UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2001 Commission File Number 0-26056
IMAGE SENSING SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
Minnesota 41-1519168
State or other jurisdiction of I.R.S. Employer Identification No.
incorporation or organization
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500 SPRUCE TREE CENTRE
1600 UNIVERSITY AVE. W.
ST. PAUL, MN 55104-3825
(Address of principal executive offices)
Registrant's telephone number, including area code: (651) 603-7700
Check whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements for the past
90 days. Yes [X] No [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS:
State the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practical date.
Common Stock, $.01 par value - 3,152,777 shares as of June 30, 2001.
IMAGE SENSING SYSTEMS, INC.
INDEX
PART I. FINANCIAL INFORMATION Page No.
Item 1. Condensed Financial Statements:
Condensed Consolidated Balance Sheets
June 30, 2001 and December 31, 2000 4
Condensed Statements of Operations
Three- and six-month periods ended June 30, 2001 and 2000 5
Condensed Statements of Cash Flows
Six-month periods ended June 30, 2001 and 2000 6
Notes to Condensed Financial Statements 7
Item 2. Management's Discussion and Analysis of
Results of Operations and Financial Condition 8
PART II. OTHER INFORMATION
Item 2. Changes in Securities 10
Item 4. Submission of Matters to a Vote of Security Holders 10
Item 6. Exhibits and Reports on Form 8-K 11
Signatures 13
Exhibit Index 14
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SAFE HARBOR STATEMENT UNDER THE
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
This Quarterly Report on Form 10-QSB contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These forward-looking statements involve risks and uncertainties that may cause the Company's actual results to differ materially from the results discussed in the forward-looking statements. Factors that might cause such differences include, but are not limited to, lack of market acceptance of the Company's products; the Company's dependence on third parties for manufacturing and marketing capabilities and its 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 99.1, under the caption "Cautionary Statement," to this Quarterly Report.
IMAGE SENSING SYSTEMS, INC.
Condensed Balance Sheet
June 30 December 31
2001 2000
----------- -----------
(Unaudited) (Note)
ASSETS
Current assets:
Cash and cash equivalents $ 1,036,000 $ 1,780,000
Accounts receivable 1,689,000 943,000
Inventories 542,000 370,000
Prepaid expenses 105,000 117,000
Deferred income taxes 92,000 92,000
----------- -----------
Total current assets 3,464,000 3,302,000
Property and equipment, net 381,000 383,000
Other assets:
Capitalized software development costs, net 1,324,000 1,453,000
Deferred income taxes 34,000 34,000
Other 108,000 110,000
----------- -----------
1,466,000 1,597,000
----------- -----------
Total assets $ 5,311,000 $ 5,282,000
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 770,000 $ 433,000
Accrued compensation 362,000 365,000
Deferred income 109,000 109,000
----------- -----------
Total current liabilities 1,241,000 907,000
Minority interest 95,000 134,000
Shareholders' equity:
Common stock 32,000 32,000
Additional paid-in capital 4,600,000 4,572,000
Retained earnings (deficit) (657,000) (363,000)
----------- -----------
3,975,000 4,241,000
----------- -----------
Total liabilities and shareholders' equity $ 5,311,000 $ 5,282,000
=========== ===========
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Note: The balance sheet at December 31, 2000 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements.
See accompanying notes
IMAGE SENSING SYSTEMS, INC.
Income Statement
(unaudited)
Three-Month Period Ended Six-Month Period Ended
June 30 June 30
2001 2000 2001 2000
----------- ----------- ----------- -----------
REVENUE:
Product sales $ 499,000 $ 840,000 $ 885,000 $ 1,150,000
Royalties 986,000 652,000 1,998,000 1,412,000
Consulting services 59,000 41,000 94,000 66,000
----------- ----------- ----------- -----------
1,544,000 1,533,000 2,977,000 2,628,000
COSTS OF REVENUE:
Product sales 260,000 442,000 461,000 608,000
Royalties 57,000 67,000 157,000 142,000
Consulting services 37,000 25,000 67,000 39,000
----------- ----------- ----------- -----------
354,000 534,000 685,000 789,000
----------- ----------- ----------- -----------
Gross profit 1,190,000 999,000 2,292,000 1,839,000
OPERATING EXPENSES:
General and administrative 670,000 656,000 1,271,000 1,208,000
Business development 410,000 364,000 947,000 713,000
Research and development 199,000 - 412,000 -
----------- ----------- ----------- -----------
1,279,000 1,020,000 2,630,000 1,921,000
----------- ----------- ----------- -----------
Income (loss) from operations (89,000) (21,000) (338,000) (82,000)
Other income, net 28,000 32,000 55,000 61,000
----------- ----------- ----------- -----------
Income (loss) before income taxes (61,000) 11,000 (283,000) (21,000)
Income (taxes) benefits - - - 117,000
----------- ----------- ----------- -----------
Net income (loss) before minority interest (61,000) 11,000 (283,000) 96,000
Minority interest (9,000) - (11,000) -
----------- ----------- ----------- -----------
Net income (loss) $ (70,000) $ 11,000 $ (294,000) $ 96,000
=========== =========== =========== ===========
Net income (loss) per common share - basic
and diluted $ (0.02) $ 0.00 $ (0.09) $ 0.03
=========== =========== =========== ===========
Weighted average number of common shares outstanding:
Basic and Diluted 3,153,000 3,137,000 3,150,000 3,137,000
=========== =========== =========== ===========
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See accompanying notes
IMAGE SENSING SYSTEMS, INC.
