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, 1999
[ ] 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
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IMAGE SENSING SYSTEMS, INC.
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(Name of small business issuer in its charter)
MINNESOTA 41-1519168
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State or other jurisdiction of I.R.S. Employer Identification No.
incorporation of organization
1600 UNIVERSITY AVE. W., #500, ST. PAUL, MN 55104 (651) 603-7700
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Address of principal executive offices Issuer's telephone number
Securities registered under Section 12(b) of the Exchange act:
NONE
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Title of each class
Securities registered under Section 12(g) of the Exchange Act:
COMMON STOCK, $.01 PAR VALUE
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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, 1999
totaled $4,772,000.
Based on the closing bid price at March 24, 2000, the aggregate market
value of the voting stock held by nonaffiliates of the registrant was
$18,763,425.
The number of shares outstanding of the registrant's $.01 par value
common stock, as of March 24, 1999, was 2,480,950 shares.
Transitional Small Business Issuer Format: [ ] Yes [x] No
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the registrant's Annual Report to Shareholders for the year ended
December 31, 1999, which was filed as an exhibit hereto, are incorporated by
reference into Parts I and II.
Portions of the registrant's Proxy Statement for its May 10, 2000 Annual
Meeting, which will be filed prior to April 30, 1999, are incorporated by
reference in Part III.
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SAFE HARBOR STATEMENT UNDER THE
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
This Annual Report on Form 10-KSB 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, lack of market acceptance of the Company's products;
dependence on third parties for manufacturing and marketing capabilities and
continuing ability to pay royalties owed; inability of the Company to diversify
its product offerings; revenue fluctuations caused by the Company's dependence
on sales to governmental entities; failure of the Company to secure adequate
protection for the Company's intellectual property rights; failure of the
Company to respond to evolving industry standards and technological changes;
inability of the Company to properly manage growth in revenues and/or production
requirements; inability of the Company to meet its future additional capital
requirements; and control of the voting stock by insiders. The forward-looking
statements are qualified in their entirety by the cautions and risk factors set
forth in Exhibit 99, under the caption "Cautionary Statement," to this Annual
Report on Form 10-KSB for the year ended December 31, 1999.
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 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
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detectors and 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. 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 right to
manufacture the Autoscope Solo(TM)product solely for sale to ISS and Econolite.
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-one distributors covering countries primarily in Europe, Asia, and South
America.
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, Director 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.
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THE AUTOSCOPE SYSTEM
The Autoscope 2004 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 Solo(TM) system (Solo) incorporates the microprocessor and
circuitry into a single video camera. The Autoscope microprocessor in both the
2004 and Solo systems 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 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.
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The Company introduced Autoscope Solo in October 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 two large projects in
Minneapolis and St. Paul, Minnesota.
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), 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. The majority of all commercially installed Autoscope systems
are currently being used for intersection control applications.
FREEWAY APPLICATIONS. For freeway applications, Autoscope provides 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 is also 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 detects traffic movement
on a freeway on-ramp or in the merging area on the freeway, and the resulting
data is used to prevent a queue from developing
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on a side street, to control on-ramp traffic signals, or to determine the
capacity of a merge area for planning and control purposes.
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 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 captures 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.
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.
The size of the Company's research and development staff varies in
numbers depending on the allocation of engineering resources to outside projects
and product support. Generally fifteen individuals, of whom six hold advanced
degrees, are presently involved in research and development. The Company's
research and development expenditures totaled approximately $478,000 in 1999 and
$203,000 in 1998. In addition, the Company capitalized software development
costs during the application development stage for the Solo product totaling
$287,000 in 1999 and $825,000 in 1998. The combination of capitalized software
development costs and research and development costs was $765,000 in 1999 and
$1,028,000 in 1998. The
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Company expects its research and development costs in 2000 to be comparable to
the combined capitalized software development and research and development costs
incurred in previous years.
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 transportation, the ITS program seeks to develop and
implement a variety of transportation user services.
On June 9, 1998, the Transportation Equity Act for the 21st Century
(TEA-21) was signed into law. This law authorizes $198 billion in spending for
highways, highway safety, transit and other surface transportation programs over
the next five years. Over $10 billion is earmarked for mitigation of congestion
and air quality improvement, to develop and deploy advanced intelligent
transportation system technologies and for transportation research and
technology
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deployment. TEA-21 will provide transportation managers with
increased funding over the next five years to enable more deployment of machine
vision technology.
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.
While the Company is optimistic that its Autoscope machine vision
technology will be selected for deployment in the United States with increasing
frequency, there can be no assurance that traffic managers responsible for
selecting Intelligent Transportation Systems will choose machine vision
technology over embedded loop detectors, pressure plates, radar, microwave or
other competing technologies or will choose the Autoscope system over competing
machine vision products.
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.
BACKLOG
The Company's backlog of unfulfilled firm orders from distributors was
not material as of December 31, 1999 and was $288,000 as of December 31, 1998.
Terms of agreements between distributors of the Company's products and
government contractors and other customers generally provide for cancellation or
rescheduling of delivery. Accordingly, the Company's backlog at a particular
date may not be indicative of its future revenue.
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COMPETITION
Competition in the area of advanced traffic management and surveillance
is growing, due in part to the increased federal funding of advanced
technologies under the ITS program. Some of the companies that may compete with
the Company in the business of developing and implementing traffic control
systems include companies that have substantially more financial, technological,
marketing, personnel, and research and development resources than the Company.
The Company's products will compete not only with conventional methods of
vehicle detection and traffic control, such as embedded loop detectors, but also
with new technologies that may be applied to problems of urban traffic
congestion. New technologies or applications in traffic control systems may
provide the Company's customers with alternatives to the Autoscope system.
Various technologies have been used as traffic sensing devices in the past and
will continue to be developed for application to traffic management. These
technologies include embedded loop detectors, pressure plates, pneumatic tubes,
radars, lasers, magnetometers, acoustics, and microwaves. The Company estimates
that over 95% of the detector systems currently in use in the U.S. are embedded
loop detectors. Embedded loop detectors are relatively easy to manufacture and
are currently manufactured by numerous companies throughout the world.
The Company is aware of several companies that are developing traffic
management devices using machine vision technology or other advanced technology.
Among the companies that are expected to provide direct competition to the
Company's Autoscope system in the use of machine vision technology in traffic
management are Traficon N.V. (Traficon), Peek business unit of Thermo Power
Corp. (Peek), Nestor, Inc., and Odetics, Inc., (Odetics). 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 Nestor, Inc. 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
revenue derived by Econolite from sales of the Autoscope system. Econolite has
over 64 years of experience in the traditional traffic intersection control
industry.
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In January 1998, Econolite was certified as to ISO 9002 standards in
its manufacture of machine vision products for the transportation management
industry.
The Company also obtained Conformite Europeenne (CE) Mark approval in
1998 for its Autoscope technology. The CE Mark is a worldwide standard for
safety and quality assurance.
ISS may terminate the Econolite Agreement if a minimum annual sales
level 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.
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.
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.
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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.
Econolite provides a two-year warranty on the current Autoscope system
and must provide all service required under such warranties. Cohu provides a
two-year warranty to ISS and Econolite on the Solo product. Some of the
component hardware incorporated into the Autoscope system, such as the
supervisor computer and the video monitor, are standard computer hardware
products that are available from multiple sources. Other parts, such as the
microprocessor and digitizer 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, Cohu'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 or Cohu's ability to manufacture the Autoscope system, which could,
in turn, adversely affect the Company's business.
