Item 1.01. Entry into a Material Definitive Agreement.
Business Loan Agreements
(a) On December 4, 2007, Image Sensing Systems, Inc. (the Company) entered into a Business Loan Agreement (the Line of Credit Agreement) with Wells Fargo Bank, National Association (the Bank), and issued an accompanying Promissory Note to the Bank providing for a $3,000,000 line of credit. Advances under the line of credit bear interest at an annual rate equal to the prime rate set from time to time by the Bank (the Prime Rate), which currently is 7.5%. In connection with the Line of Credit Agreement, the Company entered into a Commercial Security Agreement with the Bank (the Security Agreement) granting to the Bank a security interest in all of the Companys inventory, accounts, equipment and general intangibles to collateralize borrowings under the Line of Credit Agreement. The Line of Credit Agreement limits the
Companys borrowings to 80% of eligible accounts receivable and 10% of eligible inventory. Amounts owed by the Company under the Line of Credit Agreement and accompanying Promissory Note mature on May 31, 2008. The Line of Credit Agreement replaced the Companys $1,000,000 credit facility with the Bank. No amounts are outstanding under the Line of Credit Agreement.
Also on December 4, 2007, the Company entered into a Business Loan Agreement (the Term Loan Agreement) with the Bank and issued an accompanying Promissory Note to the Bank providing for an $8,000,000 term loan. Advances under the term loan bear interest at the Prime Rate less 0.50%, resulting in an initial annual interest rate of 7.0%. In connection with the Term Loan Agreement, the Company entered into a Commercial Pledge Agreement with the Bank (the Pledge Agreement) under which the Company granted to the Bank a security interest in securities, interests and other investments held in the Companys investment accounts and in all of the Companys property. The Term Loan Agreement limits the Companys borrowings to 85% of eligible investments. Amounts owed by the Company under the Term Loan Agreement and accompanying Promissory Note mature on
September 30, 2008. On December 5, 2007, the Company borrowed $5,000,000 under the Term Loan Agreement and accompanying Promissory Note to partially finance the acquisition of assets of EIS Electronic Integrated Systems Inc. and Dan Manor under the Asset Purchase Agreement described below.
The Line of Credit Agreement and the Term Loan Agreement (collectively, the Loan Agreements) and the accompanying Promissory Notes contain financial and other covenants and other customary terms and conditions for indebtedness of this type. The maturity dates may be accelerated upon the occurrence of various events of default set forth in the Loan Agreements and accompanying Promissory Notes, including breaches of the Loan Agreements, certain cross-default situations, certain bankruptcy-related situations and other customary events of default for indebtedness of this type.
Asset Purchase Agreement
On December 6, 2007, the Company entered into and closed on an Asset Purchase Agreement (the Purchase Agreement) with EIS Electronic Integrated Systems Inc. (EIS), Dan Manor (Manor), Faye Manor, Donald D. Drewell, Mendel M. Greenberg, the Faye and Dan Manor Family Trust, the MMG Trust and the Drewell Family Trust. EIS is based in Toronto, Ontario, Canada. Under the Purchase Agreement, the Company purchased certain assets from EIS and Manor, including EIS RTMS radar traffic sensor product line. Under the Purchase Agreement, the Company made a $13,400,000 initial payment, consisting of $10,160,000 in cash paid directly to EIS, $140,000 in cash paid directly to Manor, and 111,874 shares of common stock of the Company with a value of approximately $1,900,000 that were issued directly to EIS. The Company placed an additional $600,000 in cash and
35,328 shares of its common stock with a value of approximately $600,000 in escrow (the Escrowed Consideration). In addition, the Purchase Agreement provides for earn-out payments over an approximate three-year period (the Earn-Out Payments). If earnings from the purchased assets are at targeted levels, EIS would receive $6,000,000 cash in Earn-Out Payments for the earn-out period beginning on December 7, 2007 and ending on December 31, 2010 (the Earn-Out Period), with the first earn-out year beginning on December 7, 2007 and ending on December 31, 2008 and the second and third earn-out years consisting of calendar years 2009 and 2010. Under the Purchase Agreement, the shares of common stock of the Company were valued at $16.9835 per share, which is equal to the average closing prices of the shares as quoted on The NASDAQ Capital Market for the 20 consecutive trading days ended December 3, 2007. As described above, the Company borrowed
$5,000,000 under the Term Loan Agreement to fund part of the initial cash consideration. The Purchase Agreement provides that the Company may set off any claims it has against the other parties to the Purchase Agreement against the Escrowed Consideration and the Earn-Out Payments. Any Escrowed Consideration remaining in escrow on December 6, 2012 will then be released. In connection with its purchase of assets under the Purchase Agreement, the Company formed ISS Image Sensing Systems Canada Ltd. and ISS Canada Sales Corp. as new wholly-owned subsidiaries incorporated under the laws of British Columbia.
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