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, 2001
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the transition period from _____________ to __________
Commission file number 0-26056
IMAGE SENSING SYSTEMS, INC.
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(Name of small business issuer in its charter)
MINNESOTA 41-1519168
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State or other jurisdiction of IRS Employer Identification No.
incorporation of organization
500 SPRUCE TREE CENTRE
1600 UNIVERSITY AVE. W.
ST. PAUL, MN 55104 (651) 603-7700
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Address of principal executive offices Issuer's telephone number
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Securities registered under Section 12(b) of the Exchange act:
Securities registered under Section 12(g) of the Exchange Act:
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, 2001 totaled $6,682,000.
Based on the closing bid price at March 12, 2002, the aggregate market value of the voting stock held by nonaffiliates of the registrant was $6,305,554.
The number of shares outstanding of the registrant's $.01 par value common stock, as of March 12, 2002, was 3,152,777 shares.
Transitional Small Business Issuer Format: [ ] Yes [X] No
DOCUMENTS INCORPORATED BY REFERENCE
Portions of our proxy statement for our May 16, 2002 annual meeting of shareholders, which will be filed on or prior to April 30, 2002, are incorporated by reference into Part III of this Form 10-KSB.
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 of 1934, as amended. Forward-looking
statements represent our expectations or beliefs concerning future events and
can be identified by the use of forward-looking words such as "believes,"
"expects," "may," "will," "should," "intends," "plans," "estimates" or
"anticipates" or other comparable terminology. Forward-looking statements are
subject to risks and uncertainties that may cause our actual results to differ
materially from the results discussed in the forward-looking statements. Factors
that might cause these differences include, but are not limited to:
- lack of market acceptance of our products;
- dependence on third parties for manufacturing and marketing capabilities and continuing ability to pay royalties owed;
- inability to diversify our product offerings;
- revenue fluctuations caused by our dependence on sales to governmental entities;
- failure to secure adequate protection for our intellectual property rights;
- failure to respond to evolving industry standards and technological changes;
- inability to properly manage a growth in revenue and/or production requirements;
- inability to meet our future additional capital requirements; and
- control of our voting stock by insiders.
We caution that the forward-looking statements made in this report or in other announcements made by Image Sensing Systems are further qualified by the factors set forth in Exhibit 99 to this Annual Report on Form 10-KSB, under the caption "Cautionary Statement."
PART I
ITEM 1. DESCRIPTION OF BUSINESS
Image Sensing Systems develops and markets video image processing products for implementation in advanced traffic management systems, freeway incident detection and traffic data collection. Video image processing, also known as machine vision or artificial vision, is a technology that captures and analyzes video images through the use of sophisticated algorithms and computer software combined with special purpose hardware. Combining this technology with commercially available computer hardware and video cameras, we created our core product, the Autoscope(R) Wide Area Video Vehicle Detection System. The Autoscope 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 applications in intersection control, freeway traffic management, and traffic data collection. The system can be used by traffic managers for traffic control, management, planning, research, and other applications and ultimately can help reduce traffic congestion, improve roadway planning, and increase cost efficiencies in traffic management and control.
The original Autoscope system was first marketed and sold commercially in 1991. Since that time, we have developed a number of Autoscope products, including the Autoscope 2004, the Autoscope Solo(R), the Autoscope Solo Pro(TM) and the Autoscope Image Sensor Camera (AIS). The Autoscope 2004 system, introduced in 1991, 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 system, introduced in 1998, is a one-camera version of the Autoscope 2004. The Autoscope Solo Pro, introduced in 2000, upgraded the Autoscope Solo by including a zoom lens and producing a color video image. The new AIS is our stand-alone camera that takes advantage of the zoom lens and color video image. It can be used with our Autoscope 2004 and integrated with competitor products. A Microsoft Windows(R)-based graphical user interface enables standard video cameras to work with our Autoscope products.
In addition to the Autoscope family of products, in the past we also have marketed and sold a suite of products that provide wireless transmission of video and digital data, as well as the Mobile Blocker(TM) cellular telephone and pager jamming device. We have decided to exit this business generally because we have not seen satisfactory returns; in addition, the effort has been dilutitive from our core Autoscope business. Consequently, we intend to discontinue the Mobile Blocker and non-traffic related wireless business in 2002 and focus on our core business of developing and marketing video imaging technology applications to address traffic and other transportation problems. We do however, intend to continue to market a wireless transmission system for video and data that is applicable to the transportation industry and is a value-added product to our core Autoscope business.
Image Sensing Systems was incorporated in Minnesota in 1984.
The Autoscope System
Automated vehicle detection for traffic management traditionally has been performed with inductive wire loops buried in the pavement. However, embedded loop detectors are difficult to install and maintain, are destructive to road surfaces, and are not capable of wide-area vehicle detection without the use of many loops. 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. We believe that the Autoscope system's range of applications and its ability to support new applications for advanced technology solutions to traffic management problems make it superior to loop detectors and most other commercially available vehicle detection systems.
The Autoscope system permits users to draw detection zones on a video screen displaying the traffic scene and to 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. More than 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 easily by using the mouse to resize, reshape, or relocate the detection zones on the video monitor.
Once a 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 also can 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 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.
In 1998 we obtained Conformite Europeenne (CE) Mark approval for our Autoscope technology. The CE Mark is a worldwide standard for safety and quality assurance.
Product Applications and New Product Development
The Autoscope system currently is used primarily for intersections, freeways, tunnels, and traffic count stations. We also are continuously exploring new uses for the Autoscope system.
Intersection Applications. Installed at an intersection, the Autoscope system can be programmed to provide signal controllers with data including 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 can help signal controllers 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, the Autoscope system can be programmed so that selected detection zones detect cars moving in only 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 also can 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 currently are being used for intersection control applications.
Freeway and Tunnel Applications. Typical freeway traffic and tunnel information provided by the Autoscope system includes traffic volumes, time occupancy, vehicle speeds, and vehicle counts of five different vehicle classes based on length. The system also can be programmed 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 freeway or in the tunnel. By placing a video camera next to a freeway on-ramp, the Autoscope system detects traffic movement on the on-ramp or in the merging area onto the freeway. The resulting data can be used to prevent a queue from developing on a side street, to control on-ramp traffic signals, or to determine the capacity of a merge area for planning and control purposes.
Traffic Information Gathering and Analysis. Traffic planners use traffic data collected by the Autoscope system at intersections and on freeways and other roadways 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 microprocessor.
Applications Under Development. In May 2001 we entered into an agreement with Detector Electronics Corporation (also known as Det-Tronics), an international supplier of fire and gas detection products, to develop an integrated vehicular traffic and fire detection system to add to our Autoscope product line. With Det-Tronics we currently are testing and reviewing performance issues related to the fire detection aspects of the system. Once we are satisfied with product performance we intend to seek regulatory approvals so that we can commence domestic and international sales of the product.
Ongoing Research and Development. We engage in ongoing research and development to reduce manufacturing costs, develop less expensive system configurations, and improve product quality. We also engage in research and development to broaden current applications for the Autoscope system and to develop new products and product enhancements. The amount of our research and development cost varies depending on the allocation of engineering resources to outside projects and product support. As of March 1, 2002, 10 individuals, six of whom hold advanced degrees, are involved in research and development. We incurred $961,000 in research and development costs in 2001, and $615,000 research and development costs in 2000. In 2000 all of our research and development costs were related to software development costs for the development of the Autoscope Solo, Solo Pro and Comserver products, and were capitalized. We did not capitalize any software development costs in 2001. We expect our research and development costs in 2002 to be comparable to our research and development costs in 2001. In 2002 we will be working primarily on new applications and enhanced support for our existing products, including developing a replacement product for our four camera Autoscope 2004 system and releasing the new Solo Pro NC system that offers video processing remote from the camera sensor.
Customers
Our customers primarily consist of federal, state, city, and county departments of transportation; road commissions; and port, turnpike, tunnel, and other transportation authorities. We market and sell our products to customers both inside and outside the United States. The decision-makers within these government entities typically are traffic planners and government engineers, who in turn often rely on consulting firms that perform planning and feasibility studies for the government entities. Our products sometimes also are sold directly to system integrators or other suppliers of systems and services who are operating under subcontracts in connection with major road construction contracts.
Manufacturing, Marketing, and Distribution
Our products are manufactured in the United States pursuant to long-term production agreements with three companies: Econolite Control Products, Inc., the Electronic Division of Cohu, Inc., and Wireless Technology, Inc. The production agreements are described in more detail below. We have granted Econolite an exclusive right to market the Autoscope system in North America and the Caribbean. We market our products outside of North America through our wholly owned Asian subsidiary, Flow Traffic Ltd., and through agreements with 31 distributors covering countries in Europe, the Middle East, 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 Autoscope demonstration system for use in its marketing efforts. Our Vice President for International Business is responsible for the operations of Flow Traffic Ltd. and for the business development activities of expanding the distribution network in Europe and Latin America. To date, we have installed Autoscope systems in more than 40 countries around the world, including a large number of U.S. sites. We intend to continue to increase our marketing efforts in foreign countries.
Econolite Control Products, Inc. Econolite manufactures and markets the Autoscope system in North America and the Caribbean pursuant to a manufacturing, distribution, and technology license agreement. Pursuant to that agreement, we have appointed Econolite as our licensee to make, have made, use, license, distribute and sell the Autoscope system and related technology in North America and the Caribbean. Econolite has agreed to use its best efforts to promote the sale of the Autoscope system in this territory and not to distribute products that compete with the Autoscope system. Econolite pays us a royalty on revenue derived by Econolite from sales of the Autoscope system. Econolite has more than 65 years of experience in the traditional traffic intersection control industry and is certified as to ISO 9002 standards in its manufacture of machine vision products for the transportation management industry.
We may terminate our agreement with Econolite if a minimum annual sales level is not met. The initial term of the agreement was 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. At a board meeting on October 4, 2001, our board approved a five-year extension of our agreement with Econolite, extending its term to 2012.
Econolite's license encompasses any knowledge, information, know-how, software, or devices relating to vehicle detection, whether patentable or not, that is or are licensed to us pursuant to our license agreement with the University of Minnesota (described under "Patents and Proprietary Rights" below) and any knowledge, information, know-how, software, or devices relating to vehicle detection owned or licensable by us. Econolite has a right of first refusal for extension of its license to include rights related to distribution of the Autoscope system in countries outside North America and the Caribbean. Econolite also currently manufactures, on a non-exclusive basis, the Autoscope systems sold outside its distribution territory.
We support Econolite's marketing efforts in North America and the Caribbean through an integrated marketing communications program with Econolite. This program attempts to increase market awareness of our technology and our products by direct mailings of Autoscope brochures, manuals and videos to potential customers, also by joint planning and sharing of advertising and exhibition budgets.
Econolite provides a two-year warranty on the current Autoscope system and must provide all service required under this warranty.
Cohu, Inc. In July 1997 we entered into a production agreement with Econolite and the Electronic Division of Cohu, Inc. Under this agreement, Cohu manufactures and sells exclusively to us and Econolite as many units of the Autoscope Solo product as each of us may order from time to time, and each of us has agreed to purchase from Cohu all of our respective requirements for the Autoscope Solo product for sale to end users in our respective distribution territories until such time as Econolite and/or we have purchased 5,000 units in the aggregate. Econolite has agreed to continue thereafter to purchase all of its requirements for the Autoscope Solo product from Cohu, subject to Econolite's option to manufacture the Solo product and our right of termination. The agreement with Cohu does not require either us or Econolite to purchase a minimum number of units from Cohu on an annual basis. Under the agreement, we and Econolite granted Cohu a non-exclusive, non-transferable, non-assignable, royalty-free right and license to use such of our respective intellectual property as may be necessary to make, design, develop, assemble, manufacture, and repair the Autoscope Solo product solely for sale to us and Econolite. Cohu acquired no right, title, or interest in or to our intellectual property other than the foregoing limited license, nor does Cohu have the right or authority to sublicense all or any portion of either of our intellectual property.
We may terminate the agreement with Cohu, with or without cause, upon 60 days' prior written notice. Cohu may terminate the agreement, with or without cause, upon 12 months' prior written notice. If we terminate the agreement with cause, Cohu must deliver to us all tooling specific to production of the Autoscope Solo product, and Cohu is not entitled to any further payment after termination. If we terminate the agreement without cause, we must purchase from Cohu all of its inventory, including raw materials, unique parts, work in process, and finished goods, for a purchase price equal to Cohu's cost, up to a maximum purchase price of $90,000.
Cohu provides a two-year warranty to Econolite and us for the Autoscope
Solo product it manufactures.
Wireless Technology, Inc. In 2000, we entered into a verbal production agreement with Econolite and Wireless Technology, Inc. (or "WTI"), which was formalized and signed by all parties in February 2002. Under the agreement, WTI manufactures and sells exclusively to us and Econolite as many units of the Solo Pro and Autoscope Image Sensor (or "AIS") camera products as each of us may order from time to time, and each of us has agreed to purchase from WTI all of our respective requirements for the Solo Pro and AIS camera products for sale to end users in our respective distribution territories. The agreement does not require either us or Econolite to purchase a minimum number of units from WTI. Under the agreement, we and Econolite granted WTI a non-exclusive, non-transferable, non-assignable, royalty-free right and license to use such of our respective intellectual property as may be necessary to make, design, develop, assemble, manufacture, and repair the Solo Pro and AIS camera products solely for sale to us and Econolite. WTI acquired no right, title, or interest in or to our intellectual property or the Econolite intellectual property other than the foregoing limited license, nor does WTI have the right or authority to sublicense all or any portion of our intellectual property.
We may terminate the agreement with WTI, with or without cause, upon six months' prior written notice. WTI may terminate the agreement, with or without cause, upon 12 months' prior written notice. WTI is not entitled to any further payment after termination. If we terminate the agreement with cause, WTI must deliver to us all tooling specific to production of the Solo Pro and AIS camera products. If we terminate the WTI Agreement without cause, we must purchase all of WTI's inventory, including raw materials, unique parts, work in process, and finished goods, for a purchase price equal to WTI's cost plus 10%, up to a maximum purchase price of $100,000.
WTI provides a two-year warranty to Econolite and us on the Solo Pro and AIS camera products it manufactures.
Product Liability Insurance
Econolite currently maintains $15,000,000 of product liability insurance, and we maintain $2,000,000 of product liability insurance. In addition, Econolite has agreed to indemnify us and hold us harmless from and against any losses, damages, or expenses arising out of the products made or sold by Econolite pursuant to our manufacturing, distribution, and technology license agreement with Econolite.
Suppliers
Some of the component hardware incorporated in the Autoscope products are standard computer hardware products that are available from multiple sources. Other parts, such as the Autoscope microprocessor and digitizer, are manufactured to our specifications by third-party vendors for integration into our products. To date, our current vendors of these components have met our quality and performance expectations. However, we believe alternative component vendors are available should the necessity arise. Nevertheless, shortages of parts or the need to change vendors could hinder Econolite's, Cohu's, and WTI's ability to manufacture our products, which could, in turn, decrease our revenues and harm our business.
Backlog
Our backlog of unfulfilled firm orders from distributors was not material as of December 31, 2001 and was approximately $2,430,000 December 31, 2000. The 2000 backlog was attributable solely to an unfulfilled order for the Mobile Blocker product which was never confirmed. In 2002, we decided to exit certain markets for wireless products, including Mobile Blocker. Terms of agreements between distributors of our products and government contractors and other customers generally provide for cancellation or rescheduling of delivery in the case of backlogs. A backlog in our orders as of a particular date may not be a relevant factor in predicting our future revenue.
Intellectual Property
The technology underlying the Autoscope system was initially developed by Dr. Panos Michalopoulos, one of our directors 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. Between 1985 and 1989, additional system
developments were funded partially by the Minnesota Department of Transportation and the Federal Highway Administration. Dr. Michalopoulos has assigned all of his rights in the technology underlying the Autoscope system to us or to the University of Minnesota. The U.S. patent for 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.
We entered into a license agreement with the University of Minnesota in 1991. Under the agreement, we have 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 of Minnesota and related to a video vehicle detection system developed by the University of Minnesota, solely or jointly with us, including certain improvements made to this technology. In exchange for our license, we pay to the University of Minnesota:
- a royalty of 3% of the net sales of licensed products (as defined below);
- 50% of all site license revenue; and
- 10% of all of our sublicensing revenue.
For these purposes, the 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 us and specifically allocable to us 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 us from parties to whom we grant sublicense rights to make or sell the licensed products. The University of Minnesota has retained a non-exclusive and non-transferable 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 are not paid, if there is a material breach of the agreement by us, or if we fail to use our best efforts to effect commercial sales of the licensed products. We have agreed to indemnify the University of Minnesota against all liabilities or losses arising from (1) the manufacture, use, lease, or sale of a licensed product by us or a sublicensee of us, (2) a third party's use of a licensed product purchased from us or a sublicensee of us, and (3) a third party's manufacture of a licensed product at our request.
We have sublicensed some of our rights in the Autoscope technology to Econolite pursuant to the Econolite Agreement. See "Marketing and Manufacturing" above.
Our technology is dependent upon the knowledge, experience, and skills of our key scientific and technical personnel. To protect our rights to our proprietary know-how and technology, we require all employees and consultants to execute confidentiality agreements that prohibit the disclosure of confidential information to any third parties. These agreements also require disclosure and assignment to us of any discoveries and inventions made by employees and consultants while they are devoted to our business activities.
We intend to actively protect our intellectual property assets and will actively seek, when appropriate, protection for owned or licensed products and proprietary information by means of United States and foreign patents, trademarks, and contractual arrangements. In addition, we rely upon trade secrets and contractual arrangements to protect some of our proprietary information. We have federally registered trademark rights to "Autoscope" and "Autoscope Solo."
Competition
Competition in the area of advanced traffic management and surveillance is growing, due in part to increased federal funding of advanced technologies under the U.S. government's national Intelligent Transportation Systems initiative, which was formally endorsed by the U.S. Congress in 1991 and was strengthened in 1998 when Congress earmarked more than $10 billion of its transportation funding bill for mitigation of congestion, highway safety, transit, and other surface transportation projects for spending over the subsequent five years.
We are 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 Autoscope system are Traficon N.V., the Peek business unit of First Atlantic, Nestor, Inc., and Odetics, Inc. To our knowledge, Traficon, Odetics, and Peek have working installations of their machine vision systems in the United States and other parts of the world. However, these companies do not have as many installations as we have. To our knowledge, machine vision systems are also under development by Nestor. We are 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, we believe that our products have undergone more extensive field-testing and are at a more advanced stage of development than any of our competitors' products.
Other potential competitors include companies that have substantially more financial, technological, marketing, personnel, and research and development resources than we have. Our 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 urban traffic congestion problems. 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. We estimate that more than 95% of the detector systems currently in use in the United States are embedded loop detectors. Embedded loop detectors are relatively easy to manufacture, are currently manufactured by numerous companies throughout the world, and require lower initial capital commitment than the Autoscope system.
Employees
As of March 1, 2002, we had 29 full-time employees, 11 of whom are employed by Flow Traffic Ltd. Of our U.S. employees, 10 are involved in research and development, two provide product and customer support, one is engaged in sales and marketing, and five are involved in management, administration, finance, and human resources. None of our employees is represented by a union. We believe our employee relations are good.
ITEM 2. DESCRIPTION OF PROPERTY
Image Sensing Systems currently leases approximately 10,000 square feet of office space in St. Paul, Minnesota, pursuant to an operating lease that expires in November 2002, with options to renew through November 2004. The lease provides for monthly payments of $13,230 and we are responsible for our proportionate share of increases in operating expenses that exceed a base rent factor. Rent expense amounted to $153,400 in 2001 and $145,000 in 2000. At December 31, 2001, future minimum annual lease payments are $134,000.
We believe that our current space exceeds our future needs and intend to negotiate a new lease during 2002 for approximately 7,000 square feet of office space, in the same building at approximately the same lease cost per square foot.
Flow Traffic Ltd. leases office space in Hong Kong, China and Thailand. Aggregate lease payments under theses leases are $84,000 in 2002 and $25,600 in total non-cancelable lease payments in 2003 through 2006. We believe these facilities will be sufficient for Flow Traffic's current and foreseeable future needs.
We do not otherwise invest in real estate in any manner.
ITEM 3. LEGAL PROCEEDINGS
During 2001, we were not involved in any legal proceedings, and we currently are not subject to any legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders during the fourth quarter of the calendar year covered by this report.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
Market Information
Our common stock is traded on the Nasdaq Small Cap Market under the symbol "ISNS." The quarterly high and low sales prices for our common stock for our last two fiscal years are set forth below.
FY 2001 FY 2000
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QUARTER HIGH LOW HIGH LOW
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First $4.19 $2.88 $9.44 $3.63
Second 4.60 1.99 11.50 5.75
Third 2.82 1.47 5.97 4.25
Fourth 3.25 1.76 5.98 3.63
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Shareholders
As of March 12, 2002, there were 27 holders of record of our common stock and approximately 650 beneficial holders of our common stock.
Dividends
We have never declared or paid a cash dividend on our common stock. We currently intend to retain earnings for use in the operation and expansion of our business, and, consequently, we do not anticipate paying any dividends in the foreseeable future.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Our critical accounting policies, including the assumptions and judgments underlying them, are disclosed in Note 1 to the Consolidated Financial Statements. These policies have been consistently applied in all material respects and address such matters as revenue recognition, depreciation methods, asset impairment recognition, deferred tax valuation allowance, business combination and accounting. While the estimates and judgments associated with the application of these policies may be affected by different assumptions or conditions, we believe the estimates and judgments associated with the reported amounts are appropriate in the circumstances.
The following table sets forth, for the periods indicated, certain statements of operational data as a percent of revenue:
Year Ended December 31
2001 2000
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Product sales 36.1 % 53.2 %
Royalties 60.0 44.5
Consulting services 3.9 2.3
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Total revenue 100.0 100.0
Cost of revenue 31.1 38.5
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Gross profit 68.9 61.5
Selling, marketing and product support 33.4 26.7
General and administrative 30.0 38.2
Research and development 14.4 0.0
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Loss from operations (8.9) (3.4)
Net loss (6.8) (.8)
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Product sales for 2001 decreased to $2,410,000 compared to $3,210,000 in 2000. The decrease was due primarily to lower sales in Asia ($1,866,000 in 2001 compared to $2,643,000 in 2000). The difference is attributable to large orders from Korea and Hong Kong in 2000 with a value of approximately $1,300,000. Royalty income increased to $4,010,000 in 2001, compared to $2,684,000 in 2000. The increase in royalty income in 2001
resulted primarily from the introduction of the AutoScope Solo Pro(TM), which is more cost effective than the prior version of the Solo product. Revenue from consulting services increased to $262,000 in 2001 from $142,000 in 2000. The majority of consulting income came from our contract with Oakland County in Michigan.
Gross profits were $4,601,000, or 68.9% of revenue, in 2001, compared to $3,711,000, or 61.5% of revenue, in 2000. The gross profit was 74.4% before the write-off of Mobile Blocker inventory and write down of old style Solo inventory. This inventory adjustment total was $368,000. The increase in our gross profit margin percentage was due primarily to greater royalty revenue from Econolite as a percent of total revenues. We expect the revenue mix to be comparable to 2001 levels in 2002.
