Table of Contents
Amortization
of intangibles expense was $1.2 million in 2010 and reflects the amortization
of intangible assets acquired in both the EIS asset purchase and the CitySync
acquisition. Assuming there are no changes to our intangible assets, we anticipate
amortization expense will be approximately $1.6 million in 2011.
Other
income (expense) was an expense of $123,000 in 2010, primarily consisting of
interest expense, as opposed to income of $7,000 in 2009 mainly due to higher
debt balances in 2010 including a portion related to CitySync.
Income
before income taxes for the Autoscope segment decreased to $2.6 million in 2010
from $3.8 million in 2009, a decrease of 31.6%. The decrease was mainly due to
increased competition. Income before income taxes for the RTMS segment
increased to $1.8 million in 2010 from $1.4 million in 2009, an increase of
29.1%. The increase was due to higher revenues in the segment, which were
partially offset by increased warranty expense.
Our
income tax effective rate was 23.2% in 2010 compared to 25.9% in 2009. The 2010
effective rate was positively impacted by increased tax credits for research
and development activities. We expect the effective rate in 2011 to be below
30%.
Year
Ended December 31, 2009 Compared to Year Ended December 31, 2008.
Total revenue decreased to $24.6 million in 2009 from $26.5 million in 2008, a
decrease of 7.1%. Royalty income decreased to $12.1 million in 2009 from $13.3
million in 2008, a decrease of 9.1%. We attribute the decrease in royalties to
the economic recession in North America and its negative impact on state and
federal spending. Product sales decreased to $12.5 million in 2009 from $13.1
million in 2008, a decrease of 5.0%. The decrease was mainly due to weakness in
the Asian market in the first half of 2009. Revenue for the Autoscope segment
decreased to $16.2 million in 2009 from $18.7 million in 2008, a decrease of
13.2%. The decrease related to lower royalties and weakness in Asia as discussed
above. Revenue for the RTMS segment increased to $8.4 million in 2009 from $7.8
million in 2008, an increase of 7.6%. The increase resulted mainly as a result
of improved sales in North America.
Gross
margins for product sales increased to 65.6% in 2009 from 62.4% in 2008. The
increase resulted mainly from the increase in RTMS revenue, which typically
earns higher margins than Autoscope, and to a lesser extent from fewer lower of
cost or market adjustments to inventory in 2009 as compared to 2008. Gross
margins on royalty income remained consistent at 100% in 2009 and 2008.
Selling,
marketing and product support expense increased to $7.2 million or 29.3% of
total revenue in 2009 from $6.7 million or 25.2% of total revenue in 2008. The
selling, marketing and product support expense increased in 2009 as we invested
in market expansion activities in Europe and Asia and realized the impact of
headcount additions made late in 2008.
General
and administrative expense decreased to $3.8 million or 15.4% of total revenue
in 2009, down from $4.1 million or 15.4% of total revenue in 2008. The general
and administrative expenses decrease in 2009 resulted mainly from lower
incentive pay expense and higher foreign currency transaction gains, which were
partially offset by increased professional services expense.
Research
and development expense increased to $3.3 million or 13.6% of total revenue in
2009, up from $2.9 million or 11.0% of total revenue in 2008. The increase was
directly related to our investment in video/radar hybrid solutions and tailored
international offerings, development projects to reduce manufacturing costs,
and the realization of the impact of headcount additions made late in 2008.
Amortization
of intangibles expense was $768,000 in 2009 and reflects the amortization of
intangible assets acquired in the EIS asset purchase.
Other
income decreased to $7,000 in 2009 from $43,000 in 2008 mainly due to lower
interest rates. In 2008, other income fell due to lower cash and investment
balances, lower interest rates and interest expense on debt incurred for the
EIS asset purchase.
Income
before income taxes for the Autoscope segment decreased to $3.8 million in 2009
from $5.9 million in 2008, a decrease of 35.9%. The decrease was mainly due to
lower gross margins and higher investments in market expansion activities in
the segment. Income before income taxes for the RTMS segment increased to $1.4
million in 2009 from $1.2 million in 2008, an increase of 14.6%. The increase
was due to higher revenues in the segment, which were partially offset by
increased expenses, a majority of which were caused by the U.S. Dollar
weakening over the course of 2009 against the Canadian Dollar.
Our
income tax effective rate was 25.9% in 2009 compared to 30.8% in 2008. The 2009
effective rate was positively impacted by the realization of $236,000 in
foreign tax credits whose status was uncertain prior to 2009.
Liquidity
and Capital Resources
At
December 31, 2010, we had $8.0 million in cash and cash equivalents and $4.0
million in short-term investments, compared to $14.1 million in cash and cash
equivalents and $3.9 million in short-term investments at December 31, 2009.
24
Table of Contents
Net
cash provided by operating activities was $33,000 in 2010, compared to $5.4
million and $5.2 million in 2009 and 2008, respectively. In 2010, as compared
to 2009, we had increased accounts and other receivables outstanding, the
majority of which related to CitySync activity. The primary reasons for the
2009 change compared to 2008 were lower net income and increased inventory
balances that were offset by decreased accounts receivable outstanding. In
2010, investment balances were similar to those of 2009. We anticipate that
average receivable collection days in 2011 will be similar to 2010 and 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 2011. We used $8.3 million of cash in 2010 to acquire
CitySync including repaying seller loans. This was mostly offset by our 2010
secondary offering which provided $8.8 million in cash, net of offering
expenses.
In
December 2009, we entered into a term loan agreement for $4.0 million with
Associated Bank, National Association, or Associated Bank, which we fully
repaid in September 2010. We previously had a separate $4.0 million term note
with Associated Bank that originated in May 2008 and was fully repaid in
February 2009.
We
also have a revolving line of credit agreement with Associated Bank. 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 the bank. Advances on the line of credit cannot exceed a borrowing base
determined under a formula, which is a percentage of the amounts of eligible
receivables. The line of credit currently has no borrowings outstanding and
matures on May 1, 2012. We believe that on an ongoing basis, we will have
regular availability to draw a minimum of $3.0 million on our line of credit
based on our qualifying assets.
In
conjunction with our acquisition of CitySync, the sellers have an earn-out
arrangement over approximately 18 months from the June 2010 date of purchase.
The earn-out is based on achieving certain revenue and minimum gross margins
from the sale of CitySync ANPR systems and it is calculated in two separate
periods, each ending on December 31. In each period there are two tiers and
superior performance could lead to a total earn-out of $2 million or higher, as
the earn-out is not capped. Earn-out payments are due within three months of
the end of an earn-out period. Based on the 2010 results, the sellers are
entitled to receive a $696,000 earn-out for the first period which ran from the
June acquisition date to December 31, 2010. The payment is expected to be made
in March 2011, and a liability has been recorded on our balance sheet as of
December 31, 2010. As part of the recognition of the liability, we recorded an
additional $205,000 in expense as the earn-out exceeded our initial estimate.
In
conjunction with our EIS asset purchase, the sellers had an earn-out
arrangement over approximately three years from the December 2007 date of
purchase. The earn-out ended as of December 31, 2010. The earn-out was based on
earnings before taxes from RTMS sales less related cost of revenue and operating
expenses, excluding depreciation, amortization and interest expenses, and was
calculated annually. For the first two earn-out periods, the sellers of the EIS
assets received a total of $2.7 million in earn-out payments. Based on the 2010
results, the sellers are entitled to receive a $1.7 million earn-out for the
third and final period. The payment is expected to be made in March 2011, and a
liability has been recorded on our balance sheet as of December 31, 2010.