Cash Flow
(unaudited)
Six-Month Period Ended
June 30
------------------------------
2001 2000
----------- -----------
OPERATING ACTIVITIES:
Net income $ (294,000) $ 96,000
Adjustments to reconcile net income to
net cash provided by operating activities (317,000) (75,000)
Minority interest 11,000 -
----------- -----------
Net cash provided by operating activities (600,000) 21,000
INVESTING ACTIVITIES:
Purchase of property and equipment (122,000) (78,000)
Other - (28,000)
Capitalized software development costs - (306,000)
----------- -----------
Net cash used in investing activities (122,000) (412,000)
FINANCING ACTIVITIES:
Proceeds from exercise of stock option 28,000 665,000
Dividends paid by Flow Traffic (50,000)
----------- -----------
Net cash provided by financing activities (22,000) 665,000
Increase (decrease) in cash and cash equivalents (744,000) 274,000
Cash and cash equivalents, beginning of period 1,780,000 1,319,000
----------- -----------
Cash and cash equivalents, end of period $ 1,036,000 $ 1,593,000
=========== ===========
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See accompanying notes
IMAGE SENSING SYSTEMS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
June 30, 2001
Note A: Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-QSB. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three- and six-month periods ended June 30, 2001 are not necessarily indicative of the results that may be expected for the year ending December 31, 2001. For further information, refer to the financial statements and footnotes thereto for the year ended December 31, 2000, included in our Annual Report on Form 10-KSB for the year ended December 31, 2000.
Note B:
The Company entered into a Distribution Agreement with Wireless Technology, Inc. on April 27, 2001. This agreement is filed as an exhibit to this Form 10-QSB.
Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
(Three- and Six-Month Periods Ended June 30, 2001)
Revenues for the second quarter of 2001 were $1,544,000, an increase of 1% from $1,533,000 for the same period a year ago, while revenues for the first half of 2001 were $2,977,000, an increase of 13% from $2,628,000 a year ago. The increase in revenues is a result of an increase in royalties received for these periods, which in turn was due primarily to increased sales of Autoscope(R) systems by Econolite Control Products, Inc. (Econolite), the Company's North American distributor. Unit sales by the Company and Econolite increased 236% for the second quarter and 193% for the first half of 2001, compared to the same periods a year ago. Revenue from royalties for the second quarter of 2001 increased 51%, while revenue from direct sales decreased 41%, both as compared to the second quarter of 2000. Revenue from royalties for the first half of 2001 increased 41%, while revenue from direct sales decreased 23%, both as compared to the first half of 2000. The decrease in direct sales is due to continued delays in orders from the European market, complicated by currency valuation with the Euro.
Gross profit was $1,190,000 in the second quarter of 2001, or 77% of revenue, compared to $999,000, or 65% of revenue, for the same period a year ago. Gross profit for the first half of 2001 was $2,292,000, or 77% of revenue, compared to $1,839,000, or 70% of revenue, for the same period a year ago. The higher margin in the second quarter and first half of 2001 was due primarily to the Company's deriving proportionately more revenue from royalties than from direct sales during these periods, as royalties have a higher gross profit margin.
General and administrative expenses were $670,000 and $1,271,000, respectively, for the three- and six-month periods ended June 30, 2001, compared to $656,000 and $1,208,000, respectively, for the same periods a year ago. The increase is due to additional expenses related to the preparation of this year's annual report and proxy.
Business development expenses were $410,000 and $947,000, respectively, for the three- and six-month periods ended June 30, 2001, compared to $364,000 and $713,000, respectively, for the same period a year ago. The increase is primarily due to the continued development of the Wireless Technology sales, marketing, and distribution infrastructure.
Research and development expenses were $199,000 and $412,000 for the three- and six-month periods ended June 30, 2001, compared to none for the same periods a year ago. The increase is due to the fact that all development efforts in the first half of 2000 were directed toward software development for the new Autoscope Solo Release 3, a new
comserver and the next-generation Autoscope Solo Pro, with associated costs capitalized in accordance with Statement of Financial Accounting Standards No. 86.
Loss from operations was $89,000 and $338,000, respectively, for the three- and six-month periods ended June 30, 2001, compared to loss from operations of $21,000 and $82,000, respectively, for the same periods a year ago. The decrease in earnings from operations for the three- and six-month periods ended June 30, 2001, compared to the same periods a year ago, are primarily due to increases in business development expenditures and the amortization of software development costs.
Other income, net, was $28,000 and $55,000, respectively, for the three- and six-month periods ended June 30, 2001, compared to $32,000 and $61,000, respectively, for the same periods a year ago. The decrease is due primarily to lower cash balances coupled with lower yields on our money market and short-term investments.
The Company recognized no income tax benefit in 2001, versus a $117,000 benefit in the first quarter of 2000. Management believes it is more likely than not that the net deferred tax asset will be realized over the next three years.
The Company has net operating loss carryforwards for income tax purposes of approximately $1,488,000 and research and development tax credits of $245,000 that expire in the years 2007 through 2019. The Company incurred losses in the first and second quarter of 2001 and therefore, has not accrued any taxes.
Liquidity and Capital Resources
Cash used by operating activities was $600,000 for the six-month period ended June 30, 2001, compared to cash provided by operations of $21,000 for the same period in 2000. The reduced cash flow from operations in the first half of 2001 was primarily due to increases in both accounts receivable and inventory for the first half of 2001 compared to 2000.
Capital expenditures were $122,000 for the first half of 2001, compared to $78,000 for the same period in 2000. The Company does not expect to make significant changes to the level of investments in capital expenditures for the balance of 2001. The Company did not capitalize software development costs in the first half of 2001, whereas $306,000 of software development was capitalized in the first half of 2000.
Management believes that the Company's cash and investment position, anticipated cash flows from operations, and funds available through its bank line of credit will be sufficient to meet working capital requirements for current operations and planned new product introductions for the foreseeable future.
PART II: OTHER INFORMATION
Item 1. Legal Proceedings
Not applicable
Item 2. Changes in Securities
The Company amended its articles of incorporation on May 30, 2001 to increase the number of authorized shares of the Company's common stock from 5,000,000 to 20,000,000 and its authorized shares of preferred stock from 2,000,000 to 5,000,000.