Selling, marketing, and product support expenses were $2,229,000, or 33.4% of revenue, in 2001, compared to $1,609,000, or 26.7% of revenue, in 2000. The increase resulted primarily from increased spending for sales and marketing personnel and other business development costs related to our international business, and the development of the business infrastructure for the sales and marketing of our suite of wireless products, including the Mobile Blocker product. We expect selling, marketing and product expenses to decrease in 2002 based on the fact that we are returning primary focus to our core business.
General and administrative expenses were $2,006,000, or 30.0% of revenue, in 2001, compared to $2,305,000, or 38.2% of revenue, in 2000. The decrease was due primarily to cost cutting in 2001, eliminating two part-time positions, cutting back in travel, dues, and quarterly shareholder mailings along with the absence in 2001 of the incremental expense we incurred in 2000 related to our stock dividend and fees related to the issuance of additional shares in connection with the dividend.
The research and development expenses and capitalized software development costs totaled $961,000 in 2001 compared to $615,000 in 2000. The increase resulted primarily from the fact that we focused on the development of enhancements to existing products in 2001, and additionally on the development work on Flame Detection. We also added two engineers in January 2001, which increased our research and development cost. In early 2002 we laid off five engineers and believe our development expense for 2002 will be closer to the levels in 2000.
Net loss was $455,000 (Image Sensing Systems loss of $416,000 and loss from Flow Traffic of $39,000), or 6.8% of revenue, in 2001, compared to a loss of $50,000 (Image Sensing Systems loss of $242,000 and income from Flow Traffic of $192,000), or 0.8% of revenue, in 2000. There was an $87,000 domestic tax benefit in 2000 that mitigated 2000 losses. There was no tax provision in 2001. The primary difference in the 2001 loss as compared to 2000 is the write off of $370,000 of inventory, $325,000 of which is attributable to the Mobile Blocker product. We took the write off in connection with our decision to cease our efforts to enter the Mobile Blocker and non-traffic related wireless business.
Liquidity and Capital Resources
At December 31, 2001, we had $1,200,000 in cash and cash equivalents, compared to $1,780,000 at December 31, 2000. We had working capital of $2,175,000, and a ratio of current assets to current liabilities of 2.9 to 1 at December 31, 2001, compared to $2,395,000 and 3.6 to 1, respectively, at the end of 2000. We believe that our decision to exit unprofitable business, related staff reductions and reduced business development expenses will have a positive impact on our liquidity in 2002.
Net cash provided by operating activities was $374,000 in 2001, compared to $563,000 in 2000. The decrease in 2001 was due primarily to an increase in accounts receivable, which was attributable to the increased royalty income from Econolite. We anticipate 2002 accounts receivable to be similar to 2001 levels, and cash from operating activity to increase, for the same reasons we expect liquidity to increase in 2002, as described above.
In 2001 we received cash of approximately $28,000 in connection with the exercise of stock options and warrants.
We believe that cash and cash equivalents on hand at December 31, 2001, along with an available $500,000 revolving line of credit with a bank and savings from recent restructuring, will satisfy our projected working capital needs, investing activities, and other cash requirements through 2002. Current availability on our line of credit is $50,000 with the balance used to secure the letter of credit issued to our Flow Traffic minority shareholders (see Recent Developments).
Recent Developments
On January 7, 2002 we purchased all of the shares then held by the minority shareholders of our subsidiary Flow Traffic Ltd., making Flow Traffic our wholly owned subsidiary. The purchase was made in accordance with the Shares Sale and Purchase Agreement dated November 28, 2001, as amended on December 31, 2001, among Image Sensing Systems and the minority shareholders of Flow Traffic. The minority shareholders then included Johan Billow and Grove Place Limited (a consulting company), affiliated with Anthony H. Gould. Subsequently, in February 2002, Anthony Gould and Johan Billow were elected to our Board of Directors, Anthony Gould was appointed as our President and Chief Executive Officer and Johan Billow was appointed as our Vice President for International Business. The agreement is filed as an exhibit to this Form 10-KSB. Prior to this purchase, we owned six shares of Flow Traffic, and the minority shareholders collectively owned four shares of Flow Traffic.
We agreed to pay the following amounts to the minority shareholders as consideration for their shares:
- Cash payments at the time of purchase totaling $250,000.
- Additional payments totaling $450,000, payable at any time between April 1, 2003 and April 30, 2003 upon the request of the minority shareholders, which payments are secured by letters of credit drawn in favor of the minority shareholders and expiring on April 30, 2003.
- Non-interest bearing notes, maturing on January 7, 2007, in the aggregate principal amount of $250,000, and convertible into an aggregate of 100,000 shares of our common stock. The holders may demand payment for their notes at any time after April 1, 2003. The notes may be prepaid by us at any time during calendar year 2002 for their aggregate principal amount of $250,000 and without penalty or additional fees, or may be prepaid by us at any time after April 1, 2003, for the aggregate principal amount of $250,000 plus additional payments totaling $50,000. If not converted or paid by January 7, 2007, each note will be redeemed by us on that date for its principal amount. Each note also provides that if the note is converted into shares of our common stock, we will register such shares with the Securities and Exchange Commission, if so requested by the holder.
In addition to the foregoing consideration, if Flow Traffic achieves an audited net profit before tax of HK$1,418,000 (approximately US$181,795) or greater for fiscal year 2002, we will make an additional cash payment totaling $100,000 to the minority shareholders, payable within 10 days after completion of Flow Traffic's annual audit.
In the first quarter of 2002 we laid off seven full-time employees. Of the seven employees, five were in engineering and two were in sales and marketing. Additionally in the first quarter of 2002, William L. Russell, our Chairman, President and Chief Executive Officer, left Image Sensing Systems to pursue other interests. Mr. Russell was replaced as President and Chief Executive Officer by Anthony H. Gould, then serving as Managing Director of our subsidiary Flow Traffic Ltd. We will incur $277,000 in severance expense in the first quarter of 2002.
ITEM 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
IMAGE SENSING SYSTEMS, INC.
CONSOLIDATED BALANCE SHEET
December 31
----------------------------------------
ASSETS 2001 2000
----------------------------------------
Current assets:
Cash and cash equivalents $1,200,000 $1,780,000
Accounts receivable, net of allowance for returns and doubtful accounts of
$41,000 in 2001 & $43,000 in 2000 1,589,000 943,000
Inventories 341,000 370,000
Prepaid expenses 88,000 117,000
Deferred income taxes 92,000 92,000
----------------------------------------
Total current assets 3,310,000 3,302,000
Property and equipment:
Furniture and fixtures 181,000 210,000
Leasehold improvements 107,000 104,000
Equipment 1,444,000 1,234,000
----------------------------------------
1,732,000 1,548,000
Accumulated depreciation (1,381,000) (1,165,000)
----------------------------------------
351,000 383,000
Deferred income taxes 34,000 34,000
Goodwill, net of accumulated amortization of $13,000 in 2001 & $9,000 in
2000 77,000 81,000
Other Assets 37,000 29,000
Capitalized software development costs, net of accumulated amortization of
$607,000 in 2001 ($349,000 in 2000) 1,195,000 1,453,000
----------------------------------------
TOTAL ASSETS $5,004,000 $5,282,000
========================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $720,000 $433,000
Accrued compensation 374,000 365,000
Deferred revenue 40,000 109,000
----------------------------------------
Total current liabilities 1,134,000 907,000
Minority Interest 56,000 134,000
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 - 3,153,000 in 2001 & 3,143,000 in 2000 32,000 32,000
Additional paid-in capital 4,600,000 4,572,000
Retained earnings (deficit) (818,000) (363,000)
----------------------------------------
Total shareholders' equity 3,814,000 4,241,000
----------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 5,004,000 $ 5,282,000
========================================
|
IMAGE SENSING SYSTEMS, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
Year ended December 31
2001 2000
---------------------------------------
Revenue:
Product sales $2,410,000 $3,210,000
Royalties 4,010,000 2,684,000
Consulting services 262,000 142,000
---------------------------------------
6,682,000 6,036,000
Cost of revenue:
Product sales (see Note 2) 1,613,000 1,936,000
Royalties 285,000 271,000
Consulting services 183,000 118,000
---------------------------------------
2,081,000 2,325,000
---------------------------------------
Gross profit 4,601,000 3,711,000
Operating expenses:
Selling, marketing and product support 2,230,000 1,609,000
General and administrative 2,006,000 2,305,000
Research and development 961,000 --
---------------------------------------
5,197,000 3,914,000
---------------------------------------
Loss from operations (596,000) (203,000)
Interest income 115,000 120,000
---------------------------------------
Loss before income taxes (481,000) (83,000)
Income taxes (benefit) 2,000 (87,000)
---------------------------------------
Income/(loss) before minority interest (483,000) 4,000
Minority interest 28,000 (54,000)
---------------------------------------
Net loss $(455,000) $(50,000)
=======================================
Net loss per common share--basic and diluted $(0.14) $(0.02)
=======================================
Weighted average number of common shares outstanding 3,147,567 3,142,837
=======================================
|
See accompanying notes.
IMAGE SENSING SYSTEMS, INC.
CONSOLIDATED STATEMENT OF CASH FLOW
Year ended December 31
2001 2000
--------------------------------------
Operating activities:
Net loss $(455,000) $(50,000)
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation 216,000 238,000
Amortization 262,000 181,000
Minority interest in subsidiary's earnings (28,000) 54,000
Changes in operating assets and liabilities:
Receivables (646,000) 485,000
Inventories 29,000 (286,000)
Deferred income taxes - (117,000)
Prepaid expenses 21,000 (89,000)
Accounts payable 287,000 4,000
Accrued compensation 9,000 87,000
Deferred revenue (69,000) 56,000
--------------------------------------
Net cash (used in) provided by operating activities (374,000) 563,000
Investing activities:
Flow Traffic Dividend (50,000) -
Purchases of property and equipment (184,000) (176,000)
Capitalized software development costs - (615,000)
--------------------------------------
Net cash used in investing activities (234,000) (791,000)
Financing activities:
Proceeds from sale of common stock 28,000 689,000
--------------------------------------
Net cash provided by financing activities 28,000 689,000
Increase (decrease) in cash (580,000) 461,000
Cash and cash equivalents at beginning of year 1,780,000 1,319,000
--------------------------------------
Cash and cash equivalents at end of year $ 1,200,000 $ 1,780,000
======================================
|
See accompanying notes.
IMAGE SENSING SYSTEMS, INC.
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
ADDITIONAL RETAINED
SHARES COMMON PAID-IN EARNINGS
DESCRIPTION ISSUED STOCK CAPITAL (DEFICIT) TOTAL
----------- ----------- ----------- ----------- ----------- -----------
Balance at December 31, 1999 2,479,200 $ 25,000 $ 3,890,000 $ (313,000) $ 3,602,000
Common stock issued in 20% Dividend 503,000 5,000 (5,000) -- --
Common stock issued for options and
warrants exercised 161,200 2,000 687,000 -- 689,000
Net Loss -- -- -- (50,000) (50,000)
-----------------------------------------------------------------------------------------
Balance at December 31, 2000 3,143,400 $ 32,000 $ 4,572,000 $ (363,000) $ 4,241,000
Common stock issued for options
exercised 9,940 -- 28,000 -- 28,000
Net Loss -- -- -- (455,000) (455,000)
-----------------------------------------------------------------------------------------
Balance at December 31, 2001 3,153,340 $ 32,000 $ 4,600,000 $ (818,000) $ 3,814,000
=========================================================================================
|
DECEMBER 31, 2001
1. SIGNIFICANT ACCOUNTING POLICIES DESCRIPTION OF BUSINESS Image Sensing Systems, Inc. ("ISS") develops and markets video image processing technology and products for use in advanced traffic management systems and traffic data collection. ISS sells its products primarily to foreign distributors of its products and receives a royalty for sales made by a sub licensee to North American distributors. ISS also provides technical expertise in image processing, hardware and software design, and traffic management and control. ISS's products are used primarily by governmental entities.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of ISS and its
majority-owned subsidiary, Flow Traffic Ltd., located in Hong Kong. All
significant inter-company transactions and accounts have been eliminated in
consolidation.
REVENUE RECOGNITION
Revenue from product sales and royalties from the sale of products by a
sub-licensee are recorded upon shipment by the sub licensee. All direct and
distributor sales are recorded upon shipment. Consulting fees are recorded as
earned.
CASH AND CASH EQUIVALENTS
ISS considers all highly liquid investments with a maturity date of three months
or less when purchased to be cash equivalents. Investments classified as cash
equivalents consist of commercial paper. The market value of these investments
approximates cost at December 31, 2001 and 2000.
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
ISS 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.
ISS has adopted the disclosure-only provisions of Statement of Financial Accounting Standards (SFAS) No. 123, Accounting for Stock-Based Compensation ("SFAS 123"). Accordingly, ISS has made pro forma disclosures of what net income and net income per share would have been had the provisions of SFAS 123 been applied to ISS's stock options.
ADVERTISING
Advertising and promotion costs are expensed as incurred and amounted to
approximately $224,000 and $117,000 in the fiscal years ended 2001 and 2000,
respectively.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles generally accepted in the United States requires
management to make estimates and assumptions that affect the amounts reported in
the financial statements and accompanying notes. Actual results could differ
from the estimates.
ACCOUNTING FOR IMPAIRMENT OF LONG-LIVED ASSETS
ISS 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
ISS 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. ISS 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 are 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 and were antidilutive for 2001 and 2000.
NEW ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board issued Statements of
Financial Accounting Standards No. 141, Business Combinations, and No. 142,
Goodwill and Other Intangible Assets, effective for fiscal years beginning after
December 15, 2001. Under the new rules, goodwill will no longer be amortized but
will be subject to annual impairment tests in accordance with the Statements.
Other intangible assets will continue to be amortized over their useful lives.
The Company will apply the new rules on accounting for goodwill and other intangible assets beginning in the first quarter of 2002. During 2002, the Company will perform the first of the required impairment tests of goodwill and indefinite lived intangible assets and has not yet determined what the effect of these tests will be on the earnings and financial position of the Company.
RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform to the current year
presentation.
2. INVENTORY Cost of revenue for 2001 product sales included a write-off of $368,000 related to Mobile Blocker and our old-style Solo product.
3. CREDIT FACILITY ISS has a credit agreement that provides up to $500,000 in short-term borrowings at 1.25% over the prime rate (6.00% at December 31, 2001). 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 that relate to certain financial statement ratios and restrictions. ISS had no outstanding borrowings in 2001 or 2000.
4. LEASE COMMITMENT ISS rents office space under an operating lease agreement expiring in November 2002, with options to renew through November 2004. The lease provides for monthly payments of $12,000 and ISS is responsible for its proportionate share of increases in operating expenses that exceed a base rent factor. Rent expense amounted to $153,400 in 2001 and $145,000 in 2000.
At December 31, 2001, future minimum annual lease payments are $134,000 for 2002.
5. 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 ISS's deferred tax assets and liabilities are as follows:
December 31
2001 2000
-----------------------------------
Deferred tax assets:
Accounts receivable allowances $ 3,000 $ 15,000
Other reserves 16,000 -
Accrued compensation 23,000 32,000
Warranty reserve 5,000 5,000
Inventory reserve 126,000 -
Deferred revenue 15,000 40,000
Research and development tax credits 290,000 245,000
Net operating loss carry forward 548,000 549,000
Less valuation allowance (458,000) (216,000)
-----------------------------------
568,000 670,000
Deferred tax liabilities:
Tax depreciation in excess of book $ - $ 6,000
Capitalized SW development costs 442,000 538,000
-----------------------------------
442,000 544,000
-----------------------------------
Net deferred taxes $ 126,000 $ 126,000
===================================
|
ISS has net operating loss carry forwards for income tax purposes of $1,882,000 and research and development tax credits of $290,000 that expire in the years 2007 through 2020. Included in the NOL is approximately $170,000 of deductions resulting from disqualifying dispositions of stock options. These deductions currently have a full valuation allowance; and when realized for financial statement purposes, they will not result in a reduction in income tax expense. Rather, the benefit will be recorded as additional paid-in capital.
Cash paid for income taxes amounted to $1,900 in 2001 and $4,400 in 2000.
Deferred tax assets have been offset by a valuation allowance as deemed necessary based on ISS estimates of its future sources of taxable income and the expected timing of temporary difference reversals. Despite the reported cumulative net loss for fiscal 2001, ISS believes recorded net deferred tax assets are more likely than not to be recoverable, based upon its estimates of future sources of taxable income and the expected timing of temporary difference reversals.
There are no undistributed earnings of ISS foreign subsidiary at December 31, 2001.
The components of income tax (benefit) expense as recorded by ISS for December 31, 2001 and 2000 are as follows:
Year Ended December 31
2001 2000
----------------------------
Current:
Federal $ -- $ --
State 4,000 4,000
Foreign (2,000) 26,000
----------------------------
2,000 30,000
----------------------------
Deferred:
Federal -- (117,000)
State -- --
Foreign -- --
----------------------------
-- (117,000)
----------------------------
Total income tax expense $ 2,000 $ (87,000)
============================
|
A reconciliation of income taxes to the statutory federal rate is as follows:
December 31
2001 2000
---------------------------------------
Federal tax (benefit) statutory rate $ (163,000) $ (28,000)
State taxes net of federal benefit (19,000) (14,000)
Meals and entertainment 7,000 7,000
Research and development tax credits (45,000) --
Effect of lower rates for Flow Traffic Ltd. 22,000 (65,000)
Change in valuation allowance 242,000 24,000
Other (42,000) (11,000)
---------------------------------------
Income taxes (benefit) $ 2,000 $ (87,000)
=======================================
|
6. LICENSING The United States patent for some aspects of the technology underlying ISS's Autoscope system was issued in 1989 to the University of Minnesota. ISS 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 $285,000 in 2001 and $271,000 in 2000.
ISS has sublicensed the right to manufacture and market the Autoscope technology in North America and the Caribbean to Econolite Control Products, Inc., of Anaheim, California 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 ISS outside of North America and the Caribbean. ISS recognized royalty income from this agreement of $4,010,000 in 2001 and $2,684,000 in 2000. Accounts receivable from Econolite were $1,276,000 and $859,000 at December 31, 2001 and 2000, respectively.
7. SIGNIFICANT CUSTOMERS AND CONCENTRATION OF CREDIT RISK ISS derived the following percentages of its net revenues from the following geographic regions:
2001 2000
---- ----
Asia Pacific 28% 44%
Europe 5% 9%
North America 67% 47%
|
Shown below are the percentages of sales of specific customers, which exceed 10% for the years shown.
2001 2000
---- ----
Econolite Control Products, Inc. 60% 44%
|
8. RETIREMENT PLAN Substantially all employees of ISS 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. ISS may make contributions to the plan. No discretionary contributions were made by ISS in 2001 and 2000.
9. EMPLOYMENT AGREEMENTS ISS has employment agreements with its chief executive officer and chief financial officer. The agreements provide for a minimum salary and a stock option grant and include non-compete and non-solicitation provisions. The agreement with the chief financial officer additionally provides for severance pay in the event of involuntary termination or termination resulting from a sale, acquisition or merger of ISS. The maximum severance is the chief financial officer's current salary for up to one year. During the first quarter of 2002, ISS will incur approximately $277,000 in severance related expenses primarily as a result of the replacement of its President and Chief Executive Officer.
10. STOCK OPTIONS In February 1995, ISS adopted the 1995 Long-Term Incentive and Stock Option Plan (the "1995 Plan"), which provides for the granting of incentive (ISO) and non-incentive (NSO) stock options, stock appreciation rights, restricted stock awards and performance awards to officers, directors, employees, consultants and independent contractors of ISS and its subsidiaries. The following table summarizes stock option activity for 2001 and 2000:
PLAN
OPTIONS NON-PLAN WEIGHTED AVERAGE
AVAILABLE PLAN OPTIONS OPTIONS EXERCISE PRICE
FOR GRANT OUTSTANDING OUTSTANDING PER SHARE
------------------------------------------------------------------------------
ISO NSO
------------------------------------------------------------------------------
Balance at December 31, 1999 50,450 327,350 18,000 244,200 $3.77
Stock Dividend - 20% 10,090 60,470 3,600 44,840 --
Granted (15,000) 15,000 -- 126,000 6.90
Exercised -- (27,200) (6,000) (20,000) 3.29
Canceled 53,100 (37,500) (15,600) -- 3.96
------------------------------------------------------------------------------
Balance at December 31, 2000 98,640 338,120 -- 395,040 3.68
Reserved for options under Plan 420,000 -- -- -- --
Granted (28,000) 28,000 -- -- 4.13
Exercised -- (9,940) -- -- 2.83
Canceled 62,160 (52,560) -- (9,600) 3.11
------------------------------------------------------------------------------
Balance at December 31, 2001 552,800 303,620 -- 385,440 $3.93
==============================================================================
|
The following table summarizes information about the stock options outstanding at December 31, 2001.
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
-------------------------------------------------------------------------------------------------------------------
EXERCISABLE
-------------------------------------------------------------------------------------------------------------------
WEIGHTED AVERAGE WEIGHTED WEIGHTED
RANGE OF REMAINING AVERAGE NUMBER AVERAGE
EXERCISE PRICE NUMBER OUTSTANDING CONTRACTUAL LIFE EXERCISE PRICE EXERCISABLE EXERCISE PRICE
-------------------------------------------------------------------------------------------------------------------
$ 2.40 - 3.80 300,740 6.4 years $ 2.53 236,600 $ 2.53
3.01 - 4.00 219,320 4.7 years 3.41 239,960 3.41
Over 4.00 163,000 8.5 years 6.44 49,000 5.38
-------------------------------------------------------------------------------------------------------------------
$ 2.40 - 7.50 689,060 6.3 years $ 3.93 525,560 $ 3.20
-------------------------------------------------------------------------------------------------------------------
|
Options under the 1995 Plan and Non-Plan options expire at various dates through 2010. At December 31, 2001 there were 689,060 options exercisable at a weighted average exercise price of $3.93. Options outstanding have a weighted average remaining contractual life of 6.3 years. The weighted average fair value of options granted during 2001 and 2000 was $1.63 and $3.84, respectively.
Pro forma information regarding net loss and net loss per share is required by SFAS 123 and has been determined as if ISS had accounted for its employee stock options under the fair value method of SFAS 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: a risk-free interest rate of 4.82% for 2001 and 6.05% for 2000, a volatility factor of the expected market price of ISS's common stock of .742 for 2001 and .518 for 2000, and a 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 ISS's employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions may 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. ISS's pro forma information is as follows:
2001 2000
-------------------------------------
Pro forma net loss $ (689,000) $(302,000)
Pro forma net loss per common share, basic and diluted $ (.22) $ (.10)
|
11. SUBSEQUENT EVENT
On January 7, 2002, ISS acquired the remaining 40% of Flow Traffic Ltd. The acquisition included a $250,000 cash payment, additional future cash payments totaling $450,000, secured by letters of credit, and notes payable totaling $250,000. The additional payments of $450,000 are payable at any time between April 1, 2003 and April 30, 2003, and the letters of credit expire on April 30, 2003. The notes payable totaling $250,000 are due on demand after April 1, 2003, mature on January 7, 2007, are non-interest bearing and are unsecured.
