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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-QSB
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the period ended June 30, 1998 Commission File Number 0-26056
IMAGE SENSING SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
Minnesota 41-1519168
- ------------------------------ ----------------------------------
State of other jurisdiction of I.R.S. Employer Identification No.
incorporation organization
500 SPRUCE TREE CENTRE
1600 UNIVERSITY AVE. W.
ST. PAUL, MN 55104-3825
(Address of principal executive offices)
Registrant's telephone number, including area code: (651) 603-7700
Not applicable
- --------------------------------------------------------------------------------
(Former name, former address, and former fiscal year, if changed since last
report.)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes _X_ No ___
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practical date.
Common Stock, $.01 Par Value -- 2,482,075 shares as of July 30, 1998.
<PAGE>
IMAGE SENSING SYSTEMS, INC.
INDEX
PART I. FINANCIAL INFORMATION Page No.
--------
Item 1. Condensed Financial Statements:
Condensed Balance Sheets
June 30, 1998 and December 31, 1997 3
Condensed Statements of Operations
Three- and six-month periods ended June 30, 1998 and 1997 4
Condensed Statements of Cash Flows
Six-month periods ended June 30, 1998 and 1997 5
Notes to Condensed Financial Statements 6
Item 2. Management's Discussion and Analysis of
Results of Operations and Financial Condition 7
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders 11
Item 5. Other Information 11
Item 6. Exhibits and Reports on Form 8-K 11
Signatures 12
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
IMAGE SENSING SYSTEMS, INC.
CONDENSED BALANCE SHEETS
June 30, December 31,
1998 1997
----------- -----------
ASSETS (Unaudited) (Note)
Current assets:
Cash and cash equivalents $ 1,816,000 $ 2,000,000
Accounts receivable 810,000 1,164,000
Refundable and deferred income taxes 54,000 54,000
Inventories 22,000 144,000
Prepaid expenses 91,000 67,000
----------- -----------
Total current assets 2,793,000 3,429,000
Property and equipment, net 524,000 575,000
Other asset-capitalized software 638,000 75,000
----------- -----------
Total assets $ 3,955,000 $ 4,079,000
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 194,000 $ 351,000
Accrued expenses 183,000 184,000
Deferred revenue 344,000 361,000
----------- -----------
Total current liabilities 721,000 896,000
Deferred income tax liability 45,000 45,000
Shareholders' equity:
Common stock 25,000 25,000
Additional paid-in capital 3,890,000 3,886,000
Retained earnings (deficit) (726,000) (773,000)
----------- -----------
3,189,000 3,138,000
----------- -----------
Total liabilities and shareholders' equity $ 3,955,000 $ 4,079,000
=========== ===========
Note: The balance sheet at December 31, 1997 has been derived from the audited
financial statements at that date but does not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements.
See accompanying notes
<PAGE>
IMAGE SENSING SYSTEMS, INC.
CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Three-Month Period Ended Six-Month Period Ended
June 30 June 30
---------------------------- -----------------------------
1998 1997 1998 1997
---------------------------- -----------------------------
<S> <C> <C> <C> <C>
REVENUE:
Product sales $ 236,000 $ 296,000 $ 511,000 $ 648,000
Royalties and commissions 499,000 784,000 969,000 1,305,000
Consulting and contract fees 54,000 51,000 67,000 83,000
---------------------------- -----------------------------
789,000 1,131,000 1,547,000 2,036,000
COSTS OF REVENUE:
Product sales 109,000 68,000 262,000 233,000
Royalties and commissions 57,000 88,000 110,000 154,000
Consulting and contract fees 22,000 27,000 25,000 58,000
---------------------------- -----------------------------
188,000 183,000 397,000 445,000
---------------------------- -----------------------------
Gross profit 601,000 948,000 1,150,000 1,591,000
OPERATING EXPENSES:
Selling, general and administrative 581,000 552,000 1,158,000 1,047,000
Research and development -- 160,000 -- 331,000
---------------------------- -----------------------------
581,000 712,000 1,158,000 1,378,000
---------------------------- -----------------------------
Income (loss) from operations 20,000 236,000 (8,000) 213,000
Other income, net 26,000 21,000 55,000 49,000
---------------------------- -----------------------------
Income before income taxes 46,000 257,000 47,000 262,000
Income taxes -- -- -- --
---------------------------- -----------------------------
Net income $ 46,000 $ 257,000 $ 47,000 $ 262,000
============================ =============================
Net income per common share - basic and diluted $ 0.02 $ 0.10 $ 0.02 $ 0.10
============================ =============================
Average common shares outstanding:
Weighted average number of common
shares outstanding 2,481,000 2,475,000 2,480,000 2,475,000
Dilutive effect of stock options outstanding after
application of treasury stock method 14,000 -- 4,000 --
---------------------------- -----------------------------
2,495,000 2,475,000 2,484,000 2,475,000
============================ =============================
</TABLE>
See accompanying notes
<PAGE>
IMAGE SENSING SYSTEMS, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Six-Month Period Ended
June 30
---------------------------
1998 1997
---------------------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income $ 47,000 $ 262,000
Adjustments to reconcile net income to
net cash provided by (used in) operating activities 372,000 (362,000)
---------------------------
Net cash provided by (used in) operating activities 419,000 (100,000)
INVESTING ACTIVITIES:
Capitalized software development costs (562,000) --
Purchase of property and equipment (45,000) (48,000)
---------------------------
Net cash used in investing activities (607,000) (48,000)
FINANCING ACTIVITIES:
Proceeds from exercise of stock option 4,000 --
---------------------------
Net cash provided by financing activities 4,000 --
---------------------------
Increase (decrease) in cash and cash equivalents (184,000) (148,000)
Cash and cash equivalents, beginning of period 2,000,000 1,694,000
---------------------------
Cash and cash equivalents, end of period $ 1,816,000 $ 1,546,000
===========================
</TABLE>
See accompanying notes
<PAGE>
IMAGE SENSING SYSTEMS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
June 30, 1998
Note A: Basis of Presentation
The accompanying unaudited condensed financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions to Form 10-QSB. Accordingly, they do not
include all of the information and footnotes required by generally accepted
accounting principles for complete financial statements. In the opinion of
management, all adjustments (consisting of normal recurring accruals) considered
necessary for a fair presentation have been included. Operating results for the
three- and six-month periods ended June 30, 1998 are not necessarily indicative
of the results that may be expected for the year ended December 31, 1998. For
further information, refer to the financial statements and footnotes thereto for
the year ended December 31, 1997.
