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
For the fiscal year ended December 31, 1997
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
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:
COMMON STOCK, $.01 PAR VALUE
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. [X] Yes [ ] 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,
1997 totaled $4,328,000.
Based on the closing bid price at March 26, 1998, the aggregate
market value of the voting stock held by nonaffiliates of the registrant was
$4,163,925.
The number of shares outstanding of the registrant's $.01 par value
common stock, as of March 26, 1998, was 2,478,200 shares.
Transitional Small Business Issuer Format: [ ] Yes [X] No
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the annual shareholders report for the year ended December 31, 1997,
which was filed as a exhibit hereto, are incorporated by reference into Parts I
and II.
Portions of the registrant's Proxy Statement for its May 28, 1998 Annual
Meeting, which will be filed prior to April 30, 1998, are incorporated by
reference in Part III.
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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) Wide Area Video
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, 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 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.
(Econolite) 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.
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-two distributors covering countries primarily in Europe, Southeast Asia,
and South America.
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TECHNOLOGY
The machine vision industry utilizes technology that converts real
world "scenic" information into digital electronic signals for processing by
computer. Machine vision has a number of industrial applications. For example,
machine vision 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 machine vision 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 machine vision 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, and a Microsoft Windows(R)-based graphical
user interface 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. 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 multi-camera systems. 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
<PAGE>
cable, fiber optic network, direct cable connection, or various other wireless
communications equipment. Vehicle detection output can also be 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 Company plans to introduce its new product, Autoscope Solo, in
1998. The Solo, which integrates the video image processor camera and
peripherals, was developed over the last two years and has now been deployed in
a large project in Minneapolis, Minnesota. The testing and hardware/software
integration in this installation are designed to ensure that a reliable, stable
product will be available when the first customer shipments begin, which is
currently scheduled for mid-1998.
The current price to the end user of one Autoscope 2004 system
ranges from $16,000 to $37,000, depending on the options included in the system,
including the hardware configurations and the number of cameras used. The price
range for the new Solo product has not yet been established.
CURRENT APPLICATIONS AND INSTALLATIONS
The current Autoscope system may be used in a number of
applications, primarily for intersections, freeways, tunnels, and traffic count
stations. In addition, the Company has identified additional 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 device that contains a set of sophisticated computer programs, separate from
the vehicle detection system, that uses 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),
<PAGE>
vehicle speed, turning movements, queue lengths, stopped vehicles, vehicle
direction, and vehicle length. 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. 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 260 Autoscope systems in
Oakland County. Some of the first commercially available Autoscope 2003 systems
were deployed in Oakland County and were in operation for over five years before
they were upgraded to the 2004 model.
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. A Company software product, called
ScopeServer, provides communications to all 57 field Autoscope systems and
distributes freeway traffic data every 20 seconds to GDOT. The traffic data is
networked to several locations for managing and
<PAGE>
controlling freeways and archived for design, planning, and simulation purposes.
All of the Autoscope systems in Atlanta are initially being used as traditional
freeway count stations measuring vehicle volumes, time occupancy, and speed.
Based upon feedback from GDOT, the Company is optimistic the Atlanta system will
be expanded in 1998.
In 1997, three major freeway projects were installed in Houston, New
York City, and Seoul, South Korea, using Autoscope systems. In the largest of
these, Houston's I-610 Loop, two separate projects installed more than 57
Autoscope systems processing 156 cameras, bringing the total number of cameras
to 199 and Autoscope processors to 77.
The first commercial installation of the Autoscope 2004 Incident
Detection system was completed in Brooklyn, New York on the Gowanus
Expressway/Prospect Parkway during 1997. This system has approximately 43
cameras processed by eleven Autoscope processors. In operation from May through
October of 1997, officials reported that the system was achieving detection of
80% of the incidents in the Autoscope area covered. They speculate that the 20%
not detected did not cause travel backups and could not, therefore, be detected.
Just as importantly, no false alarms were reported during this period. Every
congestion alarm that was generated was reported to have been related to an
actual incident that had occurred on the roadway. Although the traffic
management equipment was initially intended for traffic management during
reconstruction of these two roadways, officials are so pleased that they plan to
make it a permanent feature in their plans to improve traffic through the
region.
Finally, a similar Autoscope incident detection system was installed
in Seoul, South Korea in 1997. Using 34 cameras and 17 Autoscope processors,
this is the largest deployment of the Company's product overseas.
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 impact of traffic
congestion. The Autoscope system has been deployed 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 of 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 processor.
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.
The Company will receive over $375,000 in 1998-99 from the Road
Commission for Oakland County, Michigan (RCOC) to develop two new Autoscope
applications. The two applications are Surface Street Incident Detection and
Video Compression. These two
<PAGE>
applications will be valuable additions to the functional capabilities of the
Autoscope system product line. The Surface Street Incident Detection application
will enable the Autoscope system to automatically detect incidents, such as
accidents or stalled vehicles, on arterial streets. This application will extend
the Autoscope system's current capability for freeway incident detection to
surface streets with stop-and-go traffic flows. Video compression will allow the
Autoscope system to transmit its full motion video output over low-cost
communication lines, such as telephone or twisted pair copper wires.
In early 1998, ISS also received an order from the ORION project,
Minnesota's ITS MDI (Intelligent Transportation System Model Deployment
Initiative) project, to provide Autoscope Solo for arterial status monitoring
application. Upon completion of the project, ISS intends to have demonstrated a
low-cost, reliable means for detecting traffic status from mid-block locations
for computing arterial link travel time. Mid-block status monitoring is a
desirable function not only in a congested urban megalopolis but also in
second-tier metro areas.
In 1997, ISS completed a project called Transitway, in which it
demonstrated transit bus and bicycle detection and measured their speeds using
an Autoscope system. With increasing urban vehicular congestion, transit
application of the Autoscope system has the potential to become a significant
market for the Company's products.
In 1996 and 1997, 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, improved shadow processing for better detection accuracy,
and a user-friendly on-line help system for operator efficiency. Further
enhancements are planned with additional software releases scheduled for 1998.
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 can the current Autoscope product. In January 1997,
the Company agreed to provide this new product (Solo) to the Minnesota
Department of Transportation (Mn/DOT) for deployment in the Minneapolis central
business district. A prototype unit was installed in June 1997 for initial
acceptance testing with production units and peripheral equipment delivered
beginning in September 1997. Installation of the processors began in October
1997 and was completed in January 1998. Installation of peripheral equipment
required for full system operation is continuing, with initial integration
testing scheduled for March 1998. When fully deployed in 1998, 138 Solo cameras
will monitor 350 lanes of traffic and provide vehicle
<PAGE>
detection for adaptive, real-time traffic signal control.
In late 1997, ISS initiated a new product development effort to
develop a Mini-Hub as a part of the Autoscope Solo product. The Mini-Hub will
enable the low-cost interface of the Autoscope Solo sensor with the local
traffic controller. This new product has the potential of making a high
performance traffic video sensor, such as the Autoscope Solo, cost competitive
with conventional low-cost, but limited capacity, magnetic loops. Availability
of such options will make it feasible for traffic design engineers to switch
from the conventional choice of loops to Autoscope Solo.
The Company's research and development staff presently numbers
nine individuals, of whom seven hold Ph.D. or other advanced degrees. The
Company's research and development expenditures totaled approximately $643,000
in 1997 and $834,000 in 1996. The Company expects its research and development
staff and expenditures to decrease marginally in 1998.
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
principle 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
<PAGE>
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.
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. The Company believes that as market acceptance
increases in such countries, the utilization of the Autoscope system for freeway
applications in such programs may increase. To date the Company has generated
revenues from involvement in an ITS-type program in South Korea.
CUSTOMERS
The customers for Autoscope are primarily federal, state, city, and
county departments of transportation; road commissions; and port, turnpike,
tunnel, 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 continue to increase product and technology awareness within these customer
groups.
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.
