Research
and development expense decreased to $2.3 million or 15.2% of total revenue in
2007, down from $2.6 million or 20.1% of total revenue in 2006. The decrease
was directly related to significant prototype material and consulting expenses
incurred in accelerating technical efforts on our next generation Autoscope
Terra product line in 2006 which did not carry into 2007.
Amortization
of intangibles expense was $51,000 in 2007 and reflects the amortization of
intangible assets acquired in the EIS asset purchase from December 7, 2007 to
December 31, 2007.
In-process
research and development expense was $4.5 million in 2007 ($3.0 million net of
tax). This expense was a result of a purchase price allocation component
related to the EIS asset purchase and is one-time in nature.
Other
income increased to $543,000 in 2007 from $523,000 in 2006. In 2007, other
income was mainly tax-exempt interest income which was partially offset by
interest expense on bank debt incurred in December 2007.
Our
income tax effective rate was not meaningful in 2007 due to the significant
in-process research and development expense impact on pre-tax book income
coupled with federal tax credits that brought our position to a benefit. Our
2006 income tax effective rate was unusually low due to a number of federal and
state adjustments.
Liquidity and Capital
Resources
At
December 31, 2008, we had $10.3 million in cash and cash equivalents and $4.0
million in restricted short-term investments, compared to $5.6 million in cash
and cash equivalents, $5.3 million in restricted cash and $-0- in investments
at December 31, 2007. As discussed below, our investments held at December 31,
2008 were auction rate securities that were redeemed or sold at par subsequent to
year-end.
Net
cash provided by operating activities was $5.2 million in 2008, compared to
$1.5 million and $4.6 million in 2007 and 2006, respectively. The primary
reasons for the 2008 change were the incremental net income increase in 2008,
significant increases in depreciation and amortization and stabilization of
working capital related to the EIS asset purchase. We purchased $4.0 million in
investments, net of redemptions, in 2008 as opposed to selling $4.1 million in
investments, net of purchases, in 2007. We also repaid $1.3 million in debt in
2008. We anticipate that average receivable collection days in 2009 will
increase over 2008 but that it will not have a material impact on our
liquidity. Our planned additions of property and equipment are discretionary,
and we do not expect them to exceed historical levels in 2009.
At
December 31, 2008, we held $4.0 million (par value) of investments comprised of
auction rate securities, or ARS. In January 2009, these ARS were redeemed at
par under a rights offering established in November 2008 by the broker/dealer.
Also in the fourth quarter of 2008, we sold $1.4 million of ARS at par held
through a different broker/dealer. After these two transactions, we no longer
hold any ARS.
In
May 2008, we entered into a financing arrangement with Associated Bank,
National Association, or Associated Bank, which replaced our loan agreements
with Wells Fargo Bank, N.A., including fully repaying those loans. Under the
arrangement with Associated Bank, we entered into a revolving line of credit
and a term loan. The revolving line of credit provides for up to
$5.0 million at an annual interest rate equal to the greater of 4.5% or
LIBOR plus 2.75%, as reset from time to time by Associated Bank. Advances on
the line of credit cannot exceed a borrowing base determined under a formula,
which is a percentage of the amounts of ARS and receivables. The line of credit
currently has $2.0 million in borrowings outstanding and matures on May 1,
2011. The term loan is for $3.0 million and has a fixed annual interest
rate of 6.75%. Repayment on the term loan is in equal monthly principal
installments over a 36-month period. As collateral, Associated Bank has a first
priority security interest in all of our assets, and we pledged all of our ARS.
As a result of the new financing arrangement with Associated Bank, ARS
investments were restricted as pledged to Associated Bank.
In
February 2009, we fully repaid the term loan and outstanding balances on the
revolving line of credit using the proceeds from our ARS redemption. We
believe, on an ongoing basis, we have regular availability to draw a minimum of
$3 million on our line of credit based on qualifying assets.
In
conjunction with our EIS asset purchase, the sellers have an earn-out
arrangement over approximately three years. The earn-out is based on earnings
from RTMS sales less related cost of revenue and operating expenses,
depreciation and amortization, and it is calculated annually. If the earnings
are at target levels, the sellers would receive $2.0 million annually, or $6.0
million in total. Superior performance of the assets could lead to an earn-out
in excess of $2 million, as the earn-out is not capped. Earn-out payments
generally are due within three months of the end of an earn-out period. The
first earn-out period ran from December 6, 2007 to December 31, 2008. Based on
the 2008 results for RTMS, the sellers of the RTMS business, also
known as the EIS assets, are entitled to receive a $1.2 million earnout
payment, which is expected be paid in March 2009. The liability has been
recorded on our balance sheet as of December 31, 2008, with an offsetting entry
to increase goodwill. If we are acquired or sell substantially all of our
assets before December 6, 2010, we must pay EIS $6.0 million less earn-out
amounts previously paid as an acceleration of potential earn-out payments under
the EIS asset purchase agreement.
25
We
believe that cash and cash equivalents on hand at December 31, 2008, along with
our $5.0 million revolving line of credit and cash provided by operating
activities, will satisfy our projected working capital needs, payments under the
EIS earn-out, investing activities, and other cash requirements for the
foreseeable future
Off-Balance
Sheet Arrangements
We
do not participate in transactions or have relationships or other arrangements
with an unconsolidated entity, including special purpose and similar entities
or other off-balance sheet arrangements.
Beginning
in 2009, we entered into a number of currency hedging arrangements. The purpose
of the hedging was to lock in what we believe to be favorable rates on certain
currencies and to increase our predictability on certain expenses at our
foreign subsidiaries. All hedging activity is intended to qualify for hedge
accounting under Statement of Financial Accounting Standard (SFAS) No. 133. We believe all contracts will be utilized to provide
funds to cover operating expenses.
Critical
Accounting Policies
Goodwill and Intangible
Assets
.
Goodwill is not amortized but is tested for impairment annually or whenever an
impairment indicator arises. Our recorded goodwill relates to our Flow Traffic
subsidiary and assets purchased from EIS. Goodwill for the EIS asset purchase
was recorded in December 2007 and is tested for impairment annually on October
1, beginning in 2008. The Flow Traffic goodwill is tested for impairment on
December 31 of each year. We also reconcile the fair value of our business
segments to market capitalization on December 31 or during interim periods when
our consolidated shareholders equity is similar to or exceeds our market
capitalization. The impairment tests require us to estimate the fair value of
our subsidiary and then compare it to the carrying value of the subsidiary (or
the fair value of all business segments to shareholders equity for the entity
test). If the carrying value exceeds the fair value, further analysis is
performed to determine if there is an impairment loss.
For
Flow Traffic, we estimate the fair value by using a combination of the income
approach, where fair value is dependent on the present value of future economic
benefits to be derived from ownership of Flow Traffic, and the prior
transactions in company stock method. The future economic benefits are
significantly dependent on sustaining revenue growth in our Autoscope product
line. For the EIS assets, we estimate fair value by using a combination of the
income approach, where fair value is dependent on the present value of future
economic benefits to be derived from the RTMS product line, and the market
valuation approach, where the business was compared to guideline public company
price-earning multiples with a significant weighting to companies in the
traffic detection business. The future economic benefits are mainly dependent
on future revenue growth of the RTMS product line. No impairment of goodwill
was recorded as of December 31, 2008, 2007 and 2006. If Flow Traffic and/or the
EIS assets do not provide the future economic benefits we project, the fair
value of these assets may become impaired, and we would need to record an
impairment loss.
The
fair value of all combined business segments was estimated using a discounted
cash flow analysis of future income. The market value was determined by
multiplying the sum of common shares outstanding at December 31, 2008 and
outstanding in the money stock options (as reduced using the treasury stock
method), by our average share price in December 2008, in total, our market
capitalization, and adding to it a control premium. In most industries,
including ours, an acquiring entity typically is willing to pay more for a
controlling interest than an investor would pay for a fractional,
noncontrolling ownership interest. For purposes of this analysis, we used a
control premium of 30%. To determine the applicable control premium, we
observed data derived from acquisitions and trading multiples of companies in
our industry, in addition to overall data for companies operating in both the
software and manufacturing industries. We have concluded that the control
premium is reasonable and supports the differential between our market
capitalization and the estimated fair value of our combined business, and no
impairment was recorded. The analysis indicated the two values were close and
therefore if our market capitalization were to decrease in 2009 even slightly
from the level in December 2008 or if control premiums were to decrease, it is
likely that we would need to recognize some level of impairment loss. At
December 31, 2007 and 2006, our market capitalization exceeded our shareholders
equity by a significant margin, and the reconciliation process described above
was not performed for those years.
26
Earn-outs
related to the EIS asset purchase are recorded as additional goodwill in the
year earned. Intangible assets are related to the EIS asset purchase for trade
names and technology and are amortized over their anticipated useful lives of
five to eight years.
Revenue Recognition
.
Royalty income is recognized based upon a monthly royalty report provided to us
by Econolite. This report is prepared by Econolite based on its sales of
products we developed and is based on sales delivered and accepted by its
customers. We recognize revenue from North American and international sales at
the time of delivery and acceptance; the selling price is fixed or determinable;
and collectability is reasonably assured. We record provisions against sales
revenue for estimated returns and allowances in the period when the related
revenue is recorded based upon historical sales returns and changes in end user
demands. Sales returns and warranty allowances are estimated at the time of
sale based on historical experience.
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. Deferred tax assets are offset by a valuation allowance as
deemed necessary based on our estimate of our future sources of taxable income and
the expected timing of temporary difference reversals. Uncertain tax positions
are recognized if the tax position is more likely than not of being sustained
on audit based on the technical merits of the position.
Inventories
.
Inventories are stated at the lower of cost (first-in, first-out method) or
market and allowances have been made for obsolete, excess or unmarketable
inventories based on estimated future usage or actual or anticipated product
line changes.
New and Recently Adopted
Accounting Pronouncements
In
September 2006, the Financial Accounting Standards Board (FASB) issued SFAS
No. 157,
Fair Value Measurements
.
SFAS No. 157 defines fair value, establishes a framework for measuring
fair value and expands disclosures about fair value measurement but does not
require any new fair value measurements. SFAS No. 157 is effective for
financial statements issued for fiscal years beginning after November 15, 2007
and interim periods within those fiscal years. However, on February 12, 2008,
the FASB issued proposed FASB Staff Position (FSP) FAS 157-2, which delayed the
effective date of SFAS No. 157 for all nonfinancial assets and
nonfinancial liabilities, except those that are recognized or disclosed at fair
value in the financial statements on a recurring basis (at least annually).
This FSP partially defers the effective date of SFAS No. 157 to fiscal
years beginning after November 15, 2008 and interim periods within those
fiscal years for items within the scope of this FSP. Effective for 2008, we
have adopted SFAS No. 157 except as it applies to those nonfinancial
assets and nonfinancial liabilities as noted in proposed FSP FAS 157-2. The
partial adoption of SFAS No. 157 impacted our disclosures surrounding our
restricted long-term investments. The adoption of the remaining portions of
SFAS No. 157 is not expected to have a material impact on our financial
statements.