Note B: Net Income Per Share
In 1997, the Financial Accounting Standards Board (FASB) issued FASB Statement
No. 128, "Earnings Per Share." This Statement replaced the previously reported
primary and fully-diluted earnings per share (EPS) with basic and diluted EPS.
Unlike primary EPS, basic EPS excludes any dilutive effects of options,
warrants, and convertible securities. Diluted EPS is very similar to the
previously reported fully-diluted EPS. All EPS amounts for all periods have been
presented, and where necessary, restated to conform to the FASB Statement
requirements.
<PAGE>
Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
(Three- and Six-Month Periods Ended June 30, 1998)
Revenues for the second quarter of 1998 were $789,000 a decrease of 30% from
$1,131,000 for the same period a year ago, while revenues for the first half of
1998 were $1,547,000, a decrease of 24% from $2,036,000 a year ago. The decrease
in revenues for the quarter and six-month period was due primarily to fewer
sales of Autoscope(R) systems by both Image Sensing Systems, Inc. (ISS) and its
North American distributor. Revenue from direct sales and royalties for the
second quarter of 1998 decreased 20% and 36%, respectively, compared to the
second quarter of 1997. Revenue from direct sales and royalties for the first
half of 1998 decreased 21% and 26%, respectively, compared to the first half of
1997. The Company believes the delay in passage of the transportation bill by
the United States Congress may have caused traffic managers to put off traffic
management projects otherwise planned for early 1998. The Asian economic crisis
is also having a negative impact on direct sales overseas.
Gross profit was $601,000 in the second quarter of 1998, or 76% of revenue,
compared to $948,000, or 84% of revenue, for the same period a year ago. Gross
profit for the first half of 1998 was $1,150,000, or 74% of revenue, compared to
$1,591,000, or 78% of revenue, for the same period a year ago. The lower margins
in 1998 are due primarily to deriving proportionately more revenue from direct
sales than from royalties, the former having a lower gross profit margin. Also,
in the second quarter of 1997 the Company had a significant sale with a higher
than normal gross margin.
Selling, general and administrative expenses were $581,000 and $1,158,000,
respectively, for the three- and six-month periods ended June 30, 1998 compared
to $552,000 and $1,047,000 for the same periods a year ago. The increases were
due primarily to use of contract personnel to expedite completion of a new
software release
<PAGE>
for the Autoscope 2004 system and to added costs related to preparing for
introduction of the new Autoscope Solo product.
No research and development expenses were incurred in the three- and six-month
periods ended June 30, 1998 compared to $160,000 and $331,000, respectively,
incurred in the same periods a year ago. The decrease resulted because all
development efforts in the first half of 1998 were incurred in software
development for the new Autoscope Solo product. These costs were capitalized and
will continue to be capitalized until the Solo product is introduced. At that
time, the capitalized costs will be amortized over the expected life of the new
product.
Other income, net, was $26,000 and $55,000, respectively, for the three- and
six-month periods ended June 30, 1998 compared to $21,000 and $49,000,
respectively, for the same periods a year ago. The small increase resulted
primarily from holding more cash in interest bearing cash equivalents during the
second quarter of 1998
The Company expects to utilize a portion of its operating loss carryforward and
incur no income tax expense in 1998.
Liquidity and Capital Resources:
The Company completed an initial public offering in June 1995 with the sale of
990,000 shares of common stock, receiving net proceeds of approximately $3.9
million. The proceeds are being used for the expansion of the business and the
unused portion is currently held in interest-bearing cash equivalents.
Cash provided by operating activities was $419,000 for the six-month period
ended June 30, 1998, compared to $100,000 used in operating activities for the
same period in 1997. The increase in cash flow from operations was primarily due
to the reduction in receivables and inventories compared to the prior year.