<PAGE>
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; Siemens AG,
Munich, Germany; Peek Traffic, Inc., (Peek) Jacksonville, Florida; Nestor, Inc.,
Providence, Rhode Island; and Odetics, Inc., (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 that Electronic
Integrated Systems, Inc. of Toronto, Ontario is developing a system based on
microwave 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 products have undergone more extensive field testing and are 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 (the Econolite Territory) has been 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 the Econolite Territory. 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 ISS a royalty on
all revenue derived by Econolite from sales of the Autoscope system. Econolite
has over 63 years of experience in the traditional traffic intersection control
industry.
ISS may terminate the Econolite Agreement if a minimum annual sales
level of $4,000,000 is not met. The initial term of the Econolite Agreement is
15 years, ending in 2007, automatically renewable thereafter for additional one
year periods unless terminated by either party on 60 days notice prior to the
end of the initial term or any extension term.
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 the
Econolite Territory. Currently, Econolite has agreed to manufacture, on a
non-exclusive basis, the Autoscope systems sold outside the Econolite Territory.
Econolite provides a two-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
<PAGE>
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.
In 1997, ISS and Econolite jointly entered into a Production
Agreement with Cohu, Inc., Electronic Division (Cohu), wherein ISS and Econolite
each granted to Cohu a non-exclusive, non-transferable, non-assignable,
royalty-free right and license to use such of the Company's Intellectual
Property and Econolite Intellectual Property as may be necessary to make,
design, develop, assemble, manufacture, and repair the Solo product solely for
sale to ISS and Econolite. Cohu acquired no right, title, or interest in or to
the Company's Intellectual Property or the Econolite Intellectual Property other
than the foregoing limited license, nor does Cohu have the right or authority to
sublicense all or any portion of the Company's Intellectual Property or
Econolite Intellectual Property.
Cohu agreed to manufacture and sell exclusively to ISS and Econolite
so many units of the Solo product as ISS and Econolite may order from time to
time. ISS and Econolite each agreed to purchase from Cohu all of their
respective requirements for the Solo product for sale to end users in the
Company's and Econolite's territories until such time as ISS and/or Econolite
have purchased 5,000 units in the aggregate. Econolite agreed to continue to
purchase all of its requirements for the Solo product thereafter, subject to
Econolite's option to manufacture the Solo product and the Company's right of
termination. Notwithstanding the foregoing, nothing in the Production Agreement
requires either ISS or Econolite to purchase a minimum number of units from
Cohu.
Cohu warranted to ISS and Econolite that the Solo product sold under
this agreement would be free from defects in material and workmanship, and would
conform to the Solo product specifications for a period of two years from the
date of shipment.
ISS may terminate the Production Agreement, with or without cause,
upon sixty days' prior written notice. Cohu may terminate the Production
Agreement, with or without cause, upon twelve months' prior written notice. In
the event ISS terminates the Production Agreement with cause, Cohu shall
promptly deliver to ISS all tooling specific to production of the Solo product,
and Cohu shall not be entitled to any further payment for development services.
In the event ISS terminates the Production Agreement without cause
as provided in the agreement, ISS will purchase from Cohu all of Cohu's
inventory related solely to the manufacture or sale, including raw materials,
unique parts, work in process, and finished goods up to a maximum purchase price
of $90,000. The purchase price of such inventory would be at Cohu's cost.
The Company continues to strengthen its sales and marketing effort
by investing in promotional activities to support Econolite's marketing efforts
in the Econolite Territory. 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
<PAGE>
and videos to potential customers.
ISS has established a direct sales and marketing capability in
countries outside the Econolite Territory. The Company employs a business
development manager to expand the distribution network in Europe, Asia Pacific
and Latin America. The Company currently has distributor agreements with
twenty-one distributors covering countries primarily in Europe, Southeast Asia,
and South America. 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.
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
<PAGE>
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 13, 1998, the Company had 23 full time employees, of
which 9 were engaged in research and development; 8 in product and customer
support; 2 in sales and marketing; and 4 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 $15,000,000 of product liability
insurance, and ISS maintains $2,000,000 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 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,
and the Company plans on exercising an option to extend the lease
through June 2001. 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 1997, 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.
<PAGE>
PART II
ITEM 5. MARKET PRICE OF COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
MARKET INFORMATION
Price Range of Common Stock on page 21 of the annual shareholder's
report for the year ended December 31, 1997, is incorporated herein
by reference.
HOLDERS
As of March 13, 1998, the Company had approximately 37 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 10 and 11 of the annual shareholders
report for the year ended December 31, 1997 are incorporated herein
by reference.
ITEM 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The report of independent auditors and financial statements included
on pages 12 through 20 of the annual shareholders report for the
year ended December 31, 1997 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 30, 1998, 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 30, 1998, 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 page 6 of Image Sensing Systems, Inc.'s
Proxy Statement dated March 30, 1998, 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.
<PAGE>
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.
10.14 Development Agreement dated July 8, 1997, between the Company,
Cohu, Inc., and Econolite Control Products, Inc.
10.15 Extension of Mr. Bourgeois's consulting agreement.
13 Annual Report of the Company for the year ended December 31,
1997, certain portions of which are incorporated by reference
into this Annual Report on Form 10-KSB.
23 Consent of Ernst & Young LLP
27 Financial data schedule
(b) REPORTS ON FORM 8-K FILED DURING FOURTH QUARTER OF 1997: 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.
+ Incorporated by reference to the Annual Report on Form 10-KSB, filed
March 27, 1996.
<PAGE>
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.
/s/ Spiro G. Voglis Date: March 30, 1998
- --------------------------------------
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.
/s/ Panos G. Michalopoulos Date: March 30, 1998
- ---------------------------------------
By: Panos G. Michalopoulos
Chairman of the Board & Director
/s/ Spiro G. Voglis Date: March 30, 1998
- ---------------------------------------
By: Spiro G. Voglis
President & Director (Chief Executive Officer)
/s/ Richard P. Braun Date: March 30, 1998
- ---------------------------------------
By: Richard P. Braun
Director
/s/ Richard C. Magnuson Date: March 30, 1998
- ---------------------------------------
By: Richard C. Magnuson
Director
/s/ James Murdakes Date: March 30, 1998
- ---------------------------------------
By: James Murdakes
Director
/s/ C. (Dino) Xykis Date: March 30, 1998
- ---------------------------------------
By: C. (Dino) Xykis
Director
/s/ Arthur J. Bourgeois Date: March 30, 1998
- ---------------------------------------
By: Arthur J. Bourgeois
Chief Financial Officer
Exhibit 10.14
PRODUCTION AGREEMENT
THIS AGREEMENT is made and entered into as of this 8th day of July,
1997, by and between IMAGE SENSING SYSTEMS, INC., a Minnesota corporation with
its principal place of business at 500 Spruce Tree Center, 1600 University
Avenue West, St. Paul, Minnesota 55104 ("ISS"); COHU, INC., Electronic Division,
a Delaware corporation with its principal place of business at 5755 Kearny Villa
Road, San Diego, California 92123 ("COHU"); and ECONOLITE CONTROL PRODUCTS,
INC., a California corporation with its principal place of business at 3360 East
La Palma Avenue, Anaheim, California 92806 ("Econolite").
WHEREAS, ISS and COHU entered into that certain Development Services
Agreement dated August 14, 1995 (the "Development Agreement") for the
development of, among other things, an integrated camera/image processor
automated video processing unit (the "Integrated Camera Product"), as more
specifically set forth therein;
WHEREAS, ISS and Econolite entered into that certain Manufacturing,
Distributing and Technology License Agreement dated June 11, 1991 (the
"Econolite Agreement") pursuant to which Econolite has the exclusive right to
manufacture and distribute certain products incorporating ISS Technology in
North America and the Caribbean, all as more specifically set forth therein; and
WHEREAS, the parties desire that COHU manufacture the Integrated
Camera Product for sale to ISS and Econolite, on the terms and subject to the
conditions set forth herein.
