
* preparation of quarterly shareholder reports
* coordination of annual audit
* preparation of annual report to shareholders
* preparation of annual report to SEC on Form 10-QSB
* preparation of annual Proxy
* preparation of annual budget
In exchange for my services, ISS agrees to the following:
1. pay me twelve (12) monthly retainers of $4,500, beginning March 1,
1997, continuing through February 1, 1998 (i.e. $54,000 for the twelve
month period).
2. pay me a cash bonus equal to one month's retainer, provided I have
fulfilled my obligations to ISS through at least February 28, 1998 and
ISS has met its break-even objective for 1997.
3. continue to provide me with an office, phone, fax, parking and all
necessary tools and support that were provided to me as the full-time
CFO of ISS.
If the assigned responsibilities change due to changes in the corporate
structure of ISS or you desire my services over and above the activities listed
above, lSS agrees to negotiate terms of such an additional services separate
from this agreement.
If you agree with the terms of my proposal, please indicate your acceptance
below.
Sincerely yours,
/s/ Arthur J. Bourgeois
Arthur J. Bourgeois
Accepted on behalf of Image Sensing Systems, Inc.
/s/ S.G. Voglis
Dr. Spiro G. Voglis, President and CEO
Date: 2/24/97
MANAGEMENT'S DISCUSSION AND ANALYSIS
The following table sets forth, for the periods indicated, certain statement of
operations data as a percent of revenue:
Year Ended December 31
1996 1995 1994
----- ----- -----
Product sales 19.9% 21.1% 13.7%
Royalties 62.3 69.2 78.3
Consulting and
contract fees 17.8 9.7 8.0
----- ----- -----
Total revenue 100.0 100.0 100.0
Cost of revenue 29.2 30.1 30.2
----- ----- -----
Gross profit 70.8 69.9 69.8
Sales, marketing and
product support 41.4 27.5 10.0
General and
administrative 39.2 44.9 36.1
Research and
development 26.1 22.0 15.1
----- ----- -----
Income (loss) from
operations (35.9) (24.5) 8.6
Net income (loss) (32.5) (15.2) 6.7
Product sales for 1996 increased to $635,000 versus $603,000 in 1995 and
$291,000 in 1994. The increases resulted primarily from sales of more software
to end users in Europe in 1996 compared to 1995 and from sales of more Autoscope
systems to distributors in Europe and Asia Pacific countries in 1995 compared to
1994. Royalty income increased to $1,988,000 in 1996 compared to $1,981,000 in
1995 and $1,669,000 in 1994. The increases were due to increased sales of
Autoscope systems by Econolite Control Products, Inc. (Econolite), our
manufacturing and distribution partner, resulting in increased royalty income.
Sales of Autoscope systems by the Company and Econolite combined totaled 294
units in 1996 compared to 226 units in 1995 and 193 units in 1994. Average
royalty income per system decreased in 1996 compared to 1995 due primarily to
lower pricing of newer models. Consulting and contract fees increased to
$569,000 in 1996 compared to $279,000 in 1995 and $171,000 in 1994. Increases in
1996 and 1995 resulted primarily from a contract with the Jet Propulsion
Laboratory in Pasadena, California which was started in August 1995 and
completed in 1996.
Gross profits were $2,260,000 in 1996, or 70.8% of revenues, versus $2,001,000
or 69.9% of revenues in 1995 and $1,488,000 or 69.8% of revenues in 1994. Gross
margins on product sales were 53.9% of sales in 1996 versus 56.2% in 1995 and
44.7% in 1994. The decrease of gross margins on product sales in 1996 resulted
primarily from sales of more lower priced one-camera units compared to 1995,
while in 1994 more lower priced demonstration systems were sold. The Company has
experienced lower purchase costs for Autoscope systems purchased from Econolite
in both 1996 and 1995 compared to 1994.
Selling, marketing and product support expenses were $1,322,000 in 1996, or
41.4% of revenue compared to $788,000 or 27.5% of revenue in 1995 and $212,000
or 10.0% of revenue in 1994. The increases resulted primarily from adding sales,
marketing and customer support personnel in the second half of 1995 to build
worldwide distribution channels and to support increased product in the field.