We
believe that cash and cash equivalents on hand at December 31, 2010, along with
the availability of funds under 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 and CitySync earn-outs, 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.
Critical
Accounting Policies
Goodwill
and Intangible Assets
. 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 (RTMS) related
goodwill is tested on October 1 of each year. CitySync goodwill will be tested
beginning in April 2011.
On
an annual basis, we reconcile our market value to the estimated combined fair
value of our business segments and reporting units as a separate measure to
determine whether goodwill is impaired.
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 comparable
market transactions method. The future economic benefits are significantly
dependent on sustaining revenue levels for all product lines. For the RTMS
reporting units, 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, 2010, 2009 and 2008. If Flow Traffic and/or the
RTMS reporting units 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.
25
Table of Contents
Intangible
assets are stated at their estimated value at the time of acquisition.
Amortization is computed by the straight-line method over a three- to nine-year
period for financial reporting purposes based on their estimated useful lives.
Earn-outs
related to the EIS asset purchase are recorded as additional goodwill in the
year earned. Intangible assets related to the EIS asset purchase are for trade
names and technology. Earn-outs for the CitySync acquisition were estimated at
the time of the acquisition, based on projected sales and gross margins during
the earn-out period, and recorded on our balance sheet as a liability with an
offsetting increase in goodwill. Actual earn-outs that vary from the initial
estimated liability result in operating expense or income in the applicable
year. Intangible assets related to the CitySync acquisition are for customer
relationships, trade names and technology.
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 shipped or delivered to its customers. We recognize revenue from
North American and international sales at the time of shipment or delivery;
the selling price is fixed or determinable; and collectability is reasonably
assured. We record provisions against 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. The allowance for
doubtful accounts is estimated based on specific identification of delinquent
receivables.
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.
Warranties.
We generally provide a standard two-year warranty on product sales. Reserves to
honor warranty claims are estimated and recorded at the time of sale based on
historical claim information and are analyzed and adjusted periodically based
on claim trends.
New
and Recently Adopted Accounting Pronouncements
In
January 2010, the FASB issued Accounting Standards Update (ASU)
No. 2010-06,
Improving Disclosures
about Fair Value Measurements
(ASU 2010-06). ASU 2010-06 requires
new disclosures regarding transfers in and out of Levels 1 and 2 and activity
in Level 3 fair value measurements. It also clarifies existing disclosure
requirements regarding the level of disaggregation in certain disclosures,
inputs, and valuation techniques used in ASC 820,
Fair Value Measurements and Disclosures.
We adopted all of
the requirements of this update on January 1, 2010, its effective date,
except for the new requirement regarding activity in Level 3 fair value
measurements which has a later effective date under the provisions of ASU
2010-6 and will become effective on January 1, 2011. Adoption of this
pronouncement has not had, and is not expected to have, a significant effect on
our consolidated financial statements disclosures.
In
September 2010, the FASB issued ASU No. 2010-20,
Disclosures about the Credit Quality of
Financing Receivables and the Allowance for Credit Losses
, to
enhance the disclosures required for financing receivables (for example, loans,
trade accounts receivable, notes receivable, and receivables relating to a
lessors leveraged, direct financing, and sales-type leases) and allowances for
credit losses. The amended disclosures are designed to provide more information
to financial statement users regarding the credit quality of a creditors
financing receivables and the adequacy of its allowance for credit losses. We
adopted all of the requirements of the amended guidance on December 31, 2010,
its effective date, except for the disclosures regarding the activity during a
reporting period which will become effective January 1, 2011. Adoption of the
pronouncement has not had, and is not expected to have, a significant effect on
our consolidated financial statement disclosures.
|
|
Ite
m
7A.
|
Quantitative and Qualitative
Disclosures About Market Risks
|
Our foreign
sales and results of operations are subject to the impact of foreign currency
fluctuations. From time to time, we enter into currency hedges to attempt to
lower our exposure to translation gains and losses as well as to limit the
impact of foreign currency translation upon the consolidation of our foreign
subsidiaries. A 10% adverse change in foreign currency rates, if we have not
hedged, could have a material effect on our results of operations or financial
position. Our current greatest exposure for a negative material impact to our operations
is a rising Canadian Dollar versus the U.S. Dollar.
26
Table of Contents
|
|
Item
8.
|
Financial Statements and
Supplementary Data
|
IMAGE SENSING SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
|
|
|
|
|
|
|
|
|
|
December 31
|
|
|
|
|
|
|
|
2010
|
|
2009
|
|
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
8,021
|
|
$
|
14,084
|
|
Investments
|
|
|
3,954
|
|
|
3,935
|
|
Accounts receivable, net of allowance for returns and doubtful
accounts of $328 ($90 in 2009)
|
|
|
10,137
|
|
|
5,660
|
|
Inventories
|
|
|
4,649
|
|
|
2,734
|
|
Prepaid expenses and other receivables
|
|
|
2,017
|
|
|
588
|
|
Deferred income taxes
|
|
|
230
|
|
|
137
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
29,008
|
|
|
27,138
|
|
|
|
|
|
|
|
|
|
Property and equipment:
|
|
|
|
|
|
|
|
Furniture and fixtures
|
|
|
380
|
|
|
274
|
|
Leasehold improvements
|
|
|
158
|
|
|
92
|
|
Equipment
|
|
|
2,714
|
|
|
2,288
|
|
|
|
|
|
|
|
|
|
|
|
|
3,252
|
|
|
2,654
|
|
Accumulated depreciation
|
|
|
2,130
|
|
|
1,656
|
|
|
|
|
|
|
|
|
|
|
|
|
1,122
|
|
|
998
|
|
|
|
|
|
|
|
|
|
Deferred income taxes
|
|
|
|
|
|
1,676
|
|
Intangible assets
|
|
|
9,513
|
|
|
3,714
|
|
Goodwill
|
|
|
14,713
|
|
|
7,624
|
|
|
|
|
|
|
|
|
|
TOTAL ASSETS
|
|
$
|
54,356
|
|
$
|
41,150
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS EQUITY
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
2,094
|
|
$
|
953
|
|
Bank debt
|
|
|
|
|
|
4,000
|
|
Accrued compensation
|
|
|
1,364
|
|
|
858
|
|
Accrued warranty and other
|
|
|
1,467
|
|
|
643
|
|
Earn-outs payable
|
|
|
2,928
|
|
|
1,541
|
|
Income taxes payable
|
|
|
17
|
|
|
234
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
7,870
|
|
|
8,229
|
|
|
|
|
|
|
|
|
|
Deferred income taxes
|
|
|
290
|
|
|
|
|
Income taxes payable
|
|
|
175
|
|
|
208
|
|
|
|
|
|
|
|
|
|
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, 4,878,519
issued and outstanding (3,985,819 in 2009)
|
|
|
49
|
|
|
40
|
|
Additional paid-in capital
|
|
|
22,065
|
|
|
11,994
|
|
Accumulated other comprehensive income (loss)
|
|
|
52
|
|
|
(171
|
)
|
Retained earnings
|
|
|
23,855
|
|
|
20,850
|
|
|
|
|
|
|
|
|
|
Total
shareholders equity
|
|
|
46,021
|
|
|
32,713
|
|
|
|
|
|
|
|
|
|
TOTAL LIABILITIES AND SHAREHOLDERS EQUITY
|
|
$
|
54,356
|
|
$
|
41,150
|
|
|
|
|
|
|
|
|
|
See accompanying notes to the consolidated financial
statements.