NOW, THEREFORE, in consideration of the foregoing premises and the
mutual covenants and agreements contained herein, the parties hereto agree as
FOLLOWS:
1. DEFINITIONS. For purposes of this Agreement, the following terms
shall have the following meanings and shall include the plural as well as the
singular. All capitalized terms used and not defined herein shall have the same
meaning as in the Development Agreement.
"COHU Intellectual Property" means all proprietary information of
COHU including, without limitation, (a) all of COHU's intellectual property
rights pursuant to the Development Agreement; (b) matters of a technical nature
such as trade secret processes or devices, know-how, techniques, software, data,
drawings, diagrams, programs, plans, formulas, inventions (whether or not
patentable), bills of material, specifications and characteristics of products
planned or being developed, and research subjects, methods and results; (c)
matters of a business nature such as information about costs, margins, pricing
policies, markets, sales, suppliers, customers, product plans and marketing
plans or strategies; and (d) other
<PAGE>
information of a similar nature that is not generally disclosed by COHU to the
public.
" Econolite Intellectual Property" means all proprietary information
of Econolite including, without limitation, (a) matters of a technical nature
such as trade secret processes or devices, know-how, techniques, software, data,
drawings, diagrams, programs, plans, formulas, inventions (whether or not
patentable), bills of material, specifications and characteristics of products
planned or being developed, and research subjects, methods and results; (b)
matters of a business nature such as information about costs, margins, pricing
policies, markets, sales, suppliers, customers, product plans and marketing
plans or strategies; and (c) other information of a similar nature that is not
generally disclosed by Econolite to the public.
"Econolite Territory" means North America and the Caribbean.
"ISS Intellectual Property" means all proprietary information of ISS
including, without limitation, (a) all of ISS's intellectual property rights
pursuant to the Development Agreement and the Econolite Agreement; (b) matters
of a technical nature such as trade secret processes or devices, know-how,
techniques, software, data, drawings, diagrams, programs, plans, formulas,
inventions (whether or not patentable), bills of material, specifications and
characteristics of products planned or being developed, and research subjects,
methods and results; (c) matters of a business nature such as information about
costs, margins, pricing policies, markets, sales, suppliers, customers, product
plans and marketing plans or strategies; and (d) other information of a similar
nature that is not generally disclosed by ISS to the public.
"ISS Territory" means all countries and jurisdictions in the world
excluding North America and the Caribbean.
"Preproduction Documentation" means preproduction prints and
schematics/circuit layout for the enclosure and cabling, associated electronics,
bills of material, specifications and other information, in written or other
tangible form, relevant to the manufacture of the Integrated Camera Product,
developed pursuant to the Statement of Work and approved by ISS.
"Production Documentation" means final production prints and
schematics/circuit layout for the enclosure and cabling, associated electronics,
bills of material, specifications and other information, in written or other
tangible form, relevant to the manufacture of the Integrated Camera Product,
developed pursuant to the Statement of Work and approved by ISS.
"Specifications" means the technical design, performance and
functional specifications for the Integrated Camera Product developed pursuant
to the Statement of Work and approved by ISS.
<PAGE>
2. LICENSE GRANT AND PRODUCTION.
(a) Subject to the terms and conditions set forth herein, in the
Development Agreement and in the Econolite Agreement, ISS and Econolite each
hereby grant to COHU a non-exclusive, non-transferable, non-assignable (whether
by operation of law or otherwise) royalty-free right and license to use such of
the ISS Intellectual Property and Econolite Intellectual Property as may be
necessary to make, design, develop, assemble, manufacture and repair the
Integrated Camera Product solely for sale to ISS and Econolite in the manner
provided herein. COHU shall acquire no right, title or interest in or to the ISS
Intellectual Property or the Econolite Intellectual Property other than the
foregoing limited license, nor shall COHU have the right or authority to
sublicense all or any portion of the ISS Intellectual Property or Econolite
Intellectual Property.
(b) COHU agrees to manufacture and sell exclusively to ISS and
Econolite, so many units of the Integrated Camera Product as ISS and Econolite
may order from time to time. ISS and Econolite each agree to purchase from COHU
all of their respective requirements for the Integrated Camera Product for sale
to end users in the ISS and Econolite Territories until such time as ISS and/or
Econolite shall have purchased 5,000 units in the aggregate. Econolite agrees to
continue to purchase all of its requirements for the Integrated Camera Product
thereafter, subject to Econolite's option set forth in Section 5 and ISS's right
of termination pursuant to Section 9 herein. Notwithstanding the foregoing,
nothing in this Agreement shall be deemed to require either ISS or Econolite to
purchase a minimum number of units from COHU.
(c) COHU agrees that the Integrated Camera Product shall be
manufactured in strict conformance with the Specifications, ISO-9002 guidelines
and the Production Documentation. COHU further agrees to implement such
procedures as may be agreed upon by COHU, ISS and Econolite to achieve a
production quality goal of zero defects. COHU further agrees that it shall not
make any changes to the Integrated Camera Product which affect compliance with
the Specifications, ISO-9002 guidelines, the Production Documentation or the
form, fit, function or performance of the Integrated Camera Product without
ISS's and Econolite's prior written approval. Notwithstanding the foregoing,
COHU acknowledges and agrees that, during the term of this Agreement, it shall
be responsible for "continuation engineering" for the Integrated Camera Product.
For purposes of this Agreement, "continuation engineering" shall mean any
re-design necessitated by field errors, cost reduction, quality improvement and
replacement of obsolete parts. Any request by ISS for COHU to undertake any
specific continuation engineering shall be governed by the Change Order
provisions in the Development Agreement.
(d) Promptly upon approval of the Preproduction Documentation by
ISS, COHU shall enter into purchasing relationships with integrated circuit and
<PAGE>
component parts distributors to assure a ready supply of long lead time items.
COHU further agrees to stock sufficient inventory of parts to assure a lead time
of no more than forty-five (45) days on orders for the Integrated Camera
Product.
(e) In the event COHU decides to discontinue manufacture of the
Integrated Camera Product, COHU agrees to provide ISS and Econolite with notice
of such intent at least twelve (12) months prior to the anticipated termination
date. COHU further agrees to provide ISS with such assistance as may be
reasonably necessary to establish another manufacturer for the Integrated Camera
Product; provided, however, that COHU shall be reasonably compensated for its
time and effort in connection therewith.
3. TERMS OF SALE.
(a) ISS and Econolite shall each place orders for the Integrated
Camera Product, in writing, by mail, telex or facsimile, which orders shall set
forth, at a minimum, identification of the Integrated Camera Product, quantity
and unit prices, shipping instructions, shipping address and requested delivery
dates. COHU will notify ISS and Econolite of its acceptance of all orders, in
writing, within five (5) days after receipt thereof. Any orders not accepted or
rejected within such five (5) day period shall be deemed accepted.
(b) (i) ISS, Econolite and COHU acknowledge and agree that the
target purchase price to ISS and Econolite for the
Integrated Camera Product is $1,000 per unit.
Notwithstanding the foregoing, the purchase price for
the Integrated Camera Product shall be determined
quarterly according to the following formula: the cost
of materials (including packaging) plus burdened labor
(excluding shipping costs) and a "gross margin of 37%";
provided, however, that in no event shall the price per
unit to ISS or Econolite exceed $1,500.
(ii) At the end of each calendar quarter while this Agreement
is in effect, COHU will advise ISS and Econolite of the
purchase price per unit for the next succeeding quarter.
COHU will provide ISS and Econolite, upon request, with
such information and documentation as ISS or Econolite
may reasonably request in order to enable ISS or
Econolite to independently determine the purchase price
pursuant to the foregoing formula.
(iii) For purposes of this Agreement, "gross margin of 37%"
shall mean a 58.7% mark-up on COHU's actual per unit
cost of manufacturing the Integrated Camera Product
determined in accordance with generally accepted
accounting principles consistently applied.