General and administrative expenses were $1,252,000 in 1996, or 39.2% of
revenue, compared to $1,286,000 or 44.9% of revenue in 1995 and $770,000 or
36.1% of revenue in 1994. The increase in 1995 resulted primarily from adding
executive and administrative personnel to support increases in sales and
employment, provide investor relations and adding office space.
Research and development expenses were $834,000 or 26.1% of revenue in 1996,
compared to $630,000 or 22.0% of revenue in 1995 and $322,000 or 15.1% of
revenue in 1994. The increase in 1996 was due primarily from added technical
staff and contracted engineering costs paid for new product development compared
to 1995. The increase in 1995 over 1994 resulted primarily from adding technical
staff after the public offering in May 1995.
The Company incurred a net loss of $1,038,000 in 1996 compared to $436,000 in
1995 and a net profit of $143,000 in 1994. The increase in losses in 1996 over
1995 and the loss in 1995 versus a profit in 1994 resulted primarily from adding
more employees in 1995 after the public offering to support immediate corporate
objectives. The resulting increased operating costs in 1996 and 1995 more than
offset added gross profit from increased revenues.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1996 the Company had $1,694,000 in cash and cash equivalents
compared to $2,564,000 at December 31, 1995. The Company had working capital of
$2,062,000 and a current ratio of 4.5 to 1 compared to working capital of
$3,073,000 and a current ratio of 5.2 to 1 at the end of 1995. The decrease in
liquidity in 1996 was due primarily to losses from operations and purchases of
property and equipment. Net cash used in operating activities was $728,000 in
1996 compared to $727,000 in 1995 and cash provided from operations of $370,000
in 1994. The small increase in cash used in operating activities in 1996 over
1995 was primarily due to a tax refund from an operating loss carryback and a
prepaid contract fee which offset the increased net loss. The decrease in cash
provided from operating activities in 1995 compared to 1994 resulted primarily
from the net loss in 1995 and increased receivables at year end. Net cash used
in investing activities was $142,000 in 1996, $551,000 in 1995 and $108,000 in
1994 and represents primarily investments in computer and other technical
equipment and leasehold improvements. There was no financing activity in 1996.
In 1995 there was net cash provided from financing activity of $3,829,000,
primarily from the initial public offering, compared to net cash used in
financing activities of $310,000 in 1994. The use of cash in 1994 resulted
primarily from reducing bank and other notes payable.
The Company believes that cash and cash equivalents on hand at December 31, 1996
along with an available revolving line of credit with a bank will satisfy the
Company's projected working capital and other cash requirements through 1997.
<TABLE>
<CAPTION>
BALANCE SHEETS
December 31 1996 1995
----------- -----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 1,694,000 $ 2,564,000
Accounts receivable, net of allowance
for returns and doubtful accounts of
$53,000 (1995-$5,000) 772,000 865,000
Refundable income taxes 18,000 173,000
Inventories 70,000 95,000
Prepaid expenses 45,000 74,000
Deferred income taxes 45,000 40,000
----------- -----------
Total current assets 2,644,000 3,811,000
Property and equipment:
Furniture and fixtures 140,000 163,000
Leasehold improvements 101,000 57,000
Equipment 703,000 589,000
----------- -----------
944,000 809,000
Accumulated depreciation (330,000) (173,000)
----------- -----------
614,000 636,000
----------- -----------
TOTAL ASSETS $ 3,258,000 $ 4,447,000
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 296,000 $ 494,000
Accrued compensation 159,000 244,000
Prepaid contract service fee 127,000 -
----------- -----------
Total current liabilities 582,000 738,000
Deferred income tax liability 36,000 31,000
Commitments
Shareholders' equity:
Preferred stock, $.01 par value:
Authorized shares - 2,000,000
Issued and outstanding - none _ _
Common stock, $.01 par value:
Authorized shares - 5,000,000
Issued and outstanding shares - 2,475,000 25,000 25,000
Additional paid-in capital 3,875,000 3,875,000
Retained earnings (deficit) (1,260,000) (222,000)
----------- -----------
Total shareholders' equity 2,640,000 3,678,000
=========== ===========
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 3,258,000 $ 4,447,000
=========== ===========
</TABLE>
See accompanying notes.