On
February 15, 2007, the FASB issued SFAS No. 159,
The Fair Value Option for Financial Assets and
Financial Liabilities Including an Amendment of FASB Statement No. 115
.
This standard permits an entity to choose to measure many financial instruments
and certain other items at fair value. The fair value option established by
SFAS No. 159 permits all entities to choose to measure eligible items at
fair value at specified election dates. SFAS No. 159 is effective for the
Company as of January 1, 2008. The initial impact of adopting this
pronouncement had no effect on our consolidated financial statements because we
did not elect the fair value option for any financial assets or liabilities at
the beginning of 2008. During the year, SFAS No. 159 impacted our accounting
and disclosure of the put option received as part of our auction rate
securities settlement.
In
December 2007, the FASB issued SFAS No. 141 (Revised 2007),
Business Combinations
. SFAS
No. 141(R) will significantly change the accounting for business
combinations. Under SFAS No. 141(R), an acquiring entity will be required
to recognize all the assets acquired and liabilities assumed in a transaction
at the acquisition-date fair value with limited exceptions. SFAS
No. 141(R) will change the accounting treatment for certain specific
items. SFAS No. 141(R) also includes a substantial number of new
disclosure requirements. SFAS No. 141(R) applies prospectively to business
combinations for which the acquisition date is on or after the beginning of the
first annual reporting period beginning on or after December 15, 2008. Earlier
adoption is prohibited. SFAS No. 141(R) will impact us if we complete an
acquisition after the effective date.
27
In
December 2007, the FASB issued SFAS No. 160,
Noncontrolling Interests in Consolidated Financial
Statements An
Amendment of ARB No. 51
. SFAS No. 160 establishes new
accounting and reporting standards for the noncontrolling interest in a
subsidiary and for the deconsolidation of a subsidiary. SFAS No. 160 also
includes expanded disclosure requirements
regarding the interests of the parent and its noncontrolling interest. SFAS
No. 160 is effective for fiscal years, and interim periods with those
fiscal years, beginning on or after December 15, 2008. Earlier adoption is
prohibited. We are currently assessing the potential impact that the adoption
of SFAS No. 160 will have on our financial statements.
In
March 2008, the FASB issued SFAS No. 161,
Disclosures about Derivative Instruments and Hedging
Activities an
amendment of FASB Statement No. 133
. SFAS No. 161 requires
enhanced disclosures about an entitys derivative and hedging activities and is
effective for financial statements issued for fiscal years beginning after
November 15, 2008. We are currently assessing the impact of SFAS
No. 161 on our disclosures.
In
April 2008, the FASB issued FSP FAS 142-3,
Determination
of the Useful Life of Intangible Assets
, to provide guidance for
determining the useful life of recognized intangible assets and to improve
consistency between the period of expected cash flows used to measure the fair
value of a recognized intangible asset and the useful life of the intangible
asset as determined under SFAS No. 142,
Goodwill
and Other Intangible Assets
. The FSP requires that an entity
consider its own historical experience in renewing or extending similar
arrangements. However, the entity must adjust that experience based on
entity-specific factors under FAS No. 142. FSP FAS 142-3 is effective for
fiscal years and interim periods that begin after November 15, 2008. The
Company intends to adopt FSP FAS 142-3 effective January 1, 2009 and to apply
its provisions prospectively to recognized intangible assets acquired after
that date. The Company has periodically purchased recognized intangible assets
and is in the process of evaluating the impact that the adoption of FSP FAS
142-3 will have on its financial statements.
In
May 2008, FASB issued SFAS No. 162,
The
Hierarchy of Generally Accepted Accounting Principles
. SFAS
No. 162 identifies the sources of accounting principles and the framework
for selecting the principles to be used in the preparation of financial
statements of nongovernmental entities that are presented in conformity with
generally accepted accounting principles. SFAS No. 162 is effective 60
days following the SECs approval of the Public Company Accounting Oversight
Board amendments to AU Section 411,
The
Meaning of Present Fairly in Conformity With Generally Accepted Accounting
Principles
. We do not anticipate that the adoption of SFAS
No. 162 will materially impact the Company.
Item 7A. Quantitative
and Qualitative Disclosures About Market Risks
Our
foreign sales and results of operations are subject to the impact of foreign
currency fluctuations. We have not historically hedged our exposure to
translation gains and losses. A 10% adverse change in foreign currency rates
would not have a material effect on our results of operations or financial
position.
Beginning
in 2009, we entered into a number of currency hedging arrangements. The purpose
of the hedging was to lock in what we believe to be favorable rates on certain
currencies and to increase our predictability on certain expenses at our
foreign subsidiaries. All hedging activity is intended to qualify for hedge
accounting under SFAS No. 133,
Accounting
for Derivative Instruments and Hedging Activities
, as amended. We
believe all contracts will be utilized to provide funds to cover operating
expenses.
28
|
|
Item 8.
|
Financial Statements and Supplementary Data
|
IMAGE SENSING SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
|
|
|
|
|
|
|
|
|
|
December 31
|
|
|
|
|
|
|
|
2008
|
|
2007
|
|
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
10,289
|
|
$
|
5,613
|
|
Restricted cash
|
|
|
|
|
|
5,263
|
|
Restricted investments, net
|
|
|
4,000
|
|
|
|
|
Accounts receivable, net of allowance for
returns and doubtful accounts of $96 ($32 in 2007)
|
|
|
6,620
|
|
|
4,997
|
|
Inventories
|
|
|
1,608
|
|
|
1,579
|
|
Prepaid expenses
|
|
|
376
|
|
|
228
|
|
Deferred income taxes
|
|
|
376
|
|
|
142
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
23,269
|
|
|
17,822
|
|
|
|
|
|
|
|
|
|
Property and equipment:
|
|
|
|
|
|
|
|
Furniture and fixtures
|
|
|
265
|
|
|
328
|
|
Leasehold improvements
|
|
|
64
|
|
|
27
|
|
Equipment
|
|
|
1,631
|
|
|
1,220
|
|
|
|
|
|
|
|
|
|
|
|
|
1,960
|
|
|
1,575
|
|
Accumulated depreciation
|
|
|
1,232
|
|
|
875
|
|
|
|
|
|
|
|
|
|
|
|
|
728
|
|
|
700
|
|
|
|
|
|
|
|
|
|
Deferred income taxes
|
|
|
1,575
|
|
|
1,676
|
|
Intangible assets
|
|
|
4,481
|
|
|
5,249
|
|
Goodwill
|
|
|
6,055
|
|
|
4,891
|
|
|
|
|
|
|
|
|
|
TOTAL ASSETS
|
|
$
|
36,108
|
|
$
|
30,338
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS
EQUITY
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
251
|
|
$
|
816
|
|
Current portion of bank debt
|
|
|
1,000
|
|
|
5,000
|
|
Accrued compensation
|
|
|
1,091
|
|
|
703
|
|
Accrued warranty and other
|
|
|
793
|
|
|
510
|
|
EIS earnout payable
|
|
|
1,164
|
|
|
|
|
Income taxes payable
|
|
|
283
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
4,582
|
|
|
7,029
|
|
|
|
|
|
|
|
|
|
Bank debt, less current portion
|
|
|
2,750
|
|
|
|
|
Income taxes payable
|
|
|
246
|
|
|
84
|
|
|
|
|
|
|
|
|
|
Shareholders equity:
|
|
|
|
|
|
|
|
Preferred stock, $.01 par value; 5,000,000
shares authorized, none issued or outstanding
|
|
|
|
|
|
|
|
Common stock, $.01 par value; 20,000,000
shares authorized, 3,985,219 issued and outstanding (3,927,806 in 2007)
|
|
|
40
|
|
|
39
|
|
Additional paid-in capital
|
|
|
11,652
|
|
|
11,004
|
|
Accumulated other comprehensive income
(loss)
|
|
|
(147
|
)
|
|
161
|
|
Retained earnings
|
|
|
16,985
|
|
|
12,021
|
|
|
|
|
|
|
|
|
|
Total shareholders equity
|
|
|
28,530
|
|
|
23,225
|
|
|
|
|
|
|
|
|
|
TOTAL LIABILITIES AND SHAREHOLDERS
EQUITY
|
|
$
|
36,108
|
|
$
|
30,338
|
|
|
|
|
|
|
|
|
|
See accompanying notes to the consolidated
financial statements.
29
IMAGE SENSING SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
Years
ended December 31
|
|
|
|
|
|
|
|
2008
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
International sales
|
|
$
|
7,455
|
|
$
|
4,067
|
|
$
|
2,980
|
|
North American sales
|
|
|
5,689
|
|
|
269
|
|
|
|
|
Royalties
|
|
|
13,321
|
|
|
10,747
|
|
|
10,136
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
26,465
|
|
|
15,083
|
|
|
13,116
|
|
Cost of revenue:
|
|
|
|
|
|
|
|
|
|
|
International sales
|
|
|
2,805
|
|
|
1,927
|
|
|
1,501
|
|
North American sales
|
|
|
2,107
|
|
|
60
|
|
|
|
|
Royalties
|
|
|
|
|
|
|
|
|
220
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,912
|
|
|
1,987
|
|
|
1,721
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
21,553
|
|
|
13,096
|
|
|
11,395
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
Selling, marketing and product support
|
|
|
6,680
|
|
|
3,463
|
|
|
2,850
|
|
General and administrative
|
|
|
4,069
|
|
|
2,653
|
|
|
2,382
|
|
Research and development
|
|
|
2,908
|
|
|
2,299
|
|
|
2,639
|
|
Amortization of intangible assets
|
|
|
768
|
|
|
51
|
|
|
|
|
In-process research and development
|
|
|
|
|
|
4,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14,425
|
|
|
12,966
|
|
|
7,871
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
7,128
|
|
|
130
|
|
|
3,524
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income, net
|
|
|
43
|
|
|
543
|
|
|
523
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
7,171
|
|
|
673
|
|
|
4,047
|
|
Income tax expense (benefit)
|
|
|
2,207
|
|
|
(199
|
)
|
|
942
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
4,964
|
|
$
|
872
|
|
$
|
3,105
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per share:
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
1.26
|
|
$
|
0.23
|
|
$
|
0.83
|
|
Diluted
|
|
|
1.24
|
|
|
0.22
|
|
|
0.80
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares
outstanding:
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
3,943
|
|
|
3,789
|
|
|
3,725
|
|
Diluted
|
|
|
4,001
|
|
|
3,881
|
|
|
3,891
|
|
See accompanying notes to the consolidated
financial statements.