<PAGE>
(c) All units of the Integrated Camera Product will be shipped
F.O.B. from COHU's point of shipment by the common carrier specified by ISS or
Econolite, as the case may be. COHU will "drop ship" such units as ISS or
Econolite, as the case may be, may request. Title to the units and risk of loss
shall pass to ISS or Econolite, as the case may be, upon COHU's delivery thereof
to such carrier regardless of any provisions for payment of freight or insurance
or forms of shipping documents. All prices are exclusive of freight, insurance,
custom duties, import or export fees, sales, use, excise or other taxes, all of
which shall be ISS's or Econolite's, as the case may be, responsibility.
(d) ISS or Econolite, as the case may be, shall conduct any incoming
acceptance tests within sixty (60) days after receipt of a shipment. In the
event of any shortage or nonconforming units, ISS or Econolite, as the case may
be, shall promptly report the same to COHU, and COHU shall immediately deliver
additional or substitute units to ISS or Econolite, as the case may be, and
shall be responsible for all freight, insurance and other charges in connection
therewith.
(e) COHU shall invoice ISS or Econolite, as the case may be, for the
Integrated Camera Products purchased hereunder upon shipment, and payment shall
be made net forty-five (45) days from the date of such invoice.
(f) In the event of any conflict between the terms and conditions of
this Agreement and any purchase order, acknowledgement, invoice or other
document passing between the parties, the terms and conditions of this Agreement
shall control for all purposes.
4. LIMITED WARRANTIES.
(a) COHU warrants to ISS and Econolite that the Integrated Camera
Products sold hereunder will be free from defects in material and workmanship,
and will conform to the Specifications for a period of two (2) years from the
date of shipment. In the event any Integrated Camera Product fails to meet the
foregoing warranty and is returned to COHU with all transportation charges
prepaid, COHU will, at its option, repair or replace such defective Integrated
Camera Product, or part thereof, within thirty (30) days of receipt. A return
authorization number must be obtained from COHU prior to returning any
Integrated Camera Products for warranty repair. Any Integrated Camera Product
repaired or replaced hereunder shall be warranted for the remainder of the
original warranty period or sixty (60) days, whichever is longer.
(b) COHU makes no other warranty with respect to the Integrated
Camera Product, and COHU shall not be liable or responsible for losses of any
kind resulting from the use or sale thereof by ISS or Econolite, including any
damages caused ISS, Econolite or end-users by any attendant or consequent
deficiency, defect, error, or malfunction. COHU, ISS AND ECONOLITE EXPRESSLY
AGREE THAT THE FOREGOING WARRANTIES ARE IN LIEU OF ALL OTHER WARRANTIES,
<PAGE>
WHETHER EXPRESSED OR IMPLIED, INCLUDING, WITHOUT LIMITATION, ANY WARRANTIES OF
FITNESS FOR ANY PARTICULAR PURPOSE OR MERCHANTABILITY AND NO OTHER PERSON HAS
THE AUTHORITY TO ASSUME FOR COHU ANY OTHER LIABILITIES IN CONNECTION WITH THE
SALE OF THE INTEGRATED CAMERA PRODUCT.
(c) COHU, ISS AND ECONOLITE EXPRESSLY AGREE THAT THE FOREGOING
REMEDIES SHALL BE THE EXCLUSIVE REMEDIES TO ISS AND ECONOLITE AGAINST COHU FOR
ANY DEFECTS IN INTEGRATED CAMERA PRODUCTS SOLD HEREUNDER. IN NO EVENT SHALL COHU
BE LIABLE TO ISS OR ECONOLITE FOR ANY LOST PROFITS OR OTHER SPECIAL,
CONSEQUENTIAL, INDIRECT, PUNITIVE OR INCIDENTAL DAMAGES, HOWEVER CAUSED ON ANY
THEORY OF LIABILITY, ARISING IN ANY WAY OUT OF THIS AGREEMENT OR THE
DISTRIBUTION OF THE INTEGRATED CAMERA PRODUCT BY ISS OR ECONOLITE.
(d) COHU shall have no obligation to repair, replace or correct
defective Integrated Camera Products under any warranty or otherwise if the
defect or error resulted from improper or inadequate maintenance; unauthorized
modification alteration, disassembly, or misuse; intentional or accidental
damage; use with software, hardware or interfaces not supplied or approved by
COHU; operation outside the environmental specification of the Integrated Camera
Product; improper site preparation and maintenance; or handling, installation or
operation which is not in conformance with COHU's handling, installation and
operating instructions.
(e) Upon expiration of the foregoing warranty, COHU agrees that ISS
and Econolite may each offer a repair service to end users of the Integrated
Camera Product similar to the repair service presently offered by them with
respect to COHU products.
5. ECONOLITE'S 0PTION TO MANUFACTURE.
(a) Econolite shall have an option to manufacture the Integrated
Camera Product for sale in the Econolite Territory commencing upon the purchase
of 5,000 units by ISS and/or Econolite, in the aggregate, and continuing
thereafter for so long as this Agreement and the Econolite Agreement shall be in
full force and effect, which option shall be exercisable on the terms and
conditions set forth in subsection (c) below.
(b) COHU shall provide ISS and Econolite with written notice at
least eight (8) months prior to the anticipated date upon which 5,000 units of
the Integrated Camera Product will have been sold to ISS and/or Econolite, in
the aggregate, hereunder.
(c) Econolite's option to manufacture is subject to the following
conditions:
<PAGE>
(i) Econolite shall exercise its option by providing ISS and
COHU with one (1) year's prior written notice;
(ii) Econolite shall not be in breach of any provision in the
Econolite Agreement or this Agreement; and
(iii) Econolite shall be able to meet the quality, price and
other requirements (including without limitation,
ISO-9002 guidelines or any successor guidelines) then
applicable to the manufacture and sale of the Integrated
Camera Product.
(d) In the event Econolite exercises its option to manufacture, ISS
shall terminate this Agreement pursuant to Section 9(c) herein and shall take
such steps as are necessary to grant to Econolite a non-exclusive,
non-transferable, nonassignable royalty-free right and sublicense, without the
right to sublicense, to use such COHU Intellectual Property and ISS Intellectual
Property as may be necessary to make, have made, use, sell or distribute the
Integrated Camera Product.
(e) Econolite acknowledges and agrees that it shall acquire no
right, title or interest in or to the Integrated Camera Product, ISS
Intellectual Property or COHU Intellectual Property other than the foregoing
limited rights and such rights as are granted under the Econolite Agreement.
6. ACCOUNTING AND REPORTS.
(a) COHU will deliver to ISS and Econolite, within ten (10) days
after the end of each month while this Agreement is in effect, a written report
setting forth shipping destinations and sales of units of the Integrated Camera
Product to ISS and Econolite during such month.
(b) COHU shall keep complete, true, and accurate books of accounts
and records for the purpose of showing the derivation of all reports due
hereunder. Such books and records shall be kept at COHU's principal place of
business for at least three (3) years after the end of the calendar year to
which they pertain, and shall be open at all reasonable times for inspection by
a representative of the other parties hereto for verification of reports or
compliance with other aspects of this Agreement.
7. CONFIDENTIALITY and INTELLECTUAL PROPERTY RIGHTS.
(a) The confidentiality and intellectual property rights provisions
of the Development Agreement are incorporated herein by reference and shall have
full force and effect with respect to the transactions contemplated hereby as
though fully set forth herein. Nothing in this Agreement shall be deemed to
modify or alter the intellectual property rights set forth in the Development
Agreement.
<PAGE>
(b) The parties acknowledge that each party may receive or have
access to information and material of the other party that is confidential,
proprietary or trade secret information. As used herein, "Confidential
Information" includes, but is not limited to, ISS Intellectual Property, COHU
Intellectual Property and Econolite Intellectual Property and any other
confidential, proprietary or trade secret information, technical and business
information of COHU, ISS or Econolite, excluding any such information which (i)
has been published or is otherwise readily available to the public other than by
a breach of this Agreement; (ii) has been rightfully received from a third party
without breach of confidentiality obligations; or (iii) has been independently
developed by the receiving party by personnel having no access to the
Confidential Information.