27
Table of Contents
IMAGE SENSING SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31
|
|
|
|
|
|
|
|
2010
|
|
2009
|
|
2008
|
|
|
|
|
|
|
|
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
Product sales
|
|
$
|
19,162
|
|
$
|
12,483
|
|
$
|
13,144
|
|
Royalties
|
|
|
12,519
|
|
|
12,110
|
|
|
13,321
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
31,681
|
|
|
24,593
|
|
|
26,465
|
|
Cost of revenue (exclusive of amortization shown below):
|
|
|
|
|
|
|
|
|
|
|
Product sales
|
|
|
7,799
|
|
|
4,297
|
|
|
4,912
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
23,882
|
|
|
20,296
|
|
|
21,553
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
Selling, marketing and product support
|
|
|
9,807
|
|
|
7,201
|
|
|
6,680
|
|
General and administrative
|
|
|
4,372
|
|
|
3,779
|
|
|
4,069
|
|
Research and development
|
|
|
3,630
|
|
|
3,336
|
|
|
2,908
|
|
Amortization of intangible assets
|
|
|
1,218
|
|
|
768
|
|
|
768
|
|
Acquisition related expenses
|
|
|
817
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
19,844
|
|
|
15,084
|
|
|
14,425
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
4,038
|
|
|
5,212
|
|
|
7,128
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense), net
|
|
|
(123
|
)
|
|
7
|
|
|
43
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
3,915
|
|
|
5,219
|
|
|
7,171
|
|
Income tax expense
|
|
|
910
|
|
|
1,354
|
|
|
2,207
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
3,005
|
|
$
|
3,865
|
|
$
|
4,964
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per share:
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.66
|
|
$
|
0.97
|
|
$
|
1.26
|
|
Diluted
|
|
|
0.64
|
|
|
0.95
|
|
|
1.24
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
4,555
|
|
|
3,985
|
|
|
3,943
|
|
Diluted
|
|
|
4,667
|
|
|
4,081
|
|
|
4,001
|
|
See accompanying notes to the
consolidated financial statements.
28
Table of Contents
|
IMAGE SENSING SYSTEMS, INC.
|
CONSOLIDATED STATEMENTS OF CASH FLOW
|
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31
|
|
|
|
|
|
|
|
2010
|
|
2009
|
|
2008
|
|
|
|
|
|
|
|
|
|
Operating activities:
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
3,005
|
|
$
|
3,865
|
|
$
|
4,964
|
|
Adjustments to reconcile net income to net cash provided by operating
activities:
|
|
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
498
|
|
|
424
|
|
|
357
|
|
Amortization
|
|
|
1,218
|
|
|
768
|
|
|
768
|
|
Tax benefit from disqualifying disposition
|
|
|
72
|
|
|
|
|
|
137
|
|
Stock option expense
|
|
|
342
|
|
|
341
|
|
|
339
|
|
Deferred income taxes
|
|
|
174
|
|
|
138
|
|
|
(133
|
)
|
Changes in operating assets and liabilities, net of acquisition:
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(3,711
|
)
|
|
960
|
|
|
(1,623
|
)
|
Inventories
|
|
|
(1,309
|
)
|
|
(1,126
|
)
|
|
(29
|
)
|
Prepaid expenses and other receivables
|
|
|
(1,229
|
)
|
|
(212
|
)
|
|
(148
|
)
|
Accounts payable
|
|
|
391
|
|
|
702
|
|
|
(565
|
)
|
Accrued liabilities
|
|
|
832
|
|
|
(384
|
)
|
|
671
|
|
Income taxes payable
|
|
|
(250
|
)
|
|
(87
|
)
|
|
445
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
33
|
|
|
5,389
|
|
|
5,183
|
|
|
|
|
|
|
|
|
|
|
|
|
Investing activities:
|
|
|
|
|
|
|
|
|
|
|
Cash paid to sellers of CitySync equity
|
|
|
(7,871
|
)
|
|
|
|
|
|
|
Repayment of CitySync seller loans
|
|
|
(445
|
)
|
|
|
|
|
|
|
EIS earn-out payment
|
|
|
(1,541
|
)
|
|
(1,192
|
)
|
|
|
|
Purchase of short-term investments
|
|
|
(8,882
|
)
|
|
(6,640
|
)
|
|
(7,400
|
)
|
Sale of short-term investments
|
|
|
8,863
|
|
|
6,705
|
|
|
3,400
|
|
Purchases of property and equipment
|
|
|
(380
|
)
|
|
(694
|
)
|
|
(385
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(10,256
|
)
|
|
(1,821
|
)
|
|
(4,385
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Financing activities
:
|
|
|
|
|
|
|
|
|
|
|
Net proceeds from common stock offering
|
|
|
8,818
|
|
|
|
|
|
|
|
Proceeds from exercise of stock options
|
|
|
121
|
|
|
1
|
|
|
173
|
|
Proceeds from bank debt
|
|
|
|
|
|
4,000
|
|
|
|
|
Repayment of bank debt
|
|
|
(4,556
|
)
|
|
(3,750
|
)
|
|
(1,250
|
)
|
Cash released from restriction on bank debt
|
|
|
|
|
|
|
|
|
5,263
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities
|
|
|
4,383
|
|
|
251
|
|
|
4,186
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on cash
|
|
|
(223
|
)
|
|
24
|
|
|
(308
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Increase (decrease) in cash and cash equivalents
|
|
|
(6,063
|
)
|
|
3,795
|
|
|
4,676
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at beginning of year
|
|
|
14,084
|
|
|
10,289
|
|
|
5,613
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of year
|
|
$
|
8,021
|
|
$
|
14,084
|
|
$
|
10,289
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure:
|
|
|
|
|
|
|
|
|
|
|
Income taxes paid
|
|
$
|
1,571
|
|
$
|
1,488
|
|
$
|
1,680
|
|
Interest expense paid
|
|
$
|
155
|
|
$
|
33
|
|
$
|
278
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental non-cash disclosure:
|
|
|
|
|
|
|
|
|
|
|
Common stock issued in connection with CitySync acquisition
|
|
$
|
727
|
|
$
|
|
|
$
|
|
|
EIS earn-out payable recorded as additional goodwill
|
|
$
|
1,665
|
|
$
|
1,541
|
|
$
|
1,164
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to the consolidated financial
statements.
|
|
|
|
|
|
|
|
|
|
|
29
Table of Contents
|
IMAGE SENSING SYSTEMS, INC.
|
CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY AND
COMPREHENSIVE INCOME
|
(in thousands, except share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
Issued
|
|
Common
Stock
|
|
Additional
Paid-In
Capital
|
|
Accumulated
Other
Comprehensive
Income
(Loss)
|
|
Retained
Earnings
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock issued for options exercised
|
|
|
600
|
|
|
|
|
|
1
|
|
|
|
|
|
|
|
|
1
|
|
Stock option expense
|
|
|
|
|
|
|
|
|
341
|
|
|
|
|
|
|
|
|
341
|
|
Foreign currency translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
(24
|
)
|
|
|
|
|
(24
|
)
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,865
|
|
|
3,865
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,841
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2009
|
|
|
3,985,819
|
|
|
40
|
|
|
11,994
|
|
|
(171
|
)
|
|
20,850
|
|
|
32,713
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax benefit from disqualifying disposition
|
|
|
|
|
|
|
|
|
72
|
|
|
|
|
|
|
|
|
72
|
|
Common stock issued for options exercised
|
|
|
37,700
|
|
|
|
|
|
121
|
|
|
|
|
|
|
|
|
121
|
|
Common stock issued in secondary offering, net
|
|
|
798,000
|
|
|
8
|
|
|
8,810
|
|
|
|
|
|
|
|
|
8,818
|
|
Common stock issued in CitySync acquisition
|
|
|
57,000
|
|
|
1
|
|
|
726
|
|
|
|
|
|
|
|
|
727
|
|
Stock option expense
|
|
|
|
|
|
|
|
|
342
|
|
|
|
|
|
|
|
|
342
|
|
Foreign currency translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
223
|
|
|
|
|
|
223
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,005
|
|
|
3,005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,228
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2010
|
|
|
4,878,519
|
|
$
|
49
|
|
$
|
22,065
|
|
$
|
52
|
|
$
|
23,855
|
|
$
|
46,021
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See
accompanying notes to the consolidated financial statements.