STATEMENT OF OPERATIONS
Year Ended December 31 1996 1995
----------- -----------
Revenue:
Product sales $ 635,000 $ 603,000
Royalties 1,988,000 1,981,000
Consulting and contract fees 569,000 279,000
----------- -----------
3,192,000 2,863,000
Cost of revenue:
Product sales 293,000 264,000
Royalties 227,000 377,000
Consulting and contract fees 412,000 221,000
----------- -----------
932,000 862,000
----------- -----------
Gross profit 2,260,000 2,001,000
Operating expenses:
Selling, marketing and product support 1,322,000 788,000
General and administrative 1,252,000 1,286,000
Research and development 834,000 630,000
----------- -----------
3,408,000 2,704,000
----------- -----------
Loss from operations (1,148,000) (703,000)
Interest income 92,000 112,000
Interest expense - (5,000)
----------- -----------
Loss before income taxes (1,056,000) (596,000)
Income taxes (benefit) (18,000) (160,000)
----------- -----------
Net loss $(1,038,000) $ (436,000)
=========== ===========
Net loss per common share $ (0.42) $ (0.21)
=========== ===========
Weighted average number of
common shares outstanding 2,475,000 2,114,000
=========== ===========
See accompanying notes.
<TABLE>
<CAPTION>
STATEMENTS OF CASH FLOWS
Year Ended December 31 1996 1995
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Operating activities:
Net loss $(1,038,000) $ (436,000)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 164,000 86,000
Deferred income taxes (6,000)
Changes in operating assets and liabilities:
Receivables 248,000 (724,000)
Inventories 25,000 (30,000)
Prepaid expenses 29,000 (60,000)
Accounts payable (198,000) 329,000
Accrued expenses (85,000) 114,000
Prepaid contract service fee 127,000
----------- -----------
Net cash used in operating activities (728,000) (727,000)
Investing activities:
Purchases of property and equipment (142,000) (551,000)
----------- -----------
Net cash used in investing activities (142,000) (551,000)
Financing activities:
Proceeds from sale of common stock 3,869,000
Proceeds from bank borrowings (40,000)
----------- -----------
Net cash provided by financing activities 3,829,000
----------- -----------
Increase (decrease) in cash (870,000) 2,551,000
Cash and cash equivalents at beginning of year 2,564,000 13,000
----------- -----------
Cash and cash equivalents at end of year $ 1,694,000 $ 2,564,000
----------- -----------
</TABLE>
See accompanying notes.
<TABLE>
<CAPTION>
STATEMENT OF SHAREHOLDERS' EQUITY
Additional Retained
Shares Common Paid-In Earnings
Description Issued Stock Capital (Deficit)
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Balance at December 31, 1994 1,485,000 $ 15,000 $ 16,000 $ 214,000
Common stock issued for cash in
initial public offering, net of
offering expenses of $364,000 990,000 10,000 3,859,000
Net loss
(436,000)
----------- ----------- ----------- -----------
Balance at December 31, 1995 2,475,000 25,000 3,875,000 (222,000)
Net loss (1,038,000)
----------- ----------- ----------- -----------
Balance at December 31, 1996 2,475,000 $ 25,000 $ 3,875,000 $(1,260,000)
========= =========== =========== ===========
</TABLE>
See accompanying notes
NOTES TO FINANCIAL STATEMENTS
NOTE 1: SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
The Company develops and markets video image processing technology and products
for use in advanced traffic management systems and traffic data collection. The
Company sells its product primarily to foreign distributors of its product and
receives a royalty for sales made by a sublicensee to North American
distributors. The Company also provides technical and marketing expertise in
image processing, hardware and software design and traffic management and
control. The Company's products are used primarily by governmental entities.
REVENUE RECOGNITION
Revenue from product sales and royalties from the sale of products by a
sublicensee are recorded upon shipment. Consulting and contract fees are
recorded as earned.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with a maturity of three
months or less when purchased to be cash equivalents. Investments classified as
cash equivalents consist of commercial paper. Market value of these investments
approximates cost at December 31, 1996 and 1995.
INVENTORIES
Inventories are primarily finished goods and are valued at the lower of cost or
market on the first-in, first-out (FIFO) method.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is computed by the
straight-line method over a three to seven-year period for financial reporting
purposes and by accelerated methods for income tax purposes.
INCOME TAXES
Income taxes are accounted for under the liability method. Deferred income taxes
reflect the effects of temporary differences between the carrying amounts of
assets and liabilities for financial reporting purposes and amounts used for
income tax purposes.
