UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-QSB
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Quarterly ended March 31, 2001 Commission File Number 0-26056
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IMAGE SENSING SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
Minnesota 41-1519168
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State or other jurisdiction of I.R.S. Employer Identification No.
incorporation
500 SPRUCE TREE CENTRE
1600 UNIVERSITY AVE. W.
ST. PAUL, MN 55104-3825
(Address of principal executive offices)
Registrant's telephone number, including area code: (651) 603-7700
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No __
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APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practical date.
Common Stock, $.01 Par Value - 3,146,400 shares as of May 4, 2001.
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IMAGE SENSING SYSTEMS, INC.
INDEX
PART I. FINANCIAL INFORMATION Page No.
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Item 1. Condensed Consolidated Financial Statements:
Condensed Consolidated Balance Sheets
March 31, 2001 and December 31, 2000 4
Condensed Consolidated Statements of Operations
Three-month periods ended March 31, 2001 and 2000 5
Condensed Consolidated Statements of Cash Flows
Three-month periods ended March 31, 2001 and 2000 6
Notes to Condensed Financial Statements 7
Item 2. Management's Discussion and Analysis of
Results of Operations and Financial Condition 8
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 10
Signatures 11
2
SAFE HARBOR STATEMENT UNDER THE
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
This Quarterly Report on Form 10-QSB contains forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, as amended.
These forward-looking statements involve risks and uncertainties that may cause
our actual results to differ materially from the results discussed in the
forward-looking statements. For example, we may fail to achieve the results
discussed because: we fail to achieve market acceptance of our products; third
parties upon whom we depend for manufacturing and marketing fail to perform; we
are unable to pay royalties owed under critical license agreements; we fail to
diversify our product offerings; our revenues fluctuate due to our dependence on
sales to governmental entities; we fail to secure adequate protection for our
intellectual property rights; we fail to respond to evolving industry standards
and technological changes; or we fail to properly manage growth in revenues
and/or production requirements or to meet our future capital requirements. The
forward-looking statements are qualified in their entirety by the cautions and
risk factors set forth in Exhibit 99, under the caption "Cautionary Statement,"
to this Quarterly Report.
3
PART I - FINANCIAL INFORMATION
IMAGE SENSING SYSTEMS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(ROUNDED TO THOUSANDS)
March 31, December 31,
2001 2000
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ASSETS (Unaudited) (Note)
Current assets:
Cash and cash equivalents $ 1,334,000 $ 1,780,000
Accounts receivable 1,229,000 943,000
Inventories 395,000 370,000
Prepaid expenses 91,000 117,000
Deferred income taxes 92,000 92,000
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Total current assets 3,141,000 3,302,000
Property and equipment, net 406,000 383,000
Other assets:
Capitalized software development costs, net 1,388,000 1,453,000
Deferred income taxes 34,000 34,000
Other 110,000 110,000
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1,532,000 1,597,000
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Total Assets $ 5,079,000 $ 5,282,000
===================== =====================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 546,000 $ 433,000
Accrued compensation 315,000 365,000
Deferred income 109,000 109,000
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Total current liabilites 970,000 907,000
Minority interest 82,000 134,000
Shareholders' equity:
Common stock 32,000 32,000
Additional paid-in capital 4,582,000 4,572,000
Accumulated (deficit) (587,000) (363,000)
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4,027,000 4,241,000
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Total liabilities and shareholders' equity $ 5,079,000 $ 5,282,000
===================== =====================
Note: The balance sheet at December 31, 2000 has been derived from the audited
financial statements at that date but does not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements.
See accompanying notes
4
IMAGE SENSING SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED - ROUNDED TO THOUSANDS)
Three-Month Period Ended
March 31
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2001 2000
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REVENUE:
Product sales $ 386,000 $ 310,000
Royalties 1,012,000 760,000
Consulting services 35,000 25,000
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1,433,000 1,095,000
COSTS OF REVENUE:
Product sales 201,000 166,000
Royalties 100,000 75,000
Consulting services 30,000 14,000
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331,000 255,000
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Gross profit 1,102,000 840,000
OPERATING EXPENSES:
General and Administrative 601,000 552,000
Business development 537,000 349,000
Research and development 213,000 -
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1,351,000 901,000
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Income (loss) from operations (249,000) (61,000)
Other income, net 27,000 29,000
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Income (loss) before income taxes (222,000) (32,000)
Income tax benefits - 117,000
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Net income (loss) before minority interest (222,000) 85,000
Minority interest (2,000) -
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Net income (loss) $ (224,000) $ 85,000
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Net income (loss) per common share-basic and diluted $ (0.08) $ 0.03
====================================
Weighted average number of common shares outstanding:
Basic and diluted 3,146,000 3,014,600
====================================
See accompanying notes
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IMAGE SENSING SYSTEMD, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED - ROUNDED TO THOUSANDS)
Three-Month Period Ended
March 31
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2001 2000
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OPERATING ACTIVITIES:
Net income $ (224,000) $ 85,000
Adjustments to reconcile net income to
net cash provided by operating activities (95,000) 67,000
Minority interest (2,000) -
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Net cash provided by operating activities (321,000) 152,000
INVESTING ACTIVITIES:
Purchase of property and equipment (85,000) (50,000)
Other - -
Capitalized software development costs - (172,000)
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Net cash used in investing activities (85,000) (222,000)
FINANCING ACTIVITIES:
Proceeds from exercise of stock options 10,000 99,000
Dividends paid by Flow Traffic (50,000) -
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Net cash used in financing activities (40,000) 99,000
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Increase in cash and cash equivalents (446,000) 29,000
Cash and cash equivalents, beginning of period 1,780,000 1,319,000
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Cash and cash equivalents, end of period $ 1,334,000 $ 1,348,000
==========================================
See accompanying notes
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IMAGE SENSING SYSTEMS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
March 31, 2001
Note A: Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-QSB. Accordingly,
they do not include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. In the opinion
of management, all adjustments (consisting of normal recurring accruals)
considered necessary for a fair presentation have been included. Operating
results for the three-month period ended March 31, 2001 are not necessarily
indicative of the results that may be expected for the year ending December 31,
2001. For further information, refer to the financial statements and footnotes
thereto for the year ended December 31, 2000, included in our report on Form
10-KSB for the year ended December 31, 2000.