Item 3. Defaults upon Senior Securities
Not applicable
Item 4. Submission of Matters to a Vote of Security Holders
The Company held its annual meeting of shareholders on May 17, 2001, in Minneapolis, Minnesota. The Company solicited proxies and filed its definitive proxy statement with the Commission pursuant to Regulation 14A. The matters voted upon at the meeting were (1) the election of directors, (2) a proposal to amend the Company's articles of incorporation to increase its common shares to 20,000,000 and its preferred shares to 5,000,000, (3) a proposal to ratify and approve an amendment the Company's 1995 Long-Term Incentive Stock Option Plan to increase the number of shares authorized for issuance by 420,000 from 480,000 to 900,000, and (4) to ratify and approve the grant of options to certain non-employee directors.
(1) Election of Directors:
Director For Withhold Authority Panos G. Michalopoulos 2,936,820 36,670 William L. Russell 2,969,100 4,390 Richard C. Magnuson 2,969,100 4,390 Richard P. Braun 2,969,100 4,390 James Murdakes 2,969,100 4,390 C. (Dino) Xykis 2,921,420 52,070 |
(2) Amend articles of incorporation:
Broker
For Against Abstain Non-Vote
1,818,188 41,130 750 1,113,422
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(3) Ratify and approve amendment to the Company's 1995 Long-Term Incentive Stock Option Plan:
Broker
For Against Abstain Non-Vote
1,785,388 46,060 28,620 1,113,422
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(4) Ratify and approve options granted to certain non-employee Directors:
Broker
For Against Abstain Non-Vote
1,731,327 108,046 20,695 1,113,422
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Item 5. Other Information
Not applicable
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
The following exhibits are filed as part of this quarterly report on Form 10-QSB for the quarterly period ended June 30, 2000:
Exhibit
Number Description
3.1 Restated Articles of Incorporation of ISS, incorporated by reference
to ISS's registration statement on Form SB-2 (Registration No.
90298C) filed with the Commission on March 14, 1995.
3.2 Articles of Amendment to Articles of Incorporation of ISS, dated May
30, 2001.
3.3 Bylaws of ISS, incorporated by reference to ISS's registration
statement on Form SB-2 (Registration No. 90298C) filed with the
Commission on March 14, 1995.
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10.1 Distribution Agreement with Wireless Technology, Inc., dated April
27, 2001.
99.1 Cautionary Statement, incorporated herein by reference to Exhibit 99
to the Company's Form 10-KSB for the fiscal year ended December 31,
2000.
(b) Reports
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No reports on Form 8-K were filed during the quarter covered by this Form 10-QSB.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Dated: August 13, 2001 /s/ William L. Russell
--------------------------------------------
William L. Russell
Chairman and Chief Executive Officer
(principal executive officer)
Dated: August 13, 2001 /s/ Jeffrey F. Martin
--------------------------------------------
Jeffrey F. Martin
Chief Financial Officer
(principal financial and accounting officer)
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EXHIBIT INDEX
Exhibit
Number Description
3.1 Restated Articles of Incorporation of ISS, incorporated by reference
to ISS's registration statement on Form SB-2 (Registration No.
90298C) filed with the Commission on March 14, 1995.
3.2 Articles of Amendment to Articles of Incorporation of ISS, dated May
30, 2001.
3.3 Bylaws of ISS, incorporated by reference to ISS's registration
statement on Form SB-2 (Registration No. 90298C) filed with the
Commission on March 14, 1995.
10.1 Distribution Agreement with Wireless Technology, Inc., dated April
27, 2001.
99.1 Cautionary Statement, incorporated herein by reference to Exhibit 99
to the Company's Form 10-KSB for the fiscal year ended December 31,
2000.
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EXHIBIT 3.2
ARTICLES OF AMENDMENT
OF
IMAGE SENSING SYSTEMS, INC.
Pursuant to the provisions of Minnesota Statutes Section 302A.135, the following amendment to the Restated Articles of Incorporation of Image Sensing Systems, Inc., a Minnesota corporation, was approved and adopted:
Section 1 of Article 3 of the Restated Articles of Incorporation of Image Sensing Systems, Inc. is hereby amended and restated in its entirety as follows:
The total number of shares of capital stock which the corporation is authorized to issue shall be 25,000,000 shares, consisting of 20,000,000 shares of common stock, par value $.01 per share ("Common Stock"), and 5,000,000 shares of preferred stock, par value $.01 per share ("Preferred Stock"). All shares of Common Stock of the Company outstanding as of the date of filing of these Restated Articles of Incorporation shall have a par value of $.01 per share.
In addition, Article 1 of the Restated Articles is hereby restated in its entirety as follows, solely to correct a typographical error in the Restated Articles:
The name of the corporation is Image Sensing Systems, Inc.
I swear that the foregoing is true and accurate and that I have the authority to sign these Articles of Amendment on behalf of the Corporation.
Dated: 30 May, 2001
IMAGE SENSING SYSTEMS, INC.
By /s/ William L. Russell
--------------------------------------
William L. Russell
Chairman & CEO
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EXHIBIT 10.1
DISTRIBUTION AGREEMENT
This Distribution Agreement (hereinafter "Agreement") is effective as of the 1st day of January, 2001, by and between Wireless Technology, Inc., a Nevada corporation, located at 2064 Eastman Avenue, Suite 113, Ventura, California 93003 (hereinafter "WTI"), and Image Sensing Systems, Inc., a Minnesota corporation, located at 1600 University Avenue, West St. Paul, Minnesota 55104 (hereinafter "ISS").
RECITALS
A. WTI is engaged in the business of designing and manufacturing video camera systems and wireless video, audio, and data communications equipment, with experience in the deployment of video systems for enforcement, surveillance, and security.
B. ISS is engaged, among other things, in the business of designing, developing and selling certain video detection and control devices utilizing machine vision technology, known as the Autoscope Video Detection System, under exclusive license from the University of Minnesota. ISS has sublicensed the exclusive right to manufacture and market the Autoscope system in North America and the Caribbean to Econolite Control Products, Inc. ("Econolite"). Econolite also manufactures the Autoscope system on a non-exclusive basis for direct sales by ISS outside North America and the Caribbean. ISS and Econolite have a marketing and production agreement that grants Econolite exclusive rights to sell and produce ISS licensed technology within North America and the Caribbean.
