SCHEDULE 14A
PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE SECURITIES
EXCHANGE ACT OF 1934 (AMENDMENT NO. )
Filed by the registrant [X]
Filed by a party other than the registrant [ ]
Check the appropriate box:
[ ] Preliminary proxy statement. [ ] Confidential, for use of the
Commission only (as permitted by
Rule 14a-6(e)(2)).
[X] Definitive proxy statement.
[ ] Definitive additional materials.
[ ] Soliciting material pursuant to Section 240.14a-12
IMAGE SENSING SYSTEMS, INC.
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(Name of Registrant as Specified in Its Charter)
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(Name of Person(s) Filing Proxy Statement if Other Than the Registrant)
Payment of filing fee (check the appropriate box):
[X] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and
0-11.
(1) Title of each class of securities to which transaction applies:
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(2) Aggregate number of securities to which transaction applies:
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(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on which the
filing fee is calculated and state how it was determined):
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(4) Proposed maximum aggregate value of transaction:
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(5) Total fee paid:
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[ ] Fee paid previously with preliminary materials.
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[ ] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee
was paid previously. Identify the previous filing by registration
statement number, or the form or schedule and the date of its filing.
(1) Amount Previously Paid:
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(2) Form, Schedule or Registration Statement No.:
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(3) Filing Party:
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(4) Date Filed:
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IMAGE SENSING SYSTEMS, INC.
500 Spruce Tree Centre
1600 University Avenue West
St. Paul, Minnesota 55104
(651) 603-7700
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD THURSDAY, MAY 22, 2003
TO THE SHAREHOLDERS OF IMAGE SENSING SYSTEMS, INC.:
NOTICE IS HEREBY GIVEN that the annual meeting of shareholders of Image
Sensing Systems, Inc. will be held at 3:30 p.m. Central Time on Thursday, May
22, 2003, at the Science Museum of Minnesota, 120 West Kellogg Boulevard, St.
Paul, Minnesota, for the following purposes:
1. To elect five directors to serve on the Board of Directors.
2. To transact such other business as may properly come before the
meeting.
The Board of Directors has fixed the close of business on March 24,
2003 as the record date for the determination of shareholders entitled to notice
of and to vote at the meeting.
We encourage you to take part in the affairs of your company either in
person or by executing and returning the enclosed proxy card as promptly as
possible. To ensure that your shares are represented, we request that you sign
and return your proxy card whether or not you plan to attend the meeting.
BY ORDER OF THE BOARD OF DIRECTORS,
/s/ James Murdakes
James Murdakes
Chairman of the Board, Chief Executive
Officer, President and Secretary
Dated: April 22, 2003
WE URGE YOU TO MARK, SIGN AND DATE THE ENCLOSED PROXY AND PROMPTLY MAIL IT IN
THE ENCLOSED ENVELOPE, WHICH REQUIRES NO POSTAGE IF MAILED IN THE UNITED STATES.
IMAGE SENSING SYSTEMS, INC.
500 Spruce Tree Centre
1600 University Avenue West
St. Paul, Minnesota 55104
(651) 603-7700
PROXY STATEMENT
ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD THURSDAY, MAY 22, 2003
This proxy statement is being furnished in connection with the
solicitation of proxies by the Board of Directors of Image Sensing Systems, Inc.
for use at our annual meeting of shareholders to be held Thursday, May 22, 2003,
at 3:30 p.m., Central Time, at the Science Museum of Minnesota, 120 West Kellogg
Boulevard, St. Paul, Minnesota and at any adjournment thereof. This proxy
statement and the accompanying form of proxy are being sent or given to
shareholders beginning on or about April 22, 2003, along with our 2002 Annual
Report to Shareholders. We will pay all expenses in connection with the
solicitation of proxies. In addition to solicitation by mail, our officers,
directors and regular employees, who will receive no extra compensation for
their services, may solicit proxies by telephone, facsimile or personally.
Only shareholders of record at the close of business on March 24, 2003
are entitled to notice of and to vote at the meeting or at any adjournment
thereof. On March 24, 2003, there were 3,179,277 shares of our common stock
outstanding. Each share is entitled to one vote. Cumulative voting is not
permitted.
The affirmative vote of the majority of shares represented at the
meeting, in person or by proxy, is required for the election of each nominee to
the Board of Directors. You may either vote "FOR" or "WITHHOLD" authority to
vote for each nominee for the Board of Directors. The Board of Directors
recommends a vote "FOR" each nominee. Shares represented by a proxy will be
voted in the manner directed by a shareholder. If no direction is made, the
proxy will be voted "FOR" the election of each nominee named in this proxy
statement. If you submit your proxy but withhold authority to vote, your shares
will be counted as shares that are present and entitled to vote for purposes of
determining the presence of a quorum at the meeting, and your shares will be
counted as unvoted for purposes of determining the approval of the nominee as to
whom you have withheld authority. Withholding your authority to vote for one or
more of the director nominees has the same effect as a vote against those
nominees. If a broker submits a proxy that indicates the broker does not have
discretionary authority as to certain shares to vote on one or more matters (a
broker "non-vote"), those shares will be counted as shares that are present and
entitled to vote for purposes of determining the presence of a quorum at the
meeting but will not be considered as present and entitled to vote with respect
to such matters.