STOCK-BASED COMPENSATION
The Company follows Accounting Principles Board Opinion No. 25, Accounting for
Stock Issued to Employees ("APB 25"), and related interpretations in accounting
for its stock options. Under APB 25, when the exercise price of stock options
equals the market price of the underlying stock on the date of grant, no
compensation expense is recognized.
In October 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation
("Statement 123"). The Company adopted the disclosure only provisions of
Statement 123. Accordingly, the Company has made pro forma disclosures of what
net loss and net loss per share would have been had the provisions of Statement
123 been applied to the Company's stock options.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from the estimates.
ACCOUNTING FOR IMPAIRMENT OF LONG-LIVED ASSETS
The Company records losses on long-lived assets used in operations when
indicators of impairment are present and the undiscounted cash flows estimated
to be generated by those assets are less than the assets' carrying amount.
RESEARCH AND DEVELOPMENT
Research and development costs are charged to operations in the year incurred.
NET LOSS PER COMMON SHARE
Net loss per common share is computed using the weighted average number of
common shares outstanding during the periods presented. Common equivalent shares
from stock options and warrants are excluded from the computation as their
effect is antidilutive.
NOTE 2: LINE OF CREDIT
The Company has a credit agreement which provides up to $500,000 in short-term
borrowings at 1.25% over the prime rate (9.50% at December 31, 1996). The
agreement limits the amount of short-term borrowings to 75% of eligible
receivables. Substantially all assets are pledged as collateral on the
borrowings and up to $250,000 in borrowings are guaranteed by the majority
shareholder of the Company. The credit agreement further includes covenants
which relate to certain financial statement ratios and restrictions. As of
December 31, 1996, the Company had no outstanding borrowings.
Interest paid amounted to $0 in 1996 and $5,000 in 1995.
NOTE 3: INCOME TAXES
Income tax benefit consists of:
Year Ended December 31 1996 1995
--------- ---------
Current tax benefit
Federal $ (18,000) $(154,000)
Deferred (6,000)
--------- ---------
$ (18,000) $(160,000)
========= =========
Deferred income taxes reflect the net tax effect of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred tax assets and liabilities are as follows:
December 31 1996 1995
-------- --------
Deferred tax assets:
Accounts receivable allowances $ 19,000 $
Research and development tax credits 63,000 25,000
Accrued compensation 15,000 40,000
Warranty reserve 9,000
Prepaid contract service fee 47,000
Net operating loss carryforward 255,000
-------- --------
408,000 65,000
Deferred tax liabilities:
Tax depreciation in excess of book 36,000 $ 31,000
-------- --------
Net deferred tax assets 372,000 34,000
Less valuation allowances 363,000 25,000
-------- --------
Net deferred taxes $ 9,000 $ 9,000
======== ========
The Company has a net operating loss carryforward of approximately $773,000 and
a research and development tax credit carryforward of approximately $63,000
which both expire in 2011. Cash paid for income taxes amounted to $300 in 1996
and $19,000 in 1995.
A reconciliation of income tax benefit to the statutory federal rate is as
follows:
Year Ended December 31 1996 1995
--------- ---------
Federal benefit at statutory rate $(359,000) $(203,000)
Valuation allowance 338,000 25,000
Effect of graduated tax rates 14,000
Other 3,000 4,000
--------- ---------
Income tax benefit $ (18,000) $(160,000)
========= =========
Effective tax rate 1.7% 26.8%
========= =========
NOTE 4: LEASE COMMITMENT
The Company rents office space under an operating lease agreement expiring in
June 1998. The lease provides for monthly payments of $11,000 and the Company is
responsible for its proportionate share of operating expenses which exceed a
base rent factor. Rent expense amounted to $150,000 in 1996 and $104,000 in
1995.
At December 31, 1996, future minimum annual lease payments are as follows:
Year ending December 31:
1997 $ 132,000
1998 68,000
----------
$ 200,000
==========
NOTE 5: COMMON STOCK
In May and June 1995, the Company sold 990,000 shares of common stock at an
offering price of $4.75 per share. The Company received $3,869,000 after
deducting offering costs and discounts associated with the offering. In
connection with the offering, the Company issued warrants to the underwriter to
purchase an additional 90,000 shares for a period of five years from the
effective date of the Registration Statement. The exercise price for the
warrants is $5.70 per share.