<PAGE>
Capital expenditures were $45,000 for the first half of 1998, compared to
$48,000 for the same period in 1997. The Company does not expect to make
significant changes to the level of investments in capital expenditures for the
balance of 1998. Capitalized software development costs were $562,000 in the
first half of 1998. The Company began capitalizing software development costs in
the fourth quarter of 1997 when technological feasibility for the new Autoscope
Solo product was assured. The Company expects to reduce the level of investment
in software development over the next quarter and have the product available for
distributor sales by the end of the third quarter.
Management believes that its cash and investment position, anticipated cash
flows from operations, and funds available through its bank line of credit will
be sufficient to meet working capital requirements for current operations and
planned new product introductions for the foreseeable future.
Impact of the Year 2000 Issue
The Year 2000 Issue is the result of computer programs being written using two
digits rather than four to define the applicable year. Some computer programs
that have date-sensitive software may recognize a date using "00" as the year
1900 rather than the year 2000. All of the software produced by the Company has
been analyzed and the Company is not aware of any potential for date recognition
problems in its products. However, the Company also uses off-the-shelf software
(Administrative Software) produced by third parties for use in administrative
functions such as word processing, network administration, voice mail messaging,
billing and record keeping. In the event, that any of such programs are
susceptible to date recognition problems, this could result in a system failure
or miscalculations causing disruption of operations, including, among other
things, intra-company communications, preparation of invoices and collection of
accounts receivables, and many other normal business activities.
The Company has made every attempt to identify all relevant software that may
affect the Company's operations through surveys and examination. Based on risk
assessments that
<PAGE>
have been completed for the majority of the Company's operations, the Company
must replace some of its Administrative Software so that its computer systems
will properly utilize dates beyond December 31, 1999. The Company expects to
convert the majority of its business operations to new Year 2000 compatible
software during 1998 and early 1999 by a combination of conversion to new
software and upgrading existing software. The cost of these conversions is
expected to be immaterial. However, there can be no guarantee that the
Administrative Software on which the Company's systems rely will be timely
converted, or that a failure to convert by another company, or a conversion that
is incompatible with the Company's systems, would not have a material adverse
effect on the Company.
Safe Harbor Statement under the Private Securities Litigation Reform Act of 1995
This Quarterly Report on Form 10-QSB contains forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended. These
forward-looking statements involve risks and uncertainties that may cause the
Company's actual results to differ materially from the results discussed in the
forward-looking statements. Factors that might cause such differences include
but are not limited to, the ability and willingness of governmental agencies
responsible for roadway planning to invest in Autoscope machine vision
technology for advanced traffic management, the impact of new products
introduced by competitors, and higher than expected expenses to complete the
development of new products and to establish a worldwide marketing presence.
<PAGE>
PART II: OTHER INFORMATION
Item 1. Legal Proceedings
Not applicable
Item 2. Changes in Securities
Not applicable
Item 3. Defaults upon Senior Securities
Not applicable
Item 4. Submission of Matters to a Vote of Security Holders
The Company held its annual meeting on May 28, 1998, in
Minneapolis, Minnesota. The Company solicited proxies and
filed its definitive proxy statement with the Commission
pursuant to Regulation 14A. The only matter voted upon at the
meeting was the election of directors as follows:
Director For Withhold Authority
-------- --- ------------------
Panos G. Michalopoulos 2,289,683 1,300
Spiro G. Voglis 2,289,683 1,300
Richard C. Magnuson 2,286,683 4,300
Richard P. Braun 2,289,683 1,300
James Murdakes 2,289,683 1,300
C. (Dino) Xykis 2,289,683 1,300
Item 5. Other Information
Not applicable
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibit
10 Executive Employment Agreement between the
Company and William L. Russell, dated
June 10, 1998
27 Financial Data Schedule
(b) Reports
No reports on Form 8-K were filed during the quarter covered
by this Form 10-QSB
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Image Sensing Systems, Inc.
----------------------------------------------
(Registrant)
Dated: August 14, 1998 /s/ William L. Russell
----------------------------------------------
William L. Russell
President and Chief Executive Officer
(principal executive officer)
Dated: August 14, 1998 /s/ Arthur J. Bourgeois
----------------------------------------------
Arthur J. Bourgeois
Chief Financial Officer
(principal financial and accounting officer)
EXHIBIT 10
IMAGE SENSING SYSTEMS, INC.
EXECUTIVE EMPLOYMENT AGREEMENT
------------------------------
THIS AGREEMENT ("Agreement") is effective as of June 10, 1998 by and
between Image Sensing Systems, Inc. ("the Corporation"), a Minnesota corporation
with its principal offices at 500 Spruce Tree Centre, 1600 University Avenue
West, St. Paul, MN 55104-3825, and William L. Russell ("Employee"), a Florida
resident, whose residence address is 4205 Deepwater Lane, Tampa, FL 33615.
RECITALS
A. Employee possesses certain skills, talents, contacts, judgment and
knowledge of the Corporation's industry, including its various businesses,
technology strategies and objectives.
B. The Corporation desires to offer employment to Employee, and
Employee desires to accept such employment, subject to the terms and conditions
herein.
NOW, THEREFORE, in consideration of the foregoing premises and the
parties' mutual covenants and undertakings contained in this Agreement, the
Corporation and Employee hereby agree as follows:
ARTICLE 1.0 DEFINITIONS
Capitalized terms used in this Agreement shall have their defined
meaning throughout the Agreement. The following terms shall have the meanings
set forth below, unless the context clearly requires otherwise.