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 direct mailings of Autoscope brochures, manuals and videos to
potential customers.
ISS has established a sales and marketing capability in countries
outside the Econolite Territory. In November 1998, the Company engaged a
Director of Asian Operations to be responsible for sales and marketing efforts,
including revitalization and growth of distributors in this market. In addition,
on February 1, 1999, the Company acquired a sixty- percent equity interest in a
sales organization in Hong Kong. This affiliate, under the direction of the
Director of Asian Operations, will market the Company's products as well as
related traffic control products in Asia.
The Company also employs a business development manager to expand the
distribution network in Europe and Latin America. The Company, along with its
Asian affiliate, currently has distributor agreements with twenty-one
distributors covering countries primarily in Europe, 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
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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, Director 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. Licensed products include any manufactured product that
incorporates the technology or improvements covered by the License Agreement.
Site license revenue equals all revenue collected by the Company and
specifically allocable to the Company for granting a license to use the licensed
products at a specific location or by a specific user. Sublicensing revenue
equals all revenue collected by the Company from parties to whom the Company
grants sublicense rights to make or sell the licensed products. The University
of Minnesota has retained a nonexclusive and nontransferable right to use the
licensed technology for educational and research purposes. The License Agreement
terminates at the termination of the patent covering the technology. The
University of Minnesota may terminate the License Agreement if the royalties due
thereunder are unpaid, if there is a material breach of the agreement by the
Company or if the Company fails to use best efforts to effect commercial sales
of the licensed products. The Company has agreed to indemnify the University of
Minnesota against all liabilities or losses arising from (i) manufacture, use,
lease or sale of a licensed product by the Company or a sublicensee of the
Company, or (ii) a third party's use of a licensed product purchased from the
Company or a sublicensee of the Company or (iii) a third party's manufacture of
a licensed product at the request of the Company.
The Company has sublicensed certain of its rights in the Autoscope
technology to Econolite pursuant to the Econolite Agreement. See "Marketing and
Manufacturing" above.
The Company's technology is dependent upon the knowledge, experience,
and skills of its key scientific and technical personnel. To protect its rights
to its proprietary know-how and technology, Company policy requires all
employees and consultants to execute confidentiality
12
<PAGE>
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 1, 2000 the Company and its affiliate had 35 full time
employees, of which 15 were engaged in research and development; 3 in product
and customer support; 4 in sales and marketing; 5 in management, administration,
finance, and human resources; and 8 at its affiliate. 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
November 2001, with an option to extend the lease through
November 2004. Aggregate annual lease payments under the lease
are approximately $144,000. The Company believes its
facilities are sufficient for its current needs.
ITEM 3. LEGAL PROCEEDINGS
During 1999, 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.
13
<PAGE>
PART II
ITEM 5. MARKET PRICE OF COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
MARKET INFORMATION
Price Range of Common Stock is included in the Annual Report
to Shareholders for the year ended December 31, 1999, is
incorporated herein by reference.
HOLDERS
As of March 24, 1999, the Company had approximately 27 holders
of record of its Common Stock and approximately 650
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
The following table sets forth, for the periods indicated, certain statement of
operations data as a percent of revenue:
Year Ended December 31
----------------------
1999 1998
- --------------------------------------------------------------------------------
Product sales 35.9% 26.2%
Royalties 58.7 65.8
Consulting services 5.4 8.0
----------------------
Total revenue 100.0 100.0
Cost of revenue 25.6 22.1
----------------------
Gross profit 74.4 77.9
Selling, marketing and product support 17.4 29.9
General and administrative 43.4 38.7
Research and development 10.0 6.0
----------------------
Income from operations 3.5 3.3
Net income 5.3 6.2
Product sales for 1999 increased to $1,712,000 compared to $881,000 in 1998. The
increase was due primarily to greater sales in Asia, $902,000 in 1999 compared
to $140,000 in 1998. Royalty income increased to $2,801,000 in 1999 compared to
$2,216,000 in 1998. The increase was due to greater sales and upgrades of
Autoscope systems by Econolite Control Products, Inc.
14
<PAGE>
(Econolite), our North American manufacturing and distribution partner. Revenue
from consulting services decreased to $259,000 in 1999 from $271,000 in 1998.
Gross profits were $3,549,000 or 74.4% of revenue in 1999, compared to
$2,624,000 or 77.9% of revenue in 1998. The decrease in gross profit margin
percent was due primarily to greater product sales as a percent of total
revenues.
Selling, marketing and product support expenses were $832,000 or 17.4% of
revenue in 1999, compared to $1,006,000 or 29.9% of revenue in 1998. The
decrease resulted primarily from reduced spending for sales and marketing
personnel and decreased costs for international travel. General and
administrative expenses were $2,070,000 or 43.4% of revenue in 1999, compared to
$1,303,000 or 38.7% of revenue in 1998. The increase was due primarily to added
efforts in business development, costs related to the integration of Flow
Traffic Ltd., Flow Traffic Ltd.'s general and administrative expenses, and
amortization of software development costs which began in October, 1998.
Research and development expenses were $478,000 or 10.0% of revenue in 1999,
compared to $203,000 or 6.0% of revenue in 1998. The Company capitalized
software development costs of $289,000 in 1999 for its new Autoscope Solo
Release 3 and new Comserver product. The combination of research and development
expenses and capitalized software development costs was $765,000 in 1999
compared to $1,028,000 in 1998. The decrease resulted primarily from
continuation engineering versus new product development.
Net income was $251,000 or 5.3% of revenue in 1999, compared to $203,000 or 6.0%
of revenue in 1998. There was no tax provision in 1999 because of loss carried
forward and tax credits. There was no tax provision in 1998 primarily due to a
decrease in the Company's valuation allowance.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1999 the Company had $1,319,000 in cash and cash equivalents
compared to $1,326,000 at December 31, 1998. The Company had working capital of
$2,173, 000 and a current ratio of 3.9 to 1 at December 31, 1999 compared to
$2,073,000 and 3.5 to 1 at the end of 1998. The increase in liquidity in 1999
was due primarily to increased sales and gross margin dollars. Net cash provided
by operating activities was $196,000 in 1999, compared to $249,000 in 1998. The
decrease was due primarily to an increase in accounts receivable.
The Company believes that cash and cash equivalents on hand at December 31, 1999
along with an available $500,000 revolving line of credit with a bank will
satisfy the Company's projected working capital needs and investing activities,
and other cash requirements through 2000.
15
<PAGE>
RECENT DEVELOPMENTS
It was announced on March 29th that the Board of Directors have approved a 20%
dividend to be paid in the form of additional shares of the Company's common
stock.
Shareholders of record at the close of business on April 17th will receive one
additional share for each five shares held by them on that date with any
fractional share paid in cash. The Company's transfer agent will mail the new
stock certificates representing the additional shares on or about the 1st of
May, 2000.
IMPACT OF THE YEAR 2000 ISSUE
The Company has made every attempt to identify all relevant software that might
affect the Company's operations through surveys and examination. The Company did
convert its business operations to Year 2000 compatible software during the
first half of 1999 by a combination of conversion to new software and upgrading
existing software. The cost of these conversions was in line with our budget of
$35,000. The Company has not experienced any Y2K problems with any of its
business software systems.
ITEM 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Report of Independent Auditors
SHAREHOLDERS AND BOARD OF DIRECTORS
IMAGE SENSING SYSTEMS, INC.
