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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 September 30, 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 October 28, 1999.
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IMAGE SENSING SYSTEMS, INC.
INDEX
PART I. FINANCIAL INFORMATION Page No.
Item 1. Condensed Consolidated Financial Statements:
Condensed Consolidated Balance Sheets
September 30, 1999 and December 31, 1998 4
Condensed Consolidated Statements of Operations
Three- and nine-month periods ended September 30, 1999 and 1998 5
Condensed Consolidated Statements of Cash Flows
Nine-month periods ended September 30, 1999 and 1998 6
Notes to Condensed Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of
Results of Operations and Financial Condition 8
PART II. OTHER INFORMATION
Item 4. Other Information 11
Item 6. Exhibits and Reports on Form 8-K 11
Signatures 12
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
2
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 of the Company to properly manage growth in
revenue 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
September 30 December 31,
1999 1998
----------- -----------
ASSETS (Unaudited) (Note)
Current assets:
Cash and cash equivalents $ 1,371,000 $ 1,326,000
Accounts receivable 850,000 1,402,000
Inventories 87,000 74,000
Prepaid expenses 130,000 32,000
Deferred income taxes 57,000 57,000
----------- -----------
Total current assets 2,495,000 2,891,000
Property and equipment, net 385,000 470,000
Other assets:
Capitalized software development costs, net 759,000 856,000
Deferred income taxes 318,000 318,000
Other 87,000 --
----------- -----------
1,164,000 1,174,000
----------- -----------
Total assets $ 4,044,000 $ 4,535,000
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 263,000 $ 296,000
Accrued compensation 181,000 270,000
Deferred income 35,000 252,000
----------- -----------
Total current liabilites 479,000 818,000
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) (796,000) (564,000)
----------- -----------
3,119,000 3,351,000
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Total liabilities and shareholders' equity $ 4,044,000 $ 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.
4
IMAGE SENSING SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three-Month Period Ended Nine-Month Period Ended
September 30 September 30
--------------------------- ---------------------------
1999 1998 1999 1998
--------------------------- ---------------------------
REVENUE:
Product sales $ 268,000 $ 222,000 $ 1,044,000 $ 733,000
Royalties 608,000 344,000 1,996,000 1,313,000
Consulting services 19,000 111,000 142,000 178,000
--------------------------- ---------------------------
895,000 677,000 3,182,000 2,224,000
COSTS OF REVENUE:
Product sales 161,000 80,000 538,000 342,000
Royalties 63,000 40,000 215,000 150,000
Consulting services 10,000 41,000 58,000 66,000
--------------------------- ---------------------------
234,000 161,000 811,000 558,000
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Gross profit 661,000 516,000 2,371,000 1,666,000
OPERATING EXPENSES:
Selling, general and administrative 751,000 522,000 2,117,000 1,680,000
Research and development 174,000 -- 543,000 --
--------------------------- ---------------------------
925,000 522,000 2,660,000 1,680,000
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Income (loss) from operations (264,000) (6,000) (289,000) (14,000)
Other income, net 17,000 23,000 57,000 78,000
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Income (loss) before income taxes (247,000) 17,000 (232,000) 64,000
Income taxes -- -- -- --
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Net income (loss) $ (247,000) $ 17,000 $ (232,000) $ 64,000
=========================== ===========================
Net income (loss) per common share-basic
and diluted $ (0.10) $ 0.01 $ (0.09) $ 0.03
=========================== ===========================
Weighted average number of common
shares outstanding
Basic 2,479,200 2,482,000 2,479,200 2,481,000
=========================== ===========================
Diluted 2,479,200 2,482,000 2,479,200 2,484,000
=========================== ===========================
See accompanying notes
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IMAGE SENSING SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Nine-Month Period Ended
September 30
---------------------------
1999 1998
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OPERATING ACTIVITIES:
Net income (loss) $ (232,000) $ 64,000
Adjustments to reconcile net income (loss) to
net cash provided by operating activities 365,000 249,000
---------------------------
Net cash provided by operating activities 133,000 313,000
INVESTING ACTIVITIES:
Purchase of property and equipment (78,000) (70,000)
Other (10,000)
Capitalized software development costs (825,000)
---------------------------
Net cash used in investing activities (88,000) (895,000)
FINANCING ACTIVITIES:
Proceeds from exercise of stock option -- 4,000
---------------------------
Net cash provided by financing activities -- 4,000
---------------------------
Increase (decrease) in cash and cash equivalents 45,000 (578,000)