You may revoke your proxy at any time before the proxy vote is cast at
the annual meeting by giving written notice of revocation to Arthur J.
Bourgeois, Chief Financial Officer of the Company, by submitting a later-dated
proxy or by voting in person at the meeting.
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SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information with respect to
beneficial ownership of our common stock as of March 24, 2003, by: (a) each
person or entity known by us to own beneficially more than five percent of our
common stock; (b) each director and nominee for election as a director of Image
Sensing Systems; (c) each of our executive officers named in the Summary
Compensation Table set forth under the caption "Executive Compensation" below;
and (d) all of our directors and executive officers as a group.
Beneficial ownership is determined in accordance with rules of the
Securities and Exchange Commission and includes generally voting power and/or
investment power with respect to securities. Shares of common stock issuable
pursuant to stock options and convertible securities that are exercisable or
convertible currently or within 60 days of the date of this proxy statement are
deemed outstanding for computing the beneficial ownership percentage of the
person holding the options but are not deemed outstanding for computing the
beneficial ownership percentage of any other person. Except as indicated by
footnote, the persons named in the table below have sole voting and investment
power with respect to all shares of common stock shown as beneficially owned by
them. The address of each director and executive officer named below is the same
as that of Image Sensing Systems.
AMOUNT AND NATURE OF PERCENT OF COMMON STOCK
NAME AND ADDRESS OF BENEFICIAL OWNER BENEFICIAL OWNERSHIP OUTSTANDING
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Betty P. Papapanou 643,368(1) 19.9%
2483 Albert St N
Roseville, MN 55113
Brown Brothers Harriman & Co. 327,600(2) 10.3%
59 Wall Street
NewYork, NY 10005
Mats Johan Billow 31,000(3)(4) 1.0%
Richard P. Braun 140,134(4)(5) 4.4%
Michael G. Eleftheriou 12,000(4) .4%
Richard C. Magnuson 51,852(4)(6) 1.6%
Panos G. Michalopoulos 1,411,937(1)(4)(7) 42.5%
James Murdakes 71,526(4) 2.2%
All directors and executive officers as a group (7 persons) 1,718,449(4) 49.5%
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(1) Includes 586,368 shares of common stock held by Ms. Papapanou and
57,000 shares issuable pursuant to options exercisable within 60 days
after the date of this proxy statement. In accordance with an agreement
between Ms. Papapanou and Dr. Michalopoulos, Ms. Papapanou will vote
all such shares consistent with the recommendations of the majority of
our Board of Directors, unless Dr. Michalopoulos agrees in writing that
she need not so vote with respect to a specific proposal.
(2) We have relied upon the information supplied by Brown Brothers Harriman
& Co. in a Schedule 13G furnished to us reporting information as of
December 31, 2000. Brown Brothers Harriman & Co. has shared voting and
investment power over the indicated shares.
(3) Includes 6,000 shares held by Berkeley Development Limited, a company
controlled by Mr. Billow.
(4) Includes shares issuable pursuant to options exercisable currently or
within 60 days of this proxy statement: for Mr. Billow, 25,000 shares;
for Mr. Braun, 36,000 shares; for Mr. Eleftheriou, 12,000 shares; for
Mr. Magnuson, 12,000 shares; for Dr. Michalopoulos, 144,000 shares; for
Mr. Murdakes, 62,000 shares; for all directors and executive officers
as a group, 291,000 shares.
(5) Includes 78,000 shares held indirectly through a trust of which Mr.
Braun is a trustee.
(6) Includes 39,852 shares held by Operating Management, Inc., a
corporation controlled by Mr. Magnuson.
(7) Includes 360 shares held by Dr. Michalopoulos' son, as to which Dr.
Michalopoulos disclaims beneficial ownership.
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SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 requires executive
officers and directors and persons who beneficially own more than 10% of our
common stock to file initial reports of ownership and reports of changes in
ownership with the Securities and Exchange Commission. Executive officers,
directors and greater-than-10% beneficial owners are required by SEC regulations
to furnish us with copies of all Section 16(a) reports they file. Based solely
on a review of the copies of such forms furnished to us and written
representations from the executive officers and directors, we believe that all
of our executive officers, directors and greater-than-10% shareholders complied
with all Section 16(a) filing requirements applicable to them for 2002, except
that Mr. Billow filed an amendment to a Form 3 reporting his beneficial
ownership of 1,000 shares that were inadvertently excluded from his initial Form
3 filing.
ITEM I. ELECTION OF DIRECTORS
The business and affairs of Image Sensing Systems are managed under the
direction of our Board of Directors, which presently is comprised of five
members. Each of our directors is elected until the next annual meeting of
shareholders and until the director's successor has been elected and qualifies
to serve as a director. The Board of Directors has nominated and recommends that
you vote FOR the five nominees named below for election as directors. All of the
nominees presently are members of the Board of Directors.
Unless otherwise specified, the named proxies will vote FOR the
election of the five nominees listed below. If for any reason any nominee shall
be unavailable for election to the Board of Directors, the named proxies will
vote for such other candidate or candidates as may be nominated by the Board of
Directors. The Board of Directors has no reason to believe that any of the
nominees will be unable to serve.