We have audited the accompanying consolidated balance sheets of Image Sensing
Systems, Inc. as of December 31, 1999 and 1998, and the related consolidated
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 did not audit the financial statements of
Flow Traffic Ltd., a 60% owned subsidiary, which statements reflect total assets
of $529,000 as of December 31, 1999 and total revenues of $902,000 for the year
then ended. Those statements were audited by other auditors whose report has
been furnished to us, and our opinion, insofar as it relates to data included
for Flow Traffic Ltd., is based solely on the report of the other auditors.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. 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 and the report of other auditors
provide a reasonable basis for our opinion.
In our opinion, based on our audits and the report of other auditors, the
financial statements referred to above present fairly, in all material respects,
the consolidated financial position of Image Sensing Systems, Inc. at December
31, 1999 and 1998, and the consolidated results of its operations and its cash
flows for the years then ended in conformity with accounting principles
generally accepted in the United States.
Minneapolis, Minnesota
February 11, 2000
16
<PAGE>
Image Sensing Systems, Inc.
Balance Sheets
<TABLE>
<CAPTION>
DECEMBER 31
ASSETS 1999 1998
-------------------------------
Current assets:
<S> <C> <C>
Cash and cash equivalents $ 1,319,000 $ 1,326,000
Accounts receivable, net of allowance for
returns and doubtful accounts of $43,000 in 1999 and 1998 1,428,000 1,402,000
Inventories 84,000 74,000
Prepaid expenses 57,000 32,000
Deferred income taxes 45,000 57,000
-------------------------------
Total current assets 2,933,000 2,891,000
Property and equipment:
Furniture and fixtures 135,000 129,000
Leasehold improvements 101,000 101,000
Equipment 1,136,000 950,000
-------------------------------
1,372,000 1,180,000
Accumulated depreciation (927,000) (710,000)
-------------------------------
445,000 470,000
-------------------------------
Deferred income taxes 358,000 318,000
Goodwill,net of accumulated amortization of $4,000. 86,000 -
Capitalized software development costs, net of accumulated
amortization of $173,000 (1998-$44,000) 1,014,000 856,000
-------------------------------
TOTAL ASSETS $ 4,836,000 $ 4,535,000
===============================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 429,000 $ 296,000
Accrued compensation 278,000 270,000
Deferred revenue 53,000 252,000
-------------------------------
Total current liabilities 760,000 818,000
Deferred income taxes 394,000 366,000
Commitments
Minority Interest 80,000 -
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 - 2,479,200 in 1999 and 1998 25,000 25,000
Additional paid-in capital 3,890,000 3,890,000
Retained earnings (deficit) (313,000) (564,000)
-------------------------------
Total shareholders' equity 3,602,000 3,351,000
-------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 4,836,000 $ 4,535,000
===============================
</TABLE>
SEE ACCOMPANYING NOTES.
17
<PAGE>
Image Sensing Systems, Inc.
Statements of Operations
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1999 1998
----------------------------------
Revenue:
<S> <C> <C>
Product sales $1,712,000 $ 881,000
Royalties 2,801,000 2,216,000
Consulting services 259,000 271,000
----------------------------------
4,772,000 3,368,000
Cost of revenue:
Product sales 831,000 406,000
Royalties 307,000 238,000
Consulting services 85,000 100,000
----------------------------------
1,223,000 744,000
----------------------------------
Gross profit 3,549,000 2,624,000
Operating expenses:
Selling, marketing and product support 832,000 1,006,000
General and administrative 2,070,000 1,303,000
Research and development 478,000 203,000
----------------------------------
3,380,000 2,512,000
----------------------------------
Income from operations 169,000 112,000
Interest income 82,000 97,000
----------------------------------
Income before income taxes 251,000 209,000
Income taxes -
----------------------------------
Net income $ 251,000 $ 209,000
==================================
Net income per common share-basic and diluted $ 0.10 $ 0.08
==================================
Weighted average number of common shares and
dilutive potential common shares outstanding 2,551,200 2,480,000
==================================
</TABLE>
SEE ACCOMPANYING NOTES.
18
<PAGE>
Image Sensing Systems, Inc.
Statements of Cash Flows
<TABLE>
<CAPTION>
Year ended December 31
1999 1998
----------------------------------
<S> <C> <C>
OPERATING ACTIVITIES
Net income 251,000 $ 209,000
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 218,000 207,000
Amortization 133,000 44,000
Changes in operating assets and liabilities:
Receivables (26,000) (238,000)
Inventories (10,000) 70,000
Prepaid expenses (25,000) 35,000
Accounts payable 133,000 (55,000)
Accrued compensation 8,000 86,000
Deferred revenue (199,000) (109,000)
----------------------------------
Net cash provided by operating activities 483,000 249,000
INVESTING ACTIVITIES:
Purchases of property and equipment (193,000) (102,000)
Acquisition of Flow Traffic, Ltd. (10,000)
Capitalized software development costs (287,000) (825,000)
----------------------------------
Net cash used in investing activities (490,000) (927,000)
----------------------------------
FINANCING ACTIVITIES:
Proceeds from sale of common stock - 4,000
----------------------------------
Net cash provided by financing activities - 4,000
----------------------------------
Increase (decrease) in cash (7,000) (674,000)
Cash and cash equivalents at beginning of year 1,326,000 2,000,000
----------------------------------
Cash and cash equivalents at end of year $ 1,319,000 $1,326,000
==================================
</TABLE>
SEE ACCOMPANYING NOTES.
19
<PAGE>
Image Sensing Systems, Inc.
Statement of Shareholders' Equity
<TABLE>
<CAPTION>
ADDITIONAL RETAINED
SHARES COMMON PAID-IN EARNINGS
DESCRIPTION ISSUED STOCK CAPITAL (DEFICIT)
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1997 2,478,200 25,000 3,886,000 (773,000)
Common stock issued for options exercised 1,000 - 4,000
Net income 209,000
--------------------------------------------------------------
Balance at December 31, 1998 2,479,200 $ 25,000 $3,890,000 $ (564,000)
Net income $ 251,000
--------------------------------------------------------------
Balance at December 31, 1999 $2,479,200 $ 25,000 $3,890,000 $ (313,000)
</TABLE>
SEE ACCOMPANYING NOTES.
20
<PAGE>
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999
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 products and
receives a royalty for sales made by a sublicensee to North American
distributors. The Company also provides technical expertise in image processing,
hardware and software design, and traffic management and control. The Company's
products are used primarily by governmental entities.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Image Sensing
Systems, Inc. and its majority owned subsidiary, Flow Traffic Ltd., located in
Hong Kong. All significant intercompany transactions and accounts have been
eliminated in consolidation.
REVENUE RECOGNITION
Revenue from product sales and royalties from the sale of products by a
sublicensee are recorded upon shipment. Consulting 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, 1999 and 1998.
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.
The Company has adopted the disclosure only provisions of Statement of Financial
Accounting Standards (SFAS) No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION
("Statement 123"). Accordingly, the Company has made pro forma disclosures of
what net income and net income 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
21
<PAGE>
reported in the financial statements and accompanying notes. Actual results
could differ from the estimates.
ACCOUNTING FOR IMPAIRMENT OF LONG-LIVED ASSETS
The Company records losses on long-lived assets used in operations when
indicators of impairment are present and the undiscounted cash flows estimated
to be generated by those assets are less than the assets' carrying amount.
RESEARCH AND DEVELOPMENT
Research and development costs are charged to operations in the period incurred.