30
IMAGE SENSING SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOW
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
Years
ended December 31
|
|
|
|
|
|
|
|
2008
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
|
|
Operating activities:
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
4,964
|
|
$
|
872
|
|
$
|
3,105
|
|
Adjustments to reconcile net income to net
cash provided by operating activities:
|
|
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
357
|
|
|
226
|
|
|
226
|
|
Amortization
|
|
|
768
|
|
|
51
|
|
|
162
|
|
In-process research and development
|
|
|
|
|
|
4,500
|
|
|
|
|
Tax benefit from disqualifying
disposition
|
|
|
137
|
|
|
112
|
|
|
113
|
|
Stock option expense
|
|
|
339
|
|
|
194
|
|
|
177
|
|
Deferred income taxes
|
|
|
(133
|
)
|
|
(1,653
|
)
|
|
(203
|
)
|
Changes in operating assets and
liabilities:
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(1,623
|
)
|
|
(2,040
|
)
|
|
557
|
|
Inventories
|
|
|
(29
|
)
|
|
(909
|
)
|
|
(358
|
)
|
Prepaid expenses
|
|
|
(148
|
)
|
|
(102
|
)
|
|
(22
|
)
|
Accounts payable
|
|
|
(565
|
)
|
|
200
|
|
|
218
|
|
Accrued liabilities
|
|
|
671
|
|
|
177
|
|
|
511
|
|
Income taxes payable
|
|
|
445
|
|
|
(147
|
)
|
|
137
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating
activities
|
|
|
5,183
|
|
|
1,481
|
|
|
4,623
|
|
|
|
|
|
|
|
|
|
|
|
|
Investing activities:
|
|
|
|
|
|
|
|
|
|
|
Purchase of EIS assets
|
|
|
|
|
|
(11,406
|
)
|
|
|
|
Purchase of short-term investments
|
|
|
(7,400
|
)
|
|
|
|
|
(1,800
|
)
|
Sale of short-term investments
|
|
|
3,400
|
|
|
1,800
|
|
|
|
|
Maturity of callable FHLB bonds
|
|
|
|
|
|
2,300
|
|
|
|
|
Purchases of property and equipment
|
|
|
(385
|
)
|
|
(104
|
)
|
|
(419
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(4,385
|
)
|
|
(7,410
|
)
|
|
(2,219
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Financing activities:
|
|
|
|
|
|
|
|
|
|
|
Proceeds from exercise of stock options
|
|
|
173
|
|
|
34
|
|
|
200
|
|
Proceeds from (repayment of) bank debt
|
|
|
(1,250
|
)
|
|
5,000
|
|
|
|
|
Cash (restricted for) released from
restriction on bank debt
|
|
|
5,263
|
|
|
(5,263
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing
activities
|
|
|
4,186
|
|
|
(229
|
)
|
|
200
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on cash
|
|
|
(308
|
)
|
|
145
|
|
|
16
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (decrease) in cash and cash
equivalents
|
|
|
4,676
|
|
|
(6,013
|
)
|
|
2,620
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at beginning of
year
|
|
|
5,613
|
|
|
11,626
|
|
|
9,006
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of
year
|
|
$
|
10,289
|
|
$
|
5,613
|
|
$
|
11,626
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure:
|
|
|
|
|
|
|
|
|
|
|
Income taxes paid
|
|
$
|
1,680
|
|
$
|
1,352
|
|
$
|
1,025
|
|
Interest expense paid
|
|
$
|
278
|
|
$
|
35
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental non-cash disclosure:
|
|
|
|
|
|
|
|
|
|
|
Common stock issued in connection with EIS
asset purchase
|
|
$
|
|
|
$
|
2,534
|
|
$
|
|
|
EIS earnout payable recorded as additional
goodwill
|
|
$
|
1,164
|
|
$
|
|
|
$
|
|
|
See accompanying notes to the consolidated financial statements.
31
IMAGE SENSING SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY
(in thousands, except share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
Issued
|
|
Common
Stock
|
|
Additional
Paid-In
Capital
|
|
Accumulated
Other
Compre-
hensive
Income
(Loss)
|
|
Retained
Earnings
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2005
|
|
|
3,702,005
|
|
$
|
37
|
|
$
|
7,641
|
|
$
|
|
|
$
|
8,044
|
|
$
|
15,722
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax benefit from disqualifying disposition
|
|
|
|
|
|
|
|
|
113
|
|
|
|
|
|
|
|
|
113
|
|
Common stock issued for options exercised
|
|
|
59,799
|
|
|
1
|
|
|
199
|
|
|
|
|
|
|
|
|
200
|
|
Stock option expense
|
|
|
|
|
|
|
|
|
177
|
|
|
|
|
|
|
|
|
177
|
|
Foreign currency translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
16
|
|
|
|
|
|
16
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,105
|
|
|
3,105
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,121
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2006
|
|
|
3,761,804
|
|
|
38
|
|
|
8,130
|
|
|
16
|
|
|
11,149
|
|
|
19,333
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax benefit from disqualifying disposition
|
|
|
|
|
|
|
|
|
112
|
|
|
|
|
|
|
|
|
112
|
|
Common stock issued for options exercised
|
|
|
18,800
|
|
|
|
|
|
34
|
|
|
|
|
|
|
|
|
34
|
|
Common stock issued in EIS asset purchase
|
|
|
147,202
|
|
|
1
|
|
|
2,534
|
|
|
|
|
|
|
|
|
2,535
|
|
Stock option expense
|
|
|
|
|
|
|
|
|
194
|
|
|
|
|
|
|
|
|
194
|
|
Foreign currency translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
145
|
|
|
|
|
|
145
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
872
|
|
|
872
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2007
|
|
|
3,927,806
|
|
|
39
|
|
|
11,004
|
|
|
161
|
|
|
12,021
|
|
|
23,225
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax benefit from disqualifying disposition
|
|
|
|
|
|
|
|
|
137
|
|
|
|
|
|
|
|
|
137
|
|
Common stock issued for options exercised
|
|
|
59,000
|
|
|
1
|
|
|
194
|
|
|
|
|
|
|
|
|
195
|
|
Common stock retired
|
|
|
(1,587
|
)
|
|
|
|
|
(22
|
)
|
|
|
|
|
|
|
|
(22
|
)
|
Stock option expense
|
|
|
|
|
|
|
|
|
339
|
|
|
|
|
|
|
|
|
339
|
|
Foreign currency translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
(308
|
)
|
|
|
|
|
(308
|
)
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,964
|
|
|
4,964
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,656
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2008
|
|
|
3,985,219
|
|
$
|
40
|
|
$
|
11,652
|
|
$
|
(147
|
)
|
$
|
16,985
|
|
$
|
28,530
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to the consolidated
financial statements.
32
Notes to Consolidated Financial Statements
December 31,
2008
|
|
1.
|
DESCRIPTION
OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
|
DESCRIPTION OF
BUSINESS
Image
Sensing Systems, Inc. (referred to herein as we, the Company, us and our) develops and
markets software based computer enabled detection products for use in advanced
traffic management systems and traffic data collection. We sell our products
primarily to distributors and also receive royalties under a license agreement
with a manufacturer/distributor for one of our product lines. Our products are
used primarily by governmental entities.
PRINCIPLES OF
CONSOLIDATION
The
consolidated financial statements include the accounts of Image Sensing
Systems, Inc. and its wholly-owned subsidiaries: Flow Traffic Ltd. (Flow
Traffic) located in Hong Kong, Image Sensing Systems Europe Ltd. (ISS/Europe),
located in the United Kingdom, Image Sensing Systems Europe Limited SP.Z.O.O.
(ISS/Poland), located in Poland and ISS Image Sensing Systems Canada Ltd
(ISS/Canada) and ISS Canada Sales Corp. (Canada Sales Corp.), both located in
Ontario, Canada. All significant inter-company transactions and accounts have
been eliminated in consolidation.
REVENUE
RECOGNITION
Royalty
income is recognized based upon a monthly royalty report provided to us by
Econolite Control Products, Inc. (Econolite), a licensee that sells one of our
products in North America, the Caribbean and Latin America. The royalty is
calculated using a profit sharing model where we split evenly the gross profit
on sales of our Autoscope product made by Econolite. The royalty report is
prepared by Econolite based on its sales of licensed products delivered and accepted
by its customers. Payment of royalties is due after Econolite has received
payment from its customer.
We
recognize revenue from international and North American sales at the time of
shipment or delivery, the selling price is fixed or determinable and collection
of payment is reasonably assured. We record provisions against sales revenue
for estimated returns and allowances in the period when the related revenue is
recorded based on historical sales returns and changes in end user demand.
CASH AND CASH
EQUIVALENTS
We
consider all highly liquid investments with an original maturity of three
months or less to be cash equivalents. Cash equivalents consist of money market
funds. Cash located in foreign banks was $1.0 million and $1.2 million at
December 31, 2008 and 2007, respectively.
INVESTMENTS
Investments
and marketable securities that do not qualify as cash equivalents have been
designated as trading at December 31, 2008 in accordance with Statement of
Financial Accounting Standard (SFAS) No. 115,
Accounting for Certain Investments in
Debt and Equity Securities
. Prior to our fourth fiscal quarter of
2008, we designated investments as available-for-sale. The change in
designation was made in relation to our acceptance of a settlement offer
related to auction rate securities in November 2008 (see Note 2). Trading
securities are carried at fair value, with any unrealized gains or losses
reported as investment income/loss on the statement of income.
Available-for-sale securities are carried at fair value, with unrealized gains
and losses reported in Accumulated other comprehensive income, a component of
shareholders equity.
ACCOUNTS
RECEIVABLE
We
grant credit to customers in the normal course of business and generally do not
require collateral. Management performs on-going credit evaluations of
customers. We have fixed payment terms with each of our customers that vary in
length. Accounts receivable that are outstanding longer than the fixed payment
term are considered past due. We determine an allowance for doubtful accounts
by considering a number of factors, including any on-going technical problems
with product in the field, the length of time trade accounts receivable are
past due, our previous loss history with the customer and the customers
current ability to pay. We write-off accounts receivable when they become
uncollectible, and payments subsequently received on such receivables are
credited to the allowance for doubtful accounts.
33
INVENTORIES
Inventories
are primarily electronic components and finished goods and are valued at the
lower of cost or market on the first-in, first-out (FIFO) method. Adjustments
to record inventory at the lower of cost or market are charged to cost of
revenue in the period incurred and totaled $211,000, $253,000 and $70,000 for
the years ended December 31, 2008, 2007 and 2006, respectively.
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 are
provided for temporary differences between the carrying amounts of assets and
liabilities for financial reporting purposes and amounts used for income tax
purposes. Deferred taxes are reduced by a valuation allowance when, in the
opinion of management, it is more likely than not that some portion or the
entire deferred tax asset will not be realized. Deferred tax assets and
liabilities are adjusted for the effects of changes in tax laws and rates on
the date of the enactment. We recognize tax benefits when we believe the benefit
is more likely than not to be sustained upon review from the relevant
authorities. We recognize penalties and interest expense related to
unrecognized tax benefits in income tax expense.
FAIR VALUE
MEASUREMENTS
SFAS
No. 157,
Fair Value Measurement
,
defines the meaning of the term fair value and provides a consistent
framework intended to reduce inconsistency and increase comparability in fair
value measurements for many different types of assets or liabilities.
Generally, the new framework requires fair value to be determined
on the exchange price which would be received for an asset or paid to transfer
a liability (an exit price) in the principal or most advantageous market for
the asset or liability in an orderly transaction between market participants.