The total purchase consideration does not reflect contingent consideration related to earn-out arrangements totaling $100,000. Any contingent consideration will result in additional goodwill when earned.
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, 2001 and 2000, 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 $638,000 and $738,000 as of December 31, 2001 and 2000, respectively, and total revenues of $1,866,000 and $2,643,000, respectively, for the years then ended. Those statements were audited by other auditors whose report was 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, 2001 and 2000, 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.
/s/Ernst & Young LLP
Minneapolis, Minnesota
February 8, 2002
|
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART II
ITEM 9. DIRECTORS AND OFFICERS OF THE REGISTRANT
The sections entitled "Election of Directors" and "Section 16(a) Beneficial Ownership Reporting Compliance" in our definitive proxy statement for our 2002 annual meeting of shareholders to be filed on or before April 30, 2002 are incorporated into this Form 10-KSB by reference.
ITEM 10. EXECUTIVE COMPENSATION
The section entitled "Executive Compensation" in our definitive proxy statement for the 2002 annual meeting of shareholders is incorporated into this Form 10-KSB by reference.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The section entitled "Security Ownership of Certain Beneficial Owners and Management" in our definitive proxy statement for the 2002 annual meeting of shareholders is incorporated into this Form 10-KSB by reference.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The section entitled "Certain Relationships and Related Transactions" in our definitive proxy statement for the 2002 annual meeting of shareholders is incorporated into this Form 10-KSB by reference.
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 ISS, incorporated by
reference to ISS's registration statement on Form SB-2
(Registration No. 90298C) filed on March 14, 1995.
3.2 Articles of Amendment to Articles of Incorporation of ISS,
incorporated by reference to ISS's quarterly report on Form
10-QSB for the quarter ended June 30, 2001.
3.3 Bylaws of ISS, incorporated by reference to ISS's registration
statement on Form SB-2 (Registration No. 90298C) filed on
March 14, 1995.
4.1 Specimen form of ISS's common stock certificate, incorporated
by reference to ISS's registration statement on Form SB-2
(Registration No. 90298C) filed on March 14, 1995.
10.1 Manufacturing, Distributing and Technology License Agreement
dated June 11, 1991, as amended on December 15, 1992, between
Econolite Control Products, Inc. and ISS, incorporated by
reference to ISS's registration statement on Form SB-2
(Registration No. 90298C) filed on March 14, 1995.
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10.2 License Agreement dated June 10, 1991, between the University
of Minnesota and ISS, incorporated by reference to ISS's
registration statement on Form SB-2 (Registration No. 90298C)
filed on March 14, 1995.
10.3 Form of Distributor Agreement, incorporated by reference to
ISS's registration statement on Form SB-2 (Registration No.
90298C) filed on March 14, 1995.
10.4 Assignment from Panos G. Michalopoulos to ISS dated January
19, 1985, incorporated by reference to ISS's registration
statement on Form SB-2 (Registration No. 90298C) filed on
March 14, 1995.
10.5 Production Agreement dated July 8, 1997, between ISS, Cohu,
Inc., and Econolite Control Products, Inc., incorporated by
reference to Exhibit 10.14 to ISS's annual report on Form
10-KSB for the year ended December 31, 1997.
10.6 Conditional Credit Line Letter Agreement with Wells Fargo Bank
Minnesota, N.A. dated September 14, 1998, incorporated by
reference to Exhibit 10.17 to ISS's annual report on Form
10-KSB for the year ended December 31, 1998.
10.7 Office Lease Agreement by and between Spruce Tree Centre L.L.P
and ISS, dated November 24, 1998, incorporated by reference to
Exhibit 10.18 to ISS's annual report on Form 10-KSB for the
year ended December 31, 1998.
10.8* Executive Employment Agreement between ISS and Jeffrey F.
Martin, dated December 21, 1999, incorporated by reference to
Exhibit 10.19 to ISS's annual report on Form 10-KSB for the
year ended December 31, 1999.
10.9* Executive Employment Agreement dated June 12, 2000, between
ISS and William L. Russell, incorporated by reference to
Exhibit 10.21 to ISS's quarterly report on Form 10-QSB for the
quarter ended June 30, 2000.
10.10* 1995 Long-Term Incentive and Stock Option Plan, amended and
restated through May 17, 2001.
10.11 Distribution Agreement dated April 20, 2001, between ISS and
Wireless Technology, Inc., incorporated by reference to ISS's
quarterly report on Form 10-QSB for the quarter ended June 30,
2001.
10.12 Extension and Second Modification dated July 13, 2001, to
Manufacturing, Distributing and Technology License Agreement
dated June 11, 1991, between ISS and Econolite Control
Products, Inc.
10.13 Definitive Agreement dated July 20, 2001, between ISS and
Detector Electronics Corporation, incorporated by reference to
ISS's quarterly report on Form 10-QSB for the quarter ended
September 30, 2001.
10.14 Shares Sale and Purchase Agreement dated November 28, 2001,
among ISS and Berkeley Development Limited, Mats Johan Billow
and Grove Place Limited.
10.15 Amendment No. 1 dated as of December 31, 2001, to Shares Sale
and Purchase Agreement dated November 28, 2001, among ISS and
Berkeley Development Limited, Mats Johan Billow and Grove
Place Limited.
10.16 Non-Interest Bearing Convertible Note due January 7, 2002, of
Image Sensing Systems, Inc. in favor of Mats Johan Billow.
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10.17 Non-Interest Bearing Convertible Note due January 7, 2002, of
Image Sensing Systems, Inc. in favor of Anthony H. Gould.
10.18* Settlement and Release Agreement dated February 11, 2002
between ISS and William L. Russell.
10.19* Employment Arrangement between ISS and Anthony H. Gould.
10.20 Production Agreement dated February 14, 2002, among ISS,
Wireless Technology, Inc. and Econolite Control Products, Inc.
21 List of Subsidiaries of ISS.
23 Consent of Ernst & Young LLP.
24 Power of Attorney (included on signature page).
99 Cautionary Statement.
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*Management contract or compensatory plan or arrangement.
B) REPORTS ON FORM 8-K FILED DURING FOURTH QUARTER OF 2001:
None
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/ Anthony H. Gould Date: April 1, 2002 ------------------------------------------ ------------------- By: Anthony H. Gould, President and Chief Executive Officer |
POWER OF ATTORNEY
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 Anthony H. Gould 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 connection with this report on Form 10-KSB or the amendments hereto, 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/ Anthony H. Gould Date: April 1, 2002
----------------------------------------------------- -------------------
By: Anthony H. Gould
President and Chief Executive Officer, Director (Principal Executive Officer)
/s/ Jeffrey F. Martin Date: April 1, 2002
----------------------------------------------------- -------------------
By: Jeffrey F. Martin
Chief Financial Officer (Principal Financial & Accounting Officer)
/s/ James Murdakes Date: April 1, 2002
----------------------------------------------------- -------------------
By: James Murdakes
Chairman of the Board
/s/ Panos G. Michalopoulos Date: April 1, 2002
----------------------------------------------------- -------------------
By: Panos G. Michalopoulos
Director
/s/ Richard P. Braun Date: April 1, 2002
----------------------------------------------------- -------------------
By: Richard P. Braun
Director
/s/ Richard C. Magnuson Date: April 1, 2002
----------------------------------------------------- -------------------
By: Richard C. Magnuson
Director
/s/ Mats Johan Billow Date: April 1, 2002
----------------------------------------------------- -------------------
By: Mats Johan Billow
Director
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EXHIBIT 10.10
IMAGE SENSING SYSTEMS, INC.
1995 LONG-TERM INCENTIVE AND STOCK OPTION PLAN
AMENDED AND RESTATED THROUGH MAY 17, 2001
SECTION 1. PURPOSE OF PLAN.
This Plan shall be known as the "IMAGE SENSING SYSTEMS, INC. 1995 LONG-TERM INCENTIVE AND STOCK OPTION PLAN" and is hereinafter referred to as the "Plan". The purpose of the Plan is to aid in maintaining and developing personnel capable of assuring the future `success of Image Sensing Systems, Inc., a Minnesota corporation (the "Company"), to offer such personnel additional incentives to put forth maximum efforts for the success of the business, and to afford them an opportunity to acquire a proprietary interest in the Company through stock options and other long-term incentive awards as provided herein. Options granted under this Plan may be either incentive stock options ("Incentive Stock Options") within the meaning of Section 422 of the Internal Revenue Code of 1986 (the "Code"), or options that do not qualify as Incentive Stock Options. Award granted under this Plan shall be SARS, restricted stock or performance awards as hereinafter described.
SECTION 2. STOCK SUBJECT TO PLAN.
Subject to the provisions of Section 16 hereof, the stock to be subject
to options or other awards under the Plan shall be the Company's authorized
common shares, par value $0.01 per share (the "Common Shares"). Such Common
shares may be either authorized but unissued shares, or issued shares, which
have been reacquired by the Company. Subject to adjustment as provided in
Section 16 hereof, the maximum number of shares on which options may be
exercised or other awards issued under this Plan shall be 900,000 shares. If an
option or award under the Plan expires, or for any reason is terminated or
unexercised with respect to any shares, such shares shall again be available for
options or awards thereafter granted during the term of the Plan.
SECTION 3. ADMINISTRATION OF PLAN.
(a) The Plan shall be administered by the Board of Directors of the Company or a committee thereof. The members of any such committee shall be appointed by and serve at the pleasure of the Board of Directors. (The group administering the Plan shall hereinafter be referred to as the "Committee".)
(b) The Committee shall have plenary authority in its discretion, but subject to the express provisions of the Plan: (i) to determine the purchase price of the Common Stock covered by each option or award, (ii) to determine the employees to whom and the time or times at which such options and awards shall be granted and the number of shares to be subject to each, (iii) to determine the form of payment to be made upon the exercise of an SAR or in connection with performance awards, either cash, Common Shares of the Company or a combination thereof, (iv) to determine the terms of exercise of each option and award, (v) to accelerate the time at which all or any part of an option or award may
be exercised, (vi) to amend or modify the terms of any option or award with the consent of the optionee, (vii) to interpret the Plan, (viii) to prescribe, amend and rescind rules and regulations relating to the Plan, (ix) to determine the terms and provisions of each option and award agreement under the Plan (which agreements need not be identical), including the designation of those options intended to be Incentive Stock Options, and (x) to make all other determinations necessary or advisable for the administration of the Plan, subject to the exclusive authority of the Board of Directors under Section 17 herein to amend or terminate the Plan. The Committee's determinations on the foregoing matters, unless other wise disapproved by the Board of Directors of the Company, shall be final and conclusive.
(c) The Committee shall select one of its members as its Chair and shall hold its meetings at such times and places as it may determine. A majority of its members shall constitute a quorum. All determinations of the Committee shall be made by not less than a majority of its members. Any decision or determination reduced to writing and signed by all of the members of the Committee shall be fully effective as if it had been made by a majority vote at a meeting duly called and held. The grant of an option or award shall be effective only if a written agreement shall have been duly executed and delivered by and on behalf of the Company following such grant. The Committee may appoint a Secretary and may make such rules and regulations for the conduct of its business, as it shall deem advisable.
SECTION 4. ELIGIBILITY AND GRANT.
(a) ELIGIBILITY. Incentive Stock Options may only be granted under this
Plan to any full or part-time employee (which term as used herein includes, but
is not limited to, officers and directors who are also employees) of the Company
and of its present and future subsidiary corporations within the meaning of
Section 424(f) of the Code (herein called "subsidiaries"). Full or part-time
employees, directors who are not employees, consultants or independent
contractors to the Company or one of its subsidiaries or affiliates shall be
eligible to receive options which do not qualify as Incentive Stock Options and
awards. In determining the persons to whom options and awards shall be granted
and the number of shares subject to each, the Committee may take into account
the nature of services rendered by the respective employees or consultants,
their present and potential contributions to the success of the Company and such
other factors as the Committee in its discretion shall deem relevant.
(b) GRANT OF ADDITIONAL OPTIONS. A person who has been granted an option or award under this Plan may be granted additional options or awards under the Plan if the Committee shall so determine; provided, however, that to the extent the aggregate fair market value (determined at the time the Incentive Stock Option is granted) of the Common Shares with respect to which all Incentive Stock Options are exercisable for the first time by an employee during any calendar year (under all plans described in subsection (d) of Section 422 of the Code of his or her employer corporation and its parent and subsidiary corporations) exceeds $100,000, such options shall be treated as options that do not qualify as Incentive Stock Options. Nothing in the Plan or in any agreement thereunder shall confer on any employee any right to continue in the employ
of the Company or any of its subsidiaries or affect, in any way, the right of the Company or any of its subsidiaries to terminate his or her employment at any time.
SECTION 5. PRICE.
The option price for all Incentive Stock Options granted under the Plan shall be determined by the Committee but shall not be less than 100% of the fair market value of the Common Shares at the date of grant of such option. The option price for options granted under the Plan that do not qualify as Incentive Stock Options and, if applicable, the price for all awards shall be determined by the Committee but shall not be less than 85% of the fair market value of the Common Shares at the date of grant of such option. For purposes of the preceding sentence and for all other valuation purposes under the Plan, the fair market value of the Common Shares shall be as reasonably determined by the Committee. If on the date of grant of any option or award hereunder the Common Shares are not traded on an established securities market, the Committee shall make a good faith attempt to satisfy the requirements of this Section 5 and in connection therewith shall take such action as it deems necessary or advisable.
SECTION 6. TERM.
Each option and award and all rights and obligations thereunder shall expire on the date determined by the Committee and specified in the option or award agreement. The Committee shall be under no duty to provide terms of like duration for options or awards granted under the Plan, but the term of an Incentive Stock Option may extend more than ten (10) years from the date of grant of such option and the term of options granted under the Plan which do not qualify as Incentive Stock Options may not extend more than fifteen (15) years from the date of granting of such option.
SECTION 7. EXERCISE OF OPTION OR AWARD.
(a) EXERCISABILITY. The Committee shall have full and complete authority to determine whether an option or award will be exercisable in full at any time or from time to time during the term thereof, or to provide for the exercise thereof in such installments, upon the occurrence of such events (such as termination of employment for any reason) and at such times during the term of the option as the Committee may determine and specify in the option or award agreement.
(b) NO VIOLATION OF STATE OR FEDERAL LAWS. The exercise of any option or award granted hereunder shall only be effective at such time that the sale of Common Shares pursuant to such exercise will not violate any state or federal securities or other laws.
(c) METHOD OF EXERCISE. An optionee or grantee electing to exercise an option or award shall give written notice to the Company of such election and of the number of shares subject to such exercise. The full purchase price of such shares shall be tendered with such notice of exercise. Payment shall be made to the Company in cash (including bank check, certified check, personal check, or money order), or, at the discretion of the Committee and as specified by the Committee, (i) by delivering certificates for other
Company's Common Shares already owned by the optionee or grantee having a fair market value as of the date of grant equal to the full purchase price of the shares, or (ii) by delivering the optionee's or grantee Is promissory note, which shall provide for interest at a rate not less than the minimum rate required to avoid the imputation of income, original issue discount or a below-market-rate loan pursuant to Sections 483, 1274 or 7872 of the Code or any successor provisions thereto, or (iii) a combination of cash, the optionee's or grantee promissory and such shares. The fair market value of such tendered shares shall be determined as provided in Section 5 herein. The optionee's or grantee's promissory note shall be a full recourse liability of the optionee and may, at the discretion of the Committee, be secured by a pledge of the shares being purchased. Until such person has been issued the shares subject to such exercise, her or she shall possess no rights as a shareholder with respect to such shares.
SECTION 8. RESTORATION OPTIONS.
The Committee may grant "restoration" options, separately or together with another option, pursuant to which, subject to the terms and conditions established by the Committee and any applicable requirements of Rule 16b-3 promulgated under the Exchange Act or any other applicable law, the optionee would be granted a new option when the payment of the exercise price of the option to which such "restoration" option relates is made by the delivery of shares of the Company's Common Shares owned by the optionee, as described in this Section 8, which new option would be an option to purchase the number of shares not exceeding the sum of (a) the number of shares of the Company's Common Shares tendered as payment upon the exercise of the option to which such "restoration" option relates and (b) the number of shares of the Company's Common Shares, if any, tendered as payment of the amount to be withheld under applicable income tax laws in connection with the exercise of the option to which such "restoration" option relates, as described in Section 12 hereof. "Restoration" options may be granted with respect to options previously granted under this Plan or any prior stock option plan of the Company, and may be granted in connection with any option granted under this Plan at the time of such grant. The purchase price of the Common Shares under each such new option, and the other terms and conditions of such option, shall be determined by the Committee, consistent with the provisions of the Plan.
SECTION 9. STOCK APPRECIATION RIGHTS.
(a) GRANT. At the time of grant of an option or awards under the Plan (or at any other time), the Committee, in its discretion, may grant a stock Appreciation Right ("SAR") evidenced by; an agreement in such form as the Committee shall from time to time approve. Any such SAR may be subject to restrictions on the exercise thereof as may be set forth in the agreement representing such SAR, which agreement shall comply with and be subject to the following terms and conditions and any additional terms and conditions established by the Committee that are consistent with the terms of the Plan.
(b) EXERCISE. An SAR shall be exercised by the delivery to the Company of a written notice, which shall state the holder thereof elects to exercise his or her SAR as to the number of shares specified in the notice and which shall further state what portion, if
any, of the SAR exercise amount (hereinafter defined) the holder thereof requests is to be paid in cash and what portion, if any, is to be paid in Common Shares of the Company. The Committee promptly shall cause to be paid to such holder the SAR exercise amount either in cash, in Common Shares of the Company, or any combination of cash and shares as the Committee may determine. Such determination may be either in accordance with the request made by the holder of the SAR or in the sole and absolute discretion of the Committee. The SAR exercise amount is the excess of the fair market value of one share of the Company's Common Shares on the date of exercise over the per share exercise price in respect of which the SAR was granted, multiplied by the number of shares as to which the SAR is exercised. For the purposes hereof, the fair market value of the Company's shares shall be determined as provided in Section 5 herein.
SECTION 10. RESTRICTED STOCK AWARDS.
Awards of Common Shares subject to forfeiture and transfer restrictions may be granted by the Committee. Any restricted stock award shall be evidenced by an agreement in such form as the Committee shall from time to time approve, which agreement shall comply with and be subject to the following terms and conditions and any additional terms and conditions (including any buy-back provisions) established by the Committee that are consistent with the terms of the Plan:
(a) GRANT OF RESTRICTED STOCK AWARDS. Each restricted stock award made under the Plan shall be for such number of Common Shares as shall be determined by the Committee and set forth in the agreement containing the terms of such restricted stock award. Such agreement shall set forth a period of time during which the grantee must remain in the continuous employment of the Company in order for the forfeiture and transfer restrictions to lapse. If the Committee so determines, the restrictions may lapse during such restricted period in installments with respect to specified portions of the shares covered by the restricted stock award. The agreement may also, in the discretion of the Committee, set forth performance or other conditions that will subject the Common Shares to forfeiture and transfer restrictions. The Committee may, at its discretion, waive all or any part of the restrictions applicable to any or all outstanding restricted stock awards.
(b) DELIVERY OF COMMON SHARES AND RESTRICTIONS. At the time of a restricted stock award, a certificate representing the number of Common Shares awarded thereunder shall be registered in the name of the grantee. Such certificate shall be held by the Company or any custodian appointed by the Company for the account of the grantee subject to the terms and conditions of the Plan, and shall bear such a legend setting forth the restrictions imposed thereon as the Committee, in its discretion, may determine. The grantee shall have all rights of a shareholder with respect to the Common Shares, including the right to receive dividends and the right to vote such shares, subject to the following restrictions: (i) the grantee shall not be entitled to delivery of the stock certificate until the expiration of the restricted period and the fulfillment of any other restrictive conditions set forth in the restricted stock agreement with respect to such Common Shares; (ii) none of the Common Shares may be sold, assigned, transferred, pledged, hypothecated or otherwise encumbered or disposed of during such restricted
period or until after the fulfillment of any such other restrictive conditions; and (iii) except as otherwise determined by the Committee, all of the Common Shares shall be forfeited and all rights of the grantee to such Common Shares shall terminate, without further obligation on the part of the Company, unless the grantee remains in the continuous employment of the Company for the entire restricted period in relation to which such Common Shares were granted and unless any other restrictive conditions relating to the restricted stock award are met. Any Common Shares, any other securities of the Company and any other property (except for cash dividends) distributed with respect to the Common Shares subject to restricted stock awards shall be subject to the same restrictions, terms and conditions as such restricted Common Shares.
(c) TERMINATION OF RESTRICTIONS. At the end of the restricted period and provided that any other restrictive conditions of the restricted stock award are met, or at such earlier time as otherwise determined by the Committee, all restrictions set forth in the agreement relating to the restricted stock award or in the Plan shall lapse as to the restricted Common Shares subject thereto, and a stock certificate for the appropriate number of Common Shares, free of the restrictions and the restricted stock legend, shall be delivered to the grantee or his or her beneficiary or estate, as the case may be.
SECTION 11. PERFORMANCE AWARDS.
The Committee is further authorized to grant performance awards. Subject to the terms of this Plan and any applicable award agreement, a performance award granted under the Plan (i) may be denominated or payable in cash, Common Shares (including, without limitation, restricted stock), other securities, other awards, or other property and (ii) shall confer on the holder thereof rights valued as determined by the Committee, in its discretion, and payable to, or exercisable by, the holder of the Performance awards in whole or in part, upon the achievement of such performance goals during such performance periods as the Committee, in its discretion, shall establish. Subject to the terms of this Plan and any applicable award agreement, the performance goals to be achieved during any performance period, the length of any performance period, the amount of any Performance award granted, and the amount of any payment or transfer to be made by the grantee and by the Company under any Performance award shall be determined by the Committee.
SECTION 12. INCOME TAX WITHHOLDING AND TAX BONUSES.
(a) WITHHOLDING OF TAXES. In order to comply with all applicable federal or state income tax laws or regulations, the Company may take such action as it deems appropriate to ensure that all applicable federal or state payroll, withholding, income or other taxes, which are the sole and absolute responsibility of an optionee or grantee under the Plan, are withheld or collected from such optionee or grantee. In order to assist an optionee or grantee in paying all federal and state taxes to be withheld or collected upon exercise of an option or award which does not qualify as an Incentive Stock Option hereunder, the Committee, in its absolute discretion and subject to such additional terms and conditions as it may adopt, shall permit the optionee or grantee to satisfy such tax obligation by (i) electing to have the Company withhold a portion of the shares otherwise
to be delivered upon exercise of such option or award with a fair market value, determined in accordance with Section 5 herein, equal to such taxes or (ii) delivering to the Company Common Shares other than the shares issuable upon exercise of such option or award with a fair market value, determined in accordance with Section 5, equal to such taxes.
(b) TAX BONUS. The Committee shall have the authority, at the time of grant of an option under the Plan or at any time thereafter, to approve tax bonuses to designated optionees or grantees to be paid upon their exercise of options or awards granted hereunder. The amount of any such payments shall be determined by the Committee. The Committee shall have full authority in its absolute discretion to determine the amount of any such tax bonus and the terms and conditions affecting the vesting and payment thereafter.