|
|
30
Table of Contents
Notes to Consolidated Financial Statements
December 31, 2010
|
|
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 traffic, security, police and parking applications. 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 Holdings Limited
(ISS/Holdings) and Image Sensing Systems Europe Ltd. (ISS/Europe), both located
in the United Kingdom; Image Sensing Systems Europe Limited SP.Z.O.O.
(ISS/Poland), located in Poland; ISS Image Sensing Systems Canada Ltd
(ISS/Canada) and ISS Canada Sales Corp. (Canada Sales Corp.), both located in
Ontario, Canada; and CitySync Limited (CitySync), located in the United
Kingdom. 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 shipped or delivered to its customers.
We
recognize revenue from product 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 $3.3 million and $3.6 million at
December 31, 2010 and 2009, respectively. We hold our cash and cash equivalents
with financial institutions and, at times, the amounts of our balances may be
in excess of insurance limits.
INVESTMENTS
Investments
and marketable securities held at December 31, 2010 and 2009 that do not
qualify as cash equivalents have been designated as available for sale.
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.
31
Table of Contents
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 $23,000, $6,000 and $211,000 for the
years ended December 31, 2010, 2009 and 2008, 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
Fair
value is determined on the exchange price that 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. Each major asset and liability category is
measured at fair value on either a recurring or nonrecurring basis using 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 three- to nine-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 on October 1 of each year. CitySync
goodwill will be tested beginning in April 2011. There is a two-step process
for impairment testing of goodwill. The first step, used to identify potential
impairment, compares the fair value of a reporting unit with its carrying
amount, including goodwill. The second step, if necessary, measures the amount
of the impairment by comparing the estimated fair value of the goodwill and
intangible assets to their respective carrying values. If an impairment is
identified, the carrying value of the asset is adjusted to estimated fair
value.
During
our annual impairment testing, we reconcile our market value, based on the
value of our common stock, to the estimated combined fair value of our
reporting units, to ensure that goodwill is not impaired. 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 comparable market transactions
method. The future economic benefits are significantly dependent on sustaining
revenue levels for all product lines. For the RTMS reporting unit, 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. At December 31, 2008, we performed a reconciliation, as our market
capitalization was similar to our consolidated shareholders equity. We
determined that no goodwill impairment existed at December 31, 2010, 2009 and
2008, as the fair value of each reporting unit exceeded its carrying value.
32
Table of Contents
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, 2010, 2009 or 2008.
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.
WARRANTIES
We
generally provide a standard two-year warranty on product sales. Reserves to
honor warranty claims are estimated and recorded at the time of sale based on
historical claim information and are analyzed and adjusted periodically based
on claim trends.
ADVERTISING
Advertising
costs are charged to operations in the period incurred and totaled $153,000,
$151,000 and $196,000 for the years ended December 31, 2010, 2009 and 2008,
respectively.
FOREIGN CURRENCY
All
assets and liabilities of Flow Traffic, ISS/Europe, ISS/Holdings, ISS/Poland,
ISS/Canada, Canada Sales Corp. and CitySync are translated from their
respective functional 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, 2010, 2009 and 2008, respectively, 112,000, 96,000
and 58,000 common share equivalents were included in the computation of diluted
net income per share.
At
December 31, 2010, 2009 and 2008, the exercise prices of 133,000, 36,000 and
253,500 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.
STOCK OPTIONS
We
recognize compensation expense for share-based awards using the fair value of
the option at the time of the grant and amortizing the fair value over the estimated
service period on the straight-line attribute method. Unrecognized compensation
costs were $761,000 at December 31, 2010, with a weighted average remaining
life of 2.4 years.
33
Table of Contents
NEW ACCOUNTING PRONOUNCEMENTS
In
January 2010, the FASB issued Accounting Standards Update (ASU) No. 2010-06,
Improving Disclosures about Fair Value Measurements
(ASU 2010-06). ASU 2010-06 requires new disclosures regarding transfers in
and out of Levels 1 and 2 and activity in
Level 3 fair value measurements. It also clarifies existing disclosure
requirements regarding the level of disaggregation in certain disclosures,
inputs, and valuation techniques used in ASC 820,
Fair Value Measurements and Disclosures.
We adopted all of
the requirements of this update on January 1, 2010, its effective date, except
for the new requirement regarding activity in Level 3 fair value measurements
which has a later effective date under the provisions of ASU 2010-6 and will
become effective on January 1, 2011. Adoption of this pronouncement has not
had, and is not expected to have, a significant effect on our consolidated
financial statements disclosures.
In
September 2010, the FASB issued ASU No. 2010-20,
Disclosures about the Credit Quality of Financing Receivables and the
Allowance for Credit Losses
, to enhance the disclosures required for
financing receivables (for example, loans, trade accounts receivable, notes
receivable, and receivables relating to a lessors leveraged, direct financing,
and sales-type leases) and allowances for credit losses. The amended
disclosures are designed to provide more information to financial statement
users regarding the credit quality of a creditors financing receivables and
the adequacy of its allowance for credit losses. We adopted all of the
requirements of the amended guidance on December 31, 2010, its effective date,
except for the disclosures regarding the activity during a reporting period
which will become effective January 1, 2011. Adoption of the pronouncement has
not had, and is not expected to have, a significant effect on our consolidated
financial statement disclosures.
RECLASSIFICATIONS
Certain
prior year amounts have been reclassified to conform to the current year
presentation.
Investments
and marketable securities held at December 31, 2010 and 2009 that do not
qualify as cash equivalents have been designated as available for sale. The
estimated fair value of the investments held at December 31, 2010 and 2009 was
determined using Level 1 measurements.
Our
current portfolio is composed of high-grade municipal bonds, federal notes and
commercial paper. The maximum term to maturity or time to next reset is six
months.
Investments
consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
|
|
|
|
2010
|
|
2009
|
|
|
|
|
|
|
|
Federal
notes
|
|
$
|
422
|
|
$
|
|
|
Municipal
bonds
|
|
|
2,217
|
|
|
3,935
|
|
Commercial
paper
|
|
|
1,315
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
3,954
|
|
$
|
3,935
|
|
|
|
|
|
|
|
|
|
Proceeds
from maturities and sales of investments totaled $8.9 million, $6.7 million and
$3.4 million for the years ended December 31, 2010, 2009 and 2008,
respectively. Realized gains or losses related to sales during the years ended
December 31, 2010 and 2009 were immaterial and are included in interest income.