(c) Each party agrees during the term of this Agreement and for a
period of five (5) years thereafter to take all steps reasonably necessary to
hold in trust and confidence the Confidential Information of the other parties,
and not to disclose such Confidential Information to third parties or to use
such Confidential Information in any way other than as permitted under this
Agreement, the Development Agreement or the Econolite Agreement, without the
prior written consent of the other party. Each party agrees to limit disclosure
of the Confidential Information of the other party to employees or independent
contractors with a need to know such information and to maintain at all times
appropriate agreements with any and all employees to protect the Confidential
Information of the other party.
(d) In consideration of the opportunity to perform under this
Agreement, the adequacy and sufficiency of which is hereby acknowledged, COHU
agrees that for a period commencing, on the date hereof and continuing for a
period of one (1) year after termination of this Agreement, COHU shall not
engage in any other projects, either for COHU, for Econolite or for a third
party, which relate to the design or production of a CCD camera and image
processor housed within a single enclosure for the field of use of automated
video processing for traffic measurement, including, by way of example and not
limitation, vehicles, trucks, pedestrians, airplanes, boats and bicycles, and
that COHU shall treat all information relating to use of the COHU Components in
this field of use as ISS Intellectual Property.
(e) COHU acknowledges and agrees that it shall have no rights at any
time to sell the Integrated Camera Product to any party other than ISS and
Econolite as provided herein.
8. ADDITIONAL AGREEMENTS. In further consideration of the rights
granted hereunder, the parties agree as follows:
(a) COHU hereby waives its right to receive fifty percent (50%) of
the Total Service Payments due under the Development Agreement, as the
Development Agreement may be amended or modified by change order or otherwise,
and further agrees to be solely responsible for any non-recurring engineering
costs attributable to
<PAGE>
tooling which will not be used exclusively for the production of the Integrated
Camera Product.
(b) In the event ISS terminates this Agreement without cause after
completion of the development of the Integrated Camera Product pursuant to the
Development Agreement and before at least 5,000 units in the aggregate have been
purchased hereunder, ISS shall pay to COHU, within thirty (30) days of the date
of such termination, the amount of any Total Service Payment waived pursuant to
subparagraph (a) above, minus $22.00 for each unit purchased hereunder (whether
by ISS or Econolite).
(c) In the event ISS terminates this Agreement without cause after
at least 5,000 units in the aggregate have been purchased hereunder, COHU shall
grant to ISS a non-exclusive, non-transferable, non-assignable royalty-free
right and license, with the right to sublicense, to use such COHU Intellectual
Property as may be necessary to make, have made, use, sell or distribute the
Integrated Camera Product.
9. TERM AND TERMINATION.
(a) The term of this Agreement shall commence on the date hereof and
shall continue until terminated as provided herein.
(b) If any party defaults in the performance of a material
obligation hereunder and such breach is not cured within forty-five (45) days
after receipt of written notice specifying the nature of the default, a copy of
which notice shall also be provided to the other party hereto, the complaining
party shall have the right at its option to suspend performance of any action
called for hereunder until such breach is cured or the defaulting party
commences and diligently proceeds to effect such cure; or to cancel this
Agreement by giving written notice of cancellation to the defaulting party, with
a copy to the other party, effective immediately at any time subsequent to the
forty-five (45) day cure period (provided no cure has been effected).
(c) ISS may terminate this Agreement, with or without cause, upon
sixty (60) days' prior written notice. COHU may terminate this Agreement, with
or without cause, upon twelve (12) months' prior written notice. In the event
ISS terminates this Agreement with cause, COHU shall promptly deliver to ISS all
tooling specific to production of the Integrated Camera Product, and COHU shall
not be entitled to any payments under Section 8(b) above.
(d) This Agreement shall terminate automatically without notice (i)
if either ISS or COHU files a petition in bankruptcy or is adjudicated a
bankrupt; (ii) if a petition in bankruptcy is filed against either ISS or COHU
and such petition is not discharged within ninety (90) days of such filing;
(iii) if ISS or COHU becomes insolvent, or makes an assignment for the benefit
of creditors or an arrangement
<PAGE>
pursuant to any bankruptcy law; (iv) if ISS or COHU discontinues its business;
or (v) if a receiver is appointed for ISS or COHU or its business.
(e) In the event ISS terminates this Agreement without cause as
provided herein, ISS shall purchase from COHU all of COHU's inventory related
solely to the manufacture or sale of the Integrated Camera Product, including
raw materials, unique parts, work in process and finished goods up to a maximum
purchase price of $90,000. The purchase price of such inventory shall be at
COHU's cost. COHU will provide ISS with such information and documentation as
ISS may reasonably request to document and support COHU's cost of such
inventory.
(f) Econolite's rights under this Agreement shall terminate
automatically without notice upon termination of the Econolite Agreement.
10. GENERAL.
(a) Notices. Any notice, request or demand required or desired
hereunder shall be in writing and shall be deemed sufficient and completed if
delivered personally, by first class mail, postage prepaid, or by overnight
courier, with all freight charges prepaid, addressed to the address of each
party first set forth above or such other address as may be given in a
subsequent notice.
(b) Representation. Each party warrants and represents to the other
parties that: (i) it has the authority to enter into and perform this Agreement;
and (ii) the execution, delivery and performance of this Agreement will not
conflict with the terms and conditions of any other agreement to which it is or
becomes a party or by which it is or becomes bound.
(c) Each party shall save and hold harmless and indemnify the other
party from and against any and all liability, claims, losses, costs and damages
of whatever kind and nature, including reasonable attorneys' fees and costs of
litigation, by any third party resulting directly or indirectly from any breach
of this Agreement or warranties, representations and agreements contained
herein, and from any facts, omissions, misrepresentations, warranties, covenants
or obligations hereunder by such party. The foregoing obligations of
indemnification are conditioned upon the indemnified party (i) giving prompt
notice to the indemnifying party of any such claim or action; (ii) allowing the
indemnifying party to control the defense, including the right to settle the
action (so long as the settlement is without cost to the indemnified party); and
(iii) providing full assistance in the defense so long as the indemnifying party
pays the indemnified party's reasonable out-of-pocket expenses incurred in
connection with providing such assistance.
(d) Insurance. COHU shall maintain in force at all times during the
term of this Agreement and for at least three (3) years after expiration or
termination of this Agreement, comprehensive general liability, property damage
and business
<PAGE>
interruption insurance coverage in an amount not less than One Million Dollars
($1,000,000.00) with ISS and Econolite each named as an additional insured, and
will, upon request, furnish certificates of insurance to ISS and Econolite
specifying that ISS and Econolite will receive no less than thirty (30) days'
notice of cancellation nonrenewal or material change to such insurance. All
responsibility for payment of sums under any deductible, corridor or
self-insured retention provisions of the policy or policies shall remain with
COHU, and acceptance of the insurance by ISS and Econolite shall not in any way
relieve or decrease the liability of COHU hereunder. It is expressly understood
and agreed that neither ISS nor Econolite in any way represent that the above
specified limits of liability or policy forms are sufficient or adequate to
protect the parties' interests or liabilities.
(e) Damages. None of the parties will, in any event, be liable for
special, incidental or consequential damages of any nature or kind whatsoever,
or for any indirect damages such as, but not limited to, exemplary or punitive
damages, even if such party has been advised of the possibility of such damages
and notwithstanding the form (e.g. contract, negligence, or otherwise) in which
any legal or equitable action may be brought against such party or any of its
officers, directors, employees or subcontractors.
(f) Dispute Resolution. Should any disagreement arise between COHU
and ISS relating to the other party's performance hereunder or any other matter
relating to this Agreement, COHU and Econolite agree to mediation and, if
necessary, arbitration in the State of Minnesota if the dispute resolution
process is initiated by COHU and in the State of California if the dispute
resolution process is initiated by ISS. Notwithstanding the foregoing, either
party shall be entitled to petition any court of competent jurisdiction within
the State of Minnesota for injunctive relief with respect to an alleged breach
of obligations of confidentiality or with respect to intellectual property
rights.