SECTION 13. ADDITIONAL RESTRICTIONS.
The Committee shall have full and complete authority to determine whether all or any part of the Common Shares of the Company acquired upon exercise of any of the options or awards granted under the Plan shall be subject to restrictions on the transferability thereof or any other restrictions affecting in any manner the optionee's or grantee's rights with respect thereto, but any such restriction shall be contained in the agreement relating to such options or awards.
SECTION 14. TEN PERCENT SHAREHOLDER RULE.
Notwithstanding any other provision in the Plan, if at the time an option is otherwise to be granted pursuant to the Plan the optionee owns directly or indirectly (within the meaning of Section 424(d) of the Code) Common Shares of the Company possessing more than ten percent (10%) of the total combined voting power of all classes of stock of the Company or its parent or subsidiary corporations, if any (within the meaning of Section 422(b)(6) of the Code), then any Incentive Stock Option to be granted to such optionee pursuant to the Plan shall satisfy the requirements of Section 422(c)(5) of the Code, and the option price shall be not less than 11% of the fair market value of the Common Shares of the Company determined as described herein, and such option by its terms shall not be exercisable after the expiration of five (5) years from the date such option is granted.
SECTION 15. NON-TRANSFERABILITY.
No option or award granted under the Plan shall be transferable by an optionee or grantee, otherwise than by will or the laws of descent or distribution. Except as otherwise provided in an option or award agreement, during the lifetime of an optionee or grantee, the option shall be exercisable only by such optionee or grantee.
SECTION 16. DILUTION OR OTHER ADJUSTMENTS.
If there shall be any change in the Common Shares through merger, consolidation, reorganization, recapitalization, dividend i - n the form of stock (of whatever amount),
stock split or other change in the corporate structure, appropriate adjustments in the Plan and outstanding options and awards shall be made by the Committee. In the event of any such changes, adjustments shall include, where appropriate, changes in the aggregate number of shares subject to the Plan, the number of shares and the price per share subject to outstanding options and awards and the amount payable upon exercise of outstanding awards, in order to prevent dilution or enlargement of option or award rights.
SECTION 17. AMENDMENT OR DISCONTINUANCE OF PLAN.
The Board of Directors may amend or discontinue the Plan at any time.
Subject to the provisions of Section 16 no amendment of the Plan, however, shall
without shareholder approval: (i) increase the maximum number of shares under
the Plan as provided in Section 2 herein, (ii) decrease the minimum price
provided in Section 5 herein, (iii) extend the maximum term under Section 6, or
(iv) modify the eligibility requirements for participation in the Plan. The
Board of Directors shall not alter or impair any option or award theretofore
granted under the Plan without the consent of the holder of the option.
SECTION 18. TIME OF GRANTING.
Nothing contained in the Plan or in any resolution adopted or to be adopted by the Board of Directors or by the shareholders of the Company, and no action taken by the Committee or the Board of Directors (other than the execution and delivery of an option or award agreement), shall constitute the granting of an option or award hereunder.
SECTION 19. EFFECTIVE DATE AND TERMINATION OF PLAN.
(a) The Plan was approved by the Board of Directors on February 27, 1995 and shall be approved by the shareholders of the Company within twelve (12) months thereof.
(b) Unless the Plan shall have been discontinued as provided in Section 16 hereof, the Plan shall terminate February 27, 2005. No option or award may be granted after such termination, but termination of the Plan shall not, without the consent of the optionee or grantee, alter or impair any rights or obligations under any option or award theretofore granted.
EXHIBIT 10.12
EXTENSION AND SECOND MODIFICATION TO MANUFACTURING, DISTRIBUTING
AND TECHNOLOGY LICENSE AGREEMENT
This EXTENSION AND SECOND MODIFICATION TO MANUFACTURING, DISTRIBUTING AND TECHNOLOGY LICENSE AGREEMENT (this "Second Modification") is made and entered into as of the 13th day of July, 2001 by and between Image Sensing Systems, Inc., a Delaware corporation located at 500 Spruce Tree Centre, 1600 University Avenue West, St. Paul, Minnesota 55104 (hereinafter, "ISS") and Econolite Control Products, Inc., a California corporation located at 3360 E. La Palma Avenue, Anaheim, California 92806 (hereinafter, "Econolite"). ISS and Econolite were the parties to the original MANUFACTURING, DISTRIBUTING AND TECHNOLOGY LICENSE AGREEMENT dated June 11, 1991 (the "Agreement") which was subsequently modified, in part, in a MODIFICATION TO MANUFACTURING, DISTRIBUTING AND TECHNOLOGY LICENSE AGREEMENT dated September 1, 2000 (the "Modification") and a Letter Agreement dated June 19, 1997 (the "Letter Agreement").
Recitals
A. The parties have operated successfully under the Agreement, as modified, for more than 10 years.
B. The Agreement, as modified, will, under its terms, terminate on June 11, 2006.
C. The parties acknowledge that significant planning is required to insure continued success of joint efforts, and the planning horizon exceeds five years from the date hereof.
D. The parties hereto desire to extend the term of the Agreement and to add or modify certain provisions.
NOW, THEREFORE, for and in consideration of the foregoing premises, and the mutual covenants and agreements contained herein, the parties hereto agree as follows:
1. ARTICLE VIII. DURATION AND TERMINATION is hereby modified to provide that the "initial term" is increased by five additional years, to a total of 20 years from the Effective Date, which the parties agree was June 11, 1991. The Agreement shall be automatically renewed thereafter for additional one year extension terms unless terminated by either party giving advance written notice at least sixty (60) days prior to the expiration of the initial term, as modified, or any extension term.
2. Section H of ARTICLE II. RESPONSIBILITIES OF ECONOLITE is deleted in its entirety and a new Section H of ARTICLE II is adopted as follows:
"H. Econolite will designate one or more employees to assume responsibility as product line marketing manager or managers for the Products, and one or more employees to assume responsibility for hardware engineering
tasks associated with the Products, and give ISS written notice of these designations. The parties will hold quarterly business and engineering meetings at places to be determined by the parties from time to time. In addition, on or before December 1 of each calendar year, an annual Joint Business Plan for development, promotion and sale of the Products will be developed among the senior executives of Econolite and ISS, including the Chief Executive Officers of each company."
3. A new Section L of ARTICLE II. RESPONSIBILITIES OF ECONOLITE shall
be added, containing the same terms as Section B of ARTICLE III.
RESPONSIBILITIES OF ISS as follows:
"L. Econolite shall provide, support, protect and maintain documentation for all Econolite created Product-related hardware and software designs and codes at the sole expense of Econolite. Copies of the documentation will be deposited in safekeeping at a location outside the facilities of Econolite, and the location disclosed to ISS."
4. Except as modified herein, each and every other provision of the Agreement, as modified by the Modification and the Letter Agreement are confirmed and reaffirmed.
IN WITNESS WHEREOF, the parties hereto have executed this Modification effective as of the date first set out above.
IMAGE SENSING SYSTEMS, INC. ECONOLITE CONTROL PRODUCTS, INC.
By: /s/ William L. Russell By: /s/ Gary Dunn
------------------------------- --------------------------------
Title: President & CEO Title: Senior Vice President, Product
---------------------------- Development
--------------------------------
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EXHIBIT 10.14
SHARES SALE AND PURCHASE AGREEMENT
This Agreement (hereinafter referred to as the "Agreement") is made and entered into on the 28th day of November, 2001, by and among the Parties listed below.
PARTIES:
IMAGE SENSING SYSTEMS, INC., a company incorporated in Minnesota, USA, having its registered office at 500 Spruce Tree Center, 1600 University Avenue West, St. Paul, Minnesota 55104-3825, U.S.A. (hereinafter referred to as "ISS"),
BERKELEY DEVELOPMENT LIMITED, a company incorporated in the British Virgin Islands, having its registered office at Atlantic Chambers, Romasco Harbour House, Road Town, Tortola, British Virgin Islands (hereinafter referred to as "BDL"),
MR. MATS JOHAN BILLOW, HK ID card No. P608390 (4) of One Robinson Place, 31st Floor, Flat C, 70 Robinson Road, Mid-Levels, Hong Kong (hereinafter referred to as "BILLOW"),
and GROVE PLACE LIMITED, a company incorporated in the British Virgin Islands, having its registered office at Shelton Building, P.O. Box 3136, Main Street, Road Town, Tortola, British Virgin Islands (hereinafter referred to as "GPL").
WHEREAS:
(A) BDL and Billow (collectively the "Billow Vendors") are the owners of two (2) ordinary shares in Flow Traffic Limited, a company incorporated in the Hong Kong Special Administrative Region of the People's Republic of China ("HKSAR") having its registered office at 2001 Central Plaza, 18 Harbour Road, Wanchai, Hong Kong (hereinafter referred to as "FTL").
(B) GPL (the "Grove Vendor") is the owner of two (2) ordinary shares in FTL. The Grove Vendor and the Billow Vendors are collectively referred to in this Agreement as the "Vendors".
(C) The Vendors have agreed to sell and ISS has agreed to purchase the Sale Shares (defined below) subject to and on the terms and conditions of this Agreement.
WHEREBY IT IS AGREED AS FOLLOWS:
1. INTERPRETATION.
1.01 In this Agreement unless the context otherwise requires the following words and expressions shall have the following meanings:
"Billow Consideration" has the meaning set out in Clause 3(a).
"BILLOW SALE SHARES" means 2 fully paid ordinary shares of HK$ 1 each of FM which are beneficially owned by BDL and Billow.
"BILLOW SERVICE AGREEMENT" means the contract of employment entered into between FTL and Billow in respect of the services provided by Billow to FTL.
"COMPLETION" means the performance by the parties of the several obligations contained in Clause 4.
"Completion Date" means 7th January 2002 upon which Completion is to take place pursuant to Clause 4.
"EFFECTIVE DATE" means 7th January 2002.
"GROVE CONSIDERATION" has the meaning set out in Clause 3(b).
"GROVE CONSULTANCY AGREEMENT" means the consultancy agreement entered into between ISS and GPL in respect of the consultancy services provided by GPL to FTL and/or ISS.
"GROVE SALE SHARES" means 2 fully paid ordinary shares of UK$ 1 each of FTL which are beneficially owned by GPL.
"INTEREST RATE" means 2.5 % above LIBOR.
"LETTER OF CREDIT" means an irrevocable stand-by letter of credit (in a form to be approved by each of the Vendors) issued by a licensed bank approved by each of the Vendors.
"SALE SHARES" means collectively the Billow Sale Shares and the Grove Sale Shares.
"TOTAL CONSIDERATION" means the total consideration to be paid by ISS to the Vendors for the Sale Shares as specified in Clauses 3(a), 3 (b), 6 (a) and 6 (b).
2. SHARES SALE AND PURCHASE. The Vendors shall sell the sale shares and ISS shall purchase the sale shares on the terms and conditions as set out in this agreement.
3. CONSIDERATION.
(a) The consideration for the sale of the Billow Sale Shares shall be US$475,000 (the "Billow Consideration").
(b) The consideration for the sale of the Grove Sale Shares shall be US$475,000 (the "Grove Consideration").
(c) The Total Consideration shall be paid in the manner described in Clause 5 and Clause 6.
(d) Billow is hereby irrevocably authorized and instructed to accept payment of the consideration for the sale of BDL's shares in FTL of any part thereof on the terms and conditions herein stated.
4. COMPLETION.
4.01 Completion shall take place on the Completion Date when all of the following business shall be transacted:
(a) the Billow Vendors shall release to ISS:
(i) two duly executed instruments of transfer and sold contract notes in respect of each of the Billow Sale Shares in favour of ISS and/or its nominee together with the relevant certificates therefor;
(ii) a cheque drawn in favour of the Government of the HKSAR for the amount of stamp duty payable by the Billow Vendors for the sale of the Billow Sale Shares.
(b) the Grove Vendor shall release to ISS:
(i) a duly executed instrument of transfer and sold contract note in respect of the Grove Sale Shares in favour of ISS and/or its nominee together with the relevant certificates therefor;
(ii) a cheque drawn in favour of the Government of the HKSAR for the amount of stamp duty payable by the Grove Vendor for the sale of the Grove Sale Shares.
(c) ISS shall release:
(i) to the Billow Vendors counterparts of the two instruments of transfer and the two sold contract notes in respect of each of the Billow Sale Shares in favour of the Billow Vendors;
(ii) to the Grove Vendor a counterpart of the instrument of transfer and the sold contract note in respect of the Grove Sale Shares in favour of the Grove Vendor;
(iii) to the Billow Vendors a Letter of Credit drawn in favour of Billow or his nominee in the amount of US$ 225,000 for payment to be made in accordance with Clause 5(c);
(iv) to the Grove Vendor a Letter of Credit drawn in favour of GPL or its nominee in the amount of US$ 225,000 for payment to be made in accordance with Clause 5(d);
(v) to the Billow Vendors cash to the amount of US$ 125,000 in accordance with Clause 5(a);
(vi) to the Grove Vendor cash to the amount of US$ 125,000 in accordance with Clause 5 (b);
(vii) to the Billow Vendors a preferred share certificate in ISS with a par value of US$ 125,000 in accordance with Clause 5(e)
(viii) to the Grove Vendor a preferred share certificate in ISS with a par value of US$ 125,000 in accordance with Clause 5(f)
(ix) a cheque drawn in favour of the Government of the HKSAR for the amount of stamp duty payable by ISS for the purchase of the Sale Shares;
(x) such other documents as may be required to complete the transactions contemplated by this Agreement.
(d) the [Vendors]/[ISS] shall procure a board meeting of FTL to be held at which resolutions shall be passed (where appropriate):
(i) to approve and give effect to all of the matters referred to above;
(ii) to approve ISS or its nominee for registration as the holder of the Sale Shares and to authorise and instruct FTL's company secretary to enter ISS's or its nominee's name in the register of members and to issue new Share Certificates in the name of ISS and/or its nominee;
(iii) to release the latest audited management accounts of FTL to the Vendors and/or ISS for submission to the Inland Revenue Department for stamp duty purposes;
4.02 The Vendors shall not be obliged to complete this Agreement or perform any obligations hereunder unless ISS complies fully with the requirements of Clause 4.01(c).
4.03 The transfer of the title to the Sale Shares to ISS shall take effect on the Effective Date.
5. MANNER OF PAYMENT.
(a) US$ 125,000 of the Billow Consideration shall be payable by ISS in cash by telegraphic transfer to such account in Hong Kong as nominated by Billow. This cash transfer must be received in the nominated account on or before the Completion Date.
(b) US$ 125,000 of the Grove Consideration shall be payable by ISS in cash by telegraphic transfer to such account in Hong Kong as nominated by GPL. This cash transfer must be received in the nominated account on or before the Completion Date.
(c) US$ 225,000 of the Billow Consideration shall be payable by ISS by Letter of Credit in one payment to be effected any such time between 1st April 2003 and 30th April 2003 that the Billow Vendors may choose. ISS agrees that the documentation required for payment under this Letter of Credit shall be an invoice issued by the Billow Vendors only. ISS further agrees that the Letter of Credit shall be issued to the Billow Vendors and received by the Billow Vendors on or before the Completion Date.
(d) US$ 225,000 of the Grove Consideration shall be payable by ISS by Letter of Credit in one payment to be effected at any such time between 1st April 2003 and 30th April 2003 that the Grove Vendor may choose. ISS agrees that the documentation required for payment under this Letter of Credit shall be an invoice issued by the Grove Vendor only. ISS further agrees that the Letter of Credit shall be issued to the Grove Vendor and received by the Grove Vendor on or before the Completion Date
(e) US$ 125,000 of the Billow Consideration shall be payable by ISS in the form of a preferred share certificate being convertible to 50,000 common shares in ISS at any time within five years from the issuing date. ISS shall have a call option to purchase this share certificate at any time during the year 2002 at a purchase price of US$ 125,000, payable in cash. The Billow Vendors shall have a put option to sell this share certificate at a sale price of US$ 25,000 at any time after 1st April 2003. ISS shall further have a call option to purchase this share certificate at any time after 1st April 2003 at a purchase price of US$ 150,000. If this share certificate has not been converted to common shares or purchased by ISS prior to 7th January 2007, ISS shall purchase this certificate at a purchase price of US$ 125,000. ISS agrees that this share certificate shall be issued to the Billow Vendors and received by the Billow Vendors on or before the Completion Date.
(f) US$ 125,000 of the Grove Consideration shall be payable by ISS in the form of a preferred share certificate being convertible to 50,000 common shares in ISS at any time within five years from the issuing date. ISS shall have a call option to purchase this share certificate at any time during the year 2002 at a purchase price of US$ 125,000, payable in cash. The Grove Vendor shall have a put option to sell this share certificate at a sale price of US$ 125,000 at any time after 1st April 2003. ISS shall further have a call option to purchase this share certificate at any time after 1st April 2003 at a purchase price of US$ 150,000. If this share certificate has not been converted to common shares or purchased by ISS prior to 7th January 2007, ISS shall purchase this certificate at a purchase price of US$ 125,000. ISS agrees that this share certificate shall be issued to the Grove Vendor and received by the Grove Vendor on or before the Completion Date.
(g) Any amount not paid by ISS when due shall accrue interest on such amount from the due date at the Interest Rate.
6. ADDITIONAL PAYMENT.
(a) So long as FTL achieves an audited net profit before tax of HK$ 1,418,000 or greater for the financial year 2002, ISS will pay the Billow Vendors an additional payment in consideration of the Billow Sale Shares of US$ 50,000, payable in cash within 10 days upon
completion of audit. Such payment shall be paid to such account in Hong Kong as nominated by Billow.
(b) So long as FTL achieves an audited net profit before tax of HK$ 1,418,000 or greater for the financial year 2002, ISS will pay the Grove Vendor an additional payment in consideration of the Grove Sale Shares of US$ 50,000, payable in cash within 10 days upon completion of audit. Such payment shall be paid to such account in Hong Kong as nominated by GPL.
(c) ISS agrees that it will not impose any additional costs on FTL in the year 2002 other than such costs as have been included in the budget for the financial year 2002.
7. TERM.
7.01 This Agreement shall take effect from the date first above written and shall continue in full force until the Vendors have been fully paid the Total Consideration by ISS.
7.02 If ISS fails to pay any or all of the instalments of the Total Consideration required to be paid hereunder, each of the Vendors (or both of them) as the case may be shall have the following rights and remedies:
(a) all rights and remedies arising under this Agreement and under the laws of the HKSAR;
(b) to terminate the Billow Service Agreement and/or the Grove Consultancy Agreement respectively;
(c) to require the Billow Sale Shares and/or the Grove Sale Shares to be transferred back to the Billow Vendors and the Grove Vendor respectively.
8. ENTIRE AGREEMENT. This agreement constitutes and expresses the entire agreement between the parties relating to its subject matter, superseding in all respects any and all prior oral or written agreements or understandings between them pertaining to the transactions contemplated by this Agreement, including without limitation a Shareholders' Agreement entered into between ISS, BDL, GPL, Billow, Anthony H. Gould and FTL (formerly known as Max Resources Limited) dated 1st February 1999, and a Subscription Agreement entered into between ISS, Billow, BDL and FTL (formerly blown as Max Resources Limited) dated 1st February 1999.
9. AMENDMENT. Unless otherwise specifically provided for in this Agreement, the provisions of this Agreement may be amended, supplemented or waived only if the parties hereto agree in writing.
10. NOTICES.
10.01 In Writing and Methods of Delivery. Every notice or communication under this Agreement must be in writing and may, without prejudice to any other from of delivery, be delivered personally or sent by post or transmitted by fax or telex.
10.02 Authorised Addresses and Numbers.
(a) In the case of posting, the envelope containing the notice or communication must be addressed to the intended recipient at the authorised address of that party and must be properly stamped or have the proper postage prepaid for delivery and, in the case of a fax or telex, the transmission must be sent to the intended recipient at the authorized number of that party.
(b) Subject to Clause 10.03, the authorised address, fax and telex numbers of each party, for the purpose of Clause 10, are as follows:
If to ISS: Image Sensing Systems, Inc.
500 Spruce Tree Centre
1600 University Avenue West
St. Paul, Minnesota 55104-3825
U.S.A.
Attention: President
Telefax No.: 1-651-603-7795
If to GPL: ISS Asia Regional Office
99/49 Chuan Chuen Floraville
Patum Thani 12000
Thailand
Attention: Mr. Anthony H. Gould
Telefax No.: 662-598-2780
If to BDL or Billow: 2001 Central Plaza
18 Harbour Road
Wanchai, Hong Kong
Attention: Berkeley Development Limited
Telefax No.: 852-2827-0056
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10.03 Notification of Changes. No change in any of the particulars set out in Clause 10.02 will be effective against a party until it has been notified to that party.
10.04 Deemed Giving of Notice and Receipt. A notice or communication will be deemed to have been duly given and received:
(a) on personal delivery to the addressee or on a business day to a place for the receipt of letters at that addressee's authorised address;
(b) in the case of posting, where the addressee's authorised address is in the same country as the country of posting, at 10:00 a.m. (local time at the place where the address is located) on the second business day after the day of posting;
(c) in the case of posting, where the addressee's authorised
address is not in the same country as the country of posting, at 10:00
a.m. (local time at the place where that address is located) on the fifth
business day after the day of posting;
(d) in the case of a fax, on issue to the sender of an O.K. result confirmation receipt or, if the day of issue is not a business day, at 10:00 a.m. (local time where the authorised fax number of the intended recipient is located) on the next business day; and
(e) in the case of a telex, on receipt by the sender of the confirmed answerback or, if the day of receipt is not a business day, at 10 a.m. (local time where the authorised telex number of the intended recipient is located) on the next business day.
11. WAIVER. No failure on the part of any party to exercise and no delay in exercising any right or remedy hereunder shall operate as a waiver hereof; nor shall any single or partial exercise or 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 at law or in equity.
12. ASSIGNMENT. This Agreement shall be binding upon and inure to the benefit of the parties an their respective successors and permitted assigns; provided, however, that no party shall have the right to assign this Agreement in whole or in part without the prior written consent of the other parties hereto, which consent may be granted or withheld in the sole and absolute discretion of such other parties.
13. SEVERABILITY. If any provision of this Agreement is not or ceases to be legal, valid, binding and enforceable under the law of any Jurisdiction, neither the legality, validity, binding effect or enforceability of the remaining provisions under that law nor the legality, validity, binding effect or enforceability of that provision under the law of any other jurisdiction shall be affected.
14. COUNTERPARTS. This Agreement may be executed in one or more counterparts each of which shall be binding on each party by whom or on whose behalf it is so executed, but which together shall constitute a single instrument. for the avoidance of doubt, this Agreement shall not be binding on any party hereto unless and until it shall have been executed by or on behalf of all persons expressed to be the parties hereto.
15. TIME OF THE ESSENCE. Time shall be of the essence of this Agreement, both as regards the dates and periods specifically mentioned and as to any dates and periods which may, by agreement in writing between or on behalf of the Vendors and ISS, be substituted for them.
16. SERVICE AGREEMENT/CONSULTANCY AGREEMENT. The parties agrees that any disputes or termination or other matters arising under the Billow Service Agreement and/or the Grove Consultancy Agreement shall not affect ISS's obligations (including but not limited to its obligation to pay the Total Consideration) under this Agreement.