NOTE 6: LICENSING
The U.S. patent for certain aspects of the technology underlying the Company's
Autoscope system was issued in 1989 to the University of Minnesota . The Company
has an exclusive worldwide license from the University of Minnesota for that
technology and pays royalties to the University of Minnesota in exchange for
such license. The Company also had a licensing agreement with Hughes Missile
Systems Company (Hughes) that expired December 31, 1995 that granted to the
Company a license in certain proprietary technology of Hughes relating to
sensing and image processing. Royalty expense under these agreements was
$227,000 and -0-, respectively, in 1996 and $224,000 and $153,000, respectively,
in 1995.
The Company has sublicensed the right to manufacture and market the Autoscope
technology in North America and the Caribbean to Econolite Control Products,
Inc., of Anaheim, California (Econolite) and receives royalties from Econolite
on sales of the Autoscope system in those territories. Econolite also
manufactures the Autoscope system on a non-exclusive basis for direct sales by
the Company outside of North America and the Caribbean. The Company recognized
royalty income of $1,988,000 in 1996 and $1,981,000 in 1995 from this agreement.
Accounts receivable from Econolite were $768,000 and $597,000 at December 31,
1996 and 1995, respectively.
NOTE 7: EXPORT SALES
Product sales to foreign customers were $500,000 in 1996 and $488,000 in 1995.
NOTE 8: RETIREMENT PLAN
Substantially all employees of the Company may participate in a qualified
defined contribution 401(k) plan in which participants may elect to have a
specified portion of their salary contributed to the plan. The Company may make
contributions to the plan. Company discretionary contributions totaled $41,000
in 1996 and $19,000 in 1995.
NOTE 9: EMPLOYMENT AGREEMENTS
The Company has employment agreements with two executive officers of the
Company. The agreements provide for minimum salary levels, incentive bonuses
which are payable if specified management goals are met, and stock options. In
addition, the agreements provide for severance pay in the event of involuntary
termination or termination resulting from a sale, acquisition or merger of the
Company. The maximum severance for the two executive officers under such
agreements totals $160,000. The agreements became effective January 1, 1995 and
expire within five years.
NOTE 10: STOCK OPTIONS
In February 1995, the Company adopted the 1995 Long-Term Inventive and Stock
Option Plan (the 1995 Plan), which provides for the granting of incentive (ISO)
and non-incentive (NSO) stock options, stock appreciation rights, restricted
stock awards and performance awards to officers, directors, employees,
consultants and independent contractors of the Company and its subsidiaries. In
addition, the Board of Directors granted options outside of the 1995 Plan (the
Non-Plan) in 1995 and 1996. The following table summarizes all stock option
activity.
<TABLE>
<CAPTION>
Weighted Average
Options Plan Options Non-Plan Exercise
Available Outstanding Options Price
for Grant ISO NSO Outstanding Per Share
--------- --- --- ----------- ---------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1994 - - - -
Reserved for options under Plan 220,000
Granted (130,350) 112,350 18,000 108,000 $ 4.75
-------- -------- -------- --------
Balance at December 31, 1995 89,650 112,350 18,000 108,000 4.75
Granted (109,250) 109,250 48,200 3.65
Canceled 21,500 (21,500) (8,000) 4.32
-------- -------- -------- --------
Balance at December 31, 1996 1,900 200,100 18,000 148,200 4.31
======== ======== ======== ========
</TABLE>
Exercise prices for options outstanding as of December 31, 1996 ranged from
$3.00 to $4.75. Options under the 1995 Plan and Non-Plan expire at various dates
through 2001. At December 31, 1996 there are 89,487 options exercisable at a
weighted average exercise price of $4.30. The weighted average fair value of
options granted during 1996 and 1995 was $3.00 and $2.92, respectively.
Pro forma information regarding net loss and net loss per share is required by
Statement 123, and has been determined as if the Company had accounted for its
employee stock options under the fair value method of Statement 123. The fair
value for these options was estimated at the date of grant using the
Black-Scholes option pricing model with the following weighted-average
assumptions for 1996 and 1995, respectively: risk-free interest rates ranging
from 5.8 to 6.2%; volatility factor of the expected market price of the
Company's common stock of 1.10 and a weighted-average expected life of the
option of four years.
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferrable. In addition, option valuation models require the input of highly
subjective assumptions. Because the Company's employee stock options have
characteristics significantly different from those of traded options, and
because changes in the subjective input assumptions can materially affect the
fair value estimate, in management's opinion, the existing models do not
necessarily provide a reliable single measure of the fair value of its employee
stock options.