1.1 BOARD. "Board" shall mean the Board of Directors of the
Corporation.
1.2 CHANGE IN CONTROL. "Change In Control" shall mean any of the
following: (i) a public announcement that any person has acquired or has the
right to acquire beneficial ownership of fifty-one percent (51%) or more of the
then outstanding shares of common stock of the Corporation and, for this
purpose, the terms "person" and "beneficial ownership" shall have the meanings
provided in Section 13(d) of the Securities and Exchange Commission; (ii) the
commencement of or public announcement of an intention to make a tender or
exchange offer for fifty-one percent (51%) or more of the then outstanding
shares of the common stock of the Corporation; (iii) a sale of all or
substantially all of the assets of the Corporation; or (iv) the Board of
Directors of the Corporation, in its sole and absolute discretion, determines
that there has been a sufficient change in the stock ownership of the
Corporation to constitute a change in control of the Corporation.
<PAGE>
1.3 CONFIDENTIAL INFORMATION. "Confidential Information" shall mean
information that is proprietary to the Corporation or its members or others and
that is entrusted to the Corporation, whether or not trade secrets. Confidential
Information includes, but is not limited to, information relating to designs,
software (in source and object code), technology strategies, business plans and
to the business as conducted or anticipated to be conducted by the Corporation
or its members, and to past or current or anticipated products or services of
the Corporation or its members. Confidential Information also includes, without
limitation, information concerning research, development, purchasing,
accounting, marketing, selling and services. All information that Employee has a
reasonable basis to consider confidential is Confidential Information, whether
or not originated by Employee and without regard to the manner in which Employee
obtains access to this and any other proprietary information.
1.4 DISABILITY. "Disability" shall mean the unwillingness or inability
of Employee to perform his duties on a full-time basis under this Agreement
because of continuous incapacity due to physical or mental illness, bodily
injury or disease for a period of three (3) months or more.
1.5 EFFECTIVE DATE. "Effective Date" shall mean the date on page 1
hereof.
1.6 INVENTIONS. "Inventions" shall mean ideas, improvements and
discoveries, whether or not such are patentable or copyrightable, and whether or
not in writing or reduced to practice.
1.7 WORKS OF AUTHORSHIP. "Works of Authorship" shall mean any writings,
drawings, diagrams, charts, tables, databases, software (in object or source
code and recorded on any medium), and any other works of authorship, whether or
not such are copyrightable.
ARTICLE 2.0 EMPLOYMENT
2.1 EMPLOYMENT. Upon the terms and conditions set forth herein and his
appointment by the Board, the Corporation hereby employs Employee, and Employee
accepts such employment, as President and Chief Executive Officer and member of
the Board, commencing on June 10, 1998 at the Corporation's principal place of
business in St. Paul, Minnesota. Termination of this Agreement by either party
or by mutual agreement of the parties under Article 4.0 below shall also
terminate Employee's employment by the Corporation. Upon termination of the
Agreement by either party or by mutual agreement of the parties under Article
4.0 below, Employee agrees to resign as a member of the Board if so requested by
a majority of other Board members.
<PAGE>
ARTICLE 3.0 COMPENSATION AND BENEFITS
3.1 BASE SALARY. The Corporation shall pay Employee an initial Base
Salary at a monthly rate of Eleven Thousand Six Hundred Sixty-seven dollars
($11,667.00) per month. Such Base Salary shall be paid in accordance with the
Corporation's regular payroll practices and subject to any applicable income
tax, Social Security or other withholding. Employee's Base Salary shall be
reviewed for potential adjustment on the basis of performance from time to time.
3.2 INCENTIVE COMPENSATION. The Corporation shall make Employee
eligible for incentive compensation ("Incentive Compensation"), in addition to
the Base Salary then applicable. Payment of Incentive Compensation will be
subject to Employee's achieving certain objectives set annually by Employee and
the Board. Commencing with the fiscal year beginning on January 1, 1999,
Employee shall be eligible for an Incentive Compensation payment of up to fifty
percent (50%) of Employee's annual Base Salary. For the fiscal year ending
December 31, 1998, Employee will earn a guaranteed bonus of $40,000, to be paid
during the first quarter of 1999.
3.3 EQUITY PARTICIPATION. The Corporation shall make Employee eligible
to receive options to purchase stock in the Corporation, subject to the terms
and conditions of the Corporation's 1995 Long Term Incentive Stock Option Plan
("the Plan"). The Corporation shall offer Employee an initial stock option of
100,000 common shares at an exercise price equal to the fair market value of
common shares at the date of grant, with options on Twenty-five percent (25%) of
the shares vesting upon the effective date of this Agreement. The balance of the
options will vest over the three years following the execution of this Agreement
in equal annual installments. If at any time during the three year period
Employee's employment with the Corporation is terminated for any reason or
Employee becomes ineligible to participate in the Plan, all unvested options
will be canceled immediately. Any vested options that have not been exercised by
Employee will be canceled if not exercised by Employee within the time set forth
in the Plan. If at any time during the three year period a Change In Control
occurs, all unexercised options may be exercised in full on or after the
eleventh business day following the date of the Change In Control.