SFAS No. 157 requires disclosure by each major asset and liability category
measured at fair value on either a recurring or nonrecurring basis and
establishes a three-tier fair value hierarchy which prioritizes the inputs used
in fair value measurements. The three-tier hierarchy for inputs used in
measuring fair value is as follows:
|
|
|
|
Level 1.
|
Observable
inputs such as quoted prices in active markets;
|
|
|
|
|
Level 2.
|
Inputs,
other than the quoted prices in active markets, that are observable either
directly or indirectly; and
|
|
|
|
|
Level 3.
|
Unobservable
inputs in which there is little or no market data, which require the
reporting entity to develop its own assumptions.
|
INTANGIBLE
ASSETS
Intangible
assets are stated at their estimated value at the time of acquisition.
Amortization is computed by the straight-line method over a five to eight-year
period for financial reporting purposes based on their estimated useful lives.
GOODWILL
Goodwill
is not amortized but is tested for impairment annually or whenever an
impairment indicator arises. Our goodwill related to our Flow Traffic
subsidiary is tested for impairment on December 31 of each year. EIS asset
purchase related goodwill is tested October 1 of each year. We also reconcile
the fair value of our business segments to market capitalization on December 31
or interim periods when our consolidated shareholders equity is similar to or
exceeds our market capitalization.
Because our
market capitalization was similar to or less than or consolidated shareholders
equity in and around December 31, 2008, we also reconciled our market value to
the estimated fair value of our business segments on a combined basis to ensure
our determinations of fair value at the business segment level were reasonable.
The fair value of the combined business was estimated using a discounted cash
flow analysis. The market value was determined by multiplying the sum of common
shares outstanding at December 31, 2008 and outstanding in the money stock
options (as reduced using the treasury stock method), by our average share
price in December 2008, in total, our market capitalization, and adding to it a
control premium. In most industries, including ours, an acquiring entity typically
is willing to pay more for a controlling interest than an investor would pay
for a fractional, noncontrolling ownership interest. For purposes of this
analysis, we used a control premium of 30%. To determine the applicable control
premium, we observed data derived from acquisitions and trading multiples of
companies in our industry, in addition to overall data for companies operating
in both the software and manufacturing industries. We have concluded that the
control premium is reasonable and supports the differential between our market
capitalization and the estimated fair value of our combined business. At
December 31, 2007 and 2006, our market capitalization exceeded our shareholders
equity by a significant margin, and the reconciliation process described above was not performed for those years. Based upon the
results of our testing, we determined that no impairment of goodwill existed at
December 31, 2008, 2007 and 2006.
34
IMPAIRMENT OF
LONG-LIVED ASSETS
Long-lived
assets are reviewed for impairment when indicators of impairment are present.
Impairment is recognized when the undiscounted cash flows estimated to be
generated by those assets are less than the assets carrying amount. No such
losses were recorded during the years ended December 31, 2008, 2007 or 2006,
respectively.
USE OF
ESTIMATES
Preparing
financial statements in conformity with accounting principles generally
accepted in the United States of America requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the consolidated
financial statements and reported amounts of revenues and expenses during the
reporting periods. Actual results could differ from the estimates.
RESEARCH AND
DEVELOPMENT
Research
and development costs are charged to operations in the period incurred.
WARRANTY
We
provide a standard two-year warranty on international and North American
product sales. Warranty expense was $153,000, $44,000, and $190,000 for the
years ended December 31, 2008, 2007 and 2006, respectively, and our warranty
reserve was $217,000 and $157,000 at December 31, 2008 and 2007, respectively.
ADVERTISING
Advertising
costs are charged to operations in the period incurred and totaled $196,000,
$247,000 and $129,000 for the years ended December 31, 2008, 2007 and 2006,
respectively.
FOREIGN
CURRENCY
All
assets and liabilities of Flow Traffic, ISS/Europe, ISS/Poland, ISS/Canada and
Canada Sales Corp. are translated from their respective foreign currency to
United States dollars at period-end rates of exchange, while the statement of
income is translated at the average exchange rates during the period. Accumulated
translation adjustments are shown in equity under Accumulated other
comprehensive income/loss.
NET INCOME PER SHARE
Our basic
net income per share amounts have been computed by dividing net income by the
weighted average number of outstanding common shares. Diluted net income per
share amounts have been computed by dividing net income by the weighted average
number of outstanding common shares and common share equivalents relating to
stock options, when dilutive.
For the
years ended December 31, 2008, 2007 and 2006, respectively, 58,000, 92,000 and
166,000 common share equivalents were included in the computation of diluted
net income per share.
At December
31, 2008 and 2007, the exercise prices of 253,500 and 66,000 outstanding
options, respectively, were greater than the average market price of the common
shares during the period and were excluded from the calculation of diluted net
income per share. At December 31, 2006, no outstanding options
were excluded.
STOCK OPTIONS
In 2006,
the Company adopted SFAS No. 123R,
Share-Based Payment
(SFAS No. 123R). Prior to 2006, stock options were accounted for under the
intrinsic
value method as prescribed by APB 25. No stock-based employee compensation cost
was reflected in net income, except for costs related to performance based
options, because all options granted had an exercise price equal to the market
value of the underlying common stock on the date of grant. We use the
straight-line attribute method to recognize expense for unvested options. The
amount of share-based compensation recognized during a period is based on the
value of the awards that are ultimately expected to vest.
Unrecognized
compensation costs are $774,574 at December 31, 2008, with a weighted average
remaining life of 2.5 years.
35
NEW ACCOUNTING PRONOUNCEMENTS
In
September 2006, the Financial Accounting Standards Board (FASB) issued SFAS No.
157,
Fair
Value Measurements
. SFAS No. 157 defines fair value, establishes a
framework for measuring fair value and expands disclosures about fair value
measurement but does not require any new fair value measurements. SFAS No. 157
is effective for financial statements issued for fiscal years beginning after
November 15, 2007 and interim periods within those fiscal years. However, on
February 12, 2008, the FASB issued proposed FASB Staff Position (FSP) FAS 157-2,
which delayed the effective date of SFAS No. 157 for all nonfinancial assets
and nonfinancial liabilities, except those that are recognized or disclosed at
fair value in the financial statements on a recurring basis (at least
annually). This FSP partially defers the effective date of SFAS No. 157 to
fiscal years beginning after November 15, 2008 and interim periods within
those fiscal years for items within the scope of this FSP. Effective for 2008,
we have adopted SFAS No. 157 except as it applies to those nonfinancial assets
and nonfinancial liabilities as noted in proposed FSP FAS 157-2. The partial
adoption of SFAS No. 157 impacted our disclosures surrounding our restricted
long-term investments. The adoption of the remaining portions of SFAS No. 157
is not expected to have a material impact on our financial statements.
On February
15, 2007, the FASB issued SFAS No. 159,
The Fair Value Option for Financial Assets and
Financial Liabilities Including an Amendment of FASB Statement No. 115
.
This standard permits an entity to choose to measure many financial instruments
and certain other items at fair value. The fair value option established by
SFAS No. 159 permits all entities to choose to measure eligible items at fair
value at specified election dates. SFAS No. 159 is effective for the Company as
of January 1, 2008. The initial impact of adopting this pronouncement had no
effect on our consolidated financial statements because we did not elect the
fair value option for any financial assets or liabilities at the beginning of
2008. During the year, SFAS No. 159 impacted our accounting and disclosure of
the put option received as part of our auction rate securities settlement as
further described in Note 2.
In December
2007, the FASB issued SFAS No. 141 (Revised 2007),
Business Combinations
. SFAS
No. 141(R) will significantly change the accounting for business combinations.
Under SFAS No. 141(R), an acquiring entity will be required to recognize all
the assets acquired and liabilities assumed in a transaction at the
acquisition-date fair value with limited exceptions. SFAS No. 141(R) will
change the accounting treatment for certain specific items. SFAS No. 141(R)
also includes a substantial number of new disclosure requirements. SFAS No.
141(R) applies prospectively to business combinations for which the acquisition
date is on or after the beginning of the first annual reporting period
beginning on or after December 15, 2008. Earlier adoption is prohibited. SFAS
No. 141(R) will impact us if we complete an acquisition after the effective
date.
In December
2007, the FASB issued SFAS No. 160,
Noncontrolling Interests in Consolidated Financial
Statements An Amendment of ARB No. 51
. SFAS No. 160 establishes
new accounting and reporting standards for the noncontrolling interest in a
subsidiary and for the deconsolidation of a subsidiary. SFAS No. 160 also
includes expanded disclosure requirements regarding the interests of the parent
and its noncontrolling interest. SFAS No. 160 is effective for fiscal years,
and interim periods with those fiscal years, beginning on or after December 15,
2008. Earlier adoption is prohibited. We are currently assessing the potential
impact that the adoption of SFAS No. 160 will have on our financial statements.
In March
2008, the FASB issued SFAS No. 161,
Disclosures about Derivative Instruments and Hedging
Activities an amendment of FASB Statement No. 133
. SFAS No. 161
requires enhanced disclosures about an entitys derivative and hedging
activities and is effective for financial statements issued for fiscal years
beginning after November 15, 2008. We are currently assessing the impact of
SFAS No. 161 on our disclosures.
In April
2008, the FASB issued FSP FAS 142-3,
Determination of the Useful Life of Intangible Assets
,
to provide guidance for determining the useful life of recognized intangible
assets and to improve consistency between the period of expected cash flows
used to measure the fair value of a recognized intangible asset and the useful
life of the intangible asset as determined under SFAS No. 142,
Goodwill and
Other Intangible Assets
. The FSP requires that an entity consider
its own historical experience in renewing or extending similar arrangements.
However, the entity must adjust that experience based on entity-specific
factors under FAS No. 142. FSP FAS 142-3 is effective for fiscal years and
interim periods that begin after November 15, 2008. The Company intends to
adopt FSP FAS 142-3 effective January 1, 2009 and to apply its provisions
prospectively to recognized intangible assets acquired after that date. The
Company has periodically purchased recognized intangible assets and is in the
process of evaluating the impact that the adoption of FSP FAS 142-3 will have
on its financial statements.
In May
2008, FASB issued SFAS No. 162,
The Hierarchy of Generally Accepted Accounting
Principles
. SFAS No. 162 identifies the sources of accounting
principles and the framework for selecting the principles to be used in the
preparation of financial statements of nongovernmental entities that are
presented in conformity with generally accepted accounting principles. SFAS No.
162 is effective 60 days following the SECs approval of the Public Company
Accounting Oversight Board amendments to AU Section 411,
The Meaning of Present Fairly in
Conformity With Generally Accepted Accounting Principles
. We do not
anticipate that the adoption of SFAS No. 162 will materially impact the
Company.
36
RECLASSIFICATIONS
Certain
prior year amounts have been reclassified to conform to the current year
presentation.
At December
31, 2008, we held $4.0 million (par value) of investments comprised of auction
rate securities, or ARS. In January 2009, our ARS were purchased by our
broker/dealer at par.