(g) Import/Export Regulations. The parties agree to comply with
all import and export requirements imposed on the Integrated Camera Product by
any country or organization in whose jurisdiction either party operates or does
business. ISS shall be responsible for all export permits, import certificates,
insurance, duty, customs clearance charges and/or licenses and related costs for
units shipped into the ISS Territory. Econolite shall be responsible for all
export permits, import certificates, insurance, duty, customs clearance charges
and/or licenses and related costs for units shipped into the Econolite
Territory.
(h) Relationship. The parties are independent contractors and
nothing in this Agreement shall be deemed to create the relationship of
principal and agent or master and servant or a partnership or a joint venture
between the parties. Neither party shall have the power to bind the other party.
(i) Governing Law; Interpretation. This Agreement shall be
construed, interpreted and enforced under the laws of the State of Minnesota,
excluding its
<PAGE>
provisions regarding conflicts of law. The section and subsection headings used
herein are for reference and convenience only, and shall not enter into the
interpretation hereof.
(j) No Waiver; Severability. No failure by any party to take any
action or assert any right hereunder shall be deemed to be a waiver of such
right in the event of the continuation or repetition of the circumstances giving
rise to such right. If any clause is declared illegal or invalid, the remainder
of this Agreement shall remain enforceable, its clauses being severable.
(k) Force Majeure. None of the parties shall be liable for delays in
performance that are caused by acts of God, acts of governmental or military
authority, fires, floods, epidemics, strikes, riot and war or any other cause
over which such party has no control. Under such conditions, the performance
obligations shall be extended for a period not to exceed the time of the delay,
provided that the party experiencing the delay immediately notifies the other
party of the delay and anticipated duration and uses its best efforts to
minimize the impact of the delay on its performance obligations. Notwithstanding
the foregoing, the failure of any of the parties to pay the other party any
amount then due shall not be deemed excused by reason of force majeure.
(1) No Assignment or Delegation. None of the parties shall directly
or indirectly sell, transfer, assign, convey, pledge, encumber, delegate or
otherwise dispose of this Agreement without the prior written consent of the
other parties. Notwithstanding the foregoing, either ISS or COHU may, without
the prior consent of the other party, assign or transfer this Agreement as part
of a corporate reorganization, consolidation, merger or sale of all or
substantially all of its assets, provided such entity expressly agrees in
writing to all of such party's obligations hereunder.
(m) Entire Agreement. This Agreement, the Development Agreement, the
Econolite Agreement and the schedules and exhibits attached hereto or thereto,
constitute the entire agreement concerning the subject matter covered herein and
supersede all prior oral or written agreements, understandings and promises
relating thereto. This Agreement may not be modified or amended except by an
instrument in writing declared to be an amendment hereto and executed by both
parties. This Agreement may be executed in several counterparts, all of which
taken together shall constitute one single agreement between the parties.
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement in the
manner appropriate to each as of the day and year first above written.
IMAGE SENSING SYSTEMS, INC. COHU, INC., ELECTRONICS DIVISION
By: /s/ Spiro Voglis By: /s/ James M. Brown
-------------------------------- ----------------------------------
Spiro Voglis James M. Brown
Its: President Its: President and General Manager
ECONOLITE CONTROL PRODUCTS, INC.
By: /s/ Michael Doyle
--------------------------------
Michael Doyle
Its: CEO
Exhibit 10. 15
ARTHUR J. BOURGEOIS, CPA
- --------------------------------------------------------------------------------
1168 Amble Drive
Arden Hills, Minnesota 55112
Work phone - (612) 603-7709
Home phone - (612) 636-0725
February 10, 1998
Dr. Spiro G. Voglis
Image Sensing Systems, Inc.
1600 University Avenue W. Suite 500
St. Paul, MN 55104
Dear Spiro:
As requested, this letter offers my proposal to continue on as the Chief
Financial Officer of Image Sensing Systems, Inc. for the period March 1 though
August 31, 1998. I propose that I continue to provide the services that I am
currently providing under the letter agreement dated February 24, 1997 as
follows:
Recurring monthly activities:
Financial reporting
Approving expenditures and signing checks
Supervise all accounting activities
Recurring quarterly activities:
Prepare and file three quarterly SEC Forms 10-QSB
Prepare four quarterly press releases
Prepare three quarterly reports to shareholders & coordinate printing
Recurring annual activities:
Annual audit (meetings and working papers)
Annual report to shareholders
Annual report to SEC on Form 10-KSB
Proxy filing
Attend annual meeting
Insurance review
Budget preparation
ISS agrees to provide me with office, phone, fax, parking and all necessary
tools and support that were provided to me as the full-time CFO of ISS. ISS
agrees to pay me a monthly retainer of $4,500, beginning March 1, 1998,
continuing through August 1, 1998.
<PAGE>
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, ISS agrees to negotiate terms of such 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/ Spiro G. Voglis
--------------------------------------
Dr. Spiro G. Voglis, President and CEO
2/10/98
--------------------------------------
Date
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, certain statement of
operations data as a percent of revenue:
Year ended December 31, 1997 1996
- ---------------------------------------------------------
Product sales 33.1% 19.9%
Royalties 63.4 62.3
Consulting and contract fees 3.5 17.8
- ---------------------------------------------------------
Total revenue 100.0 100.0
Cost of revenue 27.4 29.2
- ---------------------------------------------------------
Gross profit 72.6 70.8
Selling, marketing and product support 24.2 41.4
General and administrative 24.3 39.2
Research and development 14.9 26.1
- ---------------------------------------------------------
Income (loss) from operations 9.2 (35.9)
Net income (loss) 11.3 (32.5)
Product sales for 1997 increased to $1,434,000 compared with $635,000 in
1996. The increase resulted primarily from a sale of the new Autoscope Solo
system to the Minnesota Department of Transportation (MnDOT) for a test site in
downtown Minneapolis in 1997 and an increase in regular Autoscope sales to
distributors in Europe and Asia Pacific countries. Royalty income increased to
$2,742,000 in 1997 compared with $1,988,000 in 1996. The increase was due to
increased sales and upgrades of Autoscope systems by Econolite Control Products,
Inc. (Econolite), our North American manufacturing and distribution partner,
resulting in increased royalty income. In addition to the Autoscope Solo sale to
MnDOT, combined sales of multi-camera Autoscope systems by the Company and
Econolite totaled 431 units in 1997 compared with 294 units in 1996. Consulting
and contract fees decreased to $152,000 in 1997 compared with $569,000 in 1996.
The decrease resulted primarily from completion of a $640,000 contract with the
Jet Propulsion Laboratory in Pasadena, California in August 1996 which was not
renewed.
Gross profits were $3,143,000 or 72.6% of revenue in 1997, compared with
$2,260,000 or 70.8% of revenue in 1996. The increase was due primarily to a
proportionately higher mix of product sales compared to consulting and contract
fees. Product sales generally have higher gross margins than consulting and
contract fees. Gross margins on product sales, other than the single Autoscope
Solo sale to MnDOT, were 55.7% of sales in 1997, versus 53.9% in 1996. The
increase was due primarily to lower purchase costs. The Autoscope Solo sale was
made at a lower margin since the sale was recognized as a beta site for the new
product.
Selling, marketing and product support expenses were $1,051,000 or 24.2%
of revenue in 1997, compared with $1,322,000 or 41.4% of revenue in 1996. The
decrease resulted primarily from closing the United Kingdom office at the end of
1996 and general reduction of customer service, marketing and travel costs.
General and administrative expenses were $1,052,000 or 24.3% of revenue in 1997,
compared with $1,252,000 or 39.2% of revenue in 1996. The decrease resulted
primarily from reduced personnel support costs, lower office expense and fewer
administrative personnel.