3.4 HEALTH, DEATH, DISABILITY AND RETIREMENT BENEFITS. Employee shall
also be entitled to participate in the health and group life insurance benefit
plans of the Corporation to the extent that his position, title, tenure, salary,
age, health, and other qualifications make him eligible to participate. Employee
shall also be entitled to participate in disability programs and employee
pension plans of the Corporation to the extent the Corporation establishes these
plans and to the extent that his position, title, tenure, salary, age, health,
and other qualifications make him eligible to participate. The Corporation does
not guarantee the adoption or continuance of any particular employee benefit
plan or program during the term of this Agreement, and the Employee's
participation in any such plan or program shall be subject to the
<PAGE>
provisions, rules, and regulations applicable thereto. Employee will receive not
less than 20 days vacation allotment per year.
3.5 RELOCATION EXPENSES. The Corporation shall reimburse Employee for
any out of pocket expense relating to Employee's relocation to Minnesota,
including the cost of selling his current residence in Florida, and moving his
household goods to Minnesota, including, but not limited to, expenses incurred
in obtaining temporary housing in the Twin Cities area and expenses incurred
while searching for and acquiring a home in the Twin Cities area. The
determination of whether a cost relates to selling Employee's current residence
in Florida, or moving his household goods to Minnesota will be made at the sole
discretion of the Board. Employee may be required to furnish proof of actual
expenditure and the amount of these out of pocket expenses. In no event will the
total amount of Relocation Expenses reimbursed by the Corporation exceed seventy
thousand dollars ($70,000).
ARTICLE 4.0 TERM; TERMINATION
4.1 TERM. Employee's employment under this Agreement shall commence
upon the Effective Date and shall continue for not less than three years, after
which time it shall be terminable by either party for any reason or no reason
upon a notice of ninety (90) days.
4.2 TERMINATION BY THE CORPORATION FOR GOOD CAUSE. Notwithstanding
Section 4.1 above, the Corporation may terminate this Agreement at any time
without notice for Good Cause. For purposes of this Agreement, "Good Cause"
shall mean:
(a) repeated violations by Employee of any of his duties or repeated
failures or omissions to carry out lawful and reasonable orders of
the Corporation's Board which, in the reasonable judgment of the
Board, are willful and deliberate and which are not cured within a
reasonable period after Employee's receipt of written notice
thereof from the Corporation;
(b) any absence from Employee's regular full-time employment in excess
of two (2) weeks that is not due to a vacation, bona fide illness,
Disability, death or other reason expressly authorized by the
Board; or
(c) any act or acts of (i) personal dishonesty by Employee and
intended to result in substantial personal enrichment of Employee
at the expense of the Corporation; (ii) any willful and deliberate
misconduct that is materially and demonstrably injurious to the
Corporation; or (iii) any criminal indictment, presentment or
conviction for a felony, whether or not the Corporation is the
victim of such offense.
<PAGE>
4.3 TERMINATION IN THE EVENT OF EMPLOYEE'S DEATH OR DISABILITY.
Notwithstanding Section 4.1 above, Employee's employment under this Agreement
shall terminate in the event of his death or Disability.
4.4 TERMINATION BY MUTUAL AGREEMENT. Notwithstanding Section 4.1 above,
the parties may terminate this Agreement at any time and upon any other terms or
conditions by mutual written agreement.
4.5 COMPENSATION UPON TERMINATION BY THE CORPORATION. As Employee's
sole and exclusive compensation for his termination by the Corporation, the
Corporation shall pay Employee as follows:
(a) If due to termination by the Corporation for Good Cause or by
Employee for any reason, within ten (10) days after the
termination date, the Corporation shall pay Employee any amounts
due to him for salary through the termination date together with
any other unpaid and pro rata amounts of accrued vacation pay,
sick leave, and/or business expense reimbursements that may be
due.
(b) If due to termination by the Corporation for other than Good
Cause after Employee's first three years of employment, the
Corporation shall pay Employee his salary in effect at the
termination date and provide him with the medical and group life
insurance benefits in effect at the termination date for a term of
six months from the termination date, subject to withholding,
deductions and taxation in accordance with applicable law.
4.6 SURVIVAL. The provisions of Article 4.0 (relating to termination
rights and the provision of compensation and benefits beyond the termination of
this Agreement), the provisions of Article 6.0 (relating to Confidential
Information and intellectual property rights of the Corporation), the provisions
of Article 7.0 (relating to non-competition and no solicitations), the
provisions of Article 8.0 (relating to dispute resolution) and the provisions of
Article 9.0 (relating to miscellaneous terms and conditions) shall survive
termination of this Agreement for any reason.
ARTICLE 5.0 EMPLOYMENT UPON A CHANGE IN CONTROL
5.1 CONTINUED EMPLOYMENT. If a Change In Control occurs and the
Corporation or its successor desires that Employee remain in his employment with
the Corporation or its successor, Employee agrees to remain in the employment of
the Corporation or its successor for a term not to exceed one (1) year at the
compensation rate in effect at the Change In Control, or as mutually agreed upon
by the parties.