SOFTWARE DEVELOPMENT COSTS
The Company capitalizes software development costs in accordance with the
provisions of SFAS No. 86, ACCOUNTING FOR THE COSTS OF COMPUTER SOFTWARE TO BE
SOLD, LEASED, OR OTHERWISE MARKETED. Capitalization of software development
costs, 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 amortizes software development costs based on projected
revenue, with minimum annual amortization based on a seven-year life using the
straight-line method.
EARNINGS PER COMMON SHARE
Basic earnings per share is computed using the weighted average number of common
shares outstanding during the period. Fully diluted and basic earnings per share
are the same because the effect of common equivalent shares from stock options
are not material (less than $.01).
NOTE 2
CREDIT FACILITY
The Company has a credit agreement that provides up to $500,000 in short-term
borrowings at 1.25% over the prime rate (9.75% at December 31, 1999). The
agreement limits the amount of short-term borrowings to 65% of eligible
receivables. Substantially all assets are pledged as collateral on the
borrowings. The credit agreement further includes covenants which relate to
certain financial statement ratios and restrictions. The Company had no
outstanding borrowings in 1999 or 1998.
NOTE 3
LEASE COMMITMENT
The Company rents office space under an operating lease agreement expiring in
November 2001, with options to renew through November 2004. The lease provides
for monthly payments of $12,000 and the Company is responsible for its
proportionate share of increases in operating expenses which exceed a base rent
factor. Rent expense amounted to $143,000 in 1999 and $139,000 in 1998.
22
<PAGE>
At December 31, 1999, future minimum annual lease payments are as follows:
Year ending December 31:
2000 $145,000
2001 134,000
--------
$279,000
========
NOTE 4
INCOME TAXES
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
1999 1998
----------------------------
Deferred tax assets:
Accounts receivable allowances $ 16,000 $ 16,000
Accrued compensation 26,000 17,000
Warranty reserve 4,000 6,000
Deferred revenue 20,000 47,000
Research and development tax credits 256,000 148,000
Net operating loss carryforward 273,000 335,000
----------------------------
595,000 569,000
Deferred tax liabilities:
Tax depreciation in excess of book $ 19,000 49,000
Capitalized software development costs 375,000 317,000
----------------------------
394,000 397,000
----------------------------
Net deferred tax assets 291,000 201,000
Less valuation allowance 192,000 192,000
----------------------------
Net deferred taxes $ 9,000 $ 9,000
============================
The Company has net operating loss carryforwards for income tax purposes of
$740,000 and research and development tax credits of $256,000 which expire in
the years 2007 through 2019. Cash paid for income taxes amounted to $4,000 in
1999 and $4,600 in 1998.
23
<PAGE>
Domestic and international components of net income before income taxes are as
follows for the year ended December 31, 1999:
Domestic Image Sensing Systems, Inc. $358,000
International Flow Traffic Ltd. (107,000)
---------
Net income $251,000
---------
No provision has been made for income taxes for 1999 or 1998. A reconciliation
of income taxes to the statutory federal rate is as follows:
Year Ended December 31
1999 1998
----------------------------
Federal tax at statutory rate $ 122,000 $ 71,000
State taxes net of federal benefit 11,000 7,000
Meals and entertainment 6,000 5,000
Research and development tax credits (108,000) --
Change in valuation allowance -- (62,000)
Other (29,000) (21,000)
----------------------------
Income taxes $ -- $ --
============================
Effective tax rate --% --%
============================
NOTE 5
COMMON STOCK
In connection with the offering of shares of common stock in 1995, the Company
issued warrants to the underwriter to purchase 90,000 shares for a period of
five years from the effective date of the Registration Statement. The exercise
price for the warrants is $5.70 per share.
NOTE 6
LICENSING
The U.S. patent for certain aspects of the technology underlying the Company's
Autoscope system was issued in 1989 to the University of Minnesota. The Company
has an exclusive worldwide license from the University of Minnesota for that
technology and pays royalties to the University of Minnesota in exchange for
such license. Royalty expense under the agreement was $307,000 in 1999 and
$238,000 in 1998.
The Company has sublicensed the right to manufacture and market the Autoscope
technology 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 Company recognized
royalty income from this agreement of $2,801,000 in 1999 and $2,216,000 in 1998.
Accounts
24
<PAGE>
receivable from Econolite were $1,058,000 and $1,310,000 at December 31, 1999
and 1998, respectively.
NOTE 7
EXPORT SALES
Product sales to foreign customers were $1,534,000 in 1999 and $541,000 in 1998.
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 $38,000
in 1999 and $44,000 in 1998.
NOTE 9
EMPLOYMENT AGREEMENTS
The Company has employment agreements with its chief executive and chief
financial officer. 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 maximum
severance for employees with agreements is their current salary for up to one
year.
NOTE 10
STOCK OPTIONS
In February 1995, the Company adopted the 1995 Long-Term Inventive and Stock
Option Plan (the 1995 Plan), which provides for the granting of incentive (ISO)
and non-incentive (NSO) stock options, stock appreciation rights, restricted
stock awards and performance awards to officers, directors, employees,
consultants and independent contractors of the Company and its subsidiaries. In
addition in 1999 the Board authorized and granted options with respect to an
additional 80,000 shares under the 1995 Plan subject to shareholder approval and
granted options outside of the 1995 Plan (the Non-Plan) in 1995, 1997 and 1998.
The following table summarizes stock option activity for 1999 and 1998.
OPTION TABLE
<TABLE>
<CAPTION>
Plan Options Weighted Average
Options Outstanding Non-Plan Exercise
Available -------------------- Options Price
for Grant ISO NSO Outstanding Per Share
------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1997 37,650 161,150 18,000 148,200 4.33
Reserved for options under Plan 100,000
Granted (119,500) 119,500 125,000 3.12
Exercised (1,000) 3.88
Canceled 32,300 (32,300) (29,000) 4.32
------------------------------------------------------------------
Balance at December 31, 1998 50,450 247,350 18,000 244,200 3.81
Reserved for options under Plan 80,000
Granted (80,000) 80,000 3.65
Exercised
Canceled
------------------------------------------------------------------
Balance at December 31, 1999 50,450 327,350 18,000 244,200 3.79
==================================================================
</TABLE>
Exercise prices for options as of December 31, 1999 ranged from $2.875 to $4.75.
Options under the 1995 Plan and Non-Plan expire at various dates through 2009.
At December 31, 1999 there were 359,888 options exercisable at a weighted
average exercise price of $3.65. Options
25
<PAGE>
outstanding have a weighted average remaining contractual life of 7.9 years. The
weighted average fair value of options granted during 1999 was $2.41.
Pro forma information regarding net income and net income 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: risk-free interest rate of 6.3% for 1999 and 5% for 1998;
volatility factor of the expected market price of the Company's common stock of
.449 for 1999 and .838 for 1998 and weighted-average expected life of the option
of ten 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:
1999 1998
----------------------
Pro forma net income $75,000 $ 1,000
Pro forma net Income per common share, basic and diluted $ .03 $ .00
26
<PAGE>
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
None.
ITEM 9. DIRECTORS AND OFFICERS OF THE REGISTRANT
The information contained on pages 2 and 3 of the Company's
Proxy Statement dated April 7, 2000, 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 the Company's
Proxy Statement dated April 7, 2000, with respect to executive
compensation and transactions, is incorporated herein by
reference in response to this item.
ITEM 11. SECURITY OF BENEFICIAL OWNERS AND MANAGEMENT
The information contained on page 7 of the Company's Proxy
Statement dated April 7, 2000, 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.
27
<PAGE>
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,
incorporated by reference to the Company's registration
statement on Form SB-2 (Registration No. 90298C) filed with
the Commission on March 14, 1995.