The nominees for election to our Board of Directors provided the
following information about themselves.
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RICHARD P. BRAUN, age 77, director since 1994. Mr. Braun served as Director of
the Center for Transportation Studies at the University of Minnesota from 1987
to 1994. From September 1993 to February 1995, Mr. Braun served as Chairman of
the State of Minnesota's Metropolitan Airports Commission, and he was
Commissioner of Transportation for the State of Minnesota from 1979 to 1987. Mr.
Braun retired from full-time employment in 1994. Mr. Braun is chairman of the
compensation and stock option committee.
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MICHAEL G. ELEFTHERIOU, age 58, director since April 2002. Since July 2001, Mr.
Eleftheriou has served as President and Chief Executive Officer of Creative
Publishing international, a Minneapolis-based publisher of how-to books and a
premier publisher of nature, photography and wildlife books for children and
adults. Prior to joining Creative Publishing international, Mr. Eleftheriou
worked for more than 30 years in the information technology industry. From 1968
to 1997, he held various positions in engineering, software, product
development, sales, marketing and general and administrative management at
Control Data Corporation and Control Data Systems, Inc., a provider of computing
and systems integration services that was spun off from Control Data Corporation
in 1992. Mr. Eleftheriou served as Vice President, Systems Integration Services
at Control Data Systems from 1997 to 1998, and as President, Systems Integration
Services at Control Data Systems and its successor company Syntegra U.S.A., the
global consulting and systems integration arm of British Telecommunications plc,
from 1998 to November 2000. From November 2000 to July 2001, Mr. Eleftheriou
provided executive consulting services to providers of web-based media. Mr.
Eleftheriou is a member of the audit committee and the compensation and stock
option committee.
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RICHARD C. MAGNUSON, age 61, director since 1990. Since 1997, Mr. Magnuson has
served as Chairman and Chief Financial Officer of BioMedix, Inc., a medical
device company. From 1995 to 1997 he operated his own management consulting
firm, Operating Management, Inc. Mr. Magnuson served as President and Chief
Executive Officer of Image Sensing Systems from 1991 to 1995 and as Vice
President and Secretary during 1995. From 1988 to 1990, Mr. Magnuson worked with
Image Sensing Systems as a private consultant. Mr. Magnuson is chairman of the
audit committee.
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PANOS G. MICHALOPOULOS, age 54, director since 1984. Dr. Michalopoulos, the
Company's founder, was Chairman of the Board of Image Sensing Systems from our
inception in 1984 through 1999 and served as Chief Scientific Advisor from 1995
through 2000. Since 1977, Dr. Michalopoulos has been a professor in the
Department of Civil Engineering at the University of Minnesota. Dr.
Michalopoulos has more than 32 years of research, teaching, and consulting
experience in traffic engineering operations and control. He has taught at
several universities, consulted with many firms in the United States and abroad
in the area of traffic control, and has worked as a traffic engineer. Dr.
Michalopoulos is a member of the compensation and stock option committee.
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JAMES MURDAKES, age 70, director since 1994. Mr. Murdakes was elected Chairman
of the Board of Image Sensing Systems in February 2002 and was appointed Chief
Executive Officer and President of Image Sensing Systems, Inc. in April 2002. He
served as President and Chief Executive Officer of LSC, Inc., a
Minneapolis-based systems integrator for computer network storage servers, from
1993 through 1996, and was Chairman of the Board of Directors and a management
consultant to LSC in 1997. He was retired from full-time employment from 1998 to
2002.
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In addition to Mr. Murdakes, the other executive officers of Image
Sensing Systems and their biographical information are as follows:
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MATS JOHAN BILLOW, age 40, was appointed Managing Director of our wholly owned
subsidiary Flow Traffic Ltd. in June 2002 and was Vice President for
International Business of Image Sensing Systems from February 2002 until June
2002. Flow Traffic distributes traffic management products and systems and
provides marketing and technical support for a broad range of traffic
technologies throughout Asia. Mr. Billow founded Flow Traffic in 1998 and served
as its General Manager from its inception through June 2002. Between 1996 and
1998, Mr. Billow was the General Manager of Peek Ltd., the Asia-Pacific arm of
Peek plc, a provider of products and services for improving traffic and the
traveler environment, with responsibility for Peek's traffic business in East
Asia. During this time he managed Peek's Chinese joint venture business and
various traffic projects funded by the World Bank and Asian Development Bank.
Mr. Billow served as a member of our Board of Directors from February 2002
through August 2002.
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ARTHUR J. BOURGEOIS, age 61, has served as Chief Financial Officer and Treasurer
since May 2002. From 1995 through October 1999, Mr. Bourgeois served in this
same capacity for Image Sensing Systems, Inc. Mr. Bourgeois was retired from
employment from October 1999 to May 2002. From 1965 through 1994, he practiced
as a CPA and ended his professional public accounting career as an audit partner
with Ernst & Young LLP.