Inventories,
net of reserves, consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
|
|
|
|
2010
|
|
2009
|
|
|
|
|
|
|
|
Electronic
components
|
|
$
|
2,114
|
|
$
|
1,733
|
|
Finished
goods
|
|
|
2,535
|
|
|
1,001
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
4,649
|
|
$
|
2,734
|
|
|
|
|
|
|
|
|
|
34
Table of Contents
On
June 21, 2010, we purchased all of the outstanding equity of CitySync Limited,
a privately-held developer and marketer of automatic number plate recognition
(ANPR) products. We believe the CitySync acquisition expands our addressable
market, strengthens our selling presence in Europe and extends the
opportunities for hybrid product developments. The purchase price was $7.9
million in cash plus 57,000 shares of our common stock, valued using the
closing price on the day before the acquisition, totaling approximately
$727,000. In conjunction with the purchase, we repaid seller loans, including
accrued interest, of $601,000. Following the acquisition, CitySync became a
wholly-owned subsidiary of ISS/Europe.
As
part of the purchase agreement, the sellers are eligible to receive an earn-out
based on the performance of the business for the next 18 months. Earn-outs will
be calculated as of each calendar year end and paid within 90 days thereof. The
earn-out is based on achieving certain revenue and minimum gross margins from
the sale of CitySync ANPR systems, and it is calculated in two separate periods,
each ending on December 31. In each period there are two tiers, and superior
performance could lead to a total earn-out of $2 million or higher, as the
earn-out is not capped. The 2010 earn-out achieved was $696,000. We had
initially determined the fair value of the 2010 earn-out to be $491,000 as of
June 30, 2010, and therefore we incurred an additional $205,000 that is
recognized in the consolidated statements of income under the caption
Acquisition related expenses. The estimate of the 2011 earn-out fair value of
$519,000 is unchanged.
At
June 30, 2010, we preliminarily estimated the value of goodwill from the
CitySync acquisition at $3.3 million and revised our estimate to $5.3 million
as of September 30, 2010. This estimate did not change as of December 31, 2010,
and management has determined the goodwill is no longer subject to look-back
adjustments.
The
purchase price was allocated on the basis of estimated fair value at the date
of the purchase. The final purchase price allocation is as follows (in
thousands):
|
|
|
|
|
Consideration transferred:
|
|
|
|
|
Cash
|
|
$
|
7,871
|
|
Fair value of common stock
|
|
|
727
|
|
Estimated
fair value of earn-out
|
|
|
1,010
|
|
|
|
|
|
|
Total purchase price
|
|
|
9,608
|
|
|
|
|
|
|
Allocation:
|
|
|
|
|
Net tangible current assets
|
|
|
(1,684
|
)
|
Property and equipment
|
|
|
(242
|
)
|
Liabilities
|
|
|
2,450
|
|
Deferred income taxes
|
|
|
1,876
|
|
Developed technology
|
|
|
(3,300
|
)
|
Trade names
|
|
|
(1,900
|
)
|
Other
intangibles
|
|
|
(1,500
|
)
|
|
|
|
|
|
Goodwill
|
|
$
|
5,308
|
|
|
|
|
|
|
In
conjunction with the acquisition, all of the shares of common stock issued in
connection with the transaction were placed in escrow to secure potential
indemnification obligations. Any shares remaining in escrow on December 31,
2012 will be released to the sellers.
The
results of CitySync operations are included in the accompanying financial
statements since the date of the acquisition. The following pro forma summary
presents the results of operations as if the acquisition had occurred on January
1, 2009. The table below includes our results for the periods as shown and for
CitySync based on a January fiscal year. The pro forma results are not
necessarily indicative of the results that would have been achieved had the
CitySync acquisition taken place on that date (in thousands, except per share
amounts):
|
|
|
|
|
|
|
|
|
|
Year Ended
December 31,
|
|
|
|
|
|
|
|
2010
|
|
2009
|
|
|
|
|
|
|
|
Total
revenue
|
|
$
|
34,088
|
|
$
|
32,034
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
2,508
|
|
|
2,937
|
|
|
Net income per share:
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.55
|
|
$
|
0.73
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
0.53
|
|
$
|
0.71
|
|
|
|
|
|
|
|
|
|
35
Table of Contents
In
2007, we purchased certain assets of EIS Electronic Integrated Systems, Inc.
(EIS), including its RTMS radar product line. As part of the purchase
agreement, the sellers are eligible to receive an earn-out based on the
performance of the EIS assets purchased for approximately three years after the
December 2007 purchase date. Earn-outs were calculated annually for 2008, 2009
and 2010. Earn-out payments related to the EIS asset purchase were recorded as
additional goodwill when earned. In 2009, the sellers were entitled to a $1.5
million earn-out for the second earn-out period, which was paid in March 2010.
For 2010, the final earn-out period, the sellers are entitled to a $1.7 million
earn-out, which is expected to be paid in March 2011.
|
|
5.
|
GOODWILL AND INTANGIBLE ASSETS
|
Goodwill
consists of $1.1 million related to our acquisition of Flow Traffic (Autoscope
segment), $8.2 million related to the EIS asset purchase (RTMS segment) and $5.4
million related to our acquisition of CitySync (CitySync segment). Because the
goodwill and intangible assets related to the CitySync acquisition are
accounted for in Great Britain Pounds, they are impacted by period-end rates of
exchange to United States Dollars and therefore may vary in different reporting
periods.
Intangible
assets consisted of the following (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
|
|
|
|
2010
|
|
2009
|
|
|
|
|
|
|
|
Developed technology (8 to 9 year life)
|
|
$
|
7,364
|
|
$
|
3,900
|
|
Trade names (5 to 8 year life)
|
|
|
3,193
|
|
|
1,200
|
|
Other intangibles (3 to 8 year life)
|
|
|
1,774
|
|
|
200
|
|
Less: Accumulated amortization
|
|
|
(2,818
|
)
|
|
(1,586
|
)
|
|
|
|
|
|
|
|
|
Total identifiable intangible assets, net
|
|
$
|
9,513
|
|
$
|
3,714
|
|
|
|
|
|
|
|
|
|
We
expect to recognize amortization expense for the intangible assets in the above
table in each of our years ending December 31 of $1.6 million in each of 2011
and 2012, and $1.3 million in each of 2013, 2014 and 2015. The weighted average
amortization period remaining for intangible assets is 6.5 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 had term loans with our bank. These credit
agreements were initially entered into on May 1, 2008 and replaced all prior
bank agreements, including the repayment of loans under the previous
agreements.
The
revolving line of credit agreement with Associated Bank, National Association,
or Associated Bank, provides up to $5.0 million in short-term borrowings at the
banks prime rate expiring May 1, 2012. Any loans are secured by inventories,
accounts receivable and equipment, and Associated Bank has the right of setoff
against our checking, savings and other accounts. There was no outstanding
balance under the line at December 31, 2010 and 2009.
In
December 2009, we entered into a term loan agreement for $4.0 million with
Associated Bank, which was fully repaid in September 2010. We previously had a
separate $4.0 million term note with Associated Bank that originated in May
2008 and was fully repaid in February 2009.
Warranty
liability and related activity consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
|
|
|
|
2010
|
|
2009
|
|
2008
|
|
|
|
|
|
|
|
|
|
Warranty
liability at beginning of year
|
|
$
|
289
|
|
$
|
217
|
|
$
|
157
|
|
Provisions
for estimated future warranty obligations
|
|
|
484
|
|
|
175
|
|
|
153
|
|
Costs
incurred for warranties honored
|
|
|
(149
|
)
|
|
(103
|
)
|
|
(93
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Warranty
liability at end of year
|
|
$
|
624
|
|
$
|
289
|
|
$
|
217
|
|
|
|
|
|
|
|
|
|
|
|
|
36
Table of Contents
We
rent office space and equipment under operating lease agreements expiring at
various dates through January 2015. Our leases currently provide for monthly
payments of $90,000, which is inclusive of our proportionate share of operating
expenses that exceed a base rent. Rent expense for office facilities was
$777,000 in 2010, $585,000 in 2009 and $555,000 in 2008.