17. CONFIDENTIALITY. Subject to any applicable statutory or regulatory rules, none of the parties hereto shall make any public announcement or divulge or otherwise make public in any manner any information in relation to this Agreement or the transactions or arrangements hereby
contemplated or herein referred to (including without prejudice to the foregoing generality the fact that this Agreement has been entered into between the parties) or any matter ancillary hereto or thereto without the prior consent of the other parties (which consent shall not be unreasonably withheld or delayed).
18. COSTS AND EXPENSES.
18.01 Each party shall pay its or his own costs and expenses in relation to the negotiations leading up to the sale and purchase of the Sale Shares and to the preparation and execution and performance of this Agreement.
18.02 The stamp duty shall be paid by the Vendors and ISS in equal shares.
19. PROCESS AGENT.
19.01 BDL hereby appoints Johan Billow of One Robinson Place, 31st Floor, Flat C, 70 Robinson Road, Mid-Levels, Hong Kong (or such other person, being resident or incorporated in Hong Kong, as it may by notice to all other parties hereto substitute) to accept service of all legal process arising out of or connected with this Agreement and service on Johan Billow (or such substitute) shall be deemed to be service on BDL.
19.02 The Grove Vendor hereby appoints Johan Billow of One Robinson Place, 31st Floor, Flat C, 70 Robinson Road, Mid-Levels, Hong Kong (or such other person, being resident or incorporated in Hong Kong, as it may by notice to all other parties hereto substitute) to accept service of all legal process arising out of or connected with this Agreement and service on Johan Billow (or such substitute) shall be deemed to be service on the Grove Vendor.
19.03 ISS hereby appoints Horwath Management Services Limited of Hong Kong (or such other person, being resident or incorporated in Hong Kong, as it may by notice to all other parties hereto substitute) to accept service of all legal process arising out of or connected with this Agreement and service on Horwath Management Services Limited (or such substitute) shall be deemed to be service on ISS.
20. GOVERNING LAW. This Agreement shall be governed by and construed in accordance with the laws of the HKSAR and each party hereby irrevocably submits to the non-exclusive jurisdiction of the courts of the HKSAR.
In witness whereof this Agreement has been duly entered into by the parties the day and year first above written.
EXECUTED by the parties
For and on behalf of For and on behalf of
IMAGE SENSING SYSTEMS, INC. GROVE PLACE LIMITED
By: /s/ William L. Russell By: /s/ Anthony H. Gould
----------------------------- ----------------------------------
William L. Russell Anthony H. Gould
Witnessed by: Witnessed by:
/s/ Richard C. Magnuson /s/ Johan Billow
--------------------------------- --------------------------------------
Name: Richard C. Magnuson Name: Johan Billow
Title: Title:
For and on behalf of /s/ Johan Billow
--------------------------------------
MR. MATS JOHAN BILLOW
BERKELEY DEVELOPMENT LIMITED
Witnessed by:
By /s/ Johan Billow
------------------------------
Johan Billow
/s/ Anthony H. Gould
--------------------------------------
Witnessed by: Name: Anthony H. Gould
Title:
/s/ Anthony H. Gould
---------------------------------
Name: Anthony H. Gould
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Title:
EXHIBIT 10.15
AMENDMENT NO. 1
TO
SHARES SALE AND PURCHASE AGREEMENT
Amendment No. 1, dated as of December 31, 2001 (the "Amendment"), to the Shares Sale and Purchase Agreement dated November 28, 2001 (the "Agreement"), by and among Image Sensing Systems, Inc., a company incorporated in Minnesota, USA ("ISS"), Berkeley Development Limited, a company incorporated in the British Virgin Islands ("BDL"), Mr. Mats Johan Billow, a resident of Hong Kong ("Billow"), and Grove Place Limited, a company incorporated in the British Virgin Islands ("Grove").
WHEREAS, the parties to this Amendment previously entered into the Agreement, pursuant to which BDL, Billow and Grove (collectively, the "Vendors") have agreed to sell, and ISS has agreed to purchase, all of the outstanding shares, par value HK$1.00 per share, of Flow Traffic Limited, a company incorporated in Hong Kong, owned by the Vendors; and
WHEREAS, the parties desire to amend the Agreement in certain respects, in accordance with Section 9 of the Agreement.
NOW, THEREFORE, in consideration of the premises and the mutual agreements herein set forth, the parties hereby agree as follows:
1. Amendment of the Agreement. The Agreement shall be amended as follows:
(a) Section 5(e) of the Agreement is hereby amended to read in its entirety as follows:
"US$125,000 of the Billow Consideration shall be payable by ISS in the form of a non-interest bearing, non-negotiable note convertible into 50,000 shares of common stock of ISS, par value US$.01 per share, at any time within five years from the date of issuance (the "Billow Note"). Billow may demand payment for the Billow Note at any time after April 1, 2003; provided that the Billow Note may be prepaid at the option of ISS for its face amount at any time during calendar year 2002 or for US$150,000 at any time after April 1, 2003. If not converted or paid by January 7, 2007, the Billow Note will be redeemed by ISS on such date for its face amount of US$125,000."
(b) Section 5(f) of the Agreement is hereby amended to read in its entirety as follows:
"US$125,000 of the Grove Consideration shall be payable by ISS in the form of a non-interest bearing, non-negotiable note convertible into 50,000 shares of common stock of ISS, par value US$.01 per share, at any time within five years from the date of issuance (the "Grove Note"). Grove may demand payment for the Grove Note at any time after April 1, 2003; provided that the Grove Note may be prepaid at the option of ISS for its face amount at any time during calendar year 2002 or for US$150,000 at any time after April 1, 2003. If not converted or paid by January 7, 2007, the Grove Note will be redeemed by ISS on such date for its face amount of US$125,000."
2. Counterparts. This Amendment may be executed in any number of counterparts and each of such counterparts shall for all purposes be deemed to be an original, and all such counterparts shall together constitute but one and the same instrument.
IN WITNESS WHEREOF, the parties have caused this Amendment to be duly executed as of the date first above written.
IMAGE SENSING SYSTEMS, INC.
/s/ William L. Russell -------------------------------------------- Name: William L. Russell Title: Chairman and Chief Executive Officer |
BERKELEY DEVELOPMENT LIMITED
/s/ Johan Billow -------------------------------------------- Name: Johan Billow Title: Director |
MR. MATS JOHAN BILLOW
/s/ Johan Billow -------------------------------------------- |
GROVE PLACE LIMITED
/s/ Anthony H. Gould
--------------------------------------------
Name: Anthony H. Gould
Title:
|
EXHIBIT 10.16
THIS NOTE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY STATE SECURITIES LAWS. IT MAY NOT BE SOLD, OFFERED FOR SALE, TRANSFERRED, PLEDGED OR HYPOTHECATED IN THE ABSENCE OF A REGISTRATION STATEMENT IN EFFECT WITH RESPECT TO THE NOTE UNDER SUCH ACT AND ANY APPLICABLE STATE SECURITIES LAW OR PURSUANT TO RULE 144 OR AN OPINION OF COUNSEL SATISFACTORY TO THE COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED.
$125,000 JANUARY 7, 2002
IMAGE SENSING SYSTEMS, INC.
NON-INTEREST BEARING CONVERTIBLE NOTE
FOR VALUE RECEIVED, Image Sensing Systems, Inc., a Minnesota corporation (the "Company"), promises to pay to Mats Johan Billow, or his assigns (the "Holder"), the principal sum of One Hundred Twenty-Five Thousand Dollars ($125,000) as set forth below.
1. PRINCIPAL AND INTEREST. No interest shall accrue on the principal balance of this Note. If not sooner converted or paid as provided below, the entire balance of principal shall be due and payable on January 7, 2007 (the "Maturity Date").
2. CONVERSION. The Holder, at his option, may convert this Note, in whole but not in part, at any time, up to and including the Maturity Date, upon 10 days' advance written notice to the Company, into 50,000 shares of Company common stock, $.01 par value per share (the "Common Stock"), which number of shares shall be adjusted appropriately in the event of a stock split, stock dividend, reclassification, recapitalization, or similar event. Within 10 days after the conversion of this Note, the Company at its expense will issue and deliver to the Holder, upon surrender of this Note to the Company, a certificate or certificates for the number of full shares of equity securities issuable upon such conversion.
3. REGISTRATION RIGHTS. If requested by the Holder, the Company shall register under the Securities Act of 1933, as amended, the resale of the shares of Common Stock issuable upon conversion of the Note, in accordance with the terms and conditions set forth on Appendix A attached hereto.
4. NO VOTING RIGHTS. The Note shall not entitle the Holder to any voting rights or any other rights as a shareholder of the Company or to any other rights whatsoever except the rights stated herein, and no dividend or interest shall be payable or shall accrue in respect of Common Stock, until this Note shall be converted.
5. PAYMENT. All payments of principal shall be in lawful money of the United States of America and shall be made by check or telegraphic transfer delivered to the Holder at the address or account designation furnished to the Company for that purpose. The Company
may prepay this Note, upon 10 days' advance written notice to the Holder, (i) at any time during calendar year 2002, for the face amount and without penalty or additional fees, or (ii) at any time after April 1, 2003, for the face amount plus $25,000. The Holder may, upon 10 days' advance written notice to the Company, demand payment of this Note at any time after April 1, 2003, for the face amount and without penalty or additional fees. Within 10 days of delivery of such notice by the Holder or by the Company pursuant to this Section 5, the Company will pay the Holder the full face amount of $125,000, or, in the case of prepayment by the Company after April 1, 2003, the face amount plus $25,000.
6. DEFAULT. If any of the events specified in this Section 6 shall occur (each, an "Event of Default"), the Holder may, so long a such condition exists, declare the entire principal amount and unpaid accrued interest hereon immediately due and payable, by notice in writing to the Company:
(a) Failure to Pay Debts; Voluntary Bankruptcy. If the Company fails to pay its debts generally as they become due, or if the Company files any petition, proceeding, case or action for relief under any bankruptcy, reorganization, insolvency or moratorium law, rule, regulation, statute or ordinance (collectively, "Laws and Rules"), or any other Law and Rule for the relief of, or related to, debtors.
(b) Involuntary Bankruptcy. If any involuntary petition is filed under any bankruptcy or similar Law or Rule against the Company, or a receiver, trustee, liquidator, assignee, custodian, sequestrator or other similar official is appointed to take possession of any of the assets or properties of the Company or any Guarantor.
(c) Governmental Action. If any governmental or regulatory authority takes or institutes any action that will materially affect the Company's financial condition, operations or ability to pay or perform the Company's obligations under this Note.
(d) Other Breach or Defaults. If the Company breaches, or defaults in any material respect under, any material term, condition, provision, representation, warranty or covenant contained in this Note that is not specifically referred to in this Section 6.
7. WAIVER. The Company hereby waives demand, notice, presentment, protest and notice of dishonor.
8. MISCELLANEOUS. The terms of this Note shall be construed in accordance with the laws of the State of Minnesota as applied to contracts entered into by Minnesota residents within the State of Minnesota, which contracts are to be performed entirely within the State of Minnesota.
IN WITNESS WHEREOF, the Company has executed this Note as of the date set forth above.
IMAGE SENSING SYSTEMS, INC.
By: /s/ William L. Russell
-----------------------------------------------
Name: William L. Russell
Title: Chairman and Chief Executive Officer
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APPENDIX A
REGISTRATION RIGHTS
1. REGISTRATION OF THE SHARES; COMPLIANCE WITH THE SECURITIES ACT.
1.1 REGISTRATION PROCEDURES AND EXPENSES. THE COMPANY SHALL:
(a) within 10 days of the conversion of the Note pursuant to Section 2 thereof, commence the preparation of a registration statement on Form S-3 (the "REGISTRATION STATEMENT") to enable the resale of the Common Stock by the Holder from time to time through the Nasdaq Stock Market or in privately negotiated transactions; and, subject to receipt of necessary information from the Holder, file the Registration Statement with the Securities and Exchange Commission ("SEC") as soon thereafter as practicable;
(b) use its best efforts, subject to receipt of necessary information from the Holder, to cause the Registration Statement to become effective as soon as practicable;
(c) use its best efforts to prepare and file with the SEC such
amendments and supplements to the Registration Statement and the Prospectus used
in connection therewith as may be necessary to keep the Registration Statement
current and effective for a period not exceeding the earlier of (i) the second
anniversary of the date on which this Note is converted pursuant to Section 2,
(ii) the date on which the Holder may sell all Shares then held by the Holder
without restriction by the volume limitations of Rule 144(e) of the Securities
Act or (iii) such time as all shares of the Common Stock have been sold pursuant
to a registration statement, and to notify the Holder promptly upon the
Registration Statement and each post-effective amendment thereto being declared
effective by the SEC;
(d) furnish to the Holder such number of copies of the Registration Statement, Prospectuses (including supplemental prospectuses) and preliminary versions of the Prospectus filed with the SEC ("PRELIMINARY PROSPECTUSES") in conformity with the requirements of the Securities Act of 1933 and such other documents as the Holder may reasonably request, in order to facilitate the public sale or other disposition of all or any of the shares of the Common Stock by the Holder; provided, however, that unless waived by the Company in writing, the obligation of the Company to deliver copies of Prospectuses or Preliminary Prospectuses to the Holder shall be subject to the receipt by the Company of reasonable assurances from the Holder that the Holder will comply with the applicable provisions of the Securities Act and of such other securities or blue sky laws as may be applicable in connection with any use of such Prospectuses or Preliminary Prospectuses;
(e) file documents required of the Company for normal blue sky clearance in all states requiring blue sky clearance; provided, however, that the Company shall not be required to qualify to do business or consent to service of process in any jurisdiction in which it is not now so qualified or has not so consented;
(f) bear all expenses (other than underwriting discounts and
commissions, if any) in connection with the procedures in paragraph (a) through
(e) of this Section 1.1
(including reasonable fees and expenses of one counsel for Holder) and the registration of the Common Stock pursuant to the Registration Statement; and
(g) advise the Holder, promptly after it shall receive notice or obtain knowledge of the issuance of any stop order by the SEC delaying or suspending the effectiveness of the Registration Statement or of the initiation of any proceeding for that purpose; and it will promptly use its commercially reasonable efforts to prevent the issuance of any stop order or to obtain its withdrawal at the earliest possible moment if such stop order should be issued.
With a view to making available to the Holder the benefits of Rule 144 (or its successor rule) and any other rule or regulation of the SEC that may at any time permit the Holder to sell shares of the Common Stock to the public without registration, the Company covenants and agrees to: (i) make and keep public information available, as those terms are understood and defined in Rule 144, until the earlier of (A) such date as all of the Holder's shares of Common Stock may be resold pursuant to Rule 144(k) or any other rule of similar effect or (B) such date as all of the Holder's shares of Common Stock shall have been resold; (ii) file with the SEC in a timely manner all reports and other documents required of the Company under the Securities Act and under the Exchange Act; and (iii) furnish to the Holder upon request, as long as the Holder owns any shares of Common Stock, (A) a written statement by the Company that it has complied with the reporting requirements of the Securities Act and the Exchange Act, (B) a copy of the Company's most recent Annual Report on Form 10-KSB or Quarterly Report on Form 10-QSB, and (C) such other information as may be reasonably requested in order to avail the Holder of any rule or regulation of the SEC that permits the selling of any such shares of Common Stock without registration.
It shall be a condition precedent to the obligations of the Company to take any action pursuant to this Section 1.1 that the Holder shall furnish to the Company such information regarding itself, the shares of Common Stock to be sold by the Holder, and the intended method of disposition of such securities as shall be required to effect the registration of the Common Stock.
1.2 TRANSFER OF SHARES AFTER REGISTRATION; SUSPENSION.
(a) The Holder agrees that it will not effect any disposition of the Note or the Common Stock issuable upon conversion of the Note that would constitute a sale within the meaning of the Securities Act other than transactions exempt from the registration requirements of the Securities Act, except as contemplated in the Registration Statement referred to in Section 1.1 and as described below, and that it will promptly notify the Company of any changes in the information set forth in the Registration Statement regarding the Holder or its plan of distribution.
(b) Except in the event that paragraph (c) below applies, the Company shall: (i) if deemed necessary by the Company, prepare and file from time to time with the SEC a post-effective amendment to the Registration Statement or a supplement to the related Prospectus or a supplement or amendment to any document incorporated therein by reference or file any other required document so that such Registration Statement will not
contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading, and so that, as thereafter delivered to purchasers of the Common Stock being sold thereunder, such Prospectus will not contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading; and (ii) provide the Holder copies of any documents filed pursuant to Section 1.2(b)(i).
(c) Subject to paragraph (d) below, in the event: (i) of any request by
the SEC or any other federal or state governmental authority during the period
of effectiveness of the Registration Statement for amendments or supplements to
a Registration Statement or related Prospectus or for additional information;
(ii) of the issuance by the SEC or any other federal or state governmental
authority of any stop order suspending the effectiveness of a Registration
Statement or the initiation of any proceedings for that purpose; (iii) of the
receipt by the Company of any notification with respect to the suspension of the
qualification or exemption from qualification of any of the shares of Common
Stock for sale in any jurisdiction or the initiation of any proceeding for such
purpose; or (iv) of any event or circumstance which necessitates the making of
any changes in the Registration Statement or Prospectus, or any document
incorporated or deemed to be incorporated therein by reference, so that, in the
case of the Registration Statement, it will not contain any untrue statement of
a material fact or any omission to state a material fact required to be stated
therein or necessary to make the statements therein not misleading, and that in
the case of the Prospectus, it will not contain any untrue statement of a
material fact or any omission to state a material fact required to be stated
therein or necessary to make the statements therein, in the light of the
circumstances under which they were made, not misleading; then the Company shall
promptly deliver a certificate in writing to the Holder (the "SUSPENSION
NOTICE") to the effect of the foregoing and, upon receipt of such Suspension
Notice, the Holder will refrain from selling any Common Stock pursuant to the
Registration Statement (a "Suspension") until the Holder's receipt of copies of
a supplemented or amended Prospectus prepared and filed by the Company, or until
it is advised in writing by the Company that the current Prospectus may be used,
and has received copies of any additional or supplemental filings that are
incorporated or deemed incorporated by reference in any such Prospectus. In the
event of any Suspension, the Company will use its reasonable best efforts to
cause the use of the Prospectus so suspended to be resumed as soon as reasonably
practicable after delivery of a Suspension Notice to the Investors.
(d) Notwithstanding the foregoing paragraphs of this Section 1.2, the Company shall use its best efforts to ensure that the Holder shall not be prohibited from selling Common Stock under the Registration Statement as a result of Suspensions on more than two occasions of not more than 30 days each in any twelve month period.
(e) Provided that a Suspension is not then in effect, the Holder may sell shares of Common Stock under the Registration Statement, provided that it arranges for delivery of a current Prospectus to the transferee of such shares of Common Stock. Upon receipt of a request therefor, the Company will provide an adequate number of current Prospectuses to the Holder and to any other parties requiring such Prospectuses. In the event of a sale of shares of Common Stock by the Holder, unless such requirement is waived by the Company in writing, the Holder must also deliver to the Company's transfer agent, with a copy to the Company, such information as may be required by the transfer agent so that the shares may be properly transferred.
EXHIBIT 10.17
THIS NOTE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY STATE SECURITIES LAWS. IT MAY NOT BE SOLD, OFFERED FOR SALE, TRANSFERRED, PLEDGED OR HYPOTHECATED IN THE ABSENCE OF A REGISTRATION STATEMENT IN EFFECT WITH RESPECT TO THE NOTE UNDER SUCH ACT AND ANY APPLICABLE STATE SECURITIES LAW OR PURSUANT TO RULE 144 OR AN OPINION OF COUNSEL SATISFACTORY TO THE COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED.
$125,000 JANUARY 7, 2002
IMAGE SENSING SYSTEMS, INC.
NON-INTEREST BEARING CONVERTIBLE NOTE
FOR VALUE RECEIVED, Image Sensing Systems, Inc., a Minnesota corporation (the "Company"), promises to pay to Anthony H. Gould, or his assigns (the "Holder"), the principal sum of One Hundred Twenty-Five Thousand Dollars ($125,000) as set forth below.
1. PRINCIPAL AND INTEREST. No interest shall accrue on the principal balance of this Note. If not sooner converted or paid as provided below, the entire balance of principal shall be due and payable on January 7, 2007 (the "Maturity Date").
2. CONVERSION. The Holder, at his option, may convert this Note, in whole but not in part, at any time, up to and including the Maturity Date, upon 10 days' advance written notice to the Company, into 50,000 shares of Company common stock, $.01 par value per share (the "Common Stock"), which number of shares shall be adjusted appropriately in the event of a stock split, stock dividend, reclassification, recapitalization, or similar event. Within 10 days after the conversion of this Note, the Company at its expense will issue and deliver to the Holder, upon surrender of this Note to the Company, a certificate or certificates for the number of full shares of equity securities issuable upon such conversion.
3. REGISTRATION RIGHTS. If requested by the Holder, the Company shall register under the Securities Act of 1933, as amended, the resale of the shares of Common Stock issuable upon conversion of the Note, in accordance with the terms and conditions set forth on Appendix A attached hereto.
4. NO VOTING RIGHTS. The Note shall not entitle the Holder to any voting rights or any other rights as a shareholder of the Company or to any other rights whatsoever except the rights stated herein, and no dividend or interest shall be payable or shall accrue in respect of Common Stock, until this Note shall be converted.
5. PAYMENT. All payments of principal shall be in lawful money of the United States of America and shall be made by check or telegraphic transfer delivered to the Holder at the address or account designation furnished to the Company for that purpose. The Company
may prepay this Note, upon 10 days' advance written notice to the Holder, (i) at any time during calendar year 2002, for the face amount and without penalty or additional fees, or (ii) at any time after April 1, 2003, for the face amount plus $25,000. The Holder may, upon 10 days' advance written notice to the Company, demand payment of this Note at any time after April 1, 2003, for the face amount and without penalty or additional fees. Within 10 days of delivery of such notice by the Holder or by the Company pursuant to this Section 5, the Company will pay the Holder the full face amount of $125,000, or, in the case of prepayment by the Company after April 1, 2003, the face amount plus $25,000.
6. DEFAULT. If any of the events specified in this Section 6 shall occur (each, an "Event of Default"), the Holder may, so long a such condition exists, declare the entire principal amount and unpaid accrued interest hereon immediately due and payable, by notice in writing to the Company:
(a) Failure to Pay Debts; Voluntary Bankruptcy. If the Company fails to pay its debts generally as they become due, or if the Company files any petition, proceeding, case or action for relief under any bankruptcy, reorganization, insolvency or moratorium law, rule, regulation, statute or ordinance (collectively, "Laws and Rules"), or any other Law and Rule for the relief of, or related to, debtors.
(b) Involuntary Bankruptcy. If any involuntary petition is filed under any bankruptcy or similar Law or Rule against the Company, or a receiver, trustee, liquidator, assignee, custodian, sequestrator or other similar official is appointed to take possession of any of the assets or properties of the Company or any Guarantor.
(c) Governmental Action. If any governmental or regulatory authority takes or institutes any action that will materially affect the Company's financial condition, operations or ability to pay or perform the Company's obligations under this Note.