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BOARD MEETINGS AND COMMITTEES
During the fiscal year ended December 31, 2002, the Board of Directors
met eight times. Each of the directors attended more than 75% of the aggregate
of all meetings of the Board of Directors and of the committees on which they
served. The Board of Directors and its committees also act from time to time by
written consent in lieu of meetings.
The Board of Directors has a standing audit committee and a standing
compensation and stock option committee. The current membership of these
committees is indicated in the foregoing section. The Board of Directors does
not have a standing nominating committee.
The compensation and stock option committee reviews and recommends to
the Board of Directors the compensation guidelines and stock option grants for
executive officers and other key personnel. During fiscal 2002, the compensation
and stock option committee held seven meetings.
The audit committee makes recommendations as to the selection of independent
auditors and their compensation and reviews with the auditors the scope of the
annual audit, matters of internal control and procedure and the adequacy
thereof, the audit results and reports and other general matters relating to our
accounts, records,
4
controls and financial reporting. The audit committee's responsibilities are
further described in the report of the audit committee on page 10 of this proxy
statement. During fiscal 2002, the audit committee held eight meetings.
COMPENSATION OF DIRECTORS
Each of our non-employee directors receives an annual retainer for
serving as a director. In 2002, each non-employee director received a total
annual retainer of $10,000, with $4,000 paid immediately after the annual
shareholders' meeting and $500 paid each month during which the director served
on the Board. Directors who are appointed to the Board at any time after the
annual meeting receive a pro rata amount. The amount of the annual retainer and
its payment schedule will remain unchanged in 2003. In connection with their
initial appointment or election to the Board, non-employee directors also are
granted a non-incentive stock option to purchase 36,000 shares of our common
stock. The option shares become exercisable in three equal installments on the
first, second and third anniversary of the date of grant. These grants are made
under our 1995 Long-Term Incentive and Stock Option Plan. Directors who are
employees of Image Sensing Systems do not receive any additional compensation
for their service on the Board of Directors, except that the Board of Directors
has determined to continue paying Mr. Murdakes his annual retainer for service
as a director in addition to his compensation for serving as our Chief Executive
Officer and President (see "Employment Agreements" on page 7 of this proxy
statement). In addition, on February 12, 2002, the Board granted Mr. Murdakes a
non-incentive stock option to purchase 20,000 shares of our common stock. The
option was granted under our 1995 Long-Term Incentive and Stock Option Plan, has
an exercise price of $2.35 per share and was fully vested upon grant. On
September 20, 2003, the Board also granted Dr. Michalopoulos a non-incentive
stock option to purchase 36,000 shares of our common stock. The option was
granted under our 1995 Long-Term Incentive and Stock Option Plan, has an
exercise price of $3.10 per share and was fully vested upon grant.
5
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table sets forth the cash and non-cash compensation
awarded to or earned in the last three fiscal years by each person serving as
our chief executive officer during fiscal 2002 and each of our other executive
officers whose annual compensation paid by us in fiscal 2002 exceeded $100,000.
ANNUAL LONG-TERM
COMPENSATION COMPENSATION
------------------------ ------------------
NAME AND PRINCIPAL POSITION SECURITIES ALL OTHER
YEAR SALARY ($) BONUS ($) UNDERLYING COMPENSATION
OPTIONS (#) ($)
------------------------------------------------------------------------- ------------------ -----------------
James Murdakes(1) 2002 59,250 10,000 20,000(5) 10,000(6)
Chairman of the Board, Chief Executive 2001 -- -- -- 10,000(6)
Officer and President 2000 -- -- -- 10,000(6)
Anthony H. Gould(2) 2002 59,325 -- -- 178,000(7)
Interim President and Chief Executive 2001 203,400 -- -- --
Officer 2000 198,900 -- 12,000 --
William L. Russell(3) 2002 26,250 -- -- 178,813(8)
President and Chief Executive Officer 2001 157,500 13,750 -- --
2000 152,694 -- 135,000 --
Mats Johan Billow(4) 2002 199,151 30,184 100,000 8,881(9)
Managing Director, Flow Traffic Ltd. 2001 170,964 7,067 -- 4,241(9)
and Vice President for International 2000 123,910 45,000 -- --
Business, Image Sensing Systems
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(1) Mr. Murdakes was appointed Chief Executive Officer and President on
April 15, 2002. He commenced service as Chairman of the Board in
February 2002.
(2) Mr. Gould served as Managing Director, Image Sensing Systems Asia and
Managing Director of our subsidiary Flow Traffic Ltd. from December
1998 until February 2002 and served as interim President and Chief
Executive Officer of Image Sensing Systems, Inc. from February 12, 2002
through April 15, 2002.
(3) Mr. Russell served as President and Chief Executive Officer from June
2000 through February 11, 2002.
(4) Mr. Billow became Managing Director of our subsidiary Flow Traffic Ltd.
in June 2002 and served as Vice President for International Business
from February 2002 until June 2002. He served as General Manager of
Flow Traffic Ltd. from December 1998 until June 2002.
(5) Represents shares underlying an option granted to Mr. Murdakes in
February 2002 before he became an executive officer.
(6) Represents the annual retainer paid to Mr. Murdakes for his service on
the Board of Directors.
(7) Represents severance pay.
(8) Represents severance pay of $167,000 and accrued vacation of $11,813.