C. WTI desires to utilize ISS's domestic and international marketing expertise and distribution channels to sell certain present and future products designed and manufactured/assembled by WTI as designated herein.
NOW, THEREFORE, for and in consideration of the mutual covenants, promises and conditions contained herein, the parties agree as follows:
ARTICLE 1: DEFINITIONS
For purposes of this Agreement, the following terms shall have the following meanings:
1.1 Affiliate. "Affiliate" shall mean, with respect to a party to this Agreement, any person or entity that, directly or indirectly, is in control of, is controlled by or is under common control with such party. As used in the previous sentence, "control" means the possession, directly or indirectly, of the power to direct or cause the direction of the management or policies
of a person or entity, whether through the ownership of voting securities, by contract or otherwise.
1.2 Confidential Information. "Confidential Information" shall mean all information that is disclosed by one party to the other and that is designated in writing as confidential, regardless of the form in which it is disclosed, including but not limited to information embodied in the WTI Products or which relates to markets, customers, products, patents, inventions, procedures, methods, designs, strategies, plans, assets, liabilities, prices, costs, revenues, profits, organization, employees, agents, distributors, sub-distributors or business in general.
1.3 Market. "Market" shall mean transportation, retail, banking, military, security and law enforcement, in the Territory.
1.4 Territory. "Territory" shall mean worldwide, without limitation.
1.5 WTI Products. "WTI Products" shall mean all present and future systems and equipment designed and manufactured by WTI.
ARTICLE 2: APPOINTMENT; SUBDISTRIBUTORS; TRADEMARKS; NO PROPRIETARY RIGHTS CONFERRED
2.1 Scope. WTI hereby appoints ISS, and ISS hereby accepts such appointment, as WTI's exclusive distributor of the WTI Products in the transportation, retail and banking Markets, and as WTI's non-exclusive distributor of the WTI Products in the security, military, and law enforcement Markets, in the Territory during the term of this Agreement, subject to all the terms and conditions of this Agreement. In consideration of such appointment, ISS shall not represent, distribute or sell any products that compete with the WTI Products. ISS expressly acknowledges that the distribution right granted under this Agreement is limited to the Market and the Territory. With the prior written consent of ISS, WTI may sell the WTI Products directly to end-users.
2.2 Subdistributors. ISS shall have the right to appoint sub-distributors of the WTI Products with the prior written consent of WTI, which shall not be unreasonably withheld.
2.3 Use of Trademarks. WTI hereby grants ISS the nontransferable, nonexclusive right to use the WTI trademarks and trade names listed on Exhibit A, and any other trademarks owned by WTI which it may designate in writing for use by ISS (the "Trademarks"), in marketing and distributing the WTI Products in the Market in the Territory for the duration of this Agreement. ISS shall not alter any WTI Trademarks or any package or label used in connection with any WTI Products, except as specifically authorized by WTI in writing.
2.4 No Proprietary Rights. The relationship created by this Agreement is one of manufacturer (WTI) and distributor (ISS) ONLY. This Agreement shall not create in ISS or any of
its affiliates any proprietary rights in the WTI products that are now, or may in the future, be sold under this Agreement.
ARTICLE 3: GENERAL OBLIGATIONS OF ISS
3.1 Marketing. ISS shall have the following obligations with respect to the marketing and distribution of the WTI Products:
(a) To use its best efforts to further the promotion, marketing, and distribution of the WTI Products in the applicable Market, in the Territory;
(b) To commit reasonable financial, intellectual and human resources necessary to grow the Market in the Territory for the WTI Products;
(c) To provide adequate and appropriate training to its sales force and independent sales representatives concerning the WTI Products at ISS's expense;
(d) To provide WTI with a reasonably detailed business plan
(including definitive marketing and strategic plans) for the
marketing and distribution of the WTI Products within ninety
(90) days of the Effective Date (including pricing strategies,
channels to market, service and warranty plans and promotional
activities) and to update such business plan thereafter once
per year fifteen days prior to the start of WTI's fiscal year;
and
(e) To conduct its business in a professional manner which will reflect positively upon WTI and WTI Products.
3.2 Promotional Materials. ISS shall submit samples of any proposed brochures, literature, promotional materials and instructions which are created or intended for use by ISS in the advertising, promotion, marketing or sale of the WTI Products in the Market in the Territory ("Promotional Materials") to WTI for written approval at least ten (10) days prior to proposed initial use. WTI shall approve such Promotional Materials or identify any changes necessary for approval of the Promotional Materials within five (5) days of receipt from ISS. ISS shall use, and shall allow its employees or independent sales representatives to use, only such Promotional Materials as have been approved in writing by WTI. ISS shall make no claim, representation or warranty about the WTI Products, and shall allow its employees or independent sales representatives to make no claim, representation or warranty about the WTI Products, whether in writing, orally or by electronic or other means, except as is contained in Promotional Materials approved by WTI in accordance with this Section 3.2. ISS shall promptly update or modify already approved Promotional Materials at WTI's request.
3.3 Compliance with Law. ISS shall distribute the WTI Products in the Market in the Territory in compliance with all applicable legal and regulatory requirements. ISS shall not directly or indirectly misrepresent the use of the WTI Products and will not alter the WTI Products.
3.4 Customer Reports. ISS shall promptly forward to WTI any customer complaints or inquiries relating to the performance or manufacture of the WTI Products in accordance with WTI's customer service policies. ISS shall promptly respond to all other inquiries and complaints from users of the WTI Products and shall provide WTI with a monthly report on all such inquiries or complaints and such other information as WTI may request from time to time.
ARTICLE 4: ORDERS, PRICES AND PAYMENTS
4.1 Forecasts. ISS shall provide WTI with an annual (one year) forecast of orders for the WTI Products, which forecasts shall be updated monthly on a 90-day rolling basis. The forecasts shall be non-binding.