Image Sensing Systems, Inc.
Page 10
<PAGE>
Research and development expenses were $643,000 or 14.9% of revenue in
1997, compared with $834,000 or 26.1% of revenue in 1996. The decrease was due
primarily to a reduction in contracted engineering costs, parts and fabrication
to develop the new Autoscope Solo in 1997, compared with 1996.
Net income for 1997 was $487,000 compared with a net loss of $1,038,000
in 1997. The turnaround was due primarily to increased revenue while operating
costs were reduced throughout most of the Company.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1997 the Company had $2,000,000 in cash and cash equivalents,
compared with $1,694,000 at December 31, 1996. The Company had working capital
of $2,533,000 and a current ratio of 3.8 to 1 at December 31, 1997, compared
with $2,062,000 and 4.5 to 1 at the end of 1996. The increase in liquidity in
1997 was due primarily to the turnaround in operating profit from 1996. Net cash
provided by operating activities was $508,000 in 1997, compared with net cash
used in operating activities of $728,000 in 1996.
The Company believes that cash and cash equivalents at December 31, 1997
along with an available $500,000 revolving line of credit with a bank will
satisfy the Company's projected working capital and other cash requirements
through 1998.
YEAR 2000 ISSUES
Many existing computer programs use only two digits to identify a year in the
date field, with the result that data referring to the year 2000 and subsequent
years may be misinterpreted by these programs. If present in the computer
applications of the Company or its suppliers and customers and not corrected,
this problem could cause computer applications to fail or to create erroneous
results and could cause a disruption in operations and have a short-term adverse
effect on the Company's business and results of operations. The Company has
evaluated its principal computer systems and has determined that they are
substantially Year 2000 compliant. The Company has initiated discussions with
its key suppliers and customers to determine whether they have any Year 2000
issues. The Company has not incurred any material expenses to date in connection
with this evaluation and does not anticipate material expenses in the future,
depending on the status of its suppliers and customers with respect to this
issue.
Image Sensing Systems, Inc.
Page 11
<PAGE>
IMAGE SENSING SYSTEMS, INC.
BALANCE SHEETS
December 31, 1997 1996
- -------------------------------------------------------------------------------
ASSETS
Current assets:
Cash and cash equivalents $ 2,000,000 $ 1,694,000
Accounts receivable, net of allowance for returns
and doubtful accounts of $49,000 (1996-$53,000) 1,164,000 790,000
Inventories 144,000 70,000
Prepaid expenses 67,000 45,000
Deferred income taxes 54,000 45,000
- -------------------------------------------------------------------------------
Total current assets 3,429,000 2,644,000
Property and equipment:
Furniture and fixtures 127,000 140,000
Leasehold improvements 101,000 101,000
Equipment 850,000 703,000
- -------------------------------------------------------------------------------
1,078,000 944,000
Accumulated depreciation (503,000) (330,000)
- -------------------------------------------------------------------------------
575,000 614,000
- -------------------------------------------------------------------------------
Other asset 75,000 --
- -------------------------------------------------------------------------------
TOTAL ASSETS $ 4,079,000 $ 3,258,000
- -------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 351,000 $ 296,000
Accrued compensation 184,000 159,000
Deferred revenue 361,000 127,000
- -------------------------------------------------------------------------------
Total current liabilities 896,000 582,000
Deferred income taxes 45,000 36,000
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
- 2,478,200 (1996 - 2,475,000) 25,000 25,000
Additional paid-in capital 3,886,000 3,875,000
Retained earnings (deficit) (773,000) (1,260,000)
- -------------------------------------------------------------------------------
Total shareholders' equity 3,138,000 2,640,000
- -------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 4,079,000 $ 3,258,000
===============================================================================
See accompanying notes.
Image Sensing Systems, Inc.
Page 12
<PAGE>
IMAGE SENSING SYSTEMS, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year ended December 31, 1997 1996
- -----------------------------------------------------------------------------------------
<S> <C> <C>
REVENUE:
Product sales $ 1,434,000 $ 635,000
Royalties 2,742,000 1,988,000
Consulting and contract fees 152,000 569,000
- -----------------------------------------------------------------------------------------
4,328,000 3,192,000
COST OF REVENUE:
Product sales 797,000 293,000
Royalties 297,000 227,000
Consulting and contract fees 91,000 412,000
- -----------------------------------------------------------------------------------------
1,185,000 932,000
- -----------------------------------------------------------------------------------------
Gross profit 3,143,000 2,260,000
OPERATING EXPENSES:
Selling, marketing and product support 1,051,000 1,322,000
General and administrative 1,052,000 1,252,000
Research and development 643,000 834,000
- -----------------------------------------------------------------------------------------
2,746,000 3,408,000
- -----------------------------------------------------------------------------------------
Income (loss) from operations 397,000 (1,148,000)
Interest income 90,000 92,000
- -----------------------------------------------------------------------------------------
Income (loss) before income taxes 487,000 (1,056,000)
Income taxes (benefit) -- (18,000)
- -----------------------------------------------------------------------------------------
Net income (loss) $ 487,000 $(1,038,000)
=========================================================================================
Net income (loss) per common share - basic and diluted $ .20 $ (.42)
=========================================================================================
Weighted average number of common shares and
dilutive potential common shares outstanding 2,478,000 2,475,000
=========================================================================================
</TABLE>
See accompanying notes.
Image Sensing Systems, Inc.
Page 13
<PAGE>
IMAGE SENSING SYSTEMS, INC.
STATEMENTS OF CASH FLOWS
Year ended December 31, 1997 1996
- --------------------------------------------------------------------------------
OPERATING ACTIVITIES:
Net income (loss) $ 487,000 $ (1,038,000)
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depreciation and amortization 177,000 164,000
Changes in operating assets and liabilities:
Receivables (374,000) 248,000
Inventories (74,000) 25,000
Prepaid expenses (22,000) 29,000
Accounts payable 55,000 (198,000)
Accrued compensation 25,000 (85,000)
Deferred revenue 234,000 127,000
- --------------------------------------------------------------------------------
Net cash provided by (used in) operating activities 508,000 (728,000)
INVESTING ACTIVITIES:
Purchases of property and equipment (138,000) (142,000)
Capitalized software development costs (75,000) --
- --------------------------------------------------------------------------------
Net cash used in investing activities (213,000) (142,000)
- --------------------------------------------------------------------------------
FINANCING ACTIVITIES:
Proceeds from sale of common stock 11,000 --
- --------------------------------------------------------------------------------
Net cash provided by financing activities 11,000 --
- --------------------------------------------------------------------------------
Increase (decrease) in cash 306,000 (870,000)
Cash and cash equivalents at beginning of year 1,694,000 2,564,000
- --------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 2,000,000 $ 1,694,000
================================================================================
See accompanying notes.
Image Sensing Systems, Inc.
Page 14
<PAGE>
IMAGE SENSING SYSTEMS, INC.
STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Additional Retained
Shares Common Paid-In Earnings
Description Issued Stock Capital (Deficit)
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
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)
Common stock issued for options exercised 3,200 -- 11,000 --
Net income -- -- -- 487,000
- -----------------------------------------------------------------------------------------------------
Balance at December 31, 1997 2,478,200 $ 25,000 $ 3,886,000 $ (773,000)
- -----------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes.
Image Sensing Systems, Inc.
Page 15
<PAGE>
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, 1997 and 1996.
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 (FASB) 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 income (loss) and net income (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
Image Sensing Systems, Inc.
Page 16
<PAGE>
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 period incurred.
SOFTWARE DEVELOPMENT COSTS
The Company capitalizes software development costs in accordance with the
provisions of FASB Statement No. 86, ACCOUNTING FOR THE COSTS OF COMPUTER
SOFTWARE TO BE SOLD, LEASED, OR OTHERWISE MARKETED. Capitalization of software
development cost, including significant product enhancements, begins upon the
establishment of technological feasibility for the product and concludes when
the product is available for release to distributors. The establishment of
technological feasibility and the ongoing assessment of the recoverability of
these costs requires considerable judgment by management with respect to certain
external factors, including, but not limited to, anticipated future gross
product revenue or royalties, estimated economic life and changes in software
and hardware technology. The Company capitalized $75,000 in software development
costs in the fourth quarter of 1997.