(9) Represents pension plan contributions paid by Flow Traffic Ltd.
6
STOCK OPTIONS
The following tables summarize option grants and exercises during
fiscal 2002 to or by the executive officers named in the Summary Compensation
Table, and the value of the options held by these officers at the end of fiscal
2002. No stock appreciation rights, or "SARs," are held by these executive
officers.
OPTION GRANTS IN LAST FISCAL YEAR
% OF TOTAL OPTIONS
# OF SECURITIES GRANTED TO
UNDERLYING OPTIONS EMPLOYEES IN EXERCISE PRICE
NAME GRANTED FISCAL YEAR PER SHARE EXPIRATION DATE
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James Murdakes 20,000 (1) 6.6% $2.35 February 12, 2012
Anthony H. Gould -- -- -- --
William L. Russell -- -- -- --
Mats Johan Billow 100,000 (2) 33.2% $1.71 April 15, 2013
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(1) This non-incentive stock option was granted on February 12, 2002 under
the Image Sensing Systems, Inc. 1995 Long-Term Incentive and Stock
Option Plan. The option was fully vested upon grant.
(2) This non-incentive stock option was granted on April 15, 2002 under the
Image Sensing Systems, Inc. 1995 Long-Term Incentive and Stock Option
Plan. Half of the option shares vest in cumulative installments of
12,500 shares on the first four anniversaries of the date of grant, and
the remaining half vest in cumulative installments of 12,500 shares on
the first four anniversaries of the date of grant only if certain
performance targets are met. The option immediately vests in full upon
a change in control of Image Sensing Systems.
AGGREGATED OPTION EXERCISES IN FISCAL 2002
AND VALUE OF OPTIONS AT END OF FISCAL 2002
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS
OPTIONS AT 12/31/02 AT 12/31/02 ($)(1)
-------------------------------------------------
NAME SHARES ACQUIRED VALUE EXERCISABLE/ EXERCISABLE/
ON EXERCISE (#) REALIZED ($) UNEXERCISABLE UNEXERCISABLE
-------------------------------------------------------------------------------------------------------------------
James Murdakes -- -- 62,000/0 115,176/0
Anthony H. Gould -- -- 0/0 0/0
William L. Russell -- -- 0/0 0/0
Mats Johan Billow -- -- 0/100,000 0/268,000
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(1) Value determined by subtracting the exercise price per share from the
closing price per share of our common stock on December 31, 2002.
EMPLOYMENT AGREEMENTS
James Murdakes
Mr. Murdakes was appointed Chief Executive Officer and President on
April 15, 2002. The Board of Directors authorized payment of $7,000 per month to
Mr. Murdakes as consideration of his service in these capacities. Effective
January 1, 2003, the Board increased this consideration to $8,000 per month and
in January 2003 also authorized payment of a $10,000 bonus to Mr. Murdakes for
his work in fiscal 2002. Mr. Murdakes is serving without an employment
agreement. He continues to receive payment of his annual retainer for service to
the Board. See "Compensation of Directors" on page 5 of this proxy statement.
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Anthony H. Gould
Mr. Gould was appointed interim President and Chief Executive Officer
on February 12, 2002 and resigned on April 15, 2002. In connection with his
resignation, we entered into a settlement and release agreement with Mr. Gould
pursuant to which we mutually agreed to Mr. Gould's resignation from all
positions held with Image Sensing Systems and the termination of his consultancy
agreement, other than provisions relating to non-competition and
non-solicitation, which survived for 12 months following termination of the
consultancy agreement, and provisions prohibiting disclosure of confidential
information of Image Sensing Systems. Under the settlement and release
agreement, we agreed to pay Mr. Gould a severance payment of $178,000, payable
in three installments: $60,000 on each of April 19 and September 1, 2002, and
$58,000 by January 7, 2003. We also paid Mr. Gould $50,000 as additional
consideration in connection with the purchase of his minority shares of our
subsidiary Flow Traffic Ltd., which represented the earn-out portion of the
purchase.
William L. Russell
In connection with Mr. Russell's resignation on February 11, 2002, we
entered into a settlement and release agreement with Mr. Russell pursuant to
which we mutually agreed to Mr. Russell's resignation from all positions held
with Image Sensing Systems and the termination of his employment agreement,
other than provisions relating to non-competition and non-solicitation, which
survived for 12 months following termination of the consultancy agreement, and
other than provisions prohibiting disclosure of confidential information of
Image Sensing Systems. Under the settlement and release agreement, we agreed to
pay Mr. Russell a lump sum severance payment of $167,000.
Mats Johan Billow
Mr. Billow was appointed Managing Director of our wholly owned
subsidiary Flow Traffic Ltd. in June 2002 and served as Vice President for
International Business of Image Sensing Systems from February 2002 until June
2002. Flow Traffic and Image Sensing Systems entered into an employment
agreement with Mr. Billow on June 14, 2002, in which we agreed to guarantee
certain of Flow Traffic's obligations to Mr. Billow set forth in the agreement.