3.3 Bylaws of the Company, incorporated by reference to the
Company's registration statement on Form SB-2 (Registration
No. 90298C) filed with the Commission on March 14, 1995.
4.1 Specimen form of the Company's Common Stock Certificate,
incorporated by reference to the Company's registration
statement on Form SB-2 (Registration No. 90298C) filed with
the Commission on March 14, 1995.
4.2 1995 Long-Term Incentive and Stock Option Plan and form of
Option Agreement, incorporated by reference to the Company's
registration statement on Form SB-2 (Registration No. 90298C)
filed with the Commission on March 14, 1995.
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, incorporated
by reference to the Company's registration statement on Form
SB-2 (Registration No. 90298C) filed with the Commission on
March 14, 1995.
10.2 License Agreement dated June 10, 1991 between the University
of Minnesota and the Company, incorporated by reference to the
Company's registration statement on Form SB-2 (Registration
No. 90298C) filed with the Commission on March 14, 1995.
10.3 Form of Distributor Agreement, incorporated by reference to
the Company's registration statement on Form SB-2
(Registration No. 90298C) filed with the Commission on March
14, 1995.
10.4 Employment Agreement dated January 3, 1995 between the Company
and Panos G. Michalopoulos, incorporated by reference to the
Company's registration statement on Form SB-2 (Registration
No. 90298C) filed with the Commission on March 14, 1995.
10.5 Employment Agreement dated January 3, 1995 between the Company
and Spiro G. Voglis, incorporated by reference to the
Company's registration statement on Form SB-2 (Registration
No. 90298C) filed with the Commission on March 14, 1995.
10.6 Commercial Note with Norwest Bank Minnesota, N.A. dated
February 16, 1995, incorporated by reference to the Company's
registration statement on Form SB-2 (Registration No. 90298C)
filed with the Commission on March 14, 1995.
10.7 Form of Data Exchange and Disclosure Agreement, incorporated
by reference to the Company's registration statement on Form
SB-2 (Registration No. 90298C) filed with the Commission on
March 14, 1995.
10.8 Lease Agreement dated January 14, 1994 between the Company and
Bradley Real Estate Trust, incorporated by reference to the
Company's registration statement on Form SB-2 (Registration
No. 90298C) filed with the Commission on March 14, 1995.
10.9 Assignment from Panos G. Michalopoulos to the Company dated
January 19, 1985, incorporated by reference to the Company's
registration statement on Form SB-2 (Registration No. 90298C)
filed with the Commission on March 14, 1995.
10.10 Office Lease Amendment I dated June 8, 1995, by and between
Spruce Tree Centre L.L.P. and Image Sensing Systems, Inc.,
filed as Exhibit 10.10 to the Company's Form 10-KSB for the
year ended December 31, 1995 and incorporated herein by
reference.
10.11 Second Lease Amendment dated October 13, 1995, by and between
Spruce Tree Centre L.L.P. and Image Sensing Systems, Inc.
filed as Exhibit 10.11 to the Company's Form 10-KSB for the
year ended December 31, 1995 and incorporated herein by
reference.
28
<PAGE>
10.12 Extension of Spiro Voglis's employment agreement, filed as
Exhibit 10.12 to the Company's Form 10-KSB for the year ended
December 31, 1995 and incorporated herein by reference.
10.13 Consulting Agreement dated February 24, 1997, by and between
Arthur J. Bourgeois and Image Sensing Systems, Inc., filed as
Exhibit 10.13 to the Company's Form 10-KSB for the year ended
December 31, 1995 and incorporated herein by reference.
10.14 Production Agreement dated July 8, 1997, between the Company,
Cohu, Inc., and Econolite Control Products, Inc., filed as
Exhibit 10.14 to the Company's Form 10-KSB for the year ended
December 31, 1997 and incorporated herein by reference.
10.15 Extension of Mr. Bourgeois's consulting agreement, filed as
Exhibit 10.15 to the Company's Form 10-KSB for the year ended
December 31, 1997 and incorporated herein by reference.
10.16 Executive Employment Agreement between the Company and William
L. Russell, dated June 10, 1998, filed as Exhibit 10 to the
Company's Form 10-QSB for the quarter ended June 30, 1998 and
incorporated herein by reference.
10.17 Conditional Credit Line Letter Agreement with Norwest Bank
Minnesota, N.A. dated September 14, 1998
10.18 Office Lease Agreement by and between Spruce Tree Centre L.L.P
and the Company, dated November 24, 1998
10.19 Executive Employment Agreement between the Company and Jeffrey
F. Martin, dated December 21, 1999, filed as Exhibit 10.19 to
the Company's Form 10-KSB for the year ended December 31, 1999
and incorporated herein by reference.
10.20 Consulting Agreement dated December 8, 1999, by and between
Panos Michalopoulos and the Company, filed as Exhibit 10.20 to
the Company's Form 10-KSB for the year ended December 31, 1999
and incorporated herein by reference.
13 Annual Report of the Company for the year ended December 31,
1999, certain portions of which are incorporated by reference
into this Annual Report on Form 10-KSB.
23 Consent of Ernst & Young LLP
27.1 Image Sensing Systems, Inc. financial data schedule
27.2 Flow Traffic Limited financial data schedule
99 Cautionary Statement
B) REPORTS ON FORM 8-K FILED DURING FOURTH QUARTER OF 1998: NONE
29
<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/ William L. Russell Date: March 30, 2000
------------------------------------------------ --------------------
By: William L. Russell,
Chairman of the Board 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 William L. Russell and Jeffrey F. Martin, 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/ William L. Russell Date: March 30, 2000
------------------------------------------------ --------------------
By: William L. Russell
Chairman of the Board & CEO
/s/ Panos G. Michalopoulos Date: March 30, 2000
------------------------------------------------ --------------------
By: Panos G. Michalopoulos
Director
/s/ Richard P. Braun Date: March 30, 2000
------------------------------------------------ --------------------
By: Richard P. Braun
Director
/s/ Richard C. Magnuson Date: March 30, 2000
------------------------------------------------ --------------------
By: Richard C. Magnuson
Director
/s/ James Murdakes Date: March 30, 2000
------------------------------------------------ --------------------
By: James Murdakes
Director
/s/ C. (Dino) Xykis Date: March 30, 2000
------------------------------------------------ --------------------
By: C. (Dino) Xykis
Director
/s/Jeffrey F. Martin Date: March 30, 2000
------------------------------------------------ --------------------
By: Jeffrey F. Martin
Chief Financial Officer
30
EXHIBIT 10.14
IMAGE SENSING SYSTEMS, INC.
EXECUTIVE EMPLOYMENT AGREEMENT
------------------------------
THIS AGREEMENT ("Agreement") is effective as of December 21, 1999 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 Jeffrey Martin ("Employee") a Minnesota resident,
whose residence address is 3852 Tessier Trail, Vadnais Heights, MN 55127.
RECITALS
A. Employee possesses certain skills, talents, contacts, judgement
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 meaning 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 share 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.
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
<PAGE>
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 of 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 President & CEO, the Corporation hereby employs Employee,
and Employee accepts such employment, as Chief Financial Officer, commencing on
December 21, 1999 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.)
ARTICLE 3.0 COMPENSATION AND BENEFITS
3.1 BASE SALARY. The Corporation shall pay Employee an initial Base
Salary at a monthly rate of Eight Thousand Seven Hundred Fifty dollars ($8,750)
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.
2
<PAGE>
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.