The balance
of investments consists of the combination of the fair value of ARS as
determined under SFAS No. 157 and the fair value of the settlement rights that
we received from the broker/dealer under a settlement agreement reached in
November 2008. The settlement rights allowed us to put the ARS to the broker/dealer at par between the dates of January 2, 2009 and January 2,
2011.
The ARS was
valued at $3.3 million at December 31, 2008 based on an internal valuation of
the investment. As no level 1 or 2 valuation inputs were present, we determined
the valuation based upon a combination of level 3 valuation inputs, including
broker/dealer estimates, secondary market quotations of similar illiquid
securities, and a discounted cash flow estimate comparing the ARS to long-term
federal securities. The changing of the ARS status to trading resulted in the
reclassification of the unrealized loss shown under accumulated other
comprehensive income (loss) of our consolidated balance sheet to the
consolidated statement of operations. We adopted SFAS No. 159,
The Fair
Value Option for Financial Assets and Financial Liabilities
, in 2008
and selected the fair value option for the settlement right in our fiscal
quarter ending December 31, 2008. Management determined that the fair value option
was appropriate for this unusual transaction and that it reflected the most accurate
substance of the settlement right offering in conjunction with the ARS
valuation. The settlement right was valued at $700,000 at December 31, 2008 and
was also determined internally using a discounted cash flow analysis factoring
in a risk discount on the broker/dealers likelihood of meeting the obligation.
The valuation loss on the ARS and investment income from receiving the
settlement rights are recorded in the other income, net line of the
consolidated statements of income.
Proceeds
from maturities and sales of investments totaled $3.4 million, $4.1 million and
$ - for the years ended December 31, 2008, 2007 and 2006, respectively. As
described above, in the year ended December 31, 2008, we realized a $700,000
loss on our ARS and a $700,000 gain on the ARS settlement rights. There were no
realized gains or losses related to sales during the years ended December 31,
2007 and 2006.
|
|
3.
|
INVENTORIES
|
|
|
|
Inventories,
net of reserves, consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
|
|
|
|
2008
|
|
2007
|
|
|
|
|
|
Electronic
components
|
|
$
|
1,097
|
|
$
|
1,092
|
|
Finished
goods
|
|
|
511
|
|
|
487
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,608
|
|
$
|
1,579
|
|
|
|
|
|
|
|
|
|
On
December 6, 2007, we purchased certain assets of EIS Electronic Integrated
Systems, Inc. (EIS), including its RTMS radar product line. The purchase price
was $10.9 million in cash plus 147,202 shares of our common stock valued at
approximately $2.5 million. We borrowed $5.0 million from a bank to partially
finance the purchase. In addition to the purchase price, we incurred $506,000
in direct acquisition costs. As part of the purchase agreement, the sellers are
eligible to receive an earn-out based on the performance of the assets for the
next three years. Earn-outs will be calculated and paid annually. Based on
target achievement, the sellers would receive $2.0 million annually or a total
of $6.0 million. Superior performance of the assets could lead to an earn-out
in excess of $2 million, as the earn-out is not capped.
37
Following
the purchase, the former operations of EIS were split into two subsidiaries: ISS/Canada
and Canada Sales Corp. The purchase price plus direct acquisition costs were
allocated on the basis of estimated fair value at the date of the purchase. The
purchase price allocation is as follows (in thousands):
|
|
|
|
|
Purchase
price including direct acquisition costs
|
|
$
|
13,941
|
|
Less:
|
|
|
|
|
Fixed assets
|
|
|
(300
|
)
|
In-process
research and development expense
|
|
|
(4,500
|
)
|
Developed
technology
|
|
|
(3,900
|
)
|
Trade names
|
|
|
(1,200
|
)
|
Other
intangibles
|
|
|
(200
|
)
|
|
|
|
|
|
Goodwill
|
|
$
|
3,841
|
|
|
|
|
|
|
Earn-out
payments related to the EIS asset purchase will be recorded as additional
goodwill when earned. In 2008, the sellers earned an earn-out of $1.2 million,
which is payable in March 2009.
Prior
to the asset purchase, EIS was engaged in research and development activity
into its next generation product line, known internally as G4. G4 research
activity began in 2006. Because G4 had not yet reached technological
feasibility, the value of the G4 program was expensed as in-process research
and development at the date of transaction. As of the date of the EIS asset
purchase, the program was estimated to be between 50% and 75% complete. G4,
when released, is expected to provide new features and functionality and avoid
existing patent claims of competitors based upon unique technology. The value
of the G4 program was appraised utilizing a multi-period excess earnings cash
flow analysis based upon facts and circumstances surrounding the in-process
development activities and the expected economic benefits to be derived from
the resulting products. Key assumptions for the analysis include revenue from
G4 products beginning in mid-2008, achievement of an efficient cost to
manufacture and a risk adjusted discount rate of 17.0% on cash flows. At the
date of acquisition, EIS was actively selling its G3 product, which has
provided the majority of its revenues in the last two years. If G4 is not
commercialized according to plan, our financial projections may not be
attained.
EIS
was named in a U.S. lawsuit in 2006 for infringement of a patent. On October
31, 2007, the courts entered judgment that EIS had not infringed on the patent.
The plaintiff appealed the decision early in 2008, and the case currently
resides in the appellate court. Under the EIS asset purchase agreement, EIS is
required to continue to defend this case. In addition, EIS must indemnify us
for all expenses, claims or judgments related to this lawsuit up to the amount
of the purchase price, including any earn-out payments. Management believes
that the ultimate outcome of this legal action will not have a material adverse
effect on our financial statements.
In
conjunction with the EIS asset purchase, $600,000 in cash and 35,328 shares of
stock, with a value of approximately $600,000, issued in connection with the
transaction were placed in escrow to secure potential indemnification
obligations. Any amounts remaining in escrow on December 6, 2012 will then be
released.
The
results of ISS/Canada and Canada Sales Corp. operations are included in the
accompanying financial statements since the date of the EIS asset purchase. The
following pro forma summary presents the results of operations as if the EIS
asset purchase had occurred on January 1, 2006. EIS fiscal year ended on
September 30. The table below includes our results for the years ended December
31, 2007 and 2006, respectively, and EIS for the years ended September 30, 2007
and 2006, respectively. During the years ended September 30, 2007 and 2006,
respectively, EIS incurred $409,000 and $2.6 million of legal fees to defend
the patent infringement lawsuit.
The
pro forma results are not necessarily indicative of the results that would have
been achieved had the EIS asset purchase taken place on that date (in
thousands, except per share amounts):
|
|
|
|
|
|
|
|
|
|
December
31,
|
|
|
|
|
|
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
Total
revenue
|
|
$
|
23,825
|
|
$
|
21,187
|
|
Net income
(loss)
|
|
|
3,897
|
|
|
(2,170
|
)
|
|
|
|
|
|
|
|
|
Net income
(loss) per share:
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.99
|
|
$
|
(0.56
|
)
|
Diluted
|
|
|
0.97
|
|
|
(0.56
|
)
|
38
|
|
5.
|
GOODWILL AND INTANGIBLE ASSETS
|
Goodwill
consists of $1.1 million related to our acquisition of Flow Traffic and $5.0
million related to the EIS asset purchase, consisting of $3.8 million recorded
at the time of the purchase and an additional $1.2 million recorded in 2008 in
conjunction with earn-out payments due.
Intangible
assets consisted of the following (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
December 31, 2008
|
|
December 31, 2007
|
|
|
|
|
|
|
|
Developed technology (8 year life)
|
|
$
|
3,900
|
|
$
|
3,900
|
|
Trade names (5 year life)
|
|
|
1,200
|
|
|
1,200
|
|
Other intangibles (5 year life)
|
|
|
200
|
|
|
200
|
|
Less: Accumulated amortization
|
|
|
(819
|
)
|
|
(51
|
)
|
|
|
|
|
|
|
|
|
Total identifiable
intangible assets, net
|
|
$
|
4,481
|
|
$
|
5,249
|
|
|
|
|
|
|
|
|
|
We expect
to recognize amortization expense for the intangible assets in the above table
of $768,000 in each of our years ending December 31, 2009, 2010 and 2011 and of
$749,000 in 2012. The weighted average amortization period remaining for
intangible assets is 6.2 years. Goodwill and intangible assets related to the
EIS asset purchase are deductible for tax purposes over 15 years.
We
have a revolving line of credit and a term loan with our bank. These credit agreements were entered
into on May 1, 2008 and replaced all prior bank agreements, including the
repayment of loans under the previous agreements. Both agreements additionally
include the pledge of our ARS investment.
The
revolving line of credit agreement provides up to $5.0 million in short-term
borrowings at the banks prime rate (effective rate of 4.66% at December 31,
2008), expiring May 1, 2011. Any loans are secured by inventories, accounts
receivable and equipment, and the bank has the right of setoff against
checking, savings and other accounts. We had $2.0 million of outstanding
borrowings under this credit agreement at December 31, 2008, all of which are
due May 1, 2011.
The
term loan initially provides up to $3.0 million at a fixed rate of 6.75%, expiring
May 1, 2011. The loan is secured by inventories, accounts receivable and
equipment, and the bank has the right of setoff against checking, savings and
other accounts. At December 31, 2008, we had $1.75 million outstanding on this
loan. The loan is repayable in equal monthly installments, of which $1.0 million
is due in 2009 and $750,000 is due in 2010.
Subsequent
to year end, we fully repaid the term loan and the revolving line of credit and
were released from our pledge of investments.
We
rent office space and equipment under operating lease agreements expiring at
various dates through December 2010. The leases provide for monthly payments of
$44,000, and we are responsible for our proportionate share of increases in
operating expenses that exceed a base rent factor. Rent expense amounted to
$555,000 in 2008, $319,000 in 2007, and $261,000 in 2006.
Future
minimum annual lease payments under noncancelable operating leases for the
years ending December 31, 2009 and 2010 are $236,000 and $156,000,
respectively.
39
Our
deferred tax assets (liabilities) are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
December
31
|
|
|
|
|
|
|
|
2008
|
|
2007
|
|
|
|
|
|
|
|
Current
deferred tax assets (liabilities):
|
|
|
|
|
|
|
|
Accrued compensation
|
|
$
|
40
|
|
$
|
25
|
|
Prepaid expenses
|
|
|
(43
|
)
|
|
(39
|
)
|
Inventory reserves
|
|
|
165
|
|
|
118
|
|
Stock option expense (NQO)
|
|
|
90
|
|
|
36
|
|
Other
|
|
|
124
|
|
|
2
|
|
Foreign net operating loss carryforwards
|
|
|
9
|
|
|
86
|
|
Less valuation allowance
|
|
|
(9
|
)
|
|
(86
|
)
|
|
|
|
|
|
|
|
|
|
|
|
376
|
|
|
142
|
|
Non-current
deferred tax assets (liabilities):
|
|
|
|
|
|
|
|
Intangible asset amortization
|
|
|
1,611
|
|
|
1,684
|
|
Other
|
|
|
(36
|
)
|
|
(8
|
)
|
|
|
|
|
|
|
|
|
|
|
|
1,575
|
|
|
1,676
|
|
|
|
|
|
|
|
|
|
Net deferred tax assets
|
|
$
|
1,951
|
|
$
|
1,818
|
|
|
|
|
|
|
|
|
|
Deferred
tax assets have been offset by a valuation allowance as deemed necessary based
on our estimates of future sources of taxable income and the expected timing of
temporary difference reversals.