The agreement was effective as of April 1, 2002, and provides for annual base
compensation to Mr. Billow of HK$1,586,000 (approximately US$203,333) per year,
which includes a provision for a housing allowance and which is subject to
annual review by Flow Traffic's Board of Directors. Mr. Billow's annual base
compensation for 2003 will remain the same.
In addition to his annual base compensation, Mr. Billow is eligible to
receive incentive compensation. His employment agreement provides that for 2002,
if Flow Traffic achieved pre-tax net income of between US$181,818 and
US$250,000, Mr. Billow would receive a cash bonus in an amount equal to 10% of
Flow Traffic's pre-tax net income (but not to exceed $25,000), except that if,
after taking the payment of any such bonus into account, Flow Traffic's pre-tax
net income fell below $181,818, then the bonus would be decreased by an amount
equal to the difference between $181,818 and the lower pre-tax net income
amount. If, after taking the payment of any such bonus into account, Flow
Traffic achieved pre-tax net income in excess of US$250,000, then Mr. Billow
would receive a bonus of $25,000 plus an additional cash bonus of up to five
percent of any pre-tax net income exceeding $250,000 after giving effect to all
bonuses paid to Mr. Billow and other Flow Traffic employees. Based on this
provision, Mr. Billow earned a bonus for 2002 in the amount of $30,184. The
Board of Directors of Flow Traffic will follow the same formula for determining
whether Mr. Billow will be entitled to incentive compensation for 2003.
Mr. Billow may terminate his employment agreement for any reason upon six
months' notice, effective no earlier than January 1, 2004. The agreement may be
terminated by Flow Traffic for any reason at any time on or after January 1,
2004. Under the agreement, if Flow Traffic terminates Mr. Billow without cause,
it must pay him severance in an amount equal to one year of Mr. Billow's base
compensation. During the term of the agreement and for a period of 12 months
following any termination of employment, Mr. Billow will not (a) directly or
indirectly engage in any business activity that is competitive with any business
of Flow Traffic or Image Sensing Systems, (b) provide technical, commercial or
professional advice to any business that is competitive with Flow Traffic or
Image Sensing Systems, or (c) solicit or otherwise interfere with the
relationship between Flow Traffic or Image Sensing Systems and any entity or
individual who has been a customer, supplier or employee of Flow Traffic or
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Image Sensing Systems at any time during the term of Mr. Billow's employment
with Flow Traffic. In addition, the agreement provides for the non-disclosure of
confidential information of Flow Traffic and Image Sensing Systems both during
the term and following termination of the agreement.
In connection with the execution of the employment agreement, Mr.
Billow also was granted an option to purchase 100,000 shares of our common
stock. Half of these option shares will vest in cumulative installments of
12,500 shares on the first four anniversaries of the date of grant, and the
remaining half will vest in cumulative installments of 12,500 shares on the
first four anniversaries of the date of grant only if certain performance
targets are met. The option immediately vests in full upon a change in control
of Image Sensing Systems.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
On January 7, 2002, we purchased all of the shares then held by the
minority shareholders of our subsidiary Flow Traffic Ltd., making Flow Traffic
our wholly owned subsidiary. The purchase was made in accordance with the Shares
Sale and Purchase Agreement dated November 28, 2001, among Image Sensing Systems
and the minority shareholders of Flow Traffic. The agreement was amended on
December 31, 2001, April 15, 2002 and June 14, 2002. At the time the agreement
was entered into, the minority shareholders of Flow Traffic Ltd. included Mats
Johan Billow and Grove Place Limited, a consulting company affiliated with
Anthony H. Gould. Subsequently, in February 2002, Mr. Billow and Mr. Gould were
elected to our Board of Directors, Mr. Gould was appointed as our interim
President and Chief Executive Officer, and Mr. Billow was appointed as our Vice
President for International Business. Prior to this purchase, we owned six
shares of Flow Traffic, and the minority shareholders collectively owned four
shares of Flow Traffic.
In accordance with the agreement and amendments, we agreed to pay the
following amounts to Mr. Billow and Mr. Gould as consideration for their shares:
o Cash payments to each of Mr. Billow and Mr. Gould at the time
of purchase of $125,000.
o Additional payments to each of Mr. Billow and Mr. Gould of
$225,000, payable at any time between April 1, 2003 and April
30, 2003 upon the request of Mr. Billow or Mr. Gould, which
payments were secured by letters of credit drawn in favor of
Mr. Billow and Mr. Gould. These payments were made on April 1,
2003.
o Non-interest bearing notes, maturing on January 7, 2007, in
the principal amount of $125,000 for each of Mr. Billow and
Mr. Gould. Each of the notes was convertible at any time prior
to January 7, 2007, into 50,000 shares of our common stock.
The holders were entitled to demand payment for their notes at
any time after April 1, 2003. The notes were prepayable by us
at any time during 2002 for their principal amount of $125,000
each and without penalty or additional fees. We prepaid these
notes in December 2002 to preclude conversion to our common
stock.
o A cash payment of $50,000 to Mr. Gould in April 2002, and a
cash payment of $50,000 to Mr. Billow in December 2002, in
satisfaction of certain earn-out provisions of the agreement.