4.2 Orders. ISS shall use its best efforts to submit purchase orders for the WTI Products in quantities consistent with the applicable forecast. All orders shall be in writing at least fifteen (15) days prior to the requested delivery date. Orders shall include the quantity of WTI Products, requested delivery dates and shipping instructions. All purchase orders are subject to acceptance in writing by WTI.
4.3 Modification of Orders. No accepted purchase order may be modified or canceled except upon the written agreement of both WTI and ISS. ISS's purchase orders shall be subject to all provisions of this Agreement, whether or not the purchase order or change order so states.
4.4 Prices. The parties agree that the prices to ISS for WTI Products shall be 50% of WTI's list price as set forth on that Price List dated January 1, 2001 attached hereto as Exhibit B, subject to those price increases allowed under Section 4.5 below. As to any future products developed by WTI, WTI shall notify ISS of the price at which that new Product will be listed and ISS may purchase that Product at 50% of list price subject to the same price adjustments allowed under Section 4.5 below.
4.5 Price Increases. WTI may, at any time beginning three (3) months after the Effective Date of this Agreement, adjust its list prices for the WTI Products by providing ISS with at least forty five (45) days prior written notice of any such price list adjustment; provided however, that no list price increase on a WTI Product shall be allowed if the list price increase for that Product, when taken together with all other list price increases in WTI Products over the preceding twelve months, will represent an increase in the aggregate list price of all WTI Products during that same twelve month period, of more than ten per cent 10% OR the percentage increase in the Consumer Price Index - Urban Markets, whichever percentage figure is greater.
The foregoing limitation shall NOT apply to any price increases that are due to increase in WTI's component purchase costs. Any increased prices shall not apply to any purchase orders accepted by WTI prior to the effective date of any price increase.
4.6 Payment Terms. Payments due under this Agreement shall be due net forty-five (45) days from the date of WTI's invoice. An invoice shall be dated on or after the date of shipment. In the event of any dispute arising over any part of an invoice or the total amount due under an invoice, all undisputed amounts shall be promptly paid by ISS in accordance with this Section 4.6.
4.7 Resale Prices. ISS may offer the WTI Products for resale in the Market in the Territory at such prices as ISS and WTI agree to in writing.
4.8 Taxes and Duties. Except as provided in Section 4.9 below, ISS shall be solely responsible for all taxes, duties or other similar government charges in connection with its purchase of WTI Products from WTI, exclusive of income taxes owed by WTI.
4.9 Income Tax Withholding. If and only to the extent that ISS is required by income tax laws in any country in the Territory to withhold income taxes owed by WTI, ISS may so withhold such taxes from payments otherwise due to WTI and shall promptly pay such taxes to the appropriate tax authorities on behalf of WTI. ISS shall then provide WTI with written documentation of such tax payment in a form reasonably acceptable to the U.S. Internal Revenue Service for purposes of foreign tax credits.
ARTICLE 5: WARRANTIES AND INDEMNIFICATION
5.1 Warranties to ISS. WTI hereby warrants to ISS:
(a) WTI owns or has the lawful right from others to grant the rights to market and distribute the WTI Products in the Market in the Territory as set forth in this Agreement;
(b) WTI has no knowledge of any infringement by the WTI Products of any third party United States or foreign intellectual property rights, such as patents, copyrights, trade secrets or trademarks; and
(c) The WTI Products shall be manufactured in conformity with applicable good manufacturing procedures and shall be free from defects in materials and workmanship.
5.2 Limited Warranty. The warranties set forth in Section 5.1 above apply only to ISS and are in lieu of all other warranties, express or implied, including without limitation any warranty of merchantability or fitness for a particular purpose or use.
5.3 No Warranty Pass-Through. No warranty, representation or agreement
herein shall be deemed to be made for the benefit of any third parties. ISS
shall not pass through to any third parties the warranties made by WTI under
this Article 5 and shall make no claims, representations or warranties
concerning the WTI Products other than as expressly approved by WTI pursuant to
Section 3.2 hereof.
5.4 Indemnification by WTI. WTI hereby agrees to indemnify, defend and hold ISS harmless from any claims, demands, liabilities, damages, cost and expenses (including, without limitation, reasonable costs and legal fees incurred by ISS) arising out of any third party suit, claim or other legal action, including any action brought by any governmental agency ("Legal Action"), that alleges (a) WTI Products infringe any United States or foreign patent, copyright, or trade secret, or (b) personal injury, death or property damage resulting from the use of WTI Products that are alleged to be defective by manufacturing or design; provided however, that ISS shall reimburse WTI for all indemnification expense paid to or on behalf of ISS under the foregoing provisions if it is determined that ISS or any of its affiliates were also the proximate cause of such personal injury, death or property damage. ISS shall give written notice to WTI of any such Legal Action within thirty (30) days of ISS's first knowledge thereof. If a WTI Product is found to infringe any third party intellectual property right which falls within WTI's indemnification obligation, at WTI's sole discretion and expense, WTI may (a) obtain a license from such third party for the benefit of ISS; or (b) replace or modify the WTI Products so that they are no longer infringing.
5.5 Indemnification by ISS. ISS hereby agrees to indemnify, defend and
hold WTI harmless from any claims, demands, liabilities, damages, costs and
expenses (including, without limitation, reasonable costs and legal fees
incurred by WTI) arising out of any Legal Action that arises from or results out
of the marketing or distribution of the WTI Products by ISS including, without
limitation: (a) any act or omission by ISS or any of its employees or agents;
(b) any claims, warranties or representations made by ISS or any of its
employees or agents with respect to the WTI Products or in connection with such
activities of ISS or any of its employees or agents except as specifically
approved by WTI in Promotional Materials, in accordance with Section 3.2; or (c)
any unfair business practice of ISS or any of its employees or agents. WTI shall
give written notice of any such Legal Action to ISS within thirty (30) days of
WTI's first knowledge thereof.