<PAGE>
5.2 CONTINUED COMPENSATION. If a Change In Control occurs and the
Corporation or its successor does not desire that Employee remain in his
employment with the Corporation or its successor, the Corporation or its
successor agrees to pay Employee his salary in effect at the termination date
for a term of one (1) year from the termination date or until Employee obtains
new employment, whichever is earlier, subject to withholding, deductions and
taxation in accordance with applicable law.
ARTICLE 6.0 CONFIDENTIAL INFORMATION; INTELLECTUAL PROPERTY
6.1 PROHIBITIONS AGAINST UNAUTHORIZED USE. Employee shall not use or
disclose, other than in connection with Employee's employment with the
Corporation, any Confidential Information to any person not employed by the
Corporation or not authorized by the Corporation to receive such Confidential
Information, without the prior written consent of the Corporation during the
term of this Agreement or at any time thereafter. Employee shall use reasonable
and prudent care to safeguard and protect and prevent the unauthorized use and
disclosure of Confidential Information.
6.2 EXCLUSIONS. The obligations under Section 6.1 above shall not apply
to any information that:
(a) is now or becomes generally available to the public through no
fault of Employee;
(b) was already known to Employee, as shown by his books and records,
prior to disclosure of same by the Corporation;
(c) is or was independently developed or acquired by Employee without
any use of or reliance on Confidential Information;
(d) is or was provided to Employee by a third party not under any
obligation of confidentiality to the Corporation; or
(e) is required to be disclosed by law, provided, however, Employee
shall render reasonable cooperation, at the Corporation's expense,
to lawfully prevent or minimize any such public disclosure of
Confidential Information through protective orders or other
similar measures.
6.3 OWNERSHIP AND RETURN OF CORPORATION PROPERTY. All Confidential
Information or other Corporation property in Employee's possession, custody or
control, including without limitation, all documents, reports, manuals, business
plans, minutes, memoranda, computer software, computer databases, computer
print-outs, member or customer lists, credit cards, keys, identification,
products, access cards, and all other tangible or intangible property relating
in any way to the
<PAGE>
business of the Corporation are the exclusive property of the Corporation, even
if Employee authored, created or assisted in authoring or creating such
property. Employee shall return to the Corporation all such Confidential
Information or other property immediately upon termination of employment for any
reason whatsoever or at such earlier time as the Corporation may reasonably
request.
6.4 DISCLOSURE AND ASSIGNMENT OF INVENTIONS AND OTHER WORKS. Employee
shall promptly disclose to the Corporation in writing all Inventions and Works
of Authorship which are conceived, made, discovered, written or created by
Employee alone or jointly with another person, group or entity, whether during
the normal hours of his employment at the Corporation or on Employee's own time,
during the term of this Agreement and for one (1) year after termination of this
Agreement. Employee hereby assigns all rights to all such Inventions and Works
of Authorship to the Corporation. Employee shall give the Corporation all the
assistance it reasonably requires for the Corporation to perfect, protect, and
use its rights to such Inventions and Works of Authorship. Employee shall sign
all such documents, take all such actions and supply all such information that
the Corporation considers necessary or desirable to transfer or record the
transfer of Employee's entire right, title and interest in such Inventions and
Works of Authorship and to enable the Corporation to obtain exclusive patent,
copyright, or other legal protection for Inventions and Works of Authorship
anywhere in the world, provided, the Corporation shall bear all reasonable
expenses of Employee in such rendering cooperation.
6.5 EXCLUSIONS. Notwithstanding Section 6.4 above, the following shall
not be deemed Inventions or Works of Authorship assigned to Corporation by
Employee hereunder:
(a) Any invention or work of authorship for which no equipment,
supplies, facility or Confidential Information of the Corporation
was used and which was developed entirely on Employee's own time,
and which (i) does not relate (1) directly to the business of the
Corporation or (2) to the Corporation's actual or demonstrably
anticipated research or development, or (ii) which does not
result from any work performed by Employee for the Corporation.
ARTICLE 7.0 NON-COMPETITION AND NO RAID COVENANTS
7.1 NON-COMPETITION COVENANT. Subject to Section 7.2 and 7.3 below,
during the term of this Agreement and for a period of one (1) year following
termination of his employment with the Corporation for any reason, Employee
shall not directly or indirectly, engage in any business activity on his own
behalf or as a partner, shareholder, director, trustee, principal, agent,
officer, employee, consultant, or otherwise of any person or entity the business
of which is the same as, similar to, or competitive of any business of the
Corporation, or which is engaged in the development or production of products
intended to compete with the
<PAGE>
Corporation, or assist, solicit, entice, or induce any other person to engage in
any such activity. For purposes hereof, "shareholder" shall not include
beneficial ownership of less than five percent (5%) of the combined voting power
of all issued and outstanding voting securities of a publicly held corporation
whose stock is traded on a major stock exchange or quoted on NASDAQ.
7.2 CORPORATION'S OPTION TO REVISE. At its sole option, the Corporation
may, by written notice to Employee, within thirty (30) days after the effective
date of the termination of Employee's employment, waive or limit the line of
business, time period and/or geographic area in which Employee is prohibited
from engaging in competitive activity under Section 7.1 above.