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the options' vesting period. The Company's pro
forma information is as follows:
1996 1995
------------ ----------
Pro forma net loss $ 1,230,000 $ 549,000
Pro forma net loss per common share $ .50 $ .26
REPORT OF
INDEPENDENT AUDITORS
Shareholders and Board of Directors
Image Sensing Systems, Inc.
We have audited the accompanying balance sheets of Image Sensing Systems, Inc.
as of December 31, 1996 and 1995, and the related statements of operations,
shareholders' equity and cash flows for the years then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with 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 Sensing Systems, Inc. at
December 31, 1996 and 1995, and the results of its operations and its cash flows
for the years then ended in conformity with generally accepted accounting
principles.
/s/ ERNST & YOUNG LLP
Minneapolis, Minnesota
February 10, 1997
CORPORATE
INFORMATION
DIRECTORS AND OFFICERS
Panos G. Michalopoulos Chairman
Spiro G. Voglis President, Chief Executive Officer,
Secretary and Director
Richard P. Braun# Director
Richard C. Magnuson* Director
James Murdakes# Director
C. (Dino) Xykis*# Director
Arthur J. Bourgeois Chief Financial Officer and Treasurer
* Member of audit committee.
# Member of compensation committee.
ANNUAL SHAREHOLDERS' MEETING
The annual meeting of the shareholders will be held on May 12, 1997 at 3:30 P.M.
CDT at the Crowne Plaza Northstar Hotel, Minneapolis, MN.
LEGAL COUNSEL
Dorsey & Whitney, P.L.L.P.
INDEPENDENT AUDITORS
Ernst & Young LLP
STOCK TRANSFER AGENT
Norwest Bank Minnesota, N.A.
A copy of Form 10-KSB, filed with the Securities and Exchange Commission, may be
obtained without charge upon written request to Arthur J. Bourgeois, Image
Sensing Systems, Inc., St. Paul, Minnesota.
CORPORATE HEADQUARTERS
500 Spruce Tree Centre
1600 University Avenue West
St. Paul, Minnesota 55104-3825 USA
Telephone: 612-603-7700
www.imagesensing.com
PRICE RANGE OF COMMON STOCK
The Company's common stock trades on The Nasdaq Small Cap Market tier of The
Nasdaq Stock Market under the symbol ISNS. The table below presents the range of
high and low trading prices for the Company's common stock from initial trading
in May 1995 through December 31, 1996.
1996 1995
QUARTER HIGH LOW HIGH LOW
- --------------------------------------------------------------------------------
First $ 4.81 $ 2.75
Second 6.00 2.81 $ 6.50 $ 4.75
Third 5.38 3.00 6.38 4.88
Fourth 4.38 2.00 5.63 4.25
Exhibit 23
Consent of Ernst & Young LLP
We consent to the incorporation by reference in the Registration Statement (Form
S-8 No. 333-09289) pertaining to the 1995 Long-Term Incentive and Stock Option
Plan of Image Sensing Systems, Inc., of our report dated February 10, 1997, with
respect to the financial statements of Image Sensing Systems, Inc. incorporated
by reference in this Annual Report (Form 10-KSB) for the year ended December 31,
1996.
/s/ Ernst & Young LLP
Minneapolis, Minnesota
March 27, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 1,694,000
<SECURITIES> 0
<RECEIVABLES> 1,765,000
<ALLOWANCES> 53,000
<INVENTORY> 70,000
<CURRENT-ASSETS> 2,644,000
<PP&E> 944,000
<DEPRECIATION> 330,000
<TOTAL-ASSETS> 3,258,000
<CURRENT-LIABILITIES> 582,000
<BONDS> 0
0
0
<COMMON> 25,000
<OTHER-SE> 2,615,000
<TOTAL-LIABILITY-AND-EQUITY> 3,258,000
<SALES> 635,000
<TOTAL-REVENUES> 3,192,000
<CGS> 293,000
<TOTAL-COSTS> 4,340,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (1,056,000)
<INCOME-TAX> (18,000)
<INCOME-CONTINUING> (1,038,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,038,000)
<EPS-PRIMARY> (.42)
<EPS-DILUTED> (.42)
</TABLE>