There
is $2.4 million, $913,000 and $449,000 in undistributed earnings of our
wholly-owned foreign subsidiaries at December 31, 2008, 2007 and 2006,
respectively. We have not provided any additional federal or state income taxes
or foreign withholding taxes on the undistributed earnings, as such earnings
have been indefinitely reinvested in the business as defined in SFAS
No. 109,
Accounting for Income Taxes
and Accounting Principles Board
Opinion 23.
We
realize an income tax benefit from the exercise or early disposition of certain
stock options. This benefit results in a decrease in current income taxes
payable and an increase in additional paid-in capital.
The
components of income tax expense (benefit) are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
Years
Ended December 31
|
|
|
|
|
|
|
|
2008
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
|
|
Current:
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
1,738
|
|
$
|
1,318
|
|
$
|
1,039
|
|
State
|
|
|
38
|
|
|
20
|
|
|
49
|
|
Foreign
|
|
|
564
|
|
|
116
|
|
|
57
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,340
|
|
|
1,454
|
|
|
1,145
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred:
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
(59
|
)
|
|
(1,638
|
)
|
|
(173
|
)
|
State
|
|
|
(23
|
)
|
|
(15
|
)
|
|
(30
|
)
|
Foreign
|
|
|
(51
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(133
|
)
|
|
(1,653
|
)
|
|
(203
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Total income
tax expense (benefit)
|
|
$
|
2,207
|
|
$
|
(199
|
)
|
$
|
942
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
before taxes for the foreign operations were $2.1 million, $509,000 and
$236,000 for the years ended December 31, 2008, 2007 and 2006.
40
A
reconciliation of income taxes to the statutory federal rate is as follows (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
December
31
|
|
|
|
|
|
|
|
2008
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
|
|
Federal tax statutory rate
|
|
$
|
2,438
|
|
$
|
225
|
|
$
|
1,382
|
|
State taxes, net of federal benefit
|
|
|
10
|
|
|
2
|
|
|
13
|
|
Tax exempt interest
|
|
|
|
|
|
(146
|
)
|
|
(124
|
)
|
Research and development tax credits
|
|
|
(120
|
)
|
|
(120
|
)
|
|
(135
|
)
|
Domestic production activity deduction
|
|
|
(83
|
)
|
|
(61
|
)
|
|
(39
|
)
|
Effect of lower rates on foreign income
|
|
|
(125
|
)
|
|
(57
|
)
|
|
(23
|
)
|
Use of foreign loss carryforwards
|
|
|
(77
|
)
|
|
|
|
|
|
|
Stock option expense
|
|
|
66
|
|
|
32
|
|
|
60
|
|
Adjustment of prior year tax credits and
refunds
|
|
|
(50
|
)
|
|
(26
|
)
|
|
(202
|
)
|
FIN 48 adjustments
|
|
|
96
|
|
|
50
|
|
|
|
|
Other
|
|
|
52
|
|
|
(98
|
)
|
|
10
|
|
|
|
|
|
|
|
|
|
|
|
|
Income taxes
|
|
$
|
2,207
|
|
$
|
(199
|
)
|
$
|
942
|
|
|
|
|
|
|
|
|
|
|
|
|
In
July 2006, the FASB issued Interpretation No. 48,
Accounting
for Uncertainty in Income Taxesan Interpretation of FASB Statement
No. 109
, (FIN 48) which clarifies what criteria must be met
prior to recognition of the financial statement benefit of a position taken in
a tax return. FIN 48 also provides guidance on derecognition of tax benefits,
classification on the balance sheet, interest and penalties, accounting in
interim periods, disclosure and transition. We adopted FIN 48 effective
January 1, 2007. As a result of the implementation of FIN 48, we did not
change our tax liability for uncertain tax benefits. A reconciliation of the
beginning and ending amount of the tax liability for uncertain tax benefits is
as follows (in thousands):
|
|
|
|
|
Balance at January 1, 2007
|
|
$
|
100
|
|
Additions for current year
tax positions
|
|
|
50
|
|
Reductions
|
|
|
|
|
|
|
|
|
|
Balance at December 31,
2007
|
|
|
150
|
|
Additions for current year
tax positions
|
|
|
96
|
|
Reductions
|
|
|
|
|
|
|
|
|
|
Balance at December 31,
2008
|
|
$
|
246
|
|
|
|
|
|
|
We
are subject to income taxes in the U.S. federal jurisdiction and various state
and foreign jurisdictions. Tax regulations within each jurisdiction are subject
to the interpretation of the related tax laws and require significant judgment
to apply. Generally, we are subject to U.S. federal, state, local and foreign
tax examinations by taxing authorities for years after the fiscal year ended
December 31, 2004.
The
United States patent for some aspects of the technology underlying our
Autoscope system was issued in 1989 to the University of Minnesota. We had an
exclusive worldwide license from the University of Minnesota for that
technology and paid royalties to the University of Minnesota in exchange for
such license. Our exclusive license, and all related royalty obligations,
expired July 2006. Royalty expense under the agreement was $220,000 in the year
ended December 31, 2006.
We
have sublicensed the right to manufacture and market the Autoscope technology
in North America, the Caribbean and Latin America to Econolite and receive
royalties from Econolite on sales of the Autoscope system in those territories.
We may terminate our agreement with Econolite if a minimum annual sales level
is not met or Econolite fails to make royalty payments as required by the
agreement. The agreements initial term as amended was 20 years, ending in
2011. In 2008, we extended the agreement an additional 20 years, unless
terminated by either party upon three years notice.
We
recognized royalty income from this agreement of $13.3 million, $10.7 million
and $10.1 million in 2008, 2007 and 2006, respectively.
|
|
10.
|
REVENUE FROM FOREIGN COUNTRIES
|
We
derived the following percentages of our net revenues from the following
geographic regions:
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
|
|
Asia Pacific
|
|
|
12%
|
|
|
11%
|
|
|
10%
|
|
Europe
|
|
|
16%
|
|
|
16%
|
|
|
13%
|
|
North
America
|
|
|
72%
|
|
|
73%
|
|
|
77%
|
|
41
Revenue
originating from Poland was 11% of our revenue in the year ended December 31,
2007. The aggregate net book value of long-lived assets held outside of
the United States was $258,000 and $356,000 at December 31, 2008 and 2007,
respectively.
|
|
11.
|
SIGNIFICANT
CUSTOMERS AND CONCENTRATION OF CREDIT RISK
|
Royalty
income from Econolite comprised 50%, 71% and 77% of revenue in the years ended
December 31, 2008, 2007 and 2006, respectively. Accounts receivable from
Econolite were $2.9 million and $3.3 million at December 31, 2008 and 2007,
respectively. One international customer comprised 13% of accounts receivable
at December 31, 2008, and a separate international customer comprised 15% of
accounts receivable at December 31, 2007.
Substantially
all of our employees in the United States are eligible to 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 and we may
make discretionary contributions to the plan. Flow Traffic is obligated to
contribute to an employee pension plan. The Company made contributions totaling
$97,000, $89,000 and $87,000 to the plans for 2008, 2007 and 2006,
respectively.
In
February 1995 and April 2005, we adopted the 1995 Long-Term Incentive and Stock
Option Plan (the 1995 Plan) and the 2005 Stock Incentive Plan (the 2005 Plan),
respectively, which provide for the granting of incentive (ISO) and
non-qualified (NQO) stock options, stock appreciation rights, restricted stock
awards and performance awards to our officers, directors, employees, consultants
and independent contractors. The 1995 Plan terminated in February 2005. Options
granted under the Plans generally vest over three to five years based on
service and have a contractual term of six to ten years and are amortized to
expense on a straight-line basis. The following table summarizes stock option
activity for 2008 and 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Plan
Options
Available
For Grant
|
|
Plan Options
Outstanding
|
|
Non-Plan
Options
Outstanding
|
|
Weighted
Average
Exercise Price
Per Share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ISO
|
|
NQO
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at
December 31, 2006
|
|
|
263,200
|
|
|
70,700
|
|
|
102,333
|
|
|
42,000
|
|
$
|
3.38
|
|
Granted
|
|
|
(141,000
|
)
|
|
68,088
|
|
|
72,912
|
|
|
|
|
|
15.34
|
|
Exercised
|
|
|
|
|
|
(18,800
|
)
|
|
|
|
|
|
|
|
2.12
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at
December 31, 2007
|
|
|
122,200
|
|
|
119,988
|
|
|
175,245
|
|
|
42,000
|
|
$
|
8.47
|
|
Granted
|
|
|
(95,500
|
)
|
|
48,130
|
|
|
47,370
|
|
|
|
|
|
13.58
|
|
Exercised
|
|
|
|
|
|
(13,000
|
)
|
|
(10,000
|
)
|
|
(36,000
|
)
|
|
3.31
|
|
Plan addition
|
|
|
138,800
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at
December 31, 2008
|
|
|
165,500
|
|
|
155,118
|
|
|
212,615
|
|
|
6,000
|
|
$
|
10.59
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
following table summarizes information about the stock options outstanding at
December 31, 2008.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding
|
|
Options Exercisable
|
|
|
|
|
|
|
|
Range of
Exercise Price
|
|
Number
Outstanding
|
|
Weighted
Average
Remaining
Contractual
Life
|
|
Weighted
Average
Exercise
Price
|
|
Aggregate
Intrinsic
Value
|
|
Number
Exercisable
|
|
Weighted
Average
Exercise
Price
|
|
Aggregate
Intrinsic
Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$1.30-1.99
|
|
|
59,100
|
|
|
3.2 years
|
|
$
|
1.34
|
|
$
|
408,736
|
|
|
59,100
|
|
$
|
1.34
|
|
$
|
408,736
|
|
2.00-2.99
|
|
|
16,200
|
|
|
3.2 years
|
|
|
2.35
|
|
|
95,742
|
|
|
16,200
|
|
|
2.35
|
|
|
95,742
|
|
3.00-3.99
|
|
|
38,933
|
|
|
3.7 years
|
|
|
3.15
|
|
|
199,083
|
|
|
38,933
|
|
|
3.15
|
|
|
199,083
|
|
7.00-7.93
|
|
|
6,000
|
|
|
1.3 years
|
|
|
7.50
|
|
|
4,560
|
|
|
6,000
|
|
|
7.50
|
|
|
4,560
|
|
12.00-12.99
|
|
|
62,000
|
|
|
6.0 years
|
|
|
12.44
|
|
|
|
|
|
12,000
|
|
|
12.61
|
|
|
|
|
14.00-14.99
|
|
|
105,500
|
|
|
4.6 years
|
|
|
14.25
|
|
|
|
|
|
17,750
|
|
|
14.20
|
|
|
|
|
15.00-15.99
|
|
|
39,000
|
|
|
3.1 years
|
|
|
15.34
|
|
|
|
|
|
18,750
|
|
|
15.70
|
|
|
|
|
16.00-16.99
|
|
|
15,000
|
|
|
4.9 years
|
|
|
16.00
|
|
|
|
|
|
3,750
|
|
|
16.00
|
|
|
|
|
17.00-17.99
|
|
|
32,000
|
|
|
3.9 years
|
|
|
17.50
|
|
|
|
|
|
8,000
|
|
|
17.50
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
373,733
|
|
|
|
|
$
|
10.59
|
|
$
|
708,121
|
|
|
180,483
|
|
$
|
6.55
|
|
$
|
708,121
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
42
The
weighted average fair value of the 95,500 and 141,000 options granted during
2008 and 2007, respectively, was $387,975 and $851,910.