Future
minimum annual lease payments under noncancelable operating leases for the
years ending December 31, 2011, 2012, 2013, 2014 and 2015 are $556,000,
$376,000, $353,000, $261,000 and $16,000, respectively.
Our
deferred tax assets (liabilities) are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
|
|
|
|
2010
|
|
2009
|
|
|
|
|
|
|
|
Current deferred tax assets (liabilities):
|
|
|
|
|
|
|
|
Accrued compensation
|
|
$
|
55
|
|
$
|
47
|
|
Prepaid expenses
|
|
|
(67
|
)
|
|
(48
|
)
|
Bad debt reserves
|
|
|
75
|
|
|
27
|
|
Warranty reserves
|
|
|
143
|
|
|
45
|
|
Other
|
|
|
24
|
|
|
66
|
|
Foreign net operating loss carryforwards
|
|
|
|
|
|
55
|
|
Less valuation allowance
|
|
|
|
|
|
(55
|
)
|
|
|
|
|
|
|
|
|
|
|
|
230
|
|
|
137
|
|
Non-current deferred tax assets
(liabilities):
|
|
|
|
|
|
|
|
Intangible asset amortization - EIS
|
|
|
1,369
|
|
|
1,525
|
|
Intangible asset amortization - CitySync
|
|
|
(1,840
|
)
|
|
|
|
Stock option expense (non-qualified)
|
|
|
164
|
|
|
131
|
|
Other
|
|
|
17
|
|
|
20
|
|
|
|
|
|
|
|
|
|
|
|
|
(290
|
)
|
|
1,676
|
|
|
|
|
|
|
|
|
|
Net deferred tax assets (liabilities)
|
|
$
|
(60
|
)
|
$
|
1,813
|
|
|
|
|
|
|
|
|
|
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
were $4.4 million, $3.3 million and $2.0 million in undistributed earnings of
our wholly-owned foreign subsidiaries at December 31, 2010, 2009 and 2008,
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.
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.
37
Table of Contents
The
components of income tax expense are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
|
|
|
|
2010
|
|
2009
|
|
2008
|
|
|
|
|
|
|
|
|
|
Current:
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
983
|
|
$
|
1,222
|
|
$
|
1,738
|
|
State
|
|
|
(65
|
)
|
|
23
|
|
|
38
|
|
Foreign
|
|
|
25
|
|
|
(29
|
)
|
|
564
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
943
|
|
|
1,216
|
|
|
2,340
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred:
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
(32
|
)
|
|
82
|
|
|
(59
|
)
|
State
|
|
|
(1
|
)
|
|
5
|
|
|
(23
|
)
|
Foreign
|
|
|
|
|
|
51
|
|
|
(51
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(33
|
)
|
|
138
|
|
|
(133
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Total income tax expense
|
|
$
|
910
|
|
$
|
1,354
|
|
$
|
2,207
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
before taxes for the foreign operations was $1.1 million, $1.3 million and $1.7
million for the years ended December 31, 2010, 2009 and 2008.
A
reconciliation of income taxes to the statutory federal rate is as follows (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
|
|
|
|
2010
|
|
2009
|
|
2008
|
|
|
|
|
|
|
|
|
|
Federal tax statutory rate
|
|
$
|
1,331
|
|
$
|
1,774
|
|
$
|
2,438
|
|
State taxes, net of federal benefit
|
|
|
(47
|
)
|
|
18
|
|
|
10
|
|
Research and development tax credits
|
|
|
(454
|
)
|
|
(301
|
)
|
|
(120
|
)
|
Non-deductible acquisition expenses and
earn-out
|
|
|
238
|
|
|
|
|
|
|
|
Domestic production activity deduction
|
|
|
(111
|
)
|
|
(62
|
)
|
|
(83
|
)
|
Effect of lower rates on foreign income
|
|
|
(43
|
)
|
|
(58
|
)
|
|
(125
|
)
|
Reduction in valuation allowance
|
|
|
(55
|
)
|
|
|
|
|
(77
|
)
|
Stock option expense
|
|
|
75
|
|
|
74
|
|
|
66
|
|
Adjustment of prior year tax credits and
refunds
|
|
|
(64
|
)
|
|
(77
|
)
|
|
(50
|
)
|
Uncertain tax positions
|
|
|
(33
|
)
|
|
(38
|
)
|
|
96
|
|
Other
|
|
|
73
|
|
|
(46
|
)
|
|
52
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
910
|
|
$
|
1,354
|
|
$
|
2,207
|
|
|
|
|
|
|
|
|
|
|
|
|
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, 2009
|
|
$
|
246
|
|
Additions for current year tax positions
|
|
|
|
|
Reductions as a result of lapses in statute
of limitations
|
|
|
(38
|
)
|
|
|
|
|
|
Balance at December 31, 2009
|
|
|
208
|
|
|
|
|
|
|
Additions for current year tax positions
|
|
|
|
|
Reductions as a result of lapses in statute
of limitations
|
|
|
(33
|
)
|
|
|
|
|
|
Balance at December 31, 2010
|
|
$
|
175
|
|
|
|
|
|
|
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, 2006.
We
have sublicensed the exclusive right to manufacture and market the Autoscope
technology in North America, the Caribbean and Latin America to Econolite
Control Products, Inc. (Econolite) and receive royalties from Econolite on
sales of the Autoscope system in those territories as well as in non-exclusive
territories as allowed from time to time. 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 term runs to
2028, unless terminated by either party upon three years notice.
38
Table of Contents
We
recognized royalty income from this agreement of $12.5 million, $12.1 million
and $13.3 million in 2010, 2009 and 2008, respectively.
We
derived the following percentages of our net revenues from the following
geographic regions:
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
2009
|
|
2008
|
|
|
|
|
|
|
|
|
|
Asia Pacific
|
|
|
|
11
|
%
|
|
|
|
10
|
%
|
|
|
|
12
|
%
|
|
Europe
|
|
|
|
26
|
%
|
|
|
|
15
|
%
|
|
|
|
16
|
%
|
|
North America
|
|
|
|
63
|
%
|
|
|
|
75
|
%
|
|
|
|
72
|
%
|
|
No
country other than the United States had revenue in excess of 10% of our total
revenue. The aggregate net book value of long-lived assets held outside of the
United States, not including goodwill and intangible assets, was $401,000 and
$288,000 at December 31, 2010 and 2009, respectively.
|
|
12.
|
SIGNIFICANT
CUSTOMERS AND CONCENTRATION OF CREDIT RISK
|
Royalty
income from Econolite comprised 40%, 49% and 50% of revenue in the years ended
December 31, 2010, 2009 and 2008, respectively. Accounts receivable from
Econolite were $2.6 million and $2.2 million at December 31, 2010 and 2009,
respectively. Major disruptions in the manufacturing and distribution of our
products by Econolite or the inability of Econolite to make payments on their
accounts receivable with us could have a material adverse effect on our
business, financial condition and results of operations. Not including
Econolite, one international customer comprised 15% of accounts receivable at
December 31, 2010 and a separate international customer comprised 10% of
accounts receivable at December 31, 2009.