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 25,000 common shares at an exercise price to the fair market value of common
shares at the date of grant, with options on Twenty-five percent (25%) of the
shares vesting one (1) year from the effective date of the Agreement. The
balance of the option will vest over the three years following the beginning one
(1) year from the initial vesting period in equal annual installments. If at any
time, the 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 term of this Agreement 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
provisions, rules, and regulations applicable thereto. Employee will receive not
less than 20 days vacation allotment per year.
ARTICLE 4.0 TERM; TERMINATION
4.1 TERM. Employee's employment under this Agreement shall commence
upon the Effective Date and shall continue until terminated 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:
3
<PAGE>
(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 judgement of the President, are willful
and deliberate and which are not cured within 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 President; 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.
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 follow:
(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 year 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 three months from the
4
<PAGE>
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.
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. Employees 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 EXCLUSION. 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;
5
<PAGE>
(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 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 is 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:
6
<PAGE>
(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 no 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 Corporation, or assist, solicit, entice, or induce
any other person to engage in any such activity. For purpose hereof,
"shareholder" shall not included beneficial ownership of less that 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 the 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
7
<PAGE>
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) day 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 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 pre-hearing
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 sold 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.
8
<PAGE>
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 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 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, it 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 heading 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 ruled 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 our 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
<PAGE>
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.
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 replaced 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.
10
<PAGE>
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 _____________________
Its _______________________
By _____________________
Its________________________
Address:
500 Spruce Tree Centre
1600 University Avenue West
St. Paul, MN 55104-3825
___________________________
Employee
Address:
3852 Tessier Trail
Vadnais, Heights, MN 55127
11
EXHIBIT 10.2
December 8, 1999
Dr. Panos Michalopoulos
715 Fairfield Circle
Minnetonka, MN 55305
Dear Dr. Michalopoulos:
Image Sensing Systems, Inc., (the "Company") is pleased to offer you the
opportunity to act as a consultant to the Company, subject to the following
terms and conditions:
1. Duties. You agree to act as a
Technical/Scientific Advisor ("Advisor") and
to devote the time and effort necessary to
perform the acts and duties required of an
Advisor as needed and approved by the
President/CEO of the Company.
2. Term. The term of this letter agreement
shall commence on January 1, 2000 and
continue through December 31, 2000 provided,
however, that either party may terminate
this letter agreement at any time by giving
45 days notice.
3. Compensation. The Company shall pay to you
$125.00 per hour of service to the Company.
You shall provide the Company with
reasonably detailed documentation setting
forth the number of hours of service
provided by you following the completion of
each month, and the Company shall make
payment to you within ten business days of
its receipt thereof.
4. Expenses. The Company shall pay you
reasonable travel expenses related to
discharging the duties as an Advisor that
have been pre-approved by the President/CEO
of the Company. These expenses must be
submitted with documentation monthly along
with your billable hours as stated in item 3
above. Payment will be made within ten
business days of its receipt thereof.
1
<PAGE>
5. Status. You shall be an independent
contractor to the Company and nothing
contained in this letter agreement shall be
deemed to create an employer-employee,
agency or other partnership relationship
between you and the Company.
6. Confidentiality. You agree to keep
confidential all proprietary and nonpublic
information relating to the Company obtained
by you in the course of performing your
duties under this letter agreement.
7. Covenant Not to Compete. You agree that from
and after the date of this agreement and for
a period of one (1) years after the
termination of this agreement by either
party, you will not in any manner directly
or indirectly compete with the Company in
the field of image processing any where in
the United States, Canada, countries in the
European Common Market Community, or the
Orient.
8. Trade Secrets. You shall not at any time or
in any manner, either directly or
indirectly, divulge, discharge or
communicate to any person, firm or
corporation in any manner whatsoever any
information concerning any matters affecting
or relating to the business of the Company.
9. The parties agree that this agreement
supercedes and replaces any and all other
agreements between you and the Company and
may only be modified by the mutual written
agreement of the parties hereto and with the
consent of the Company's Board of Directors.
10. Not withstanding other provisions hereof,
certain of the payments contemplated
hereunder may be subject to withholding
taxes, or other statutory payments. To the
extent Company is required to make such
payments to your account they will be deemed
to have been made directly to you to satisfy
the obligation of the Company.
11. You agree that, from the date hereof, you
will make no binding commitments on behalf
of the Company, without the advice and
consent of the President/CEO of the Company.
12. It is acknowledged and agreed by the parties
hereto that the obligations to make payments
to you hereunder are the only obligations of
the Company and the Company will incur no
additional obligations to you other than as
a Board Member of the Company.
2
<PAGE>
If the foregoing accurately reflects our agreement relating to the subject
matter contained herein, please so indicate by executing this letter in the
space provided below to be effective as of the date hereof.
________________________________________
Richard Braun
Chairman of the Compensation Committee
Date ____________________
________________________________________
Jim Murdakes
Member of the Compensation Committee
Date ____________________
________________________________________
C. "Dino" Xykis
Member of the Compensation Committee
Date ____________________
Agreed To:
________________________________________
Dr. Panos Michalopoulos
Date ____________________
3
Exhibit 23
CONSENT OF ERNST & YOUNG LLP
We consent to the incorporation by reference in the Registration Statements
(Form S-8 Nos. 333-09289 and 333-86169) pertaining to the 1995 Long-Term
Incentive and Stock Option Plan of Image Sensing Systems, Inc., of our report
dated February 11, 2000, with respect to the consolidated financial statements
of Image Sensing Systems, Inc. included in this Annual Report (Form 10-KSB) for
the year ended December 31, 1999.
/s/ ERNST & YOUNG LLP
Minneapolis, Minnesota
March 28, 2000
FLOW TRAFFIC LIMITED
[FORMERLY KNOWN AS MAX RESOURCES LIMITED]
(COMPANY NAME IN CHINESE)
REPORT OF THE DIRECTORS
AND
FINANCIAL STATEMENTS
FOR THE PERIOD FROM 13 MAY 1998
(DATE OF INCORPORATION)
TO 31 DECEMBER 1999
<PAGE>
- --------------------------------------------------------------------------------
FLOW TRAFFIC LIMITED
[FORMERLY KNOWN AS MAX RESOURCES LIMITED (COMPANY NAME IN CHINESE)]
- --------------------------------------------------------------------------------
REPORT OF THE DIRECTORS AND FINANCIAL STATEMENTS
FOR THE PERIOD FROM 13 MAY 1998 (DATE OF INCORPORATION)
TO 31 DECEMBER 1999
CONTENTS PAGE
Report of the Directors 1 & 2
Report of the Auditors 3
Income statement 4
Balance sheet 5
Notes to the financial statements 6 to 9
Detailed income statement 10 & 11
(For management purposes only)
<PAGE>
- --------------------------------------------------------------------------------
FLOW TRAFFIC LIMITED
[FORMERLY KNOWN AS MAX RESOURCES LIMITED (COMPANY NAME IN CHINESE)]
- --------------------------------------------------------------------------------
REPORT OF THE DIRECTORS
The directors submit their first report together with the audited financial
statements for the period from 13 May 1998 (date of incorporation) to 31
December 1999.
PRINCIPAL ACTIVITY
The principal activity of the company is trading of traffic equipment.
CHANGE OF COMPANY'S NAME
The name of the company was changed from Max Resources Limited (COMPANY
NAME IN CHINESE) to Flow Traffic Limited on 9 April 1999.
RESULTS
The loss for the period ended 31 December 1999 and the state of affairs at
that date are set out on pages 4 to 9.
SHARE CAPITAL
Details of the increase in share capital during the period are set out in
note 8 to the financial statements.