Cash and cash equivalents, beginning of period 1,326,000 2,000,000
---------------------------
Cash and cash equivalents, end of period $ 1,371,000 $ 1,422,000
===========================
See accompanying notes
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IMAGE SENSING SYSTEMS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
September 30, 1999
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- and nine-month periods ended September 30, 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- and Nine-month Periods Ended September 30, 1999)
Revenue for the third quarter of 1999 was $895,000, an increase of 32% from
$677,000 for the same period a year ago, while revenue for the nine-month period
ended September 30, 1999 was $3,182,000, an increase of 43% from $2,224,000 a
year ago. The increase in revenue from product sales and royalties for these
periods was due primarily to more sales of Autoscope(R) systems by both Image
Sensing Systems, Inc. (ISS) and its North American distributor, Econolite
Control Products, Inc. (Econolite). Unit sales by ISS and Econolite increased
88% for the third quarter and have increased 63% for the nine-month period ended
September 30, 1999, compared to the same periods a year ago. Revenue from direct
sales and royalties for the third quarter of 1999 increased 21% and 77%,
respectively, compared to the third quarter of 1998. Revenue from direct sales
and royalties for the nine-month period ended September 30, 1999 increased 42%
and 52%, respectively, compared to a year ago.
Gross profit was $661,000 in the third quarter of 1999, or 74% of revenue,
compared to $516,000, or 76% of revenue, for the same period a year ago. Gross
profit for the nine-month period ended September 30, 1999 was $2,371,000, or 75%
of revenue, compared to $1,666,000, or 75% of revenue, for the same period a
year ago.
Selling, general and administrative expenses were $751,000 and $2,117,000,
respectively, for the three- and nine-month periods ended September 30, 1999,
compared to $522,000 and $1,680,000, respectively, for the same periods a year
ago. The increases were due primarily to added efforts in business development
and amortization of software development costs which began in October 1998.
Research and development expenses were $174,000 and $543,000, respectively, for
the three- and nine-month periods ended September 30, 1999, compared to none for
the same periods a year ago. The increase resulted because all development
efforts in the first nine months 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.
Loss from operations was $264,000 and $289,000, respectively, for the three- and
nine-month periods ended September 30, 1999, compared to $6,000 and $14,000 for
the same periods a year ago. The increase in operating losses was due primarily
to research and development costs incurred in 1999 compared to 1998 and an
increase in business development expense in 1999.
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Other income, net, was $17,000 and $57,000, respectively, for the three- and
nine-month periods ended September 30, 1999, compared to $23,000 and $78,000,
respectively, for the same periods a year ago. The decrease resulted primarily
from holding less cash in interest bearing cash equivalents during the first
nine months of 1999.
The Company does not expect to receive any current income tax benefit from
losses incurred in 1999.
Liquidity and Capital Resources:
Cash provided by operating activities was $133,000 for the nine-month period
ended September 30, 1999, compared to $313,000 for the same period in 1998. The
reduced cash flow from operations in the nine-month period ended September 30,
1999 was primarily due to an unusually large collection on accounts receivable
in 1998 compared to 1999.
Capital expenditures were $78,000 for the nine-month period ended September 30,
1999, which is comparable to 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 $825,000 in such costs were incurred in the
nine-month period ended September 30 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
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
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have been completed for the majority of the Company's operations, the Company
converted the majority of its business operations to new Year 2000 compatible
software by a combination of conversion to new software and upgrading existing
software. The cost of these conversions to date has not been material. However,
there can be no guarantee 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.
10
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 September 30, 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 bethree quarters by
the undersigned thereunto duly authorized.
Image Sensing Systems, Inc.
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(Registrant)
Dated: October 28, 1999 /s/ William L. Russell
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William L. Russell
President and Chief Executive Officer
(principal executive officer)
Dated: October 28, 1999 /s/ Arthur J. Bourgeois
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Arthur J. Bourgeois
Chief Financial Officer
(principal financial and accounting officer)
12