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 and CitySync are
obligated to contribute to certain employee pension plans. We made
contributions totaling $131,000, $98,000 and $97,000 to the plans for 2010,
2009 and 2008, respectively.
|
|
14.
|
EQUITY AND
STOCK OPTIONS
|
In
April 2010, we sold 798,000 shares of our common stock to investors at $12.25
per share under a registration statement on Form S-3 declared effective by the
Securities and Exchange Commission in December 2009. Net of underwriting fees
and other offering expenses, we received $8.8 million in cash from the stock
sale.
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, although the options granted under the 1995 Plan remain outstanding
according to their terms. 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 2010, 2009 and 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Plan
Options Available
For Grant
|
|
Plan Options
Outstanding
|
|
Non-Plan
Options Outstanding
|
|
Weighted
Average
Exercise Price
Per Share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ISO
|
|
NQO
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31,
2007
|
|
|
122,200
|
|
|
119,615
|
|
|
175,618
|
|
|
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
|
|
|
154,745
|
|
|
212,988
|
|
|
6,000
|
|
$
|
10.59
|
|
Granted
|
|
|
(68,000
|
)
|
|
19,000
|
|
|
49,000
|
|
|
|
|
|
8.62
|
|
Exercised
|
|
|
|
|
|
(600
|
)
|
|
|
|
|
|
|
|
1.30
|
|
Plan addition
|
|
|
10,000
|
|
|
(10,000
|
)
|
|
|
|
|
|
|
|
9.22
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31,
2009
|
|
|
107,500
|
|
|
163,145
|
|
|
261,988
|
|
|
6,000
|
|
$
|
8.10
|
|
Granted
|
|
|
(85,000
|
)
|
|
40,300
|
|
|
44,700
|
|
|
|
|
|
12.33
|
|
Exercised
|
|
|
|
|
|
(20,200
|
)
|
|
(11,500
|
)
|
|
(6,000
|
)
|
|
3.31
|
|
Plan addition
|
|
|
135,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
15,000
|
|
|
(7,000
|
)
|
|
(8,000
|
)
|
|
|
|
|
6.69
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31,
2010
|
|
|
172,500
|
|
|
176,245
|
|
|
287,188
|
|
|
|
|
$
|
9.11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
39
Table of Contents
The
following table summarizes information about the stock options outstanding at
December 31, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
46,000
|
|
|
1.5
years
|
|
$
|
1.36
|
|
$
|
497,147
|
|
|
46,000
|
|
$
|
1.36
|
|
$
|
497,147
|
|
3.00-3.99
|
|
|
38,933
|
|
|
1.8
years
|
|
|
3.15
|
|
|
351,080
|
|
|
38,933
|
|
|
3.15
|
|
|
351,080
|
|
8.00-8.99
|
|
|
48,000
|
|
|
5.9
years
|
|
|
8.63
|
|
|
169,755
|
|
|
13,500
|
|
|
8.58
|
|
|
48,400
|
|
9.00-9.99
|
|
|
172,500
|
|
|
4.4
years
|
|
|
9.20
|
|
|
511,371
|
|
|
55,125
|
|
|
9.16
|
|
|
165,811
|
|
11.00-11.99
|
|
|
15,000
|
|
|
5.8
years
|
|
|
11.19
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12.00-12.99
|
|
|
115,000
|
|
|
4.9
years
|
|
|
12.53
|
|
|
|
|
|
31,500
|
|
|
12.51
|
|
|
|
|
15.00-15.99
|
|
|
28,000
|
|
|
1.0
years
|
|
|
15.30
|
|
|
|
|
|
28,000
|
|
|
15.30
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
463,433
|
|
|
4.0
years
|
|
$
|
9.11
|
|
$
|
1,529,353
|
|
|
213,058
|
|
$
|
7.64
|
|
$
|
1,062,438
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
fair value of the 85,000, 68,000 and 95,500 options granted during 2010, 2009
and 2008, respectively, was $348,000, $279,000 and $388,000.
The
total intrinsic value of options exercised during 2010, 2009 and 2008 was
$352,000, $7,000 and $292,000, respectively. The total fair value of option
shares vested during 2010, 2009 and 2008 was $716,000, $578,000 and $807,000,
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 2010, 2009 and 2008, respectively:
zero dividend yield; expected volatility of 78%, 45% and 41%; risk-free
interest rate of 2.84%, 3.19% and 3.68%; and expected life of 3.68, 3.0 and 3.5
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 U.S. 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 our stock over the past three years. We have not historically
paid any dividends and do not expect to in the foreseeable future. We
recognized stock option expense of $342,000, $341,000 and $339,000 in the years
ended December 31, 2010, 2009 and 2008, respectively, and the expense is
included within general and administrative expense on the consolidated
statements of income.
There
were 213,058, 181,383 and 183,633 options exercisable at December 31, 2010,
2009 and 2008, respectively. The weighted average exercise price of these
options was $7.64, $6.39 and $2.94 at December 31, 2010, 2009 and 2008,
respectively.
We
currently operate in three reportable segments: Autoscope, RTMS and CitySync.
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. CitySync is our ANPR product line
acquired in the CitySync purchase in June 2010. All segment revenues are
derived from external customers.
Due
to the CitySync acquisition and related changes in how we manage our business,
we may reevaluate our segment definitions in the future.
The
following tables set forth selected unaudited financial information for each of
the Companys reportable segments (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31, 2010
|
|
|
|
|
|
|
|
Autoscope
|
|
RTMS
|
|
CitySync
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
16,659
|
|
$
|
9,819
|
|
$
|
5,203
|
|
$
|
31,681
|
|
Depreciation
|
|
|
293
|
|
|
173
|
|
|
32
|
|
|
498
|
|
Amortization of intangible
assets
|
|
|
|
|
|
768
|
|
|
450
|
|
|
1,218
|
|
Income (loss) before income
taxes
|
|
|
2,618
|
|
|
1,823
|
|
|
(526
|
)
|
|
3,915
|
|
Capital expenditures
|
|
|
325
|
|
|
77
|
|
|
14
|
|
|
416
|
|
Total assets
|
|
|
26,915
|
|
|
13,202
|
|
|
14,239
|
|
|
54,356
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
40
Table of Contents
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31, 2009
|
|
|
|
|
|
|
|
Autoscope
|
|
RTMS
|
|
Total
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
16,240
|
|
$
|
8,353
|
|
$
|
24,593
|
|
Depreciation
|
|
|
292
|
|
|
132
|
|
|
424
|
|
Amortization of intangible
assets
|
|
|
|
|
|
768
|
|
|
768
|
|
Income before income taxes
|
|
|
3,807
|
|
|
1,412
|
|
|
5,219
|
|
Capital expenditures
|
|
|
555
|
|
|
139
|
|
|
694
|
|
Total assets
|
|
|
29,752
|
|
|
11,398
|
|
|
41,150
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31, 2008
|
|
|
|
|
|
|
|
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
|
|
The CitySync segment loss
before income taxes includes $817,000 of acquisition related expenses.
|
|
16.
|
RELATED
PARTY TRANSACTIONS
|
Dan Manor, who was a named
executive officer in 2010, is a beneficiary of the earn-out for the EIS asset
purchase as further described in Note 4.
41
Table of Contents
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, 2010 and 2009, and the related consolidated statements of income,
shareholders equity and comprehensive income, and cash flows for each of the
three years in the period ended December 31, 2010. 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 financial position of Image Sensing
Systems, Inc. and subsidiaries as of December 31, 2010 and 2009, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 2010 in conformity with accounting principles
generally accepted in the United States of America.
|
/s/ GRANT THORNTON LLP
|
|
Minneapolis, Minnesota
|
March 24, 2011
|
42
Table of Contents
|
|
I
tem
9.
|
Changes in and Disagreements with
Accountants on Accounting and Financial Disclosure
|
None.
|
|
I
tem
9A.
|
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. 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, 2010. 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,
2010.