The issues of shares during the period were made to provide the initial
capital and additional working capital of the company.
DIRECTORS
The directors during the period were:-
Mats Johan Billow (appointed on 26 May 1998)
Anthony Howard Gould (appointed on 22 March 1999)
William L. Russell (appointed on 22 March 1999)
Richard C. Maynuson (appointed on 22 March 1999)
Constantine Xykis (appointed on 22 March 1999)
Berkeley Development Limited (appointed on 26 May 1998 and
resigned on 22 March 1999)
- --------------------------------------------------------------------------------
Page 1
<PAGE>
- --------------------------------------------------------------------------------
FLOW TRAFFIC LIMITED
[FORMERLY KNOWN AS MAX RESOURCES LIMITED (COMPANY NAME IN CHINESE)]
- --------------------------------------------------------------------------------
In accordance with article 110 of the company's articles of association,
all remaining directors retire from the board and, being eligible, offer
themselves for re-election.
During the period the company accepted a waiver of an amount of HK$231,629
payable to Mats Johan Billow.
No other contract of significance, to which the company was a party and in
which a director of the company had a material interest, subsisted at the end of
the period or at any time during the period.
At no time during the period was the company a party to any arrangement to
enable the directors of the company to acquire benefits by means of acquisition
of shares in or debentures of the Company or any other body corporate.
AUDITORS
The financial statements of the company were audited by Horwath Hong Kong
CPA Limited who retire and, being eligible, offer themselves for re-appointment.
By Order of the Board
Director
Hong Kong,
- --------------------------------------------------------------------------------
Page 2
<PAGE>
REPORT OF THE AUDITORS
TO THE SHAREHOLDERS OF FLOW TRAFFIC LIMITED
[FORMERLY KNOWN AS MAX RESOURCES LIMITED (COMPANY NAME IN CHINESE)]
(INCORPORATED IN HONG KONG WITH LIMITED LIABILITY)
We have audited the financial statements on pages 4 to 9 which have been
prepared in accordance with accounting principles generally accepted in Hong
Kong.
RESPECTIVE RESPONSIBILITIES OF DIRECTORS AND AUDITORS
The Companies Ordinance requires the directors to prepare financial
statements which give a true and fair view. In preparing financial statements
which give a true and fair view it is fundamental that appropriate accounting
policies are selected and applied consistently.
It is our responsibility to form an independent opinion, based on our
audit, on those statements and to report our opinion to you.
BASIS OF OPINION
We conducted our audit in accordance with Statements of Auditing Standards
issued by the Hong Kong Society of Accountants. An audit includes examination,
on a test basis, of evidence relevant to the amounts and disclosures in the
financial statements. It also includes an assessment of the significant
estimates and judgments made by the directors in the preparation of the
financial statements, and of whether the accounting policies are appropriate to
the company's circumstances, consistently applied and adequately disclosed.
We planned and performed our audit so as to obtain all the information and
explanations which we considered necessary in order to provide us with
sufficient evidence to give reasonable assurance as to whether the financial
statements are free from material misstatement. In forming our opinion we also
evaluated the overall adequacy of the presentation of information in the
financial statements. We believe that our audit provides a reasonable basis for
our opinion.
OPINION
In our opinion the financial statements give a true and fair view, in all
material respects, of the state of the company's affairs as at 31 December 1999
and of its loss for the period then ended and have been properly prepared in
accordance with the Companies Ordinance.
/s/ Horwath Hong Kong CPA Limited
HORWATH HONG KONG CPA LIMITED 2001 Central Plaza
Certified Public Accountants 18 Harbour Road
Wanchai
Hong Kong
Steven James Apedaile
Practising Certificate number P01211
- --------------------------------------------------------------------------------
Page 3
<PAGE>
- --------------------------------------------------------------------------------
FLOW TRAFFIC LIMITED
[FORMERLY KNOWN AS MAX RESOURCES LIMITED (COMPANY NAME IN CHINESE)]
- --------------------------------------------------------------------------------
INCOME STATEMENT
FOR THE PERIOD FROM 13 MAY 1998 (DATE OF INCORPORATION)
TO 31 DECEMBER 1999
(EXPRESSED IN HONG KONG DOLLARS)
NOTE
TURNOVER 3 $ 9,826,302
COST OF SALES (6,765,041)
-----------
GROSS PROFIT $ 3,061,261
OTHER REVENUE 295,510
DISTRIBUTION COSTS (261,669)
ADMINISTRATIVE EXPENSES (3,841,370)
-----------
LOSS FROM OPERATIONS $ (746,268)
FINANCE COSTS (89,894)
-----------
LOSS BEFORE TAXATION 4 $ (836,162)
TAXATION 5 -
-----------
LOSS AFTER TAXATION RETAINED AND CARRIED FORWARD $ (836,162)
===========
RECOGNISED GAINS AND LOSSES IN THE PERIOD COMPRISE ONLY LOSS AFTER TAXATION.
The notes on pages 6 to 9 form part of these financial statements.
- --------------------------------------------------------------------------------
Page 4
<PAGE>
- --------------------------------------------------------------------------------
FLOW TRAFFIC LIMITED
[FORMERLY KNOWN AS MAX RESOURCES LIMITED (COMPANY NAME IN CHINESE)]
- --------------------------------------------------------------------------------
BALANCE SHEET AT 31 DECEMBER 1999
(EXPRESSED IN HONG KONG DOLLARS)
NOTE
Assets and liabilities
NON-CURRENT ASSETS
Property, plant and equipment 6 $ 95,467
CURRENT ASSETS
Inventories 113,598
Accounts receivable 2,087,565
Other receivables 4,496
Prepayments 26,089
Deposits 130,814
Amount due from a director 14,000
Cash at bank 1,628,246
----------
4,004,808
CURRENT LIABILITIES
Accounts payable 747,858
Accrued charges 126,875
Deposits received 446,292
Advances from holding company 7 2,066,908
----------
3,387,933
----------
NET CURRENT ASSETS 616,875
----------
NET ASSETS $ 712,342
==========
Capital and reserves
SHARE CAPITAL 8 $ 10
SHARE PREMIUM 8 1,548,494
ACCUMULATED LOSS (836,162)
----------
SHAREHOLDERS' FUNDS $ 712,342
==========
These financial statements were approved by the board of directors on
............................. ................................
Director Director
The notes on pages 6 to 9 form part of these financial statements.
- --------------------------------------------------------------------------------
Page 5
<PAGE>
- --------------------------------------------------------------------------------
FLOW TRAFFIC LIMITED
[FORMERLY KNOWN AS MAX RESOURCES LIMITED (COMPANY NAME IN CHINESE)]
- --------------------------------------------------------------------------------
NOTES TO THE FINANCIAL STATEMENTS
(EXPRESSED IN HONG KONG DOLLARS)
1. STATUS OF THE COMPANY AND ITS OPERATIONS
The company was incorporated in Hong Kong under the Companies
Ordinance on 13 May 1998, and commenced business of trading of traffic
equipment in May 1998. The company operates primarily in the Hong Kong and
PRC market.
2. PRINCIPAL ACCOUNTING POLICIES
(a) Depreciation
Depreciation is provided to write off the cost of property, plant and
equipment over their anticipated useful lives on a straight line basis at
the following annual rates:-
Office equipment 33 1/3%
(b) Inventories
Inventories are valued at the lower of cost and net realisable value.
Cost includes cost of purchase of materials computed using the FIFO method.
