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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-QSB
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the period ended March 31, 1999 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 of other jurisdiction of I.R.S. Employer Identification No.
incorporation organization
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 ___
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 -- 2,479,200 shares as of May 5, 1999.
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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, 1999 and December 31, 1998 4
Condensed Consolidated Statements of Operations
Three-month periods ended March 31, 1999 and 1998 5
Condensed Consolidated Statements of Cash Flows
Three-month periods ended March 31, 1999 and 1998 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 5. Other Information 10
Item 6. Exhibits and Reports on Form 8-K 10
Signatures 11
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
the Company's actual results to differ materially from the results discussed in
the forward-looking statements. Factors that might cause such differences
include, but are not limited to, lack of market acceptance of the Company's
products; dependence on third parties for manufacturing and marketing
capabilities and continuing ability to pay royalties owed; inability of the
Company to diversify its product offerings; revenue fluctuations caused by the
Company's dependence on sales to governmental entities; failure of the Company
to secure adequate protection for the Company's intellectual property rights;
failure of the Company to respond to evolving industry standards and
technological changes; inability
2
of the Company to properly manage growth in revenues and/or production
requirements; inability of the Company to meet its future additional capital
requirements; and control of the voting stock by insiders. 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
Item 1. Financial Statements
IMAGE SENSING SYSTEMS, INC.
CONDENSED CONSOLIDATED BALANCE SHEET
March 31, December 31,
1999 1998
------------ ------------
ASSETS (Unaudited) (Note)
Current assets:
Cash and cash equivalents $ 1,561,000 $ 1,326,000
Accounts receivable 1,026,000 1,402,000
Inventories 54,000 74,000
Prepaid expenses 102,000 32,000
Deferred income taxes 57,000 57,000
------------ ------------
Total current assets 2,800,000 2,891,000
Property and equipment, net 443,000 470,000
Other assets:
Capitalized software development costs, net 824,000 856,000
Deferred income taxes 318,000 318,000
Other 88,000
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1,230,000 1,174,000
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Total Assets $ 4,473,000 $ 4,535,000
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 342,000 $ 296,000
Accrued compensation 190,000 270,000
Deferred income 89,000 252,000
------------ ------------
Total current liabilites 621,000 818,000
Deferred income tax liability 366,000 366,000
Minority interest 80,000
Shareholders' equity:
Common stock 25,000 25,000
Additional paid-in capital 3,890,000 3,890,000
Retained earnings (deficit) (509,000) (564,000)
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3,406,000 3,351,000
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Total liabilities and shareholders' equity $ 4,473,000 $ 4,535,000
============ ============
Note: The balance sheet at December 31, 1998 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)
Three-Month Period Ended
March 31
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1999 1998
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REVENUE:
Product sales $ 334,000 $ 275,000
Royalties 760,000 470,000
Consulting services 62,000 13,000
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1,156,000 758,000
COSTS OF REVENUE:
Product sales 160,000 153,000
Royalties 82,000 53,000
Consulting services 22,000 3,000
-----------------------------
264,000 209,000
-----------------------------
Gross profit 892,000 549,000
OPERATING EXPENSES:
Selling, general and administrative 664,000 577,000
Research and development 189,000 --
-----------------------------
853,000 577,000
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Income (loss) from operations 39,000 (28,000)
Other income, net 16,000 29,000
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Income before income taxes 55,000 1,000
Income taxes -- --
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Net income $ 55,000 $ 1,000
=============================
Net income per common share-basic and diluted $ 0.02 $ 0.00
=============================
Weighted average number of common
shares outstanding:
Basic 2,479,000 2,478,000
=============================
Diluted 2,531,000 2,478,000
=============================
See accompanying notes
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IMAGE SENSING SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Three-Month Period Ended
March 31
------------------------------
1999 1998
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OPERATING ACTIVITIES:
Net income $ 55,000 $ 1,000
Adjustments to reconcile net income to
net cash provided by operating activities 217,000 533,000
------------------------------
Net cash provided by operating activities 272,000 534,000
INVESTING ACTIVITIES:
Purchase of property and equipment (27,000) (12,000)
Other (10,000) --
Capitalized software development costs -- (259,000)
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Net cash used in investing activities (37,000) (271,000)
FINANCING ACTIVITIES: -- --
------------------------------
Increase in cash and cash equivalents 235,000 263,000
Cash and cash equivalents, beginning of period 1,326,000 2,000,000
------------------------------
Cash and cash equivalents, end of period $ 1,561,000 $ 2,263,000
==============================
See accompanying notes
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IMAGE SENSING SYSTEMS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
March 31, 1999
Note A: Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principals 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, 1999 are not necessarily
indicative of the results that may be expected for the year ending December 31,
1999. For further information, refer to the financial statements and footnotes
thereto for the year ended December 31, 1998.