The
total intrinsic value of options exercised during 2008, 2007 and 2006 was
$292,084, $255,000 and $607,000, respectively. The total fair value of shares vested during
2008, 2007 and 2006 was $807,000, $25,000 and $170,000, respectively. The fair value of each
option granted is estimated on the date of grant using the Black-Scholes
option-pricing model with the following weighted-average assumptions used
during 2008, 2007 and 2006, respectively: zero dividend yield; expected
volatility of 41%, 127% and 127%; risk-free interest rate of 3.68%, 4.75% and
4.27%; and expected life of 3.5, 3.9 and 3 years. The expected life of the
options is based on evaluations of historical and expected future exercise
behavior. The risk-free interest rate is based on the US Treasury rates at the
date of grant, with maturity dates approximately equal to the expected life at
the grant date. Volatility is based on historical volatility of the Companys
stock over the past three years. The Company has not historically paid any
dividends and does not expect to in the foreseeable future. We recognized stock
option expense of $339,000, $194,000 and $177,000 in the years ended
December 31, 2008, 2007 and 2006, respectively, and the expense is
included within general and administrative expense on the consolidated
statements of income.
There
were 183,633 and 195,833 options exercisable at December 31, 2007 and 2006,
respectively. The weighted average exercise price of these options was $2.94
and $2.53 at December 31, 2007 and 2006, respectively.
We currently
operate in two reportable segments: Autoscope and RTMS. Autoscope is our
machine-vision product line, and revenue consists of royalties (all of which
are received from Econolite), as well as a portion of international sales. RTMS
is our radar product line acquired in the EIS asset purchase in December 2007,
and revenue consists of all North American sales and a portion of international
sales. All segment revenues are derived from external customers.
The following
table sets forth selected unaudited financial information for the year ended
December 31, 2008 for each of the Companys reportable segments
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
Autoscope
|
|
RTMS
|
|
Total
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
18,705
|
|
$
|
7,760
|
|
$
|
26,465
|
|
Depreciation
|
|
|
242
|
|
|
115
|
|
|
357
|
|
Amortization of intangible
assets
|
|
|
|
|
|
768
|
|
|
768
|
|
Income before income taxes
|
|
|
5,939
|
|
|
1,232
|
|
|
7,171
|
|
Capital expenditures
|
|
|
273
|
|
|
112
|
|
|
385
|
|
Total assets
|
|
|
24,135
|
|
|
11,973
|
|
|
36,108
|
|
43
Report of Independent Registered Public
Accounting Firm
Board of
Directors and Shareholders
Image Sensing Systems, Inc.
We have
audited the accompanying consolidated balance sheets of Image Sensing Systems,
Inc. (a Minnesota Corporation) and subsidiaries (the Company) as of
December 31, 2008 and 2007, and the related consolidated statements
income, shareholders equity, and cash flows for each of the three years in the
period ended December 31, 2008. These consolidated financial statements
are the responsibility of the Companys management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted
our audits in accordance with the standards of the Public Company Accounting
Oversight Board (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. The Company is not required
to have, nor were we engaged to perform an audit of its internal control over
financial reporting. Our audit included consideration of
internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose
of expressing an opinion on the effectiveness of the Companys internal control
over financial reporting. Accordingly, we express no such opinion. An
audit also includes examining, on a test basis, evidence supporting the amounts
and disclosures in the financial statements, 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
provide a reasonable basis for our opinion.
In our
opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Image
Sensing Systems, Inc. and subsidiaries as of December 31, 2008 and 2007, and
the consolidated results of their operations and their cash flows for each of
the three years in the period ended December 31, 2008 in conformity with
accounting principles generally accepted in the United States of America.
/s/ GRANT
THORNTON LLP
Minneapolis,
Minnesota
March 26, 2009
44
|
|
Item 9.
|
Changes in and
Disagreements with Accountants on Accounting and Financial Disclosure
|
None.
|
|
Item 9A(T).
|
Controls and Procedures
|
Evaluation of disclosure controls and procedures
We
maintain disclosure controls and procedures (as defined in Rules 13a-15(e) and
15d-15(e) under the Securities Exchange Act of 1934, as amended (Exchange Act))
that are designed to reasonably ensure that information required to be
disclosed by us in the reports we file or submit under the Exchange Act is recorded,
processed, summarized and reported within the time periods specified in the
SECs rules and forms and that such information is accumulated and communicated
to our management, including our principal executive officer and principal
financial officer, or persons performing similar functions, as appropriate to
allow timely decisions regarding required disclosure. In designing and
evaluating our disclosure controls and procedures, we recognize that any
controls and procedures, no matter how well designed and operated, can provide
only reasonable assurance of achieving the desired control objectives, and we
necessarily are required to apply our judgment in evaluating the cost-benefit
relationship of possible controls and procedures. Under the supervision and
with the participation of our management, including our Chief Executive Officer
and Chief Financial Officer, we evaluated the effectiveness of the design and
operation of our disclosure controls and procedures. Based upon that
evaluation, the Chief Executive Officer and Chief Financial Officer concluded
that, as of the end of the period covered by this report, our disclosure
controls and procedures were effective.
Managements report on internal control over financial
reporting
Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting. Our internal control over financial reporting
is a process designed to provide reasonable assurance regarding the reliability
of financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principles in the
United States of America. Our internal control over financial reporting
includes those policies and procedures that (i) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly reflect our
transactions and dispositions of our assets; (ii) provide reasonable
assurance that transactions are recorded as necessary to permit preparation of
the financial statements in accordance with generally accepted accounting
principles in the United States of America, and that our receipts and
expenditures are being made only in accordance with authorizations of our
management and directors; and (iii) provide reasonable assurance regarding
prevention or timely detection of unauthorized acquisition, use or disposition
of our assets that could have a material effect on the financial statements.
Internal
control over financial reporting cannot provide absolute assurance of achieving
financial reporting objectives because of its inherent limitations. Internal
control over financial reporting is a process that involves human diligence and
is subject to lapses in judgment or breakdowns resulting from human failures. Internal
control over financial reporting also can be circumvented by collusion or
improper management override. Because of such limitations, there is a risk that
material misstatements may not be prevented or detected on a timely basis by
internal control over financial reporting. However, these inherent limitations
are known features of the financial reporting process. Therefore, it is
possible to design into the process safeguards to reduce, though not eliminate,
this risk.
Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect all misstatements. Further, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may
become inadequate because of changes in conditions, or that the degree of
compliance with the policies or procedures may deteriorate.
Management
assessed the effectiveness of our internal control over financial reporting as
of December 31, 2008. In making this assessment, management used the criteria
set forth by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO) in
Internal
ControlIntegrated Framework
. Based on this assessment, management
has concluded that our internal control over financial reporting was effective
as of December 31, 2008.
45
This
annual report does not include an attestation report of our registered public
accounting firm regarding internal control over financial reporting.
Managements report was not subject to attestation by our registered public
accounting firm pursuant to temporary rules of the Securities and Exchange
Commission that permit us to provide only managements report in this annual
report.
Changes in internal control over financial reporting
During
the most recent fiscal quarter covered by this report, there has been no change
in our internal control over financial reporting (as defined in Rule 13a-15(f)
and 15d-15(f) under the Exchange Act) that has materially affected, or is
reasonably likely to materially affect, our internal control over financial
reporting.
|
|
Item 9B.
|
Other
Information
|
None.
46
PART III
|
|
Item 10.
|
Directors,
Executive Officers and Corporate Governance
|
We
have adopted a Code of Ethics which applies to our principal executive,
accounting and financial officers. The Code of Ethics is published on our
website at www.imagesensing.com. Any amendments to the Code of Ethics and
waivers of the Code of Ethics for our principal executive, accounting and financial
officers will be published on our website.
The
sections entitled Proposal I - Election of Directors, Audit Committee and
Section 16(a) Beneficial Ownership Reporting Compliance in our definitive
proxy statement for our 2009 annual meeting of shareholders are incorporated
into this Form 10-K by reference.
|
|
Item 11.
|
Executive
Compensation
|
The
sections entitled Executive Compensation and Compensation of Directors in
our definitive proxy statement for the 2009 annual meeting of shareholders are
incorporated into this Form 10-K by reference.
|
|
Item 12.
|
Security
Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters
|
Equity
Compensation Plan Information
The
following table provides information as of December 31, 2008 about our shares
of common stock subject to outstanding awards or available for future awards
under our equity compensation plans and arrangements.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Plan
Category
|
|
Number
of securities to
be issued upon exercise
of outstanding options,
warrants and rights
|
|
Weighted-average
exercise
price of outstanding
options, warrants and
rights
|
|
Number
of securities remaining
available for future issuance
under equity compensation plans
(excluding securities reflected in
the first column)
(2)
|
|
|
|
|
|
|
|
|
|
Equity compensation plans approved by
shareholders
(1)
|
|
|
|
367,733
|
|
|
|
$
|
10.64
|
|
|
|
|
165,500
|
|
|
Equity compensation plans not approved by
shareholders
|
|
|
|
6,000
|
|
|
|
$
|
7.50
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
373,733
|
|
|
|
$
|
10.59
|
|
|
|
|
165,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
Includes shares underlying stock options under the Image Sensing Systems, Inc.
1995 Long-Term Incentive and Stock Option Plan and non-qualified stock options
granted outside the 1995 Plan between 1996 and 2000 to current and former
members of the Board of Directors.
(2)
The 165,500 shares available for grant under the 2005 Stock Incentive
Plan may become the subject of future awards in the form of stock options, stock
appreciation rights, restricted stock, performance awards or other stock-based
awards.
The
section entitled Security Ownership of Certain Beneficial Owners and
Management in our definitive proxy statement for the 2009 annual meeting of
shareholders is incorporated into this Form 10-K by reference.
|
|
Item 13.
|
Certain
Relationships and Related Transactions, and Director Independence
|
The
section entitled Certain Relationships and Related Transactions in our
definitive proxy statement for the 2009 annual meeting of shareholders is
incorporated into this Form 10-K by reference.
|
|
Item 14.
|
Principal
Accountant Fees and Services
|
The
sections entitled Audit Fees, Audit-Related Fees, Tax Fees, All Other
Fees and Policy on Audit Committee Pre-Approval of Audit and Permissible
Non-Audit Services Provided by Our Independent Registered Public Accounting
Firm in our definitive proxy statement for our 2009 annual meeting of
shareholders are incorporated into this Form 10-K by reference.