Note B: Deferred Tax Asset Valuation Allowance
We recognized an income tax benefit of $117,000 in the three-month period ended
March 31, 2000. Management believes it is more likely that not that the net
deferred tax asset will be realized over the next three years.
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Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview:
We have developed proprietary machine vision technology that converts real world
information into digital electronic signals for processing by computer, and have
applied it to traffic management problems. Our technology uses standard video
and computer equipment, combined with proprietary technology, including complex
detection algorithms, computer software, special purpose hardware, and a
Microsoft Windows(R)-based graphical user interface that enables standard video
cameras to work with the Autoscope system.
Results of Operations (Comparison of Three-Month Periods Ended March 31, 2001
and March 31, 2000):
Revenues for the first quarter of 2001 were $1,433,000, up 31% from $1,095,000
for the same period a year ago. The increase is attributable to increased
royalty income ($1,012,000 in 2001 versus $760,000 in the same period a year
ago).
Gross profits were $1,102,000 in the first quarter of 2001, or 77% of revenue,
compared to $840,000, or 77% of revenue, for the same period a year ago. The
margin percent has remained constant due to the same proportionate revenue mix
from royalties, product sales and consulting services.
General and administrative expenses were $601,000 for the first quarter of 2001
compared to $552,000 for the same period a year ago. The increase is due to
additional expenses related to this year's annual report and proxy.
Business development expenses were $537,000 for the first quarter of 2001
compared to $349,000 for the same period a year ago. The increase was due to
front-loaded business development expenses (marketing trade shows and
advertising) which is typical of the beginning of a new business year and in
line with the plan for fiscal year 2001. These expenditures are for development
of the Wireless Technology business.
8
Research and development expenses were $213,000 in the first quarter of 2001
compared to none for the same period a year ago. All development efforts in the
first quarter of 2000 involved software development for the new Autoscope Solo
Release 3 and New Comserver products, and all associated costs were capitalized
in accordance with Statement of Financial Accounting Standards No. 86.
Other income, net was $27,000 in the first quarter of 2001 compared to $29,000
for the same period a year ago. The decrease is due primarily to slightly lower
cash balances and lower yield on our short-term investments.
We recognized no income tax benefit in 2001, versus a $117,000 benefit in the
first quarter of 2000. Management believes it is more likely than not that the
net deferred tax asset will be realized over the next three years.
We expect to avail ourselves of net operating loss and research and development
tax credit carryforwards, and to incur insignificant income tax expense in 2001.
As of March 31, 2001, we have net operating loss carryforwards for income tax
purposes of $1,488,000 and research and development tax credits of $245,000 that
expire in the years 2007 through 2019.
Liquidity and Capital Resources:
Cash provided by operating activities was $(373,000) for the first quarter of
2001, compared to $152,000 for the same period in 2000. The significant use of
cash in operations in the first quarter of 2001 was primarily due to front-
loaded business development (marketing trade shows and advertising) and research
and development spending.
Capital expenditures were $84,000 for the first quarter of 2001, compared to
$50,000 for the same period in 2000. We do not expect to make significant
changes to the level of investments in capital expenditures for the balance of
2001. The Company incurred software and other research and development costs of
$213,000 in the first quarter of 2001 compared to the $172,000 of software
development costs that was capitalized in the first quarter 2000.
Management believes that our cash and investment position, anticipated cash
flows from operations, and funds available through our bank line of credit will
be sufficient to meet working capital requirements for current operations and
planned new product introductions for the foreseeable future.
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PART II: OTHER INFORMATION
Item 1. Legal Proceedings
Not applicable
Item 2. Changes in Securities
Not applicable
Item 3. Defaults upon Senior Securities
Not applicable
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable
Item 5. Other Information
Not applicable
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
The following exhibits are filed as part of this quarterly
report on Form 10-QSB for the quarterly period ended
March 31, 2001:
Exhibit 99 Cautionary Statement, incorporated herein by
reference to Exhibit 99 filed with the 2000 10-KSB.
(b) Reports
No reports on Form 8-K were filed during the quarter covered
by this Form 10-QSB
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Image Sensing Systems, Inc.
Dated: May 15, 2001 /s/ William L. Russell
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William L. Russell
Chairman and Chief Executive Officer
(principal executive officer)
Dated: May 15, 2001 /s/ Jeffrey F. Martin
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Jeffrey F. Martin
Chief Financial Officer
(principal financial and accounting officer)
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