(d) Other Breach or Defaults. If the Company breaches, or defaults in any material respect under, any material term, condition, provision, representation, warranty or covenant contained in this Note that is not specifically referred to in this Section 6.
7. WAIVER. The Company hereby waives demand, notice, presentment, protest and notice of dishonor.
8. MISCELLANEOUS. The terms of this Note shall be construed in accordance with the laws of the State of Minnesota as applied to contracts entered into by Minnesota residents within the State of Minnesota, which contracts are to be performed entirely within the State of Minnesota.
IN WITNESS WHEREOF, the Company has executed this Note as of the date set forth above.
IMAGE SENSING SYSTEMS, INC.
By: /s/ William L. Russell
--------------------------------------
Name: William L. Russell
Title: Chairman and Chief Executive
Officer
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APPENDIX A
REGISTRATION RIGHTS
1. REGISTRATION OF THE SHARES; COMPLIANCE WITH THE SECURITIES ACT.
1.1 REGISTRATION PROCEDURES AND EXPENSES. THE COMPANY SHALL:
(a) within 10 days of the conversion of the Note pursuant to
Section 2 thereof, commence the preparation of a registration statement
on Form S-3 (the "REGISTRATION STATEMENT") to enable the resale of the
Common Stock by the Holder from time to time through the Nasdaq Stock
Market or in privately negotiated transactions; and, subject to receipt
of necessary information from the Holder, file the Registration
Statement with the Securities and Exchange Commission ("SEC") as soon
thereafter as practicable;
(b) use its best efforts, subject to receipt of necessary information from the Holder, to cause the Registration Statement to become effective as soon as practicable;
(c) use its best efforts to prepare and file with the SEC such amendments and supplements to the Registration Statement and the Prospectus used in connection therewith as may be necessary to keep the Registration Statement current and effective for a period not exceeding the earlier of (i) the second anniversary of the date on which this Note is converted pursuant to Section 2, (ii) the date on which the Holder may sell all Shares then held by the Holder without restriction by the volume limitations of Rule 144(e) of the Securities Act or (iii) such time as all shares of the Common Stock have been sold pursuant to a registration statement, and to notify the Holder promptly upon the Registration Statement and each post-effective amendment thereto being declared effective by the SEC;
(d) furnish to the Holder such number of copies of the Registration Statement, Prospectuses (including supplemental prospectuses) and preliminary versions of the Prospectus filed with the SEC ("PRELIMINARY PROSPECTUSES") in conformity with the requirements of the Securities Act of 1933 and such other documents as the Holder may reasonably request, in order to facilitate the public sale or other disposition of all or any of the shares of the Common Stock by the Holder; provided, however, that unless waived by the Company in writing, the obligation of the Company to deliver copies of Prospectuses or Preliminary Prospectuses to the Holder shall be subject to the receipt by the Company of reasonable assurances from the Holder that the Holder will comply with the applicable provisions of the Securities Act and of such other securities or blue sky laws as may be applicable in connection with any use of such Prospectuses or Preliminary Prospectuses;
(e) file documents required of the Company for normal blue sky clearance in all states requiring blue sky clearance; provided, however, that the Company shall not be required to qualify to do business or consent to service of process in any jurisdiction in which it is not now so qualified or has not so consented;
(f) bear all expenses (other than underwriting discounts and commissions, if any) in connection with the procedures in paragraph (a) through (e) of this Section 1.1
(including reasonable fees and expenses of one counsel for Holder) and the registration of the Common Stock pursuant to the Registration Statement; and
(g) advise the Holder, promptly after it shall receive notice or obtain knowledge of the issuance of any stop order by the SEC delaying or suspending the effectiveness of the Registration Statement or of the initiation of any proceeding for that purpose; and it will promptly use its commercially reasonable efforts to prevent the issuance of any stop order or to obtain its withdrawal at the earliest possible moment if such stop order should be issued.
With a view to making available to the Holder the benefits of Rule 144 (or its successor rule) and any other rule or regulation of the SEC that may at any time permit the Holder to sell shares of the Common Stock to the public without registration, the Company covenants and agrees to: (i) make and keep public information available, as those terms are understood and defined in Rule 144, until the earlier of (A) such date as all of the Holder's shares of Common Stock may be resold pursuant to Rule 144(k) or any other rule of similar effect or (B) such date as all of the Holder's shares of Common Stock shall have been resold; (ii) file with the SEC in a timely manner all reports and other documents required of the Company under the Securities Act and under the Exchange Act; and (iii) furnish to the Holder upon request, as long as the Holder owns any shares of Common Stock, (A) a written statement by the Company that it has complied with the reporting requirements of the Securities Act and the Exchange Act, (B) a copy of the Company's most recent Annual Report on Form 10-KSB or Quarterly Report on Form 10-QSB, and (C) such other information as may be reasonably requested in order to avail the Holder of any rule or regulation of the SEC that permits the selling of any such shares of Common Stock without registration.
It shall be a condition precedent to the obligations of the Company to take any action pursuant to this Section 1.1 that the Holder shall furnish to the Company such information regarding itself, the shares of Common Stock to be sold by the Holder, and the intended method of disposition of such securities as shall be required to effect the registration of the Common Stock.
1.2 TRANSFER OF SHARES AFTER REGISTRATION; SUSPENSION.
(a) The Holder agrees that it will not effect any disposition of the Note or the Common Stock issuable upon conversion of the Note that would constitute a sale within the meaning of the Securities Act other than transactions exempt from the registration requirements of the Securities Act, except as contemplated in the Registration Statement referred to in Section 1.1 and as described below, and that it will promptly notify the Company of any changes in the information set forth in the Registration Statement regarding the Holder or its plan of distribution.
(b) Except in the event that paragraph (c) below applies, the Company shall: (i) if deemed necessary by the Company, prepare and file from time to time with the SEC a post-effective amendment to the Registration Statement or a supplement to the related Prospectus or a supplement or amendment to any document incorporated therein by reference or file any other required document so that such Registration Statement will not
contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading, and so that, as thereafter delivered to purchasers of the Common Stock being sold thereunder, such Prospectus will not contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading; and (ii) provide the Holder copies of any documents filed pursuant to Section 1.2(b)(i).
(c) Subject to paragraph (d) below, in the event: (i) of any request by the SEC or any other federal or state governmental authority during the period of effectiveness of the Registration Statement for amendments or supplements to a Registration Statement or related Prospectus or for additional information; (ii) of the issuance by the SEC or any other federal or state governmental authority of any stop order suspending the effectiveness of a Registration Statement or the initiation of any proceedings for that purpose; (iii) of the receipt by the Company of any notification with respect to the suspension of the qualification or exemption from qualification of any of the shares of Common Stock for sale in any jurisdiction or the initiation of any proceeding for such purpose; or (iv) of any event or circumstance which necessitates the making of any changes in the Registration Statement or Prospectus, or any document incorporated or deemed to be incorporated therein by reference, so that, in the case of the Registration Statement, it will not contain any untrue statement of a material fact or any omission to state a material fact required to be stated therein or necessary to make the statements therein not misleading, and that in the case of the Prospectus, it will not contain any untrue statement of a material fact or any omission to state a material fact required to be stated therein or necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading; then the Company shall promptly deliver a certificate in writing to the Holder (the "SUSPENSION NOTICE") to the effect of the foregoing and, upon receipt of such Suspension Notice, the Holder will refrain from selling any Common Stock pursuant to the Registration Statement (a "SUSPENSION") until the Holder's receipt of copies of a supplemented or amended Prospectus prepared and filed by the Company, or until it is advised in writing by the Company that the current Prospectus may be used, and has received copies of any additional or supplemental filings that are incorporated or deemed incorporated by reference in any such Prospectus. In the event of any Suspension, the Company will use its reasonable best efforts to cause the use of the Prospectus so suspended to be resumed as soon as reasonably practicable after delivery of a Suspension Notice to the Investors.
(d) Notwithstanding the foregoing paragraphs of this Section 1.2, the Company shall use its best efforts to ensure that the Holder shall not be prohibited from selling Common Stock under the Registration Statement as a result of Suspensions on more than two occasions of not more than 30 days each in any twelve month period.
(e) Provided that a Suspension is not then in effect, the Holder may sell shares of Common Stock under the Registration Statement, provided that it arranges for delivery of a current Prospectus to the transferee of such shares of Common Stock. Upon receipt of a request therefor, the Company will provide an adequate number of current Prospectuses to the Holder and to any other parties requiring such Prospectuses. In the event of a sale of shares of Common Stock by the Holder, unless such requirement is waived by the Company in writing, the Holder must also deliver to the Company's transfer agent, with a copy to the Company, such information as may be required by the transfer agent so that the shares may be properly transferred.
EXHIBIT 10.18
SETTLEMENT AGREEMENT AND RELEASE
The "parties" to this Settlement Agreement and Release ("Settlement Agreement"), which was made and entered into as of February 11, 2002, are Image Sensing Systems, Incorporated ("ISS") and William L. Russell ("Russell").
WHEREAS, Russell has been employed by ISS since on or about June 10, 1998 as its President.
WHEREAS, ISS and Russell executed an Executive Employment Agreement effective as of June 12, 2000. A copy of that Executive Employment Agreement is attached hereto as Exhibit A.
WHEREAS, the Executive Employment Agreement provides in part that ISS and Russell "may terminate [the] Agreement at any time and upon any other terms or conditions by mutual written agreement."
WHEREAS, ISS alleges that it is not required to provide any termination pay to Russell pursuant to the Executive Employment Agreement. Russell alleges that he is entitled to termination pay pursuant to the Executive Employment Agreement.
WHEREAS, ISS and Russell recognize the inconvenience and expense of litigation, and wish to avoid such inconvenience and expense. As a result, ISS and Russell desire to terminate, compromise and settle any and all claims over the amount of termination pay owed to Russell, pursuant to the following terms and conditions.
NOW, THEREFORE, in consideration of the promises contained herein, the parties agree as follows:
SETTLEMENT AGREEMENT
1. Termination of Executive Employment Agreement. ISS and Russell mutually agree that this Settlement Agreement supercedes and replaces the Executive Employment Agreement. Moreover, pursuant to this Settlement Agreement, ISS and Russell mutually agree to the termination of the Executive Employment Agreement effective immediately, with the sole exception that Russell's obligations pursuant to Article 6 (Confidential Information; Intellectual Property) and Article 7 (Non-Competition and No Raid Covenants) shall survive the termination of the Executive Employment Agreement in their entirety, and are hereby incorporated into this Settlement Agreement and made a part hereof as if fully set forth herein.
2. Termination Payment to Russell. No later than ten days after the
execution of this Agreement by all parties, ISS shall pay to Russell $167,000,
minus any amounts withheld by ISS for applicable federal, state and local taxes,
including income taxes and FICA ("Termination Pay"). The amount paid to Russell
pursuant to this paragraph will be included on Russell's W-2 for 2002.
Termination Pay shall be forwarded to Russell by mail, at the following address:
1770 Delaware Street, West Saint Paul, MN 55118. Russell acknowledges the
adequacy and sufficiency of the Termination Pay as consideration for this
Settlement Agreement, including, but not limited to, provisions contained herein
related to the termination of the Executive Employment Agreement, the articles
which survive the termination of the Executive Employment Agreement, the
releases, and the numbered paragraphs of this Settlement Agreement. Payment is
effective upon mailing.
3. Mutual Termination of Employment. The parties agree that effective immediately, Russell's employment with ISS shall terminate, and that there is no longer an employment relationship between ISS and Russell.
4. Resignation from All Positions. Russell hereby resigns from all positions with the ISS, including, but not limited to, any and all positions he holds as an officer and/or director of ISS.
5. Nondisparagement. Russell agrees that he will not engage in any verbal, written or other communications that in any way disparage, defame, libel, slander, malign or otherwise cause harm or potential harm to the reputation or goodwill of ISS or the officers, directors and employees of the ISS.
6. Irreparable Harm/Injunctive Relief: The parties to this Settlement Agreement mutually agree that any breach of paragraph 5 of this Settlement Agreement or of Articles 6 or 7 of the Executive Employment Agreement which, pursuant to paragraph 1 above survive termination of the Executive Employment Agreement, and are incorporated herein and made a part hereof, would result in irreparable harm to ISS, entitling ISS, among other things, to immediate injunctive relief.
7. Release by ISS. ISS hereby releases, any and all claims, causes of actions, obligations or liabilities, solely in connection with the amount of Termination Pay to be paid to Russell. ISS covenants and agrees that it will not file or pursue any claim or cause of action against Russell solely in connection with the amount of Termination Pay to be paid to Russell. If ISS breaches this covenant, it shall pay the attorneys' fees and costs of the party against whom the claim, or cause of action was asserted, related to securing dismissal of said claim or cause, or cause of action.
8. Release by Russell. Russell, for and on behalf of himself and his heirs, administrators, executors, successors and assigns hereby releases, acquits and forever discharges ISS, its parents, subsidiaries, related companies, affiliates, and assigns, and its current and former directors, officers, agents, attorneys, and employees, from any and all claims, charges, causes of actions, obligations or liabilities, known and unknown, which arise on or before the effective date of this Settlement Agreement . By way of illustration only, this Release encompasses, but is not limited to: any claim or allegations stemming from the Executive Employment Agreement, his termination, the Termination Pay, and claims, charges, or causes of action that could be brought under Title VII of the Civil Rights Act of 1964, 42 U.S.C.ss.2000(e) et seq., as amended; the Civil Rights Act of 1866, as amended; the Equal Pay Act, as amended; United States Executive Orders 11246 and 11375; The Regulations of the Office of Federal Contract Compliance Programs, as amended; the Rehabilitation Act of 1973, as amended, 29 U.S.C.ss.701, et. seq.; the Age Discrimination in Employment Act (including the Older Workers Benefit Protection Act), 29 U.S.C.ss. 621 et seq.; the Americans With Disabilities Act, 42 U.S.C. ss.ss. 12101-12213; the Employee Retirement Income Security Act (ERISA), 29 U.S.C.ss. 1001, et seq. ; the Fair Labor Standards Act, 29 U.S.C.ss. 201, et seq.; the National Labor Relations Act, 29 U.S.C.ss. 151, et seq., the Worker Adjustment Retraining and Notification Act, 29 U.S.C.ss. 2101, et seq., the Minnesota Human Rights Act, Minn. Stat.ss.363.01, et seq.; any and all statutes providing rights and protections of any kind for employees working in the state of Minnesota, and any other federal, state, or local statute, ordinance, regulation or rule, including any attorneys' fees, liquidated damages, punitive damages, and any costs or disbursements that could be awarded in connection with these or any other statutory claims; and claims, charges or causes of action which could be brought based on contract, quasi-contract, implied contract,
wrongful or constructive discharge, breach of the covenant of good faith and fair dealing, libel, defamation, slander, negligent or intentional infliction of emotional distress, discrimination on any basis prohibited by statute, ordinance or public policy, negligence, interference with business opportunity or with contracts, or unfair insurance practices, and any other cause of action whatsoever, any of which arise on or before the date of the effective date of this Settlement Agreement.
Russell, for and on behalf of himself and his heirs, administrators, executors, successors and assigns hereby covenants and agrees that he will not file or otherwise pursue any claim, charge, or cause of action against ISS, its parents, subsidiaries, related companies, affiliates, or assigns, or against its current and former directors, officers, agents, attorneys, or employees which relates to the matters released in this paragraph. If Russell breaches this covenant, he shall pay the attorneys' fees and costs of the party against whom the claim, charge or cause of action was asserted, related to securing dismissal of said claim, charge or cause of action.
9. Assumption of Settlement Agreement Successors and Assignees. ISS's rights and obligations under this Settlement Agreement will inure to the benefit of and be binding upon ISS's successors and assignees. Russell's rights and obligations under this Settlement Agreement will inure to the benefit of and be binding upon his heirs, administrators, executors, successors and assigns.
10. Oral Modification Not Binding. This instrument is the entire Settlement Agreement of the parties. Oral changes will have no effect. It may be altered only by a written agreement signed by both parties.
11. Review of Settlement Agreement. The parties to this Settlement Agreement, each affirm and acknowledge that each
has read the foregoing Settlement Agreement and that each has either consulted with or had the opportunity to consult with an attorney prior to signing this Settlement Agreement. The parties to this Settlement Agreement further affirm and agree that this Settlement Agreement is written in language understandable to them and that each understands the meaning of the terms of this Settlement Agreement and their effect.
12. Knowing and Voluntary Settlement Agreement: Russell acknowledges that he has entered into this Settlement Agreement knowingly and voluntarily. Russell further acknowledges that he has had a reasonable period of time within which to consider this Settlement Agreement. Russell further acknowledges that he has had the opportunity to retain and be represented by counsel in connection with this Settlement Agreement, whether or not he has elected to retain counsel.
13. Instrument. The parties agree that this Settlement Agreement may be executed in any number of counterparts, each of which may be deemed an original, and all of which when taken together shall constitute one and the same instrument.
14. Choice of Forum. The parties agree that any dispute arising over this Settlement Agreement shall be brought exclusively in the appropriate courts in the State of Minnesota.
By /s/ Richard P. Braun
-------------------------------
Its: Chair, Compensation Committee
------------------------------
Dated: February 12, 2002 WILLIAM L. RUSSELL
--
/s/ William L. Russell
----------------------
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EXHIBIT 10.19
Anthony H. Gould's employment arrangement with Image Sensing Systems currently is governed through an agreement with Grove Place Limited, a consulting company of which Mr. Gould is an employee, except that in 2000 his compensation increased from a total of $16,200 per month, as set forth in Schedule II of the agreement, to $16,950 per month, and on February 12, 2002, he became President and Chief Executive Officer of Image Sensing Systems.
DATED 1ST DECEMBER 1998
IMAGE SENSING SYSTEMS, INC.
-AND-
GROVE PLACE LIMITED
ANTHONY H. GOULD
CONSULTANCY AGREEMENT
CONSULTANCY AGREEMENT
THIS AGREEMENT is made the 1st day of December l998 BETWEEN Image Sensing Systems, Inc., 1600 University Avenue West, 500 Spruce Tree Centre, St Paul, MN 55104 (hereinafter called "the Company") of the one part and Grove Place Limited Shelton Building, P.O. Box 3136, Main Street, Road Town, Tortola, British Virgin Islands (hereinafter called "the Consultant") of the other part.
WHEREBY IT IS AGREED as follows:
1. APPOINTMENT. The Company appoints the Consultant and the Consultant agrees to serve the Company with effect from 1st December 1998. This Agreement may be terminated by either party giving the other party 6 months notice in writing.
The Consultant shall without any further remuneration other than is hereinafter mentioned, perform his duties as hereinafter mentioned and as set forth in Schedule I attached hereto, wither at the offices of Grove Place Limited the company in Bangkok or elsewhere as the Company may in its reasonable discretion from time to time require.
2. REMUNERATION AND BENEFITS. The Consultant shall be paid by way of remuneration for his services during his employment hereunder a salary and benefits as set out in Schedule II or otherwise as may be agreed in writing from time to time between each of the parties hereto. The Consultant's salary shall be reviewed annually and any increases resulting from the review will be effective as from the first day of the month following the review.
3. DUTIES OF THE CONSULTANT.
(a) The Consultant shall unless prevented by incapacity
(i) under this Agreement devote the whole of his time attention and ability to the carrying out of his duties set out in the Agreement and in all respects comply with directions and regulations given or made and shall well and faithfully serve the Company and Group Companies;
(ii) faithfully and diligently perform those duties and exercise such powers consistent with them which are from time to time assigned to or vested in him;
(iii) obey all lawful and reasonable directions of the company,
(iv) use his best endeavors to promote the interests of the Company and Group companies;
(v) if and for so long as the Company requires, act as an officer of and carry out duties for any Group company or hold any other appointment or office as nominee or representative of the Company or and Group company.
The Consultant is expected to work such hours as are necessary properly to undertake the duties assigned to him and, so far as practicable, to adhere to the normal hours of his place of employment.
(b) Subject to any regulations from time to time issued by the Company which may apply to him, the Consultant shall not receive or obtain directly or indirectly any discount rebate commission or other inducement in respect of any sale or purchase of any goods or services effected or other business transaction (whether or not by him) by or on behalf of the company or any Group company and if he (or any form or company in which; he is directly or indirectly engaged, concerned or interested) shall obtain any such discount rebate commission or inducement he shall immediately account to the Company for the amount received by him or the amount received by such firm company.
4. CONFLICT OF INTEREST. During the continuance of his employment the Consultant shall not (unless otherwise agreed in writing by the Company) undertake any other business or profession or be or become an employee or agent of any other company firm or person or assist in any other business or profession. However, nothing in this paragraph shall preclude the Consultant from holding or acquiring by way of bona fide investment only shares representing no more than 2 percent of the issued equity capital of any quoted company unless the Company shall require him not to do so in any particular case on the ground that such other company is or may be carrying on a business competing or intending to compete with the business of the Company or any Group Company.
5. SHARE DEALINGS. The Consultant shall comply with the Code for Transactions as defined by the United States Securities and Exchange Commission in the Shares of Image Sensing Systems, Inc.
6. CONFIDENTIALITY.
(a) The Consultant shall not either during his appointment or at any time after its termination disclose to any person or persons (except to those authorized by the Company to know) or use for his own purposes or for any purposes other than those of the Company any private, confidential or secret information of the Company (including in particular lists or details of customers of the Company or relating to the working of any process or invention carried on of used by the Company) of which be has obtained by virtue of his appointments or in respect of which the Company is bound by an obligation of confidence to a third party. These restrictions shall cease to apply to information or knowledge which may (otherwise than through the default of the Consultant) become available to the public generally.
(b) The provisions of sub-clause a) Shall apply mutatis mutandis in relation to the private, confidential or secret information of each Group company which the Consultant may have received or obtained during his appointment and the Consultant shall upon request enter into an enforceable agreement with any such company to the like effect.
(c) All notes, memoranda, books, documents, records and writing made by the Consultant relating to the business of the Company or Group companies shall be and remain the property of the company or Group company to whose business they relate and shall be returned
by him together with any credit cards, keys or other property of or relating to the business of the Company or Group companies upon request and immediately upon the termination for any reason of this Agreement
7. MEDICAL EXAMINATION. The Consultant shall at the expense of the Company submit periodically to a medical examination by a registered medical by a registered medical practitioner nominated by the Company and shall authorize such medical practitioner to disclose to and discuss with the Company's authorized officer the results of the examination and the matters which arise from it so that the Company's authorized officer can notify the Company of any matters he considers might impair the Consultant from properly discharging his duties provided that no such disclosure is made prior to the Consultant being properly counseled by the medical practitioner.
8. INCAPACITY.
(a) If the Consultant shall be prevented by illness (including mental disorder) accident or other incapacity from properly performing his duties hereunder he shall report this fact forthwith to the Company and if the Consultant is so prevented shall provide a medical practitioner's statement on the sixth day and weekly thereafter. Immediately following his return to work after a period of absence the Consultant shall complete appropriate documentation detailing the reason for his absence.