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Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
(Three Month Period Ended March 31, 1999)
Revenues for the first quarter of 1999 were $1,156,000 up 53% from $758,000 for
the same period a year ago. The increase in first quarter revenues was due
primarily to more sales of Autoscope(R) systems by both Image Sensing Systems,
Inc. (ISS) and its majority owned subsidiary and by its North American
distributor, Econolite Control Products, Inc. Econolite reported a significant
sale that represented a 33 system extension of an existing project in Michigan.
Asian sales were also better than expected with 12 units sold in the first
quarter of 1999 compared to no sales in the first quarter of 1998.
Gross profits were $892,000 in the first quarter of 1999, or 77% of revenue,
compared to $549,000, or 72% of revenue, for the same period a year ago. The
increased margin in 1999 was due primarily to proportionately more revenue from
royalties, which have significantly higher gross profit margins than product
sales or consulting services.
Selling, general and administrative expenses were $664,000 for the first quarter
of 1999 compared to $577,000 for the same period a year ago. The increase was
due primarily to increased efforts in business development.
Research and development expenses were $189,000 in the first quarter of 1999
compared to none for the same period a year ago. The increase resulted because
all development efforts in the first quarter of 1998 were directed toward
software development for the new Autoscope Solo product with associated costs
capitalized in accordance with Statement of Financial Accounting Standards No.
86.
Other income, net was $16,000 in the first quarter of 1999 compared to $29,000
for the same period a year ago. The decrease resulted due to a decrease in
interest bearing cash equivalents during the first quarter on 1999.
The Company expects to avail itself of operating loss and research and
development tax credit carryforwards and incur no income tax expense in 1999.
Liquidity and Capital Resources:
Cash provided by operating activities was $272,000 for the first quarter of
1999, compared to $534,000 for the same period in 1998. The reduced cash flow
from operations in the first quarter of 1999 was primarily due to an unusually
large collection on accounts receivables for the first quarter of 1998 compared
to 1999.
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Capital expenditures were $27,000 for the first quarter of 1999, compared to
$12,000 for the same period in 1998. The Company does not expect to make
significant changes to the level of investments in capital expenditures for the
balance of 1999. The Company is no longer incurring software development costs
that should be capitalized, whereas $259,000 in such costs were incurred in the
first quarter of 1998.
Management believes that its cash and investment position, anticipated cash
flows from operations, and funds available through its bank line of credit will
be sufficient to meet working capital requirements for current operations and
planned new product introductions for the foreseeable future.
Impact of the Year 2000 Issue
The Year 2000 Issue is the result of computer programs being written using two
digits rather than four to define the applicable year. Some computer programs
that have date-sensitive software may recognize a date using "00" as the year
1900 rather than the year 2000. All of the software produced by the Company has
been analyzed and the Company is not aware of any potential for date recognition
problems in its products. However, the Company also uses off-the-shelf software
(Administrative Software) produced by third parties for use in administrative
functions such as word processing, network administration, voice mail messaging,
billing and record keeping. In the event that any of such programs are
susceptible to date recognition problems, this could result in a system failure
or miscalculations causing disruption of operations, including, among other
things, intra-company communications, preparation of invoices and collection of
accounts receivables, and many other normal business activities.
The Company has made every attempt to identify all relevant software that may
affect the Company's operations through surveys and examination. Based on risk
assessments that have been completed for the majority of the Company's
operations, the Company must replace some of its Administrative Software so that
its computer systems will properly utilize dates beyond December 31, 1999. The
Company expects to convert its business operations to Year 2000 compatible
software during the first half of 1999 by a combination of conversion to new
software and upgrading existing software. The cost of these conversions is
expected to be less than $20,000. However, there can be no guarantee that the
Administrative Software on which the Company's systems rely will be timely
converted, or that a failure to convert by another company, or a conversion that
is incompatible with the Company's systems, would not have a material adverse
effect on the Company.
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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, 1999:
27 Financial Data Schedule
99 Cautionary Statement
(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.
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(Registrant)
Dated: May 14, 1999 /s/ William L. Russell
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William L. Russell
President and Chief Executive Officer
(principal executive officer)
Dated: May 14, 1999 /s/ Arthur J. Bourgeois
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Arthur J. Bourgeois
Chief Financial Officer
(principal financial and accounting officer)
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