9
REPORT OF THE AUDIT COMMITTEE
The audit committee of the Board of Directors is composed of the
following non-employee directors: Mr. Magnuson and Mr. Eleftheriou. Both of the
members of the audit committee are independent for purposes of the NASDAQ
listing requirements. The audit committee operates under a written charter
adopted by the Board of Directors, a copy of which was attached to Image Sensing
Systems' proxy statement for the 2001 annual meeting of shareholders.
The audit committee oversees Image Sensing System's financial reporting
process on behalf of the Board of Directors and recommends to the Board of
Directors the appointment of independent accountants. Management has the primary
responsibility for the financial reporting process, including the company's
system of internal controls. The independent accountants are responsible for
performing an independent audit of the company's consolidated financial
statements in accordance with auditing standards generally accepted in the
United States and to issue a report on the company's financial statements. The
committee discusses with the internal and independent auditors the overall scope
and plans for their respective audits and meets with the internal and
independent auditors, with and without management present, to discuss the
results of their examinations, their evaluations of our internal controls, and
the overall quality of the company's financial reporting.
In fulfilling our oversight responsibilities, the audit committee has
met and held discussions with management and the independent auditors. The audit
committee reviewed and discussed the financial statements with management and
the independent auditors, including a discussion of the application of
accounting principles generally accepted in the United States, the
reasonableness of significant judgments, and the clarity of disclosures in the
financial statements. The audit committee also has discussed with the
independent auditors the auditors' independence from management, including
whether the provision of non-audit services is compatible with maintaining the
auditors' independence, and matters required to be discussed by the Statement on
Auditing Standards No. 61 (Communications with Audit Committees). The audit
committee received from the independent auditors the written disclosures and the
letter required by Independence Standards Board Standard No. 1 (Independence
Discussions with Audit Committees).
In reliance on the reviews and discussions referred to above, the
committee recommended to the Board of Directors (and the Board has approved)
that the audited financial statements be included in Image Sensing Systems'
Annual Report on Form 10-KSB for the fiscal year ended December 31, 2002, filed
with the Securities and Exchange Commission. The committee also has recommended
the selection of Grant Thornton LLP as independent auditors for Image Sensing
Systems for the fiscal year ended December 31, 2003.
Richard C. Magnuson, Chair
Michael G. Eleftheriou
INDEPENDENT AUDITORS
CHANGE OF AUDITORS
On January 8, 2003, we engaged Grant Thornton LLP as our independent
auditors for the year ended December 31, 2002, and thereby dismissed Ernst &
Young LLP. The decision to change independent auditors was approved by the Board
of Directors.
The reports of Ernst & Young LLP on our financial statements for the
past two years ended December 31, 2001 and December 31, 2000, contained no
adverse opinion or disclaimer of opinion and were not qualified or modified as
to uncertainty, audit scope or accounting principle. In connection with the
audits for the fiscal years ended December 31, 2001 and December 31, 2000 and
all interim periods preceding the dismissal, there were no disagreements with
Ernst & Young LLP on any matter of accounting principles or practices, financial
statement disclosure, or auditing scope or procedure, which disagreements, if
not resolved to the satisfaction of Ernst & Young LLP, would have caused them to
make reference thereto in their report on the financial statements for such
years. During the fiscal years ended December 31, 2001 and December 31, 2000 and
all subsequent interim periods and to January 8, 2003, the date of dismissal,
there were no reportable events (as defined in Regulation S-K Item
304(a)(1)(V)).
10
During the fiscal years ended December 31, 2001 and December 31, 2000
and to January 8, 2003, we did not consult with Grant Thornton LLP on any items
concerning the application of accounting principles to a specified transaction,
the type of audit opinion that might be rendered on our financial statements, or
the subject matter of a disagreement or reportable event with the former auditor
(as described in Regulation S-K Item 304(a)(2)).
We reported the change in accountants on a Form 8-K on January 9, 2003.
The Form 8-K contained a letter from Ernst & Young LLP, addressed to the
Securities and Exchange Commission, stating that it agreed with the statements
concerning Ernst & Young LLP in such Form 8-K.
APPOINTMENT OF AUDITORS FOR FISCAL 2003
Grant Thornton LLP audited our consolidated financial statements for
the fiscal year ended December 31, 2002. The Board of Directors intends to
reappoint Grant Thornton LLP as our independent auditors for the year ending
December 31, 2003. A representative of Grant Thornton LLP is expected to be
present at the 2003 annual meeting. The representative will have an opportunity
to make a statement at the meeting and will be available to respond to
appropriate questions from shareholders.
DISCLOSURE OF FEES PAID TO INDEPENDENT AUDITORS IN FISCAL 2002
Audit Fees
Audit fees billed or expected to be billed to us by Grant Thornton LLP
for the audit of our financial statements for the fiscal year ended December 31,
2002, totaled $25,000. Audit fees billed to us by Ernst & Young LLP for the
audit of our financial statements for the fiscal year ended December 31, 2002
and for reviews of our financial statements included in our quarterly reports on
Form 10-Q for the fiscal year ended December 31, 2002, totaled $16,550.
Financial Information Systems Design and Implementation Fees
We did not engage Grant Thornton LLP or Ernst & Young LLP to provide
advice regarding financial information systems design and implementation during
the last fiscal year.