(b) If the Consultant shall be absent from his duties hereunder due to illness (including mental disorder) accident or other incapacity duly certified in accordance with the provisions of sub-clause a) hereof he shall be paid his base salary hereunder for up to 180 days absence in any period of 12 months and thereafter such remuneration if any as the Board shall in its discretion from time to time allow provided that there shall be deducted from or set off against such remuneration any Statutory Sick Pay to which the Consultant is entitled and Social Security Sickness Benefit or other benefits recoverable by the Consultant whether or not recovered.
(c) If the Consultant is incapacitated for a continuous period of 180 days or periods aggregating 125 working days in the preceding 12 months then the company may terminate the Agreement on 4 months notice given either during or not later than one month after the end of such period of incapacity.
9. GRIEVANCES. If the Consultant has any grievances relating to his employment these should be raised with the President & CEO.
10. TERMINATION OF AGREEMENT.
(a) The Agreement shall be terminable by notice as provided for in Clause l.
(b) Notwithstanding the provisions of Clause 1 hereof the company may either suspend the Consultant pending investigation or at the discretion terminate this Agreement with immediate effect if the Consultant.
(i) commits any act of gross misconduct or repeats or continues (after written warning) any other serious breach of his obligations under the Agreement; or
(ii) is guilty of any conduct which in the reasonable opinion of the Board of the Company brings him, the Company or any Group company into disrepute; or
(iii) is convicted of any criminal offence; or
(iv) commits any act of dishonesty whether relating to the Company, and Group company. Any of its or their employees or otherwise; or
(v) becomes bankrupt or makes any arrangements or composition with his creditors generally.
On the termination of this Agreement for whatever reason, the Consultant shall at the request of the Company resign from all offices held by him in any Group company and from all other appointments or offices which he holds as nominee or representative of the company or any Group company and if he should fail to do so within seven days the Company is hereby irrevocably authorized to appoint some person in his name and on his behalf to sign any documents or do any things necessary or requisite to give effect to these. Such resignation(s) shall be without prejudice to any claims which the Consultant may have against any company arising out of this Agreement or the termination thereof.
It is understood that following termination of this Agreement and in accordance with normal ethical and professional standards the Consultant will refrain from taking any action of making statements, either written or oral, which are intended to and do disparage the goodwill or reputation of the Company, its Directors, Officers, Executives, or which could adversely affect the moral of other employees.
11. POST TERMINATION OBLIGATIONS OF THE CONSULTANT. For the purposes of this clause Business shall be defined as businesses of the Company or any Group company in which the Consultant has been involved to a material extent during the period of twelve months prior to the termination of his employment hereunder.
(a) Non-competition. The Consultant shall not for a period of 12 months after the termination of his employment (however that comes about and whether lawful or not) in relation to the Business.
(i) be directly or indirectly engaged concerned or interested in any capacity whether as Director Principal Agent Partner Consultant Employee or otherwise in any other business of whatever kind which is wholly or partly in competition with the Business.
(ii) provide technical commercial or professional advice to any business concern which is wholly or partly in competition with the Business.
(b) Non-solicitation. The Consultant shall not for a period of 12 months after the termination of his employment hereunder (howsoever that comes about and whether lawfully or
not) directly and indirectly and whether on his own behalf or on behalf of any other body which is wholly or partly in competition with the Business:
(i) solicit custom, entice customers or interface with the relationship between customers for any products of services where such customers were carrying on trade with the Business at any time during the 12 months prior to such determination; or
(ii) solicit or endeavor to entice away, offer employment to or employ any person who at any time during 12 months prior to such determination was employed by the Business; or
(iii) interfere or seek to interfere or take such steps as may interfere with the continuance of supplies to the Business from any suppliers who have been supplying components materials of services to the Business at any time during the last 12 months of his employment hereunder.
(c) The parties agree that the convenants set our in clauses a) and b) above are separate and severable and enforceable accordingly and whilst the restrictions are considered by the parties to be reasonable in all the circumstances as at the date hereof it is acknowledge that restrictions of such a nature may be invalid because of changing circumstances or other unforeseen reasons and accordingly if any of the restrictions shall be adjudged to be void or ineffective for whatever reason but would be adjudged to be valid and effective if part of the wording thereof were deleted or the periods thereof reduced or the area thereof reduced in scope, they shall apply with such modifications as may be necessary to make them valid and effective.
12. GENERAL.
(a) Other Terms. The provisions of the company's standard terms and conditions of employment (where applicable and as amended from time to time) sha11 be the terms of the Consultant's employment except so far as they are inconsistent with this Agreement.
(b) Prior Agreements. This Agreement sets out the entire agreement and understanding of the parties and is in substitution for any previous contracts of employment or any agreements for the provision of services by the Consultant to the Company or any of its Group companies (which shall be deemed to have been terminated by mutual consent).
(c) Accrued Rights. The expiration or termination of this Agreement however arising shall not operate to affect such of the provisions of this Agreement as are expressed to operate or have effect after then and shall be without prejudice to any accrued rights or remedies of the parties.
(d) Definitions. In this Agreement Group means any subsidiary or associated company for the time being of the Company. "Group company" means all or any subsidiary or Associated company for the time being the business of which tire Consultant is concerned with by virtue of his duties hereunder. "Associated company" means any company in which the Company and any of the Group companies can together exercise more that twenty (20) percent of the voting rights of the issued share capital of that company. "Board" means the Board of Directors of the Company for the time being.
(e) Proper Law. The validity construction and performance of this Agreement shall be governed by the Laws of the State of Minnesota, USA.
(f) Notices. Any notice in writing to be served hereunder may be given by the Company personally to the Consultant or by the Consultant to an appropriate officer of the Company or may be posted to the Company (for the attention of its Secretary) at its principal office for the time being or by the Company to the Consultant either at this address given above or at his last known address. Any such notice sent by post shall be deemed served forty-eight hours after it is posted and in proving such service it shall be sufficient to prove that the notice was properly addressed in the case of the Consultant to his last known address and put in the post.
As WITNESS whereof the Agreement has been executed by or on behalf of the parties hereto the day and year first before written.
Signed by
For and on behalf of Image Sensing Systems, Inc.
/s/ William L. Russell In the presence of |
Signed by the Consultant
/s/ Anthony H. Gould In the presence of |
SCHEDULE 1
Consultancy Agreement
Grove Place Ltd. - Mr. Anthony Gould
MISSION
To create an Asian presence for products developed or offered by Image Sensing Systems, Inc. to include marketing, sales, and service in the near term with a long term objective to develop a full line products supply, service and integration business for the Traffic and Transportation sector within Asia.
POSITION
MANAGING DIRECTOR, ISS ASIA
REPORTS TO: President & CEO, Image Sensing Systems, Inc.
DUTIES
1. Develop a products business within ASIA for technology developed by Image Sensing Systems including software and hardware systems.
2. Formulate an annul financial and operational business plan meeting or exceeding the requirements of the ISS BoD and agreed with the CEO.
3. Participate in the annual Company Strategic Planning process.
4. Organize, staff and manage the business unit consistent with ongoing needs of the business.
5. Identify, appoint and manage a distribution network within the defined territory.
6. Identify potential strategic or joint venture partners within Asia for projects or day to day business.
7. Provide monthly management activity reports to the CEO.
8. Otherwise perform duties that may be requested by the CEO or BoD from time to time.
SCHEDULE II
CONSULTANCY AGREEMENT
GROVE PLACE LTD --MR. ANTHONY GOULD
REMUNERATION AND BENEFITS
Consultant Fees: $15,000.00 US per month, includes office and
secretarial expense.
Additional Benefit: $ 1,200.00 US per month to cover auto,
health/medical.
Business Expense: Actual travel and entertainment expense paid
within seven days of submission of expenses
subject to approval.
Vacation: 15 working days per year, 20 working days
after 5 years.
Share Options: Subject to Board of Director approval an
initial incentive share option grant of
10,000 shares will be awarded in the name
specified by the consultant.
Bonus: Participation in the annual management bonus
plan designed to provide incentive to meet
and exceed agreed budget objectives.
|
EXHIBIT 10.20
PRODUCTION AGREEMENT
THIS AGREEMENT is made and entered into as of the 14th day of February, 2002, by and among IMAGE SENSING SYSTEMS, INC., a Minnesota corporation with its principal place of business at 500 Spruce Tree Center, 1600 University Avenue, Suite 500, West St. Paul, Minnesota 55104 ("ISS"); WIRELESS TECHNOLOGY, INC., a Nevada corporation with its principal place of business at 2064 Eastman Avenue, Suite 113, Ventura, California 93003 ("WTI"); and ECONOLITE CONTROL PRODUCTS, INC., a California corporation with it principal place of business at 3360 East La Palma Avenue, Anaheim, California 92806 ("Econolite").
WHEREAS, ISS and WTI entered into that certain Distribution Agreement dated April 20, 2001 (the "Distribution Agreement") and, among other things, development of an integrated camera/image processor automated video processing unit (the "SOLOPRO"), and the development of an AIS image sensor ("AIS") as more specifically set forth therein, the terms of which included, among other things, that ISS paid certain non-recurring engineering charges;
WHEREAS, the parties desire that WTI manufacture the SOLOPRO and AIS for sale exclusively to ISS and Econolite, on the terms and subject to the conditions set forth herein.
NOW, THEREFORE, in consideration of the foregoing premises and the mutual covenants and agreements contained herein, the parties hereto agree as follows:
1. DEFINITIONS. For purposes of the Agreement, the following terms shall have the following meanings and shall include the plural as well as the singular. All capitalized terms used and not defined herein shall have the same meaning as in the Distribution Agreement.
"WTI Intellectual Property" means all proprietary information of WTI including, without limitation, (a) all of WTI's intellectual property rights pursuant to the Distribution Agreement; (b) matters of a technical nature such as trade secret processes or devices, know-how, techniques, software, data, drawings, diagrams, programs, plans, formulas, inventions (whether or not patentable), bills of material, specifications and characteristics of products planned or being developed, and research subjects, methods and results; (c) matters of a business nature such as information about costs, margins, pricing policies, markets, sales, suppliers, customers, product plans and marketing plans or strategies; and (d) other "information of a similar nature that is not generally disclosed by WTI to the public.
"Econolite Intellectual Property" means all proprietary information of Econolite including, without limitation, (a) matters of a technical nature such as trade secret processes or devices, know-how, techniques, software, data, drawing, diagrams, programs, plans, formulas, inventions (whether or not patentable), bills of material, specifications and characteristics of products planned or being developed, and research subjects, methods and results; (b) matters of a business nature such as information about costs, margins, pricing policies, markets, sales, suppliers, customers, product plans and marketing plans or strategies; and (c) other information of a similar nature that is not generally disclosed by Econolite to the public.
"Econolite Territory" means North America and the Caribbean.
"ISS Intellectual Property" means all proprietary information of ISS including, with limitation, (a) all of ISS's intellectual property rights pursuant to the Distribution Agreement; (b) matters of a technical nature such as trade secret processes or devices, know-how, techniques, software, data, drawings, diagrams, programs, pans, formulas, inventions (whether or not patentable), bills of material, specifications and characteristics of products planned or being developed, and research subjects, methods and results; (c) matters of a business nature such as information about costs, margins, pricing policies, markets, sales, suppliers, customers, product plans and marketing plans or strategies; and (d) other information of a similar nature that is not generally disclosed by ISS to the public.
"ISS Territory" means all countries and jurisdictions in the world excluding North America and the Caribbean.
"Preproduction Documentation" means preproduction prints and schematics/circuit layout for the enclosure and cabling, associated electronics, bills of material, specifications and other information, in written or other tangible form, relevant to the manufacture of the SOLOPRO and the AIS, developed pursuant to the Statement of Work and approved by ISS.
"Production Documentation" means final production prints and schematics/circuit layout for the enclosure and cabling, associated electronics, bills of material, specifications and other information, in written or other tangible form, relevant to the manufacture of the SOLOPRO and AIS, developed pursuant to the Statement of Work and approved by ISS.
"Specifications" means the technical design, performance and functional specifications for the SOLOPRO and AIS developed pursuant to the Statement of Work and approved by ISS.
2. LICENSE GRANT AND PRODUCTION.
(a) Subject to the terms and conditions set forth herein, in the Distribution Agreement, ISS and Econolite each hereby grant to WTI a non-exclusive, non-transferable, non-assignable (whether by operation of law or otherwise) royalty-free right and license to use such of the ISS Intellectual Property and Econolite Intellectual Property as may be necessary to make, design, develop, assemble, manufacture and repair the SOLOPRO and the AIS solely for sale to ISS and Econolite in the manner provided herein. WTI shall acquire no right, title or interest in or to the ISS Intellectual Property or the Econolite Intellectual Property other than the foregoing limited license, nor shall WTI have the right or authority to sublicense all or any portion of the ISS Intellectual Property or Econolite Intellectual Property.
(b) WTI agrees to manufacture and sell exclusively to ISS and Econolite, so many units of the SOLOPRO and the AIS as ISS and Econolite may order from time to time. ISS and Econolite each agree to purchase from WTI all of their respective requirements for the SOLOPRO and the AIS for sale to end users in the ISS and Econolite Territories until such time as ISS and or Econolite shall have purchased an aggregate total of 10,000 units of SOLOPRO and AIS. Econolite and ISS agree to continue to purchase all of its requirements for the SOLOPRO and AIS thereafter, subject to Econolite's option set for in Section 5 and ISS's right of termination pursuant to Section 8 herein. Notwithstanding the foregoing, nothing in the
Agreement shall be deemed to require either ISS or Econolite to purchase a minimum number of units from WTI.
(c) WTI agrees that the SOLOPRO and AIS shall be manufactured in strict conformance with the Specifications and the Production Documentation. WTI further agrees to implement such procedures as may be agreed upon by WTI, ISS and Econolite to achieve a production quality goal of zero defects. WTI further agrees that it shall not make any changes to the SOLOPRO or AIS which affect compliance with the Specifications and the Production Documentation or the form, fit, function or performance of the SOLOPRO or AIS without ISS's and Econolite's prior written approval. Notwithstanding the foregoing, WTI acknowledges and agrees that, during the term of this Agreement, it shall be responsible for "continuation engineering" for the SOLOPRO and the AIS. For purposes of the Agreement, "continuation engineering" shall mean any re-design necessitated by field errors, cost reduction, quality improvement and replacement of obsolete parts. Any request by ISS for WTI to undertake any specific continuation engineering shall be governed by a Change Order and Statement of Work issued to WTI.
(d) Econolite and ISS agree to provide WTI with calendar year and quarterly Sales Forecasts of target quantities of SOLOPRO and AIS product as long as this Production Agreement is in effect. Econolite agrees to supply to WTI in a timely manner, a sufficient quantity of CPU Circuit Boards as required to satisfy SOLOPRO production requirements. Promptly upon WTI's acceptance of Purchase Orders from Econolite and ISS, which include product quantities, and requested delivery dates, WTI shall enter into purchasing relationships with integrated circuit and component parts distributors to assure a ready supply of long lead time items. WTI further agrees to stock sufficient inventory of parts to assure a lead-time of not more than forty-five (45) days on orders for the SOLOPRO and AIS.
(e) In the event WTI decides to discontinue manufacture of the SOLOPRO and AIS, WTI agrees to provide ISS and Econolite with notice of such intent at least six (6) months prior to the anticipated termination date. WTI further agrees to provide ISS and Econolite with such assistance as may be reasonably necessary to establish another manufacturer for the SOLOPRO and AIS; provided, however, that WTI shall be reasonably compensated for its time and effort in connection therewith.
3. TERMS OF SALE.
(a) ISS and Econolite shall each place orders for the SOLOPRO and AIS,
in writing, by mail, E-Mail, telex or facsimile, which orders shall set forth,
at a minimum, identification of the SOLOPRO and AIS, quantity and unit prices,
shipping instructions, shipping address and requested delivery dates. WTI will
notify ISS and Econolite of its acceptance of all orders, in writing, within ten
(10) days after receipt thereof. Any orders not accepted or rejected within such
ten (10) day period shall be deemed accepted.
(b) (i) ISS, Econolite and WTI acknowledge and agree that the target purchase price to ISS and Econolite for the SOLOPRO is $740 per unit, which includes installation by WTI of a CPU Board furnished by Econolite, loading software and testing the product.
(ii) ISS, Econolite and WTI acknowledge and agree that the target purchase price to ISS and Econolite for the AIS is $665 per unit.
(iii) At the end of each calendar quarter while this Agreement is in effect, WTI will advise ISS and Econolite of the purchase price per unit of SOLOPRO and AIS for the next succeeding quarter.
(iv) At any time after the expiration of six (6) months from the commencement of this Agreement, WTI may adjust the selling prices of SOLOPRO and/or AIS by providing written notice of such proposed price change to Econolite and ISS at least 45 days in advance of such proposed price change. The adjustment to prices shall not exceed the lesser of the percentage change in the Consumers Price Index - Urban Markets for the preceding twelve (12) months period, or five percent (5%). Such price increase shall not apply to orders accepted by WTI prior to the effective date of the proposed price increase; provided Econolite and ISS accept delivery of such orders in process with WTI not more than 30 days after the effective date of price increase. In the event WTI must accept material price increases from vendors contractually specified by ISS and/or Econolite, WTI may increase prices in excess of the five percent (5%) limitation expressed herein; provided that WTI shall provide documentation of such increase directly to ISS and Econolite substantiating such material cost increases. WTI shall, upon request of either ISS or Econolite, provide material cost, labor and overhead data to substantiate any price increases.
(c) All units of the SOLOPRO and AIS will be shipped F.O.B. from WTI's point of shipment by the common carrier specified by ISS or Econolite, as the case may be. WTI will "drop ship" such units as ISS or Econolite, as the case may be, may request. Title to the units and risk of loss shall pass to ISS or Econolite, as the case may be, upon WTI's delivery thereof to such carrier regardless of any provisions for payment of freight or insurance or forms of shipping documents. All prices are exclusive of freight, insurance, custom duties, import or export fees, sales, use, excise of other taxes, all of which shall be ISS's or Econolite's, as the case may be, responsibility.
(d) ISS and Econolite, as the case may be, shall conduct any incoming acceptance tests within sixty (60) days after receipt of a shipment. In the event of any shortage or nonconforming units, excepting for defects attributable to the SOLOPRO CPU Board and associated Software, ISS or Econolite, as the case may be, shall promptly report the same to WTI, and WTI shall immediately deliver additional or substitute units to ISS or Econolite, as the case may be, and shall be responsible for all freight, insurance and other charges in connection therewith. If it is determined that the SOLOPRO CPU Board is defective, Econolite shall be responsible for all freight, insurance and other charges in connection therewith. If it is determined that the SOLOPRO Software is at fault ISS shall be responsible for all freight, insurance and other charges in connection therewith.
(e) WTI shall invoice ISS or Econolite, as the case may be, for the SOLOPRO and the AIS purchased hereunder upon shipment, and payment shall be made net forty-five (45) days from the date of such invoice.
(f) In the event of any conflict between the terms and conditions of this Agreement and any purchase order, acknowledgement, invoice or other document passing between the parties, the terms and conditions of the Agreement shall control for all purposes.
4. LIMITED WARRANTIES.
(a) WTI warrants to ISS and Econolite that, excepting for defects attributable to the SOLOPRO CPU Board supplied by Econolite, and associated Software supplied by ISS, the SOLOPRO and AIS units sold hereunder will be free from defects in material and workmanship, and will conform to the Specifications for a period of two (2) years from the date of shipment. In the event any SOLOPRO or AIS fails to meet the foregoing warranty and is returned to WTI with all transportation charges prepaid, WTI will, at its option, repair or replace such defective SOLOPRO or AIS, or part thereof, within thirty (30) days of receipt. A return authorization number must be obtained from WTI prior to returning any SOLO PRO or AIS for warranty repair. Any SOLOPRO or AIS repaired or replaced hereunder shall be warranted for the remainder of the original warranty period or sixty (60) days, whichever is longer.
(b) WTI makes no other warranty with respect to the SOLOPRO or AIS, and WTI shall not be liable or responsible for losses of any kind resulting from the use or sale thereof by ISS or Econolite, including any damages caused ISS, Econolite or end-users by any attendant or consequent deficiency, defect, error or malfunction. WTI, ISS AND ECONOLITE EXPRESSLY AGREE THAT THE FOREGOING WARRANTIES ARE IN LIEU OF ALL OTHER WARRANTIES, WHETHER EXPRESSED OR IMPLIED, INCLUDING, WITHOUT LIMITATION, ANY WARRANTIES OF FITNESS FOR ANY PARTICULAR PURPOSE OR MERCHANTABILITY AND NO OTHER PERSON HAS THE AUTHORITY TO ASSUME FOR WTI ANY OTHER LIABILITIES IN CONNECTION WITH THE SALE OF THE SOLOPRO OR AIS.
(c) WTI, ISS AND ECONOLITE EXPRESSLY AGREE THAT THE FOREGOING REMEDIES SHALL BE THE EXCLUSIVE REMEDIES TO ISS AND ECONOLITE AGAINST WTI FOR ANY DEFECTS IN SOLOPROS OR AIS SOLD HEREUNDER. IN NO EVENT SHALL WTI BE LIABLE TO ISS OR ECONOLITE : FOR ANY LOST PROFITS OR OTHER SPECIAL, CONSEQUENTIAL, INDIRECT, PUNITIVE OR INCIDENTAL DAMAGES, HOWEVER CAUSED ON ANY THEORY OF LIABILITY, ARISING IN ANY WAY OUT OF THIS AGREEMENT OR THE DISTRIBUTION OF THE SOLOPRO OR AIS BY ISS OR ECONOLITE.
(d) WTI shall have no obligation to repair, replace or correct defective SOLOPRO or AIS under any warranty or otherwise if the defect or error resulted from improper or inadequate maintenance; unauthorized modification, alteration, disassembly, or misuse; intentional or accidental damage; use with software, hardware or interfaces not supplied or approved by WTI; operation outside the environmental specification of the SOLOPRO or AIS; improper site
preparation and maintenance; or handling, installation or operation which is not in conformance with WTI's handling, installation and operating instructions.
(e) Upon expiration of the foregoing warranty, WTI agrees that ISS and Econolite may each offer a repair service to end users of the SOLOPRO or AIS similar to the repair service presently offered by them with respect to WTI products.
5. ECONOLITE'S OPTION TO MANUFACTURE.
(a) Econolite shall have an option to manufacture the SOLOPRO and AIS for sale in the Econolite Territory commencing upon the purchase of 10,000 units by ISS and/or Econolite, in the aggregate, and continuing thereafter for so long as this Agreement shall be in full force and effect, which option shall be exercisable on the terms and conditions set forth in subsection (c) below.
(b) WTI shall provide ISS and Econolite with written notice at least eight (8) months prior to the anticipated date upon which 10,000 units of the SOLOPRO and AIS will have been sold to ISS and/or Econolite, in the aggregate, hereunder.
(c) Econolite's option to manufacture is subject to the following conditions:
(i) Econolite shall exercise its option by providing ISS and WTI with one (1) year's prior written notice;
(ii) Econolite shall not be in breach of any provision in the Econolite Agreement or this Agreement; and
(iii) Econolite shall be able to meet the quality, price and other requirement (including without limitation, ISO-9001 guidelines or any successor guidelines) then applicable to the manufacture and sale of the SOLOPRO or AIS.