7.3 COVENANT NOT TO RECRUIT. Employee hereby acknowledges that the
Corporation's employees, consultants and other contractors constitute vital and
valuable aspects of its business and missions on a world-wide basis. In
recognition of that fact, for a period of one (1) year following the termination
of this Agreement for any reason whatsoever, Employee shall not solicit, or
assist anyone else in the solicitation of, any of the Corporation's then-current
employees, consultants or other contractors to terminate their respective
relationships with the Corporation and to become employees, consultants or
contractors by any enterprise with which the Employee may then be associated,
affiliated or connected.
7.4 COVENANT NOT TO SOLICIT. Employee hereby acknowledges that the
Corporation's customers constitute vital and valuable aspects of its business on
a world-wide basis. In recognition of that fact, for a period of one (1) year
following the termination of this Agreement for any reason whatsoever, Employee
shall not solicit, or assist anyone else in the solicitation of, any of the
Corporation's then-current customers to terminate their respective relationships
with the Corporation and to become customers of any enterprise with which the
Employee may then be associated, affiliated or connected.
ARTICLE 8.0 DISPUTE RESOLUTION
8.1 PROCEDURE FOR ARBITRATION. Except as provided in Section 8.2 below,
any dispute, claim or controversy arising out of or in connection with this
Agreement which has not been settled through negotiation within a period of
thirty (30) days after the date on which either party shall first have notified
the other party in writing of the existence of a dispute shall be settled by
final and binding arbitration under the then-applicable Commercial Arbitration
Rules of the American Arbitration Association ("AAA"). Any such arbitration
shall be conducted by one (1) neutral arbitrator appointed by mutual agreement
of the parties or, failing such agreement, in accordance with said Rules. Such
arbitrator shall be an experienced attorney with a background in employment law.
Any such arbitration shall be conducted in St. Paul, Minnesota. An arbitral
award may be enforced in any court of competent jurisdiction. Notwithstanding
any contrary provision in the AAA
<PAGE>
Rules, the following additional procedures and rules shall apply to any such
arbitration:
(a) Each party shall have the right to request from the arbitrator,
and the arbitrator shall order upon good cause shown, reasonable
and limited prehearing discovery, including (i) exchange of
witness lists, (ii) depositions under oath of named witnesses at a
mutually convenient location, (iii) written interrogatories, and
(iv) document requests.
(b) Upon conclusion of the pre-hearing discovery, the arbitrator shall
promptly hold a hearing upon the evidence to be adduced by the
parties and shall promptly render a written opinion and award.
(c) The arbitrator shall adhere strictly to the sole and exclusive
remedies set forth in Article 4.0 above and may not award or
assess punitive damages against either party.
(d) Each party shall bear its own costs and expenses of the
arbitration and one-half (1/2) of the fees and costs of the
arbitrator, subject to the power of the arbitrator, in his or her
sole discretion, to award all such reasonable costs, expenses and
fees to the prevailing party.
8.2 LITIGATION RIGHTS RESERVED. If any dispute arises with regard to
the unauthorized use or infringement of Confidential Information by Employee or
with regard to Employee's breach or threatened breach of covenants in Article
7.0, the Corporation may seek any available remedy at law or in equity from a
court of competent jurisdiction.
ARTICLE 9.0 GENERAL PROVISIONS
9.1 INDEMNIFICATION. To the fullest extent required by law, the
Corporation shall indemnify Employee with respect to any actions commenced
against Employee in his capacity as an officer or director of the Corporation,
and the Corporation shall advance on a timely basis any costs or expenses
(including legal fees) incurred in defending such actions, subject only to
Employee's agreement to repay such amount if later found not entitled to be
indemnified. The obligation to indemnify hereunder shall survive the termination
of this Agreement. The Corporation acknowledges that the indemnification
obligations generally available to directors, officers or employees of the
Corporation pursuant to the Corporation's articles of incorporation or bylaws
will be available to Employee.
9.2 SUCCESSORS AND ASSIGNS. This Agreement constitutes a personal
service agreement on the part of Employee and his duties hereunder may not be
assigned or delegated to any other person without the prior written consent of
the Corporation, but all rights of Employee hereunder shall inure to the benefit
of and be enforceable
<PAGE>
by Employee's personal or legal representatives, executors, administrators,
successors, heirs, distributees, devisees and legatees. If Employee should die
while any amounts would still be payable to Employee hereunder if Employee had
continued to live, all such amounts, unless otherwise provided herein, shall be
paid in accordance with the terms of this Agreement to Employee's devisee,
legatee, or other designee or, if there be no such designee, to Employee's
estate.
9.3 NOTICES. All notices, requests and demands required or permitted
hereunder shall be in writing and be personally or courier delivered or mailed
postage prepaid, registered or certified U.S. mail to the other party at its
address set forth on the last page of this Agreement. Either party may, by
notice hereunder, designate a changed address. Any notice hereunder shall be
deemed effectively given and received: (a) if personally or courier delivered,
upon delivery; or (b) if mailed, on the third (3rd) day after deposit in the
mail.
9.4 CAPTIONS. The various headings or captions in this Agreement are
for convenience only and shall not affect the meaning or interpretation of this
Agreement.