5.6 Insurance. Each of the parties shall procure and maintain in effect, liability insurance in an amount not less than Two Million Dollars ($2,000,000.00), which will insure against claims and liabilities arising out of or related to the WTI Products or covered by such party's indemnification obligation hereunder. Each party's policy shall identify the other party as an additional insured, and shall provide that there shall be no cancellation or reduction of coverage except upon written notice to the other party of at least thirty (30) days. Upon request, each party shall furnish appropriate certificates of insurance to the other party.
ARTICLE 6: LIMITATION OF LIABILITY.
WTI AGREES THAT ISS SHALL NOT BE LIABLE FOR ANY LOSS OR DAMAGE CAUSED BY WTI'S DELAY IN FURNISHING THE WTI PRODUCTS. IN NO EVENT WILL ISS OR ITS AFFILIATES BE LIABLE TO WTI FOR CONSEQUENTIAL, EXEMPLARY, INCIDENTAL OR INDIRECT OR PUNITIVE DAMAGES OR COSTS (INCLUDING LEGAL FEES AND EXPENSES) OR LOSS OF GOODWILL OR PROFIT IN CONNECTION WITH THE DISTRIBUTION AND SALE OF THE WTI PRODUCTS, OR IN CONNECTION WITH ANY CLAIM ARISING FROM THIS AGREEMENT, EVEN IF ISS AND ITS AFFILIATES HAVE BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGES OR COSTS. WTI AGREES THAT ISS'S TOTAL AGGREGATE LIABILITY UNDER THIS AGREEMENT SHALL NOT EXCEED TWO MILLION DOLLARS ($2,000,000).
ISS AGREES THAT WTI SHALL NOT BE LIABLE FOR ANY LOSS OR DAMAGE CAUSED BY ISS'S OWN DELAY IN DELIVERING THE WTI PRODUCTS TO THE END USER OR PURCHASER. IN NO EVENT WILL WTI OR ITS AFFILIATES BE LIABLE TO ISS FOR CONSEQUENTIAL, EXEMPLARY, INCIDENTAL OR INDIRECT OR PUNITIVE DAMAGES OR COSTS (INCLUDING LEGAL FEES AND EXPENSES) OR LOSS OF GOODWILL OR PROFIT IN CONNECTION WITH THE DISTRIBUTION AND SALE OF THE WTI PRODUCTS, OR IN CONNECTION WITH ANY CLAIM ARISING FROM THIS AGREEMENT, EVEN IF WTI AND ITS AFFILIATES HAVE BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGES OR COSTS. ISS AGREES THAT WTI'S TOTAL AGGREGATE LIABILITY UNDER THIS AGREEMENT SHALL NOT EXCEED TWO MILLION DOLLARS ($2,000,000).
ARTICLE 7: CONFIDENTIALITY
7.1 Confidential Information; Term. All Confidential Information shall be deemed confidential and proprietary to the party disclosing such information hereunder. Each party may use the Confidential Information of the other party during the term of this Agreement only as permitted or required for the receiving party's performance hereunder. The receiving party shall not disclose or provide any Confidential Information to any third party and shall take reasonable measures to prevent any unauthorized disclosure by its employees, agents, contractors or consultants during the term hereof, including appropriate individual nondisclosure agreements. The foregoing duty shall apply to any Confidential Information during the term of this Agreement and for a period of five (5) years from the date of termination of this Agreement.
7.2 Exclusions. The following shall not be considered Confidential Information for purposes of this Article 7:
(a) Information that is or comes into the public domain through no fault or act of the receiving party;
(b) Information that was independently developed by the receiving party without the use of or reliance on the disclosing party's Confidential Information;
(c) Information which was provided to the receiving party by a third party under no duty of confidentiality to the disclosing party; or
(d) Information which is required to be disclosed by law, provided however, prompt prior notice thereof shall be given to the party whose Confidential Information is involved.
ARTICLE 8: ASSIGNMENT; SURVIVORSHIP
8.1 Assignment. Neither party may assign its rights or obligations under this Agreement, even to its affiliates, without the written consent of the other party.
8.2 Survivorship. If more than half of the equity of WTI is purchased by a single person or entity that was not an WTI Affiliate before such purchase, that person or entity shall take subject to this Agreement, which shall remain in full force and effect.
ARTICLE 9: IMPORT AND EXPORT OF WTI PRODUCTS
9.1 Import Documentation. If applicable, ISS shall be responsible for obtaining all licenses, permits and registrations required to import the WTI Products into the Territory in accordance with applicable laws or regulations in the Territory.
9.2. Export Regulations. If applicable, ISS shall supply WTI on a timely basis with all necessary information and documentation requested by WTI for export of the WTI Products in accordance with United States export control laws and regulations.
9.3 Written Assurance. If applicable, ISS hereby assures WTI that ISS shall not re-export, directly or indirectly, the WTI Products to any destination forbidden under the then-applicable United States Export Administration Regulations unless the United States Export Administration Regulations expressly permit such re-export or the United States Commerce Department's Bureau of Export Administration has granted such authorization in writing.
ARTICLE 10: TERM AND TERMINATION
10.1 Term. This Agreement shall take effect as of the Effective Date and shall have an initial term of seven (7) years. Unless terminated as set forth below, this Agreement shall automatically extend for consecutive one year periods unless either party notifies the other no less than 60 days prior to the date of expiration of the initial term or any extension term that the Agreement will not be extended.
10.2 Termination. Notwithstanding the provisions of Section 10.1 above, this Agreement may be terminated earlier:
(a) By either party immediately on written notice to the other party if the other party files a petition of any type as to its bankruptcy, is declared bankrupt, becomes insolvent, makes an assignment for the benefit of creditors, goes into liquidation or receivership, or otherwise loses legal control of its business involuntarily;
(b) By either party if the other party is in material breach of this Agreement and has failed to cure such breach within thirty (30) days of receipt of written notice thereof from the first party;
(c) By either party immediately on written notice to the other
party if an event of Force Majeure continues for more than six
(6) months, provided however both parties shall use all best
and reasonable efforts to find a solution to or a method of
avoiding the effects of such Force Majeure event and only in
the event such solutions or efforts fail then either party may
terminate this Agreement.