(d) In the event Econolite exercises its option to manufacture, ISS shall terminate this Agreement pursuant to Section 8(c) herein and shall take such steps as are necessary to grant to Econolite a non-exclusive, non-transferable, non-assignable royalty-free right and sublicense, without the right to sublicense, to use such WTI Intellectual Property and ISS Intellectual Property as may be necessary to make, have made, use, sell or distribute the SOLOPRO and AIS.
(e) Econolite acknowledges and agrees that it shall acquire no right, title or interest in or to the SOLOPRO, AIS, ISS Intellectual Property or WTI Intellectual Property other than the foregoing limited rights.
6. ACCOUNTING AND REPORTS.
(a) WTI will deliver to ISS and Econolite, within thirty (30) days after the end of each month while this Agreement is in effect, a written report setting forth shipping destinations and sales of units of the SOLOPRO and AIS to ISS and Econolite during such month.
(b) WTI shall keep complete, true, and accurate books of accounts and records for the purpose of showing the derivation of all reports due hereunder. Such books and records shall be kept at WTI's principal place of business for at least three (3) years after the end of the calendar year to which they pertain, and shall be open at all reasonable times for inspection by a representative of the other parties hereto for verification of reports or compliance with other aspects of this Agreement.
7. CONFIDENTIALITY AND INTELLECTUAL PROPERTY RIGHTS.
(a) Nothing in this Agreement shall be deemed to modify or alter the intellectual property rights set for in the Distribution Agreement.
(b) The parties acknowledge that each party may receive or have access to information and material of the other party that is confidential, proprietary or trade secret information. As used herein, "Confidential Information" includes, but is not limited to, ISS Intellectual Property, WTI Intellectual Property and Econolite Intellectual Property and any other confidential, proprietary or trade secret information, technical and business information of WTI, ISS or Econolite, excluding any such information which (i) has been published or is otherwise readily available to the public other than by a breach of the Agreement; (ii) has been rightfully received from a third party without breach of confidentiality obligations; or (iii) has been independently developed by the receiving party by personnel having no access to the Confidential Information.
(c) Each party agrees during the term of the Agreement and thereafter to take all steps reasonably necessary to hold in trust and confidence the Confidential Information of the other parties, and not to disclose such Confidential Information to third parties or to use such Confidential Information in any way other than as permitted under this Agreement, the Development Agreement or the Econolite Agreement, without the prior written consent of the other party. Each party agrees to limit disclosure of the Confidential Information of the other party to employees or independent contractors with a need to know such information and to maintain at all times appropriate agreements with any and all employees to protect the Confidential information of the other party.
(d) In consideration of the opportunity to perform under this Agreement, the adequacy and sufficiency of which is hereby acknowledged, WTI agrees that for a period commencing on the date hereof and continuing for a period of one (1) year after termination of this Agreement, WTI shall not engage in any other projects, either for WTI, for Econolite or for a third party, which relate to the design or production of a CCD camera and image processor housed within a single enclosure for the field of use of automated video processing for traffic measurement, including, by way of example and not limitation, vehicles, trucks, pedestrians, airplanes, boats and bicycles, and that WTI shall treat all information relating to use of the WTI Components in this field of use as ISS Intellectual Property. The forgoing prohibition shall not apply to CCD and or Thermal Imaging (IR) video surveillance cameras manufactured by WTI.
(e) WTI acknowledges and agrees that it shall have no rights at any time to sell the SOLOPRO or AIS to any party other than ISS and Econolite as provided herein.
8. TERM AND TERMINATION.
(a) The term of this Agreement shall commence on the date hereof and shall continue until terminated as provided herein.
(b) If any party defaults in the performance of a material obligation hereunder and such breach is not cured within forty-five (45) days after receipt of written notice specifying the nature of the default, a copy of which notice shall also be provided to the other party hereto, the complaining party shall have the right at its option to suspend performance of any action called for hereunder until such breach is cured or the defaulting party commences and diligently proceeds to effect such cure; or to cancel this Agreement by giving written notice of cancellation to the defaulting party, with a copy to the other party, effective immediately at any time subsequent to the forty-five (45) day cure period (provided no cure has been effected).
(c) ISS may terminate this Agreement, with or without cause, upon six
(6) months' prior written notice. WTI may terminate this Agreement, with or
without cause, upon twelve (12) months' prior written notice. In the event ISS
terminates this Agreement with cause, WTI shall promptly deliver to ISS all
tooling specific to production of the SOLOPRO and AIS.
(d) This Agreement shall terminate automatically without notice (i) if
either ISS or WTI files a petition in bankruptcy or is adjudicated a bankrupt;
(ii) if a petition in bankruptcy is filed against either ISS or WTI and such
petition is not discharged within ninety (90) days of such filing; (iii) if ISS
or WTI becomes insolvent, or makes an assignment for the benefit of creditors or
an arrangement pursuant to any bankruptcy law; (iv) if ISS or WTI discontinues
its business; or (v) if a receiver is appointed for ISS or WTI or its business.
(e) In the event ISS terminates this Agreement without cause as provided herein, ISS shall purchase all of WTI's inventory related solely to the manufacture or sale of the SOLOPRO and AIS, including raw materials, unique parts, work in process and finished goods up to a maximum purchase price of $100,000. The purchase price of such inventory shall be at WTI's cost plus 10%. In addition, ISS shall assume and satisfy all open Purchase Orders issued by WTI to Vendors supplying scheduled inventory related solely to the manufacture of the SOLOPRO and AIS. WTI will provide ISS with such information and documentation as ISS may reasonably request to document and support WTI's cost of such inventory.
9. GENERAL.
(a) Notices. Any notice, request or demand required or desired hereunder shall be in writing and shall be deemed sufficient and completed if delivered personally, by first class mail, postage prepaid, or by overnight courier, with all freight charges prepaid, addressed to the address of each party first set forth above or such other address as may be given in a subsequent notice.
(b) Representation. Each party warrants and represents to the other parties that: (i) it has the authority to enter into and perform this Agreement; and (ii) the execution, delivery and performance of this Agreement will not conflict with the terms and conditions of any other agreement to which it is or becomes a party or by which it is or becomes bound.
(c) Indemnity. Each party shall save and hold harmless and indemnify
the other party from and against any and all liability, claims, losses, costs
and damages of whatever kind and nature, including reasonable attorneys' fees
and costs of litigation, by any third party resulting directly or indirectly
from any breach of this Agreement or warranties, representations and agreements
contained herein, and from any facts, omissions, misrepresentations, warranties,
covenants or obligations hereunder by such party. The foregoing obligations of
indemnification are conditioned upon the indemnified party (i) giving prompt
notice to the indemnifying party of any such claim or action; (ii) allowing the
indemnifying party to control the defense, including the right to settle the
action (so long as the settlement is without cost to the indemnified party); and
(iii) providing full assistance in the defense so long as the indemnifying party
pays the indemnified party's reasonable out-of-pocket expenses incurred in
connection with providing such assistance.
(d) Insurance. WTI shall maintain in force at all times during the term
of this Agreement and for at least three (3) years after expiration or
termination of the Agreement, comprehensive general liability, property damage
and business interruption insurance coverage in an amount not less than One
Million Dollars ($1,000,000) with ISS and Econolite each named as an additional
insured, and will, upon request, furnish certificates of insurance to ISS and
Econolite specifying that ISS and Econolite will receive no less than thirty
(30) days' notice of cancellation, nonrenewal or material change to such
insurance. All responsibility for payment of sums under any deductible, corridor
or self-insured retention provisions of the policy or policies shall remain with
WTI, and acceptance of the insurance by ISS and Econolite shall not in any way
relieve or decrease the liability of WTI hereunder. It is expressly understood
and agreed that neither ISS nor Econolite in any way represent that the above
specified limits of liability or policy forms are sufficient or adequate to
protect the parties' interests or liabilities.
(e) Damages. None of the parties will, in any event, be liable for special, incidental or consequential damages of any nature or kind whatsoever, or for any indirect damages such as, but not limited to, exemplary or punitive damages, even if such party has been advised of the possibility of such damages and notwithstanding the form (e.g. contract negligence, or otherwise) in which any legal or equitable action may be brought against such party or any of its officers, directors, employees or subcontractors.
(f) Dispute Resolution. Should any disagreement arise between WTI and ISS relating to the other party's performance hereunder or any other matter relating to this Agreement, WTI and Econolite agree to mediation and, if necessary, arbitration in the state of California. Notwithstanding the foregoing, either party shall be entitled to petition any court of competent jurisdiction within the State of California for injunctive relief with respect to an alleged breach of obligations of confidentiality or with respect to intellectual property rights.
(g) Import/Export Regulations. The parties agree to comply with all import and export requirements imposed on the SOLOPRO and AIS by any country or organization in whose jurisdiction either party operates or does business. ISS shall be responsible for all export permits, import certificates, insurance, duty, customs clearance charges and/or licenses and related costs for units shipped into the ISS Territory. Econolite shall be responsible for all export permits, import certificates, insurance, duty, customs clearance charges and/or licenses and related costs for units shipped into the Econolite Territory.
(h) Relationship. The parties are independent contractors and nothing in this Agreement shall be deemed to create the relationship of principal and agent or master and servant or a partnership or a joint venture between parties. Neither party shall have the power to bind the other party.
(i) Governing Law; Interpretation. This Agreement shall be construed, interpreted and enforced under the laws of the State of California, excluding its provisions regarding conflicts of law. The section and subsection headings used herein are for reference and convenience only, and shall not enter into the interpretation hereof
(j) No Waiver; Severability. No failure by any party to take any action or assert any right hereunder shall be deemed to be a waiver of such right in the event of the continuation or repetition of the circumstances giving rise to such right. If any clause is declared illegal or invalid, the remainder of this Agreement shall remain enforceable, its clauses being severable.
(k) Force Majeure. None of the parties shall be liable for delays in performance that are caused by acts of God, acts of governmental or military authority, fires, floods, epidemics, strikes, riot and war or any other cause over which such party has no control. Under such conditions, the performance obligations shall be extended for a period not to exceed the time of the delay, provided that the party experiencing the delay immediately notifies the other party of the delay and anticipated duration and uses its best efforts to minimize the impact of the delay on its performance obligations. Notwithstanding the foregoing, the failure of any of the parties to pay the other party an amount then due shall not be deemed excused by reason of force majeure.
(l) No Assignment or Deletion. None of the parties shall directly or indirectly sell, transfer, assign, convey, pledge, encumber, delegate or otherwise dispose of this Agreement without the prior written consent of the other parties. Notwithstanding the foregoing, either ISS or WTI may, without the prior consent of the other party, assign or transfer this Agreement as part of a corporate reorganization, consolidation, merger or sale of all or substantially all of its assets, provided such entity expressly agrees in writing to all of such party's obligations hereunder.
(m) Entire Agreement. This Agreement, the Distribution Agreement, and the schedules and exhibits attached hereto or thereto, constitute the entire agreement concerning the subject matter covered herein and supersede all prior oral or written agreements, understandings and promises relating thereto. This Agreement may not be modified or amended except by an instrument in writing declared to be an amendment hereto and executed by both parties. This Agreement may be executed in several counterparts, all of which taken together shall constitute one single agreement between the parties.
IN WITNESS WHEREOF, the parties have executed this Agreement in the manner appropriate to each as of the day and year first above written.
IMAGE SENSING SYSTEMS, INC. WIRELESS TECHNOLOGY, INC.
By: /s/ Anthony Gould By: /s/ Daniel Fancher
------------------------------- ---------------------------------
Anthony Gould Daniel Fancher
Its: President Its President
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ECONOLITE CONTROL PRODUCTS, INC.
By: /s/ Michael Doyle
-------------------------------
Michael Doyle
Its: Chairman
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EXHIBIT 21
LIST OF SUBSIDIARIES OF IMAGE SENSING SYSTEMS, INC.
NAME OF SUBSIDIARY JURISDICTION OF INCORPORATION OR ORGANIZATION
------------------------ -----------------------------------------------
Flow Traffic Ltd. Hong Kong Special Administrative Region
of the People's Republic of China
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EXHIBIT 23
Consent of Ernst & Young LLP
We consent to the incorporation by reference in the Registration Statements (Form S-8 Nos. 333-82546, 333-09289 and 333-86169) pertaining to the 1995 Long-Term Incentive and Stock Option Plan of Image Sensing Systems, Inc. and Form S-3 No. 333-41706 pertaining to the registration of 108,000 shares of Image Sensing Systems, Inc. common stock, of our report dated February 8, 2002, 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, 2001.
/s/ Ernst & Young LLP
Minneapolis, Minnesota
March 27, 2002
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EXHIBIT 99
CAUTIONARY STATEMENT
Image Sensing Systems, Inc. wishes to take advantage of the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995 and is filing this cautionary statement in connection with this Act. Our annual report on Form 10-KSB, our Annual Report to Shareholders, any quarterly report on Form 10-QSB or current report on Form 8-K, or any other written or oral statements made by us or on our behalf may include forward-looking statement that reflect our current views with respect to future events and financial performance. The words "believe," "expect," "may," "will," "should," "intend," "plan," "estimate," or "anticipate" and other comparable terminology identify forward-looking statements. Forward-looking statements are subject to risks and uncertainties that may cause our actual results to differ materially from the results discussed in the forward-looking statements. Some factors that might cause these differences include the factors listed below. Although we have attempted to list these factors comprehensively, we wish to caution investors that other factors may prove to be important in the future and may affect our operating results. New factors may emerge from time to time, and it is not possible to predict all of these factors, nor can we assess the affect each factor or combination of factors may have on our business.
We further caution you not to unduly rely on any forward-looking statements, because they reflect our views only as of the date the statements were made. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.
RISK FACTORS
WE ARE DEPENDENT ON A SINGLE PRODUCT FOR MOST OF OUR REVENUE, AND IF WE DO NOT INCREASE THE MARKET FOR OUR PRODUCT, WE WILL BE UNABLE TO BE PROFITABLE AND OUR BUSINESS WILL BE HARMED.
More than 80% of our revenue since inception has been generated from sales of, or royalties from the sales of, the Autoscope(R) system vehicle detection system, and the Autoscope system currently is our only producT sold commercially. The application of machine vision technology to traffic management is a relatively new concept in the traffic management industry. Our financial success and prospects for growth will depend in large part on the continued development of the market for advanced technology solutions for traffic management and the acceptance of the Autoscope system as a reliable, cost-effective alternative to traditional vehicle detection systems. We cannot assure you that a sustainable market will develop for the Autoscope system or that, if a sustainable market does not develop, we will be able to utilize our technology profitably in other products or markets. If the Autoscope system does not gain greater market acceptance and if we are unable to increase awareness of our product and expand our customer base, sales of our products will suffer and we may be unable to sustain our business.
IF GOVERNMENTAL ENTITIES ELECT NOT TO USE OUR PRODUCT DUE TO BUDGETARY CONSTRAINTS, PROJECT DELAYS OR OTHER REASONS, OUR REVENUES MAY FLUCTUATE SEVERELY OR BE SUBSTANTIALLY DIMINISHED.
We sell the Autoscope system primarily to governmental entities for use in large traffic control projects using advanced traffic control technologies. Unless and until broader market acceptance of the Autoscope system is achieved, we will continue to rely substantially on revenues and royalties from sales of the Autoscope system to governmental entities. It often takes considerable time before governmental traffic control projects are developed to the point where a purchase of the Autoscope system is made, and a purchase of our product also may be subject to a time-consuming approval process. Additionally, governmental budgets and plans may change without warning. Substantial delays in purchase decisions by governmental entities, or governmental budgetary constraints, could cause our revenues and income to drop substantially or to fluctuate significantly between fiscal periods.
IF OUR PRIMARY DISTRIBUTOR FAILS TO PAY ROYALTIES TO US IN A TIMELY MANNER OR AT ALL, OUR FINANCIAL RESULTS WILL SUFFER.
We have entered into an agreement with Econolite Control Products, Inc., pursuant to which Econolite is the exclusive distributor of the Autoscope system in North America and the Caribbean. In exchange for its right to distribute our product, Econolite pays us royalties for sales of the Autoscope system. Since 1991, more than 60% of our revenue has consisted of royalties resulting from sales made by Econolite. A failure by Econolite to make royalty payments to us in a timely manner or at all will significantly reduce our revenues and harm our financial condition.
OUR DEPENDENCE ON THIRD PARTIES FOR MANUFACTURING AND MARKETING OUR PRODUCT MAY PREVENT US FROM MEETING CUSTOMERS' NEEDS IN A TIMELY MANNER.
We do not have, and do not intend to develop in the near future, the capability to manufacture our products. We have entered into agreements with Econolite Control Products, Inc. and Cohu, Inc., Electronic Division to manufacture the Autoscope system and related technology. If Econolite and Cohu are unable to manufacture our products in the future, we may be unable to identify other manufacturers able to meet product and quality demands in a timely manner or at all. Our inability to find suitable manufacturers for our products could result in delays or reductions in product shipments, which in turn may harm our business reputation and results of operations. In addition, we have granted Econolite the exclusive right to market the Autoscope system and related products in North America and the Caribbean. Consequently, our revenues depend to a significant extent on Econolite's marketing efforts. Econolite's inability to effectively market the Autoscope system, or the disruption or termination of that relationship, could result in reduced revenues and market share for our products.
OUR DEPENDENCE ON SINGLE-SOURCE SUPPLIERS AND SPECIALIZED SUPPLIERS MAY PREVENT US FROM MEETING CUSTOMERS' NEEDS IN A TIMELY MANNER.
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 our specifications by third-party vendors for integration into the system. If current vendors of components for the Autoscope system fail to meet quality and performance expectations, and if alternative component vendors are unavailable, shortages of parts or the need to change vendors could limit our ability to manufacture the Autoscope system, which would harm our business reputation and financial results.
WE MAY FACE INCREASED COMPETITION IF WE FAIL TO ADEQUATELY PROTECT OUR INTELLECTUAL PROPERTY RIGHTS, AND EFFORTS TO PROTECT OUR INTELLECTUAL PROPERTY RIGHTS MAY RESULT IN COSTLY LITIGATION.
Our success depends in large measure on the protection of our proprietary technology rights. We rely on trade secret, copyright and trademark laws, patents and confidentiality agreements with employees and third parties, all of which offer only limited protection. We cannot assure you that the scope of any current or future patents relating to our products will
exclude competitors or provide competitive advantages to us, or that the current patent on the technology underlying the Autoscope system will be held valid if challenged. We also cannot assure you that others have not developed or will not develop similar products, duplicate any of our products or design around our patents. The reverse engineering, unauthorized copying or other misappropriation of our proprietary technology could enable third parties to benefit from our technology without paying us for it. This could adversely affect our business and financial results. Litigation may be necessary in the future to enforce our intellectual property rights, to protect our trade secrets or to determine the validity and scope of the proprietary rights of others. Litigation could result in substantial costs and the diversion of management resources, either of which could harm our business.
We have not applied for patent protection in all foreign countries in which we may market and sell the Autoscope system. Consequently, our proprietary rights in the technology underlying the Autoscope system will be protected only to the extent that trade secret, copyright or other non-patent protection is available in other countries and to the extent we are able to enforce our rights in those countries. The laws of other countries in which we market our products may afford little or no effective protection of our proprietary technology.
The U.S. and foreign patents for certain aspects of the underlying technology for the Autoscope system are owned by the University of Minnesota. We have entered into a license agreement with the University of Minnesota, pursuant to which we have been granted an exclusive, worldwide license, with a right to grant sub-licenses, to make, have made, use, sell and lease products incorporating the Autoscope technology, and we pay royalties to the University for this license. The University of Minnesota may terminate the license only in limited circumstances, but any termination would prevent us from developing and selling our products and therefore would severely disrupt our business operations.
INCREASED COMPETITION MAY MAKE IT DIFFICULT FOR US TO ACQUIRE AND RETAIN CUSTOMERS, AND IF WE ARE UNSUCCESSFUL IN DEVELOPING NEW APPLICATIONS AND PRODUCT ENHANCEMENTS, OUR PRODUCTS MAY BECOME OBSOLETE.
Competition in the area of advanced traffic management and surveillance is growing. Some of the companies that may compete with us in the business of developing and implementing traffic control systems have substantially more financial, technological, marketing, personnel and research and development resources than we have. Therefore, they may be able to respond more quickly than we can to new or changing opportunities, technologies, standards or customer requirements. If we are unable to compete successfully with these companies, the market share for our products will decrease, and competitive pressures may seriously harm our business.
Additionally, the market for adaptive technology for vehicle detection is continuously seeking more advanced technological solutions to traffic management and control problems. Technologies such as embedded loop detectors, pressure plates, pneumatic tubes, radars, lasers, magnetometers, acoustics, and microwaves that have been used as traffic sensing devices in the past will be enhanced for use in the traffic management industry, and new technologies may be developed. We are aware of several companies that are developing traffic management devices using machine vision technology or other advanced technology. We expect that we increasingly
will face competitive product developments, applications and enhancements. New technologies or applications in traffic control systems may provide our customers with alternatives to the Autoscope system and could render our products or technologies noncompetitive or obsolete. If we are unable to increase the number of our applications and develop and commercialize product enhancements and applications in a timely manner that respond to changing technology and satisfy the needs of our customers, our business and financial results will suffer. We cannot be certain that we will be successful in developing and marketing product enhancements or new products on a timely or cost-effective basis or that these products, if developed, will achieve market acceptance.
OUR INABILITY TO MANAGE GROWTH EFFECTIVELY COULD SERIOUSLY HARM OUR BUSINESS.
Growth and expansion of our business could significantly strain our capital resources as well as the time and abilities of our management personnel. Our ability to manage growth effectively will require continued improvement of our operational, financial and management systems, and successful training, motivation and management of our employees. If we are unable to manage growth successfully, our business and operating results will suffer.
THE SIGNIFICANT CONTROL OVER SHAREHOLDER VOTING MATTERS THAT MAY BE EXERCISED BY OUR DIRECTORS AND OFFICERS MAY DEPRIVE OTHER SHAREHOLDERS OF THE ABILITY TO INFLUENCE CORPORATE ACTIONS.
As of March 25, 2002, our directors and officers owned beneficially approximately 54.0% of our outstanding common stock. Accordingly, these shareholders may be able to influence the outcome of shareholder votes, including votes concerning the election of directors and the outcome of corporate actions requiring shareholder approval, such as mergers and acquisitions, regardless of how other shareholders may vote. This concentration of voting control among our officers and directors may result in the deferral, prevention or significant delay in a change in management or change in control of Image Sensing Systems and may constrain the voting or other rights of other holders of our common stock.
OUR BUSINESS OPERATIONS WILL BE SEVERELY DISRUPTED IF WE LOSE KEY PERSONNEL OR IF WE FAIL TO ATTRACT AND RETAIN QUALIFIED PERSONNEL.
Our technology is dependent upon the knowledge, experience, and skills of key scientific and technical personnel. Additionally, our ability to continue technological developments and to market our products, and thereby develop a competitive edge in the marketplace, depends in large part on our ability to attract and retain qualified scientific and technical personnel. Competition for qualified personnel is intense, and we cannot assure you that we will be able to attract and retain the individuals we need. The loss of key personnel, or our inability to hire and retain qualified personnel, will harm our business.