All Other Fees
We did not engage Grant Thornton LLP to provide any other non-audit
services to us for fiscal 2002. The aggregate fees billed to us by Ernst & Young
LLP for other non-audit services, including tax-related services, provided
during the last fiscal year totaled $8,303.
SHAREHOLDER PROPOSALS FOR THE NEXT ANNUAL MEETING
Any proposal by a shareholder to be presented in our proxy statement
for the 2004 annual meeting must comply with the applicable rules and
regulations of the Securities and Exchange Commission and must be received at
our principal executive offices, 500 Spruce Tree Centre, 1600 University Avenue
West, St. Paul, Minnesota 55104, no later than December 24, 2003. Pursuant to
the rules of the Securities and Exchange Commission, proxies solicited by
management for the next annual meeting may grant management the authority to
vote in its discretion on any proposal submitted by a shareholder otherwise than
through inclusion in the proxy statement for the meeting, unless we have
received notice of the shareholder proposal at our principal executive offices
on or before March 8, 2004.
11
OTHER MATTERS
We are including with this proxy statement our Annual Report to
Shareholders for the year ended December 31, 2002, which includes an audited
balance sheet as of that date and the related statements of operations, cash
flows and shareholders' equity for fiscal 2002, as well as other financial
information relating to Image Sensing Systems, including Management's Discussion
and Analysis of Financial Condition and Results of Operations. Shareholders may
receive, upon payment of a reasonable fee, a copy of any exhibit to our Annual
Report on Form 10-KSB for fiscal 2002, as filed with the Securities and Exchange
Commission, by writing to Image Sensing Systems, Inc., 500 Spruce Tree Centre,
1600 University Avenue West, St. Paul, Minnesota 55104, Attention: Chief
Financial Officer.
We know of no matters other than those that are described in this proxy
statement to come before the 2003 annual meeting of shareholders. However, if
any other matters are properly brought before the meeting, one or more persons
named in the enclosed proxy card or their substitutes will vote in accordance
with their best judgment on such matters.
/s/ James Murdakes
James Murdakes
Chairman of the Board, Chief Executive
Officer, President and Secretary
Dated: April 22, 2003
12
IMAGE SENSING SYSTEMS, INC.
ANNUAL MEETING OF SHAREHOLDERS
THURSDAY, MAY 22, 2003
3:30 P.M. CENTRAL TIME
SCIENCE MUSEUM OF MINNESOTA
120 WEST KELLOGG BOULEVARD
ST. PAUL, MINNESOTA 55102
IMAGE SENSING SYSTEMS, INC. PROXY
--------------------------------------------------------------------------------
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS.
The undersigned, having received the Notice of Annual Meeting and Proxy
Statement dated April 22, 2003, revoking any proxy previously given, hereby
appoint(s) James Murdakes and Arthur J. Bourgeois as proxies (each with the
power to act alone and with the power of substitution and revocation) to
represent the undersigned and to vote, as designated on the reverse side, all
shares of common stock of Image Sensing Systems, Inc. which the undersigned is
entitled to vote at the Annual Meeting of Shareholders to be held at 3:30 p.m.
Central Time on Thursday, May 22, 2003 at the Science Museum of Minnesota, 120
West Kellogg Boulevard, St. Paul, Minnesota 55102, and at any adjournment or
postponement thereof. THIS PROXY, WHEN PROPERLY EXECUTED, WILL BE VOTED AS
DIRECTED BY THE UNDERSIGNED. IF NO DIRECTION IS GIVEN, THIS PROXY WILL BE VOTED
"FOR" ALL NOMINEES FOR DIRECTOR AND IN THE DISCRETION OF THE NAMED PROXIES ON
ALL OTHER MATTERS.
PLEASE MARK, SIGN AND DATE THIS PROXY ON THE REVERSE SIDE AND RETURN IT IN THE
ENCLOSED POSTAGE-PREPAID ENVELOPE.
See reverse side for voting instructions.
- Detach below and return using the envelope provided -
--------------------------------------------------------------------------------
IMAGE SENSING SYSTEMS, INC. 2003 ANNUAL MEETING OF SHAREHOLDERS
1. Election of directors: 01 Richard P. Braun 04 Panos G. Michalopoulos
02 Michael G. Eleftheriou 05 James Murdakes
03 Richard C. Magnuson
[ ] FOR all nominees [ ] WITHHOLD AUTHORITY
listed to the left to vote for all nominees
(except as specified listed to the left.
below).
(INSTRUCTIONS: TO WITHHOLD AUTHORITY TO VOTE FOR ANY INDICATED NOMINEE, WRITE
THE NUMBER(S) OF THE NOMINEE(S) IN THE BOX PROVIDED TO THE RIGHT.)
[ ]
Address Change? Mark Box [ ]
and Indicate changes below:
Date _____________________________________
[ ]
Signature(s) in Box
PLEASE DATE AND SIGN name(s) exactly as
shown on this proxy card. When shares are
held by joint tenants, both should sign.
When signing as attorney, executor,
administrator, trustee or guardian, please
give full title as such. If a corporation,
please sign in full corporate name by
President or other authorized officer. If a
partnership, please sign in partnership name
by authorized person.