(d) By either party upon sixty (60) days prior written notice if the sales from WTI to ISS and Econolite under this Agreement do not meet the Minimum Sales Requirements set forth in Exhibit C hereto.
10.3 Rights and Obligations on Termination. In the event of termination or expiration of this Agreement for any reason, the parties shall have the following rights and obligations:
(a) ISS shall cease to distribute the WTI Products;
(b) Neither party shall be released from the obligation to make payment of all amounts then or thereafter due and payable under this Agreement;
(c) ISS's duty of compliance with applicable United States export control laws under Section 9.3 hereof and duties of both parties of confidentiality under Article 7 and concerning dispute resolution under Article 10, shall survive termination of this Agreement; and
(d) Each party shall return all copies of the other party's Confidential Information and, if applicable, shall erase all Confidential Information from its computer systems and shall certify in writing to the other party that it has done so.
10.4 No Compensation. In the event of any termination of this Agreement under Section 10.2, subject to Section 10.3(b), neither party shall owe any compensation to the other party for lost profits, lost opportunities, good will, or any other loss or damage as a result of or arising from such termination.
ARTICLE 11: ARBITRATION
11.1 Dispute Resolution. Except as provided in Section 11.2, WTI and
ISS shall each use best efforts to resolve any dispute between them promptly and
amicably and without resort to any legal process, if feasible, within thirty
(30) days of receipt of a written notice by one party to the other party of the
existence of such dispute. Except as provided in Section 11.2, no further action
may be taken under this Article 11 unless and until executive officers of WTI
and ISS have met in good faith to discuss and settle such dispute. The foregoing
requirement in this Section 11.1 shall be without prejudice to either party's
rights, if applicable, to terminate this Agreement under Section 10.2.
11.2 Litigation Rights Reserved. If any dispute arises with regard to the unauthorized use or disclosure of Confidential Information by the other party, the party whose Confidential Information was so used or disclosed may seek any available remedy at law or in equity from a court of competent jurisdiction.
11.3 Procedure for Arbitration. Except as provided in Section 11.2, any
dispute, claim or controversy arising out of or in connection with this
Agreement which has not been settled through negotiation within a period of
thirty (30) days after the date on which either party shall first have notified
the other party in writing of the existence of a dispute, shall be settled by
final and binding arbitration under the then applicable Commercial Arbitration
Rules of the American Arbitration Association ("AAA"). Any such arbitration
shall be conducted by three (3) arbitrators appointed by mutual agreement of the
parties or, failing such agreement, in accordance with AAA Rules. At least one
(1) arbitrator shall be an experienced industry professional and at least one
(1) arbitrator shall be an experienced business attorney with background in the
licensing and distribution of similar products. Any such arbitration shall be
conducted in Omaha, Nebraska, U.S.A. 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
arbitrators, and the arbitrators shall order upon good cause
shown, reasonable and limited pre-hearing discovery, including
(a) exchange of witness lists, (b) depositions under oath of
named witnesses at a mutually convenient location, (c) written
interrogatories, and (d) document requests.
(b) Upon conclusion of the pre-hearing discovery, the arbitrators 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 arbitrators 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 arbitrators, subject to the power of the arbitrators, in their sole discretion, to award all such reasonable costs, expenses and fees to the prevailing party.
ARTICLE 12: MISCELLANEOUS
12.1 Relationship. This Agreement does not make either party the employee, agent or legal representative of the other for any purpose whatsoever. Neither party is granted any right or authority to assume or to create any obligation or responsibility, express or implied, on behalf of or in the name of the other party. Each party is acting as an independent contractor and nothing herein shall be construed to create a partnership, joint venture, franchise, employment, or agency relationship between the parties.
12.2 Assignment. Neither party shall have the right to assign or otherwise transfer its rights and obligations under this Agreement without the prior written consent of the other party. Any prohibited assignment shall be null and void.
12.3 Notices. Notices permitted or required to be given hereunder shall be deemed sufficient if given by registered or certified mail, postage prepaid, return receipt requested, by private courier service, or by facsimile addressed to the respective addresses of the parties as first above written or at such other addresses as the respective parties may designate by like notice from time to time. Notices so given shall be effective upon (a) receipt by the party to which notice is given or (b) on the fifth (5th) day following domestic mailing or the tenth (10th) day following international mailing, as the case may be, whichever occurs first.
12.4 Entire Agreement. This Agreement, including the Exhibits hereto which are incorporated herein by reference, constitutes the entire agreement of the parties with respect to the subject matter hereof and supersedes and replaces all proposals, oral or written, and all negotiations, conversations, discussions and previous agreements heretofore between the parties. WTI hereby acknowledges that it has not been induced to enter into this Agreement by any representations or statements, oral or written, not expressly contained herein. If any provision hereof is declared invalid by a court of competent jurisdiction, such provision shall be ineffective only to the extent of such invalidity, so that the remainder of that provision and all remaining provisions of this Agreement will continue in full force and effect.
12.5 Amendment. This Agreement may not be modified, amended, rescinded, canceled or waived, in whole or in part, except by written amendment signed by both parties hereto.
12.6 Publicity. Subject to Section 12.12 hereof, this Agreement is confidential, and no party shall issue press releases or engage in other types of publicity of any nature dealing with the commercial or legal details of this Agreement without the other party's prior written approval, which approval shall not be unreasonably withheld; provided however, approval of such disclosure shall be deemed to be given to the extent such disclosure is required to comply with governmental rules, regulations or other governmental requirements. In such event, the publishing party shall furnish a copy of such disclosure to the other party.