9.5 GOVERNING LAW; CHOICE OF FORUM. The validity, interpretation,
construction, performance, enforcement and remedies of or relating to this
Agreement, and the rights and obligations of the parties hereunder, shall be
governed by the substantive laws of the State of Minnesota (without regard to
the conflict of laws rules or statutes of any jurisdiction), and, expressly
subject to the dispute resolution mechanism in Article 8.0 above, any and every
other legal proceeding arising out of or in connection with this Agreement shall
be brought in the appropriate courts of the State of Minnesota, each of the
parties hereby consenting to the exclusive jurisdiction of said courts for this
purpose.
9.6 CONSTRUCTION. Wherever possible, each provision of this Agreement
shall be interpreted in such manner as to be effective and valid under
applicable law, but if any provision of this Agreement shall be prohibited by or
invalid under applicable law, such provision shall be ineffective only to the
extent of such prohibition or invalidity without invalidating the remainder of
such provision or the remaining provisions of this Agreement.
9.7 WAIVERS. No failure on the part of either party to exercise, and no
delay in exercising, any right or remedy hereunder shall operate as a waiver
thereof; nor shall any single or partial exercise of any right or remedy
hereunder preclude any other or further exercise thereof or the exercise of any
other right or remedy granted hereby or by any related document or by law.
9.8 MODIFICATION. This Agreement may not be modified or amended except
by written instrument signed by Employee and another senior Executive of the
Corporation who is a member of the Board and is acting pursuant to the authority
of the Board.
<PAGE>
9.9 ENTIRE AGREEMENT. This Agreement constitutes the entire agreement
and understanding between the parties hereto in reference to all the matters
herein agreed upon. This Agreement replaces in full all prior employment offers,
discussions, requests, agreements or understandings of the parties hereto, and
any and all such prior offers, discussions, requests, agreements or
understandings are hereby rescinded by mutual agreement.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed and delivered as of the day and year first above written in St.
Paul, Minnesota.
IMAGE SENSING SYSTEMS, INC.
By /s/ Richard C. Magnuson
------------------------------------------
Its /s/ Board of Directors 4/17/98
---------------------------------------
By /s/ James Murdakes
------------------------------------------
Its /s/ Board of Directors 4/15/98
---------------------------------------
Address: 500 Spruce Tree Centre
1600 University Avenue West
St. Paul, MN 55104-3825
/s/ William L. Russell 4/17/98
--------------------------------------------
Employee
Address: 4205 Deepwater Lane
Tampa, FL 33615
<PAGE>
ADDENDUM
TO
IMAGE SENSING SYSTEMS, INC.
EXECUTIVE EMPLOYMENT AGREEMENT
WHEREAS, the undersigned are parties to that Agreement dated as of June
10, 1998 (the "Agreement") by and between Image Sensing Systems, Inc., a
Minnesota corporation (the "Corporation"), and William L. Russell, a resident of
the state of Florida ("Employee");
WHEREAS, Section 3.3 of the Agreement contemplates granting Employee a
stock option to purchase up to 100,000 shares of the Corporation's common stock
at an exercise price equal to the fair market value of one share of common stock
on the date of grant; and
WHEREAS, the date of grant of such option and its vesting schedule were
unclear in the Agreement and the Corporation and Employee desire to clarify each
of the foregoing.
NOW, THEREFORE, in consideration of the foregoing premises and the
parties' mutual covenants and undertakings contained herein, the undersigned
hereby agree that, pursuant to the Agreement and within 15 days after the
effective date thereof, the Corporation shall grant Employee a stock option to
purchase up to 100,000 shares of the Corporation's common stock at a per share
exercise price equal to the fair market value of one share of the Corporation's
common stock on the date of grant, which option shall vest in four equal annual
installments on each of the date of grant and the first, second and third
anniversary of the date of grant.
IN WITNESS WHEREOF, the parties hereto have caused this Addendum to be
duly executed and delivered as of the date hereof in St. Paul, Minnesota.
Dated: June 18, 1998 IMAGE SENSING SYSTEMS, INC.
By /s/ James Murdakes
------------------------------------------
Its Director
---------------------------------------
By /s/ Richard C. Magnuson
------------------------------------------
Its Director
---------------------------------------
Address: 500 Spruce Tree Centre
1600 University Avenue West
St. Paul, Minnesota 55104-3825
/s/ William L. Russell
--------------------------------------------
Employee
Address: 4205 Deepwater Lane
Tampa, Florida 33615
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 1,816,000
<SECURITIES> 0
<RECEIVABLES> 871,000
<ALLOWANCES> 61,000
<INVENTORY> 22,000
<CURRENT-ASSETS> 2,793,000
<PP&E> 1,123,000
<DEPRECIATION> 599,000
<TOTAL-ASSETS> 3,955,000
<CURRENT-LIABILITIES> 721,000
<BONDS> 0
0
0
<COMMON> 25,000
<OTHER-SE> 3,164,000
<TOTAL-LIABILITY-AND-EQUITY> 0
<SALES> 511,000
<TOTAL-REVENUES> 1,547,000
<CGS> 262,000
<TOTAL-COSTS> 1,555,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 47,000
<INCOME-TAX> 0
<INCOME-CONTINUING> 47,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 47,000
<EPS-PRIMARY> .02
<EPS-DILUTED> .02
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