Net realisable value is determined by reference to the sales proceeds of
items sold in the ordinary course of business after the balance sheet date
or to management estimates based on prevailing market conditions.
(c) Translation of foreign currencies
Foreign currency transactions are translated into Hong Kong dollars at
the exchange rates ruling at the transaction dates. Monetary assets and
liabilities in foreign currencies are translated into Hong Kong dollars at
the rates of exchange ruling at the balance sheet date. Exchange gains and
losses on foreign currency translation are dealt with in the profit and
loss account.
- --------------------------------------------------------------------------------
Page 6
<PAGE>
- --------------------------------------------------------------------------------
FLOW TRAFFIC LIMITED
[FORMERLY KNOWN AS MAX RESOURCES LIMITED (COMPANY NAME IN CHINESE)]
- --------------------------------------------------------------------------------
(d) Revenue recognition
i) Revenue for sale of goods is recognised when the goods are
delivered to customers.
ii) Interest income is recognised on an accrual basis.
3. TURNOVER
Turnover represents the net invoiced value of goods sold.
4. LOSS BEFORE TAXATION
Loss before taxation is arrived at after charging:-
Directors' remuneration $ 910,000
Auditors' remuneration 22,000
Operating lease rentals 347,325
Interest on loan repayable within five years 28,314
Depreciation 18,641
Staff costs excluding directors' remuneration 1,143,616
==========
and after crediting:-
Interest income $ 39,995
Net exchange gain 23,886
==========
5. TAXATION
No provision has been made for Hong Kong profits tax as the company
sustained a loss during the period.
- --------------------------------------------------------------------------------
Page 7
<PAGE>
- --------------------------------------------------------------------------------
FLOW TRAFFIC LIMITED
[FORMERLY KNOWN AS MAX RESOURCES LIMITED (COMPANY NAME IN CHINESE)]
- --------------------------------------------------------------------------------
6. PROPERTY, PLANT AND EQUIPMENT
Office equipment
Cost:
Additions and at 31 December 1999 $ 114,108
----------
Aggregate depreciation:
Charge for the period
and at 31 December 1999 $ 18,641
----------
Net book value:
At 31 December 1999 $ 95,467
==========
7. ADVANCES FROM HOLDING COMPANY
The advances are unsecured, bear interest at 1.25% over prime rate per
annum and have no fixed repayment terms.
8. SHARE CAPITAL
Authorised:
100,000 ordinary shares of $1 each $ 100,000
==========
Issued and fully paid:
10 ordinary shares of $1 each $ 10
==========
The company was incorporated with an authorised share capital of
$10,000 divided into 10,000 shares of $1 each. 2 shares of $1 each were
issued to the subscribers to the Memorandum of Association at par for cash
on incorporation to provide the initial capital.
Pursuant to an ordinary resolution passed on 19 November 1999, the
authorised share capital was increased to $100,000 by the creation of an
additional 90,000 ordinary shares of $1 each.
On 8 March 1999, the issued share capital of the company was increased
to $10 by the allotment of 8 shares of $1 each to provide additional
working capital. 2 shares were issued at par for cash whereas 6 shares were
issued for a total consideration of US$200,000 (HK$1,548,500) resulting in
a share premium of HK$1,548,494.
- --------------------------------------------------------------------------------
Page 8
<PAGE>
- --------------------------------------------------------------------------------
FLOW TRAFFIC LIMITED
[FORMERLY KNOWN AS MAX RESOURCES LIMITED (COMPANY NAME IN CHINESE)]
- --------------------------------------------------------------------------------
9. RELATED PARTY TRANSACTIONS
During the period, the company entered into the following
transactions:
i) purchased goods of $1,555,821 from holding company;
ii) paid interest of $28,314 to holding company;
iii) paid royalty of $58,762 to holding company; and
iv) accepted a waiver of an amount of $231,629 payable to Mats Johan
Billow.
10. COMMITMENTS UNDER OPERATING LEASES
At 31 December 1999, the company had annual commitments under
operating leases as follows:
Land and buildings
Leases expiring:
Within 1 year $ 268,200
After 1 year but within 2 years 381,480
----------
$ 649,680
==========
- --------------------------------------------------------------------------------
Page 9
<PAGE>
- --------------------------------------------------------------------------------
FLOW TRAFFIC LIMITED
[FORMERLY KNOWN AS MAX RESOURCES LIMITED (COMPANY NAME IN CHINESE)]
- --------------------------------------------------------------------------------
DETAILED INCOME STATEMENT
FOR THE PERIOD FROM 13 MAY 1998 (DATE OF INCORPORATION)
TO 31 DECEMBER 1999
(EXPRESSED IN HONG KONG DOLLARS)
SALES $ 9,826,302
COST OF SALES 6,765,041
------------
GROSS PROFIT $ 3,061,261
OTHER REVENUE
Interest income 39,995
Exchange gain 23,886
Other income 231,629
------------
295,510
------------
$ 3,356,771
DISTRIBUTION COSTS 261,669
ADMINISTRATIVE EXPENSES 3,841,370
FINANCE COSTS 89,894
------------
LOSS BEFORE TAXATION $ (836,162)
============
(FOR MANAGEMENT PURPOSES ONLY}
- --------------------------------------------------------------------------------
Page 10
<PAGE>
- --------------------------------------------------------------------------------
FLOW TRAFFIC LIMITED
[FORMERLY KNOWN AS MAX RESOURCES LIMITED (COMPANY NAME IN CHINESE)]
- --------------------------------------------------------------------------------
DETAILED INCOME STATEMENT
FOR THE PERIOD FROM 13 MAY 1998 (DATE OF INCORPORATION)
TO 31 DECEMBER 1999
(EXPRESSED IN HONG KONG DOLLARS)
DISTRIBUTION COSTS
Exhibition expenses $ 100,323
Royalty 58,762
Commissions 57,012
Advertising and promotion 45,572
------------
$ 261,669
============
ADMINISTRATIVE EXPENSES
Salaries $ 1,542,291
Travelling expenses 564,411
Director's quarter expenses 449,500
Rent, rate and building management fee 402,590
Telephone and faxes 354,832
Legal and professional fees 119,724
Entertainment 99,656
Printing and stationery 71,217
Pension fund 61,825
Insurance 43,287
Sundry expenses 42,406
Accountancy fee 23,000
Audit fee 22,000
Depreciation 18,641
Postage and courier 17,457
Electricity 8,533
------------
$ 3,841,370
============
FINANCE COSTS
Bank charges $ 61,580
Interest expenses 28,314
------------
$ 89,894
============
(FOR MANAGEMENT PURPOSES ONLY)
- --------------------------------------------------------------------------------
Page 11
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 1,319,000
<SECURITIES> 0
<RECEIVABLES> 1,471,000
<ALLOWANCES> 43,000
<INVENTORY> 57,000
<CURRENT-ASSETS> 2,933,000
<PP&E> 1,372,000
<DEPRECIATION> 927,000
<TOTAL-ASSETS> 4,836,000
<CURRENT-LIABILITIES> 760,000
<BONDS> 0
0
0
<COMMON> 25,000
<OTHER-SE> 2,577,000
<TOTAL-LIABILITY-AND-EQUITY> 4,836,000
<SALES> 4,772,000
<TOTAL-REVENUES> 4,772,000
<CGS> 1,223,000
<TOTAL-COSTS> 1,223,000
<OTHER-EXPENSES> 3,380,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 251,000
<INCOME-TAX> 0
<INCOME-CONTINUING> 251,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 251,000
<EPS-BASIC> .11
<EPS-DILUTED> .10
</TABLE>