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.
|
|
I
tem
9B.
|
Other Information
|
None.
43
Table of Contents
P
ART III
|
|
I
tem
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 2011 annual meeting of shareholders are incorporated
into this Annual Report on Form 10-K by reference.
|
|
I
tem
11.
|
Executive Compensation
|
The
sections entitled Executive Compensation and Compensation of Directors in
our definitive proxy statement for the 2011 annual meeting of shareholders are
incorporated into this Annual Report on Form 10-K by reference.
|
|
I
tem
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, 2010 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)
|
|
|
463,433
|
|
$
|
9.11
|
|
|
172,500
|
|
|
|
(1)
Includes shares underlying stock options granted under the Image Sensing
Systems, Inc. 1995 Long-Term Incentive and Stock Option Plan (1995 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 172,500 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 2011 annual meeting of
shareholders is incorporated into this Form Annual Report on 10-K by reference.
|
|
I
tem
13.
|
Certain Relationships and Related Transactions,
and Director Independence
|
The
section entitled Certain Relationships and Related Transactions in our
definitive proxy statement for the 2011 annual meeting of shareholders is
incorporated into this Annual Report on Form 10-K by reference.
|
|
I
tem
14.
|
Principal Accounting 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 2011 annual meeting of
shareholders are incorporated into this Annual Report on Form 10-K by
reference.
44
Table of Contents
P
ART IV
|
|
It
em
15.
|
Exhibits and Financial Statement
Schedules
|
(a)
Documents filed as part of this report:
|
|
|
|
1.
|
Financial statements
|
|
|
|
|
|
The following consolidated
financial statements are included in Part II, Item 8. Financial Statements
and Supplementary Data:
|
|
|
|
|
|
Consolidated Balance Sheets
as of December 31, 2010 and 2009
|
|
|
Consolidated Statements of
Income for the years ended December 31, 2010, 2009 and 2008
|
|
|
Consolidated Statements of
Cash Flow for the years ended December 31, 2010, 2009 and 2008
|
|
|
Consolidated Statements of
Shareholders Equity and Comprehensive Income for the years ended December
31, 2010, 2009 and 2008
|
|
|
Notes to Consolidated Financial Statements
|
|
|
Report of Independent
Registered Public Accounting Firm
|
|
|
|
|
2.
|
Financial Statement
Schedules:
|
|
|
|
|
|
All financial statement
schedules have been omitted because they are not required or not applicable,
or the information is included in the Consolidated Financial Statements or
Notes.
|
|
|
|
|
3.
|
The following documents are
filed as exhibits to this report:
|
|
|
|
Exhibit No.
|
Description
|
|
|
|
1.1
|
Underwriting Agreement by
and among ISS, Wedbush Securities Inc. and Craig-Hallum Capital Group Inc.
dated April 15, 2010, incorporated by reference to Exhibit 1.1 to ISS Current
Report on Form 8-K dated April 15, 2010.
|
|
|
|
|
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.)
|
|
|
|
|
2.2
|
Share Purchase Agreement
dated June 21, 2010 by and among ISS, Image Sensing Systems Europe Limited,
CitySync Limited and three shareholders of CitySync Limited, incorporated by
reference to Exhibit 2.1 to ISS Quarterly Report on Form 10-Q for the
quarter ended June 30, 2010.
|
|
|
|
|
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.
|
45
Table of Contents
|
|
|
|
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
|
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 Annual Report on
Form 10-K for the year ended December 31, 2007 (2007 Form 10-K).
|
|
|
|
|
10.6
|
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.
|
|
|
|
|
10.7**
|
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.
|
|
|
|
|
10.8
|
Manufacturing, Distributing
and Technology License Agreement dated June 11, 1991 by and between ISS and
Econolite Control Products, Inc. (Econolite), incorporated by reference to
Exhibit 10.1 to the Registration Statement.
|
|
|
|
|
10.09
|
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.
|
|
|
|
|
10.10
|
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.
|
|
|
|
|
10.11
|
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.
|
|
|
|
|
10.12
|
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.
|
|
|
|
|
10.13**
|
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.
|
|
|
|
|
10.14
|
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).
|
|
|
|
|
10.15
|
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.
|
|
|
|
|
10.16
|
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.
|
|
|
|
|
10.17
|
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.
|
|
|
|
|
10.18
|
Modification Agreement
dated December 28, 2009 by and between ISS and Associated Bank under which
ISS and Associated Bank amended the Loan Agreement dated as of May 1, 2008 by
and between ISS and Associated Bank, incorporated by reference to Exhibit
10.18 to ISS Annual Report on Form 10-K for the year ended December 31, 2009
(2009 Form 10-K).
|
|
|
|
|
10.19
|
Promissory Note (Loan)
dated December 28, 2009 in the original principal amount of $4,000,000 issued
by ISS to Associated Bank, incorporated by reference to Exhibit 10.19 to the
2009 Form 10-K.
|
46
Table of Contents
|
|
|
|
10.20
|
Lease dated February 1,
2010 between CitySync Limited and Nortrust Nominees Limited, incorporated by
reference to Exhibit 10.1 to ISS Quarterly Report on Form 10-Q for the
quarter ended June 30, 2010.
|
|
|
|
|
10.21
|
Third Modification Agreement
dated December 28, 2010 by and between ISS and Associated Bank under which
ISS and Associated Bank amended the Loan Agreement dated as of May 1, 2008 by
and between ISS and Associated Bank (filed herewith).
|
|
|
|
|
21
|
List of Subsidiaries of ISS.
|
|
|
|
|
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.
|
47
Table of Contents
S
ignatures
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 24, 2011
|
|
|
|
Kenneth R. Aubrey
|
|
|
President and Chief
Executive Officer
|
|
|
(Principal Executive
Officer)
|
|
|
Each
person whose signature to this Annual 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 Annual Report on Form 10-K, and any and all instruments or
documents filed as part of or in connection with this Annual Report on Form
10-K or any 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 24, 2011
|
|
|
|
Kenneth R. Aubrey
|
|
|
President and Chief
Executive Officer
|
|
|
(Principal Executive
Officer)
|
|
|
|
|
|
/s/ Gregory R. L. Smith
|
|
Date:
March 24, 2011
|
|
|
|
Gregory R. L. Smith
|
|
|
Chief Financial Officer
|
|
|
(Principal Financial and
Principal Accounting Officer)
|
|
|
|
|
|
/s/ James Murdakes
|
|
Date:
March 24, 2011
|
|
|
|
James Murdakes
|
|
|
Chairman of the Board of
Directors
|
|
|
|
|
|
/s/ James W. Bracke
|
|
Date:
March 24, 2011
|
|
|
|
James W. Bracke
|
|
|
Director
|
|
|
|
|
|
/s/ Michael G. Eleftheriou
|
|
Date:
March 24, 2011
|
|
|
|
Michael G. Eleftheriou
|
|
|
Director
|
|
|
|
|
|
/s/ Panos G. Michalopoulos
|
|
Date:
March 24, 2011
|
|
|
|
Panos G. Michalopoulos
|
|
|
Director
|
|
|
|
|
|
/s/ Sven A. Wehrwein
|
|
Date:
March 24, 2011
|
|
|
|
Sven A. Wehrwein
|
|
|
Director
|
|
|
48
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