EARNINGS PER COMMON SHARE
The Company has adopted FASB Statement No. 128, EARNINGS PER SHARE (EPS). This
Statement replaces previously reported primary and fully diluted earnings per
share with basic and diluted earnings per share. Unlike primary EPS, basic EPS
excludes any dilutive effects of options, warrants and convertible securities.
Diluted earnings per share is very similar to previously reported fully diluted
earnings per share.
NOTE 2
NOTES PAYABLE AND CREDIT FACILITIES
The Company has a credit agreement which provides up to $500,000 in short-term
borrowings at 1.25% over the prime rate (9.75% at December 31, 1997). 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. The Company
had no outstanding borrowings in 1997 or 1996.
NOTE 3
LEASE COMMITMENT
The Company rents office space under an operating lease agreement expiring in
June 1998, with options to renew through June 2004. 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 $138,000 in 1997 and $150,000 in 1996.
At December 31, 1997, future minimum annual lease payments total $68,000
payable in 1998.
NOTE 4
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. 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.
Image Sensing Systems, Inc.
Page 17
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONT.)
NOTE 5
INCOME TAXES
A net operating loss carryforward from 1996 was used to offset taxable income in
1997 resulting in no taxable income. The income tax benefit for 1996 consisted
of a current federal income tax benefit of $18,000 resulting from a carryback of
the 1996 loss to prior years.
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, 1997 1996
- ---------------------------------------------------------
Deferred tax assets:
Accounts receivable allowances $ 19,000 $ 19,000
Research and development
tax credits 98,000 63,000
Accrued compensation 15,000 15,000
Warranty reserve 8,000 9,000
Prepaid contract service fee 135,000 47,000
Net operating loss carryforward 35,000 255,000
- ---------------------------------------------------------
$ 310,000 $ 408,000
Deferred tax liabilities:
Tax depreciation in excess
of book $ 45,000 $ 36,000
- ---------------------------------------------------------
Net deferred tax assets 265,000 372,000
Less valuation allowances 256,000 363,000
- ---------------------------------------------------------
Net deferred taxes $ 9,000 $ 9,000
=========================================================
The Company has a net operating loss carryforward of $104,000 and research
and development tax credits of $98,000 which both expire in 2011. Cash paid for
income taxes amounted to $300 in 1997 and 1996.
A reconciliation of income taxes (benefit) to the statutory federal rate
is as follows:
Year ended December 31, 1997 1996
- ---------------------------------------------------------
Federal tax (benefit) at
statutory rate $ 166,000 $(359,000)
Utilization of operating loss
carryforward and change
in valuation allowance (188,000) 338,000
Other 22,000 3,000
- ---------------------------------------------------------
Income taxes (benefit) $ -- $ (18,000)
=========================================================
Effective tax rate --% 1.7%
=========================================================
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. Royalty expense under the agreement was $297,000 in 1997 and
$227,000 in 1996.
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
Image Sensing Systems, Inc.
Page 18
<PAGE>
America and the Caribbean. The Company recognized royalty income from this
agreement of $2,742,000 in 1997 and $1,988,000 in 1996. Accounts receivable from
Econolite were $979,000 and $768,000 at December 31, 1997 and 1996,
respectively.
NOTE 7
EMPLOYMENT AGREEMENTS
The Company has employment agreements with the chairman of the board and the
chief executive officer of the Company. The agreements provide for a minimum
salary, stock options and severance pay in the event of involuntary termination
or termination resulting from a sale, acquisition or merger of the Company. The
employment agreements expire through December 31, 1999 as to employment and
December 31, 2005 as to the right to exercise options.
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 1997 and 1996.
NOTE 9
EXPORT SALES
Product sales to foreign customers were $644,000 in 1997 and $500,000 in 1996.
NOTE 10
STOCK OPTIONS
In February 1995, the Company adopted the 1995 Long-Term Incentive 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>
Plan Options
Options Outstanding Non-Plan Weighted Average
available -------------------- Options Exercise
for Grant ISO NSO Outstanding Price Per Share
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
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
Exercised (3,200) 3.68
Canceled 35,750 (35,750) 4.19
----------------------------------------------
Balance at December 31, 1997 37,650 161,150 18,000 148,200 4.33
==============================================
</TABLE>
Exercise prices for options as of December 31, 1997 ranged from $3.00 to
$4.75. Options under the 1995 Plan and Non-Plan expire at various dates through
2005. At December 31, 1997 there were 159,050 options exercisable at a
weighted-average exercise price of $4.30. There were no options granted in 1997.
The weighted-average fair value of options granted during 1996 was $3.65.
Image Sensing Systems, Inc.
Page 19
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONT.)
Pro forma information regarding net income (loss) and net income (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 1997 and 1996, 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 transferable. 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:
1997 1996
- ---------------------------------------------------------
Pro forma net income (loss) $259,000 $(1,230,000)
Pro forma net income (loss)
per common share -
basic and diluted $ .11 $ (.50)
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, 1997 and 1996, 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, 1997 and 1996, 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 13, 1998
Image Sensing Systems, Inc.
Page 20
<PAGE>
CORPORATE INFORMATION
DIRECTORS AND OFFICERS
PANOS G. MICHALOPOULOS
Chairman and Director
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 MEETING OF SHAREHOLDERS
The annual meeting of shareholders will be held on May 28, 1998, at 3:30 p.m.
CDT at the Crowne Plaza Northstar Hotel, Minneapolis, MN.
LEGAL COUNSEL
Dorsey & Whitney LLP
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.
LOCATION
CORPORATE HEADQUARTERS
500 Spruce Tree Centre
1600 University Avenue West
St. Paul, Minnesota 55104-3825 USA
PRICE RANGE OF COMMON STOCK
The Company's common stock trades on the Nasdaq SmallCap Market tier of the
Nasdaq Stock Market under the symbol ISNS. The table below presents the price
range of high and low trading prices for the Company's common stock for each
period indicated as reported by Nasdaq.
1997 1996
------------------------- ---------------------------
Quarter High Low High Low
- ---------------------------------------------------------------------------
First $ 4.00 $ 2.38 $ 4.81 $ 2.75
Second 3.50 2.13 6.00 2.81
Third 5.88 2.63 5.38 3.00
Fourth 5.25 3.50 4.38 2.00
IMAGE SENSING SYSTEMS, INC.
500 Spruce Tree Centre
1600 University Avenue West
Saint Paul, Minnesota 55104-3825
Phone: 612.603.7700
Fax: 612.603.7795
www.imagesensing.com
Image Sensing Systems, Inc.
Page 21
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 13, 1998, with
repect 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,
1997.
/s/ ERNST & YOUNG LLP
Minneapolis, Minnesota
March 27, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 2,000,000
<SECURITIES> 0
<RECEIVABLES> 1,213,000
<ALLOWANCES> 49,000
<INVENTORY> 144,000
<CURRENT-ASSETS> 3,429,000
<PP&E> 1,078,000
<DEPRECIATION> 503,000
<TOTAL-ASSETS> 4,079,000
<CURRENT-LIABILITIES> 896,000
<BONDS> 0
0
0
<COMMON> 25,000
<OTHER-SE> 3,110,000
<TOTAL-LIABILITY-AND-EQUITY> 4,079,000
<SALES> 1,434,000
<TOTAL-REVENUES> 4,328,000
<CGS> 797,000
<TOTAL-COSTS> 3,931,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 487,000
<INCOME-TAX> 0
<INCOME-CONTINUING> 487,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 487,000
<EPS-PRIMARY> .20
<EPS-DILUTED> .20
</TABLE>