47
PART IV
|
|
Item 15.
|
Exhibits
and Financial Statement Schedules
|
(b)
The following documents are filed as exhibits to this report:
|
|
|
Exhibit No.
|
Description
|
|
|
|
|
2.1*
|
Asset Purchase Agreement
dated December 6, 2007 by and among Image Sensing Systems, Inc. (ISS), EIS
Electronic Integrated Systems Inc., Dan Manor and the other parties named
therein, incorporated by reference to Exhibit 2.1 to ISS Annual Report on
Form 10-K for the year ended December 31, 2007 (2007 Form 10-K). (Schedules
to this Agreement have not been filed in reliance on Item 601(b)(2) of
Regulation S-K of the Securities and Exchange Commission (SEC). ISS will
furnish supplementally copies of such schedules to the SEC upon its request.)
|
|
|
|
|
3.1
|
Restated Articles of
Incorporation of ISS, incorporated by reference to Exhibit 3.1 to ISS
Registration Statement on Form SB-2 (Registration No. 33-90298C) filed on
March 14, 1995, as amended (Registration Statement).
|
|
|
|
|
3.2
|
Articles of Amendment to
Articles of Incorporation of ISS, incorporated by reference to Exhibit 3.2 to
ISS Quarterly Report on Form 10-QSB for the quarter ended June 30, 2001.
|
|
|
|
|
3.3
|
Bylaws of ISS,
incorporated by reference to Exhibit 3.3 to ISS Registration Statement.
|
|
|
|
|
4.1
|
Specimen form of ISS
common stock certificate, incorporated by reference to Exhibit 4.1 to ISS
Registration Statement.
|
|
|
|
|
10.1
|
Form of Distributor
Agreement, incorporated by reference to Exhibit 10.1 to ISS Registration
Statement.
|
|
|
|
|
10.2**
|
1995 Long-Term Incentive
and Stock Option Plan, amended and restated through May 17, 2001,
incorporated by reference to Exhibit 10.10 to ISS Annual Report on Form
10-KSB for the year ended December 31, 2001.
|
|
|
|
|
10.3**
|
Employment Agreement
between ISS and Kenneth R. Aubrey, dated December 12, 2006, effective on or
about January 15, 2007 (in capacity as President) and effective on or about
June 1, 2007 (in capacity of President and Chief Executive Officer),
incorporated by reference to Exhibit 10.1 to ISS Current Report on Form 8-K
dated December 14, 2006.
|
|
|
|
|
10.4**
|
Employment Agreement
between ISS and Gregory R. L. Smith, dated December 8, 2006, incorporated by
reference to Exhibit 10.1 to ISS Current Report on Form 8-K dated December
8, 2006.
|
|
|
|
|
10.5**
|
Employment Agreement
between ISS and James Murdakes, dated March 9, 2007, incorporated by
reference to Exhibit 10.1 to ISS Current Report on Form 8-K dated March 13,
2007.
|
|
|
|
|
10.6
|
Business Loan Agreement
dated December 4, 2007 by and between ISS and Wells Fargo Bank, National
Association (Wells Fargo), incorporated by reference to Exhibit 10.6 to ISS
2007 Form 10-K.
|
|
|
|
|
10.7
|
Promissory Note dated
December 4, 2007 in the original principal amount of $3,000,000 issued by ISS
to Wells Fargo, incorporated by reference to Exhibit 10.7 to ISS 2007 Form
10-K.
|
|
|
|
|
10.8
|
Business Loan Agreement
dated December 4, 2007 by and between ISS and Wells Fargo, incorporated by
reference to Exhibit 10.8 to ISS 2007 Form 10-K.
|
|
|
|
|
|
|
|
10.9
|
Promissory Note dated
December 4, 2007 in the original principal amount of $8,000,000 issued by ISS
to Wells Fargo, incorporated by reference to Exhibit 10.9 to ISS 2007 Form
10-K.
|
|
|
|
|
10.10
|
Commercial Security
Agreement dated January 8, 2002 by and between ISS and Wells Fargo, incorporated
by reference to Exhibit 10.10 to ISS 2007 Form 10-K.
|
|
|
|
|
10.11
|
Amendment VII to Office
Lease Agreement dated April 26, 2007 by and between ISS and Spruce Tree
Centre L.L.P., incorporated by reference to Exhibit 10.11 to ISS 2007 Form
10-K.
|
48
|
|
|
|
10.12
|
Modification to
Manufacturing, Distributing and Technology License Agreement dated
September 1, 2000 by and between ISS and Econolite Control Products,
Inc. (Econolite), incorporated by reference to Exhibit 10.12 to ISS 2007
Form 10-K.
|
|
|
|
|
10.13**
|
Image Sensing Systems,
Inc. 2005 Stock Incentive Plan, incorporated by reference to Appendix A
to ISS proxy statement filed with the SEC on April 19, 2005.
|
|
|
|
|
10.14
|
Manufacturing,
Distributing and Technology License Agreement dated June 11, 1991 by and
between ISS and Econolite Control Products, Inc., incorporated by reference
to Exhibit 10.1 to the Registration Statement.
|
|
|
|
|
10.15
|
Extension and Second
Modification to License Agreement dated July 13, 2001 by and between ISS and
Econolite, incorporated by reference to Exhibit 10.12 to ISS Annual Report
on Form 10-KSB for the year ended December 31, 2001.
|
|
|
|
|
10.16
|
Distribution Agreement
dated January 1, 2001 by and between ISS and Wireless Technology, Inc.,
incorporated by reference to Exhibit 10.1 to ISS Quarterly Report on Form
10-QSB for the quarter ended June 30, 2001.
|
|
|
|
|
10.17
|
Office Lease Agreement
dated November 24, 1998 by and between ISS and Spruce Tree Centre L.L.P.,
incorporated by reference to Exhibit 10.18 to ISS Annual Report on Form
10-KSB for the year ended December 31, 1998.
|
|
|
|
|
10.18
|
Production Agreement dated
February 14, 2002 by and among ISS, Wireless Technology, Inc. and Econolite,
incorporated by reference to Exhibit 10.20 to ISS Annual Report on Form
10-KSB for the year ended December 31, 2001.
|
|
|
|
|
10.19
|
Extension and Third
Modification to Manufacturing Distributing and Technology License Agreement
dated July 3, 2008 by and between ISS and Econolite, incorporated by
reference to Exhibit 10.1 to ISS Current Report on Form 8-K dated July 3,
2008.
|
|
|
|
|
10.20**
|
Employment Agreement dated
December 6, 2007 by and between ISS Image Sensing Systems Canada Ltd. and Dan
Manor, incorporated by reference to Exhibit 99.1 to ISS 2007 Form 10-K.
|
|
|
|
|
10.21
|
Loan Agreement dated May 1, 2008 by and between ISS and Associated Bank,
National Association (Associated Bank), incorporated by reference to Exhibit
10.19 to ISS Registration Statement on Form S-1 filed on May 12, 2008
(Form S-1).
|
|
|
|
|
10.22
|
Security Agreement dated May 1, 2008 by and between ISS and Associated Bank, incorporated by reference to Exhibit 10.20 to ISS Form S-1.
|
|
|
|
|
10.23
|
Promissory Note (Line of Credit) dated May 1, 2008 in the original principal amount of $5,000,000 issued by ISS to Associated Bank, incorporated by reference to Exhibit 10.21 to ISS Form S-1.
|
|
|
|
|
10.24
|
Promissory Note (Loan) dated May 1, 2008 in the original principal amount of $3,000,000 issued by ISS to Associated Bank, incorporated by reference to Exhibit 10.22 to ISS Form S-1.
|
|
|
|
|
21
|
List of Subsidiaries of
ISS (filed herewith).
|
|
|
|
|
23.1
|
Consent of Independent
Registered Public Accounting Firm.
|
|
|
|
|
24
|
Power of Attorney
(included on signature page).
|
|
|
|
|
31.1
|
Certification of Chief
Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
|
|
|
|
|
31.2
|
Certification of Chief
Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
|
|
|
|
|
32.1
|
Certification of Chief
Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
|
|
|
|
|
32.2
|
Certification of Chief
Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
|
|
|
|
|
99.1
|
Extension of Modification
to Manufacturing, Distributing and Technology License Agreement dated
May 31, 2002 by and between ISS and Econolite, incorporated by reference
to Exhibit 99.2 to ISS 2007 Form 10-K.
|
|
|
|
|
99.2
|
Letter agreement dated
June 19, 1997 by and between ISS and Econolite, incorporated by reference to
Exhibit 99.3 to ISS 2007 Form 10-K.
|
|
|
*
|
Portions of this exhibit
are treated as confidential pursuant to a request for confidential treatment
filed by ISS with the SEC.
|
|
|
**
|
Management contract or
compensatory plan or arrangement.
|
|
|
|
Copies of all exhibits not
attached will be furnished without charge upon written request to the Company
at the address set forth on the inside back cover page of this Annual Report.
|
49
SIGNATURES
Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
Image Sensing Systems, Inc.
|
|
|
/s/ Kenneth R. Aubrey
|
|
Date: March 26, 2009
|
|
|
|
Kenneth R. Aubrey
|
|
|
President and Chief
Executive Officer
|
|
|
Each
person whose signature to this report on Form 10-K appears below hereby
constitutes and appoints Kenneth R. Aubrey and Gregory R. L. Smith, 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-K, and any and all instruments or
documents filed as part of or in connection with this report on Form 10-K 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.
In
accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated:
|
|
|
/s/ Kenneth R. Aubrey
|
|
Date: March 26, 2009
|
|
|
|
Kenneth R. Aubrey
|
|
|
President and Chief
Executive Officer
|
|
|
(Principal Executive
Officer)
|
|
|
|
|
|
/s/ Gregory R. L. Smith
|
|
Date: March 26, 2009
|
|
|
|
Gregory R. L. Smith
|
|
|
Chief Financial Officer
|
|
|
(Principal Financial and
Principal Accounting Officer)
|
|
|
|
|
|
/s/ James Murdakes
|
|
Date: March 26, 2009
|
|
|
|
James Murdakes
|
|
|
Chairman of the Board of
Directors
|
|
|
|
|
|
/s/ Panos G. Michalopoulos
|
|
Date: March 26, 2009
|
|
|
|
Panos G. Michalopoulos
|
|
|
Director
|
|
|
|
|
|
/s/ Michael G. Eleftheriou
|
|
Date: March 26, 2009
|
|
|
|
Michael G. Eleftheriou
|
|
|
Director
|
|
|
|
|
|
/s/ Sven A. Wehrwein
|
|
Date: March 26, 2009
|
|
|
|
Sven A. Wehrwein
|
|
|
Director
|
|
|
50
Image Sensing Systems (NASDAQ:ISNS)
Historical Stock Chart
From Jun 2024 to Jul 2024
Image Sensing Systems (NASDAQ:ISNS)
Historical Stock Chart
From Jul 2023 to Jul 2024