12.7 Governing Law. This Agreement shall be governed by and interpreted under the laws of the State of Minnesota, excluding its choice of law rules. The parties agree that the United Nations Convention on Contracts for the International Sale of Goods shall not apply in any respect to this Agreement or the parties hereto.
12.8 Severability. If any provision of this Agreement is found unenforceable under any laws or regulations applicable thereto, such provision shall be deemed stricken from this Agreement, but such invalidity or unenforceability shall not invalidate any of the other provisions of this Agreement.
12.9 Counterparts. This Agreement may be executed in two or more counterparts and each such counterpart shall be deemed an original hereof.
12.10 Waiver. No failure by either party to take any action or assert any right hereunder shall be deemed to be a waiver of such right in the event of the continuation or repetition of the circumstances giving rise to such right.
12.11 Force Majeure. Upon written notice to the other party, a party affected by an event of Force Majeure shall be suspended without any liability on its part from the performance of its obligations under this Agreement, except for the obligation to pay any amounts due and owing hereunder. As used in this Agreement, the term "Force Majeure" shall mean any event or condition beyond the reasonable control of either party which prevents, in whole or in material part, the performance by one of the parties of its obligations hereunder or which renders the performance of such obligations so difficult or costly as to make such performance commercially unreasonable, including acts of State or governmental action, riots, disturbance, war, strikes, lockouts, slowdowns, prolonged shortage of energy or other supplies, epidemics, fire, flood, hurricane, typhoon, earthquake, lightning and explosion, or any refusal or failure of any governmental authority to grant any approval or export license legally required.
12.12 Announcements. ISS shall have the right to announce to its shareholders and to the public significant events and achievements by ISS and WTI under this Agreement with the prior written consent of WTI.
IN WITNESS WHEREOF, the parties have caused this Distributorship Agreement to be executed by their duly authorized representatives below.
"ISS"
IMAGE SENSING SYSTEMS, INC.
Date: April 27, 2001 By: /s/ William L. Russell
Title: CEO
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"WTI"
WIRELESS TECHNOLOGY, INC.
Date: April 27, 2001 By: /s/ Phillip D. Fancher
Title: President/CEO
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EXHIBIT A
WTI TRADEMARKS AND TRADE NAMES
WIRELESS TECHNOLOGY, INC. (WTI)
FS-930N VIDEO TRANSMISSION SYSTEMS
2400 VIDEO TRANSMISSION SYSTEMS
5.8 GHZ VIDEO TRANSMISSION SYSTEMS
PS-991 PORTABLE VIDEO SURVEILLANCE SYSTEM
FAST DEPLOYMENT POWER OPTIONS
CFS-2400P INTELLIGENT TRAFFIC SYSTEMS- WIRELESS VIDEO MONITORING
FS-2400 WIRELESS VIDEO FOR GRADE CROSSING SAFETY
TWO-WIRE TRANSMISSION SYSTEM
2400 MHZ VIDEO MULTI-CHANNEL ANTENNAS
2400 MHZ VIDEO ANTENNA FOR COVERT APPLICATIONS
RL450AXB CONTROL LINK OMNIDIRECTIONAL ANTENNA
900 MHZ LINEAR POLARIZED MICROSTRIP ANTENNA
CONTROL LINK 460 UHF YAGI ANTENNA
2400 MHZ LINEAR POLARIZED MICROSTRIP ANTENNA
900 MHZ LINEAR POLARIZED YAGI ANTENNA
PRS-24, PS-2401 PORTABLE VIDEO SURVEILLANCE SYSTEM
MOBILE BLOCKER, MOBILE ALERT, MOBILE INTERCEPTOR
AUTOSCOPE SOLO PRO, AUTOSCOPE IMAGE SENSOR (AIS)
EXHIBIT B
WTI PRODUCTS PRICES
NOTE: TRANSFER PRICING FROM WTI TO ISS IS AT A 50% DISCOUNT OFF PUBLISHED LIST PRICE, IN ACCORD WITH WTI PRICE LIST DATED 4 JULY 2000. THE PRODUCTS, AUTOSCOPE SOLO PRO, AUTOSCOPE IMAGE SENSOR, MOBILE BLOCKER, MOBILE ALERT AND MOBILE INTERCEPTOR ARE EXCLUSIVELY ISS PRODUCTS, FOR WHICH A UNIQUE TRANSFER PRICE HAS BEEN AGREED, OR WILL BE JOINTLY AGREED UPON SUBMITTAL OF A FORMAL SYSTEM REQUIREMENT SPECIFICATION.
FS-930N VIDEO TRANSMISSION SYSTEMS
2400 VIDEO TRANSMISSION SYSTEMS
5.8 GHZ VIDEO TRANSMISSION SYSTEMS
PS-991 PORTABLE VIDEO SURVEILLANCE SYSTEM
FAST DEPLOYMENT POWER OPTIONS
CFS-2400P INTELLIGENT TRAFFIC SYSTEMS- WIRELESS VIDEO MONITORING
FS-2400 WIRELESS VIDEO FOR GRADE CROSSING SAFETY
TWO-WIRE TRANSMISSION SYSTEM
2400 MHZ VIDEO MULTI-CHANNEL ANTENNAS
2400 MHZ VIDEO ANTENNA FOR COVERT APPLICATIONS
RL450AXB CONTROL LINK OMNIDIRECTIONAL ANTENNA
900 MHZ LINEAR POLARIZED MICROSTRIP ANTENNA
CONTROL LINK 460 UHF YAGI ANTENNA
2400 MHZ LINEAR POLARIZED MICROSTRIP ANTENNA
900 MHZ LINEAR POLARIZED YAGI ANTENNA
PRS-24, PS-2401 PORTABLE VIDEO SURVEILLANCE SYSTEM
EXHIBIT C
MINIMUM SALES REQUIREMENTS
For the calendar year 2001 $1,500,000 For the calendar year 2002 $2,000,000 For the calendar year 2003 $2,500,000 For the calendar year 2004 $3,000,000 For the calendar years 2005 through 2010 $3,500,000 |