8-K

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 8-K

CURRENT REPORT

Pursuant to Section 13 Or 15(d) of The Securities Exchange Act of 1934

Date of Report (Date of earliest event reported)  June 21, 2010

Image Sensing Systems, Inc.

(Exact name of registrant as specified in its charter)

Minnesota	0-26056	41-1519168
(State or other jurisdiction of incorporation)	(Commission File Number)	(IRS Employer Identification No.)
500 Spruce Tree Centre, 1600 University Avenue West, St. Paul, Minnesota		55104
(Address of principal executive offices)		(Zip Code)

Registrant’s telephone number, including area code  (651) 603-7700

(Former name or former address, if changed since last report)

Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions (see General Instructions A.2. below):

o   Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)

o   Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)

o   Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))

o   Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))

Section 1 – Registrant’s Business and Operations

Item 1.01.  Entry into a Material Definitive Agreement.

On June 21, 2010, Image Sensing Systems, Inc. (the “Company”) and Image Sensing Systems Europe Limited, which is the Company’s wholly-owned subsidiary based in the United Kingdom (“ISS Europe”), entered into and closed on a Share Purchase Agreement (the “Purchase Agreement”) with three shareholders (the “Sellers”) of CitySync Limited (“CitySync”) under which ISS Europe purchased all of the shareholders’ ordinary shares of CitySync.  Also on June 21, 2010, the Company exercised its options (the “Options”) granted to it by the two other shareholders of CitySync to purchase the remaining ordinary shares of CitySync.  CitySync, based in Hertfordshire, United Kingdom, is a privately-held developer and marketer of automated license (or number) plate reader technology.

Under the Purchase Agreement and the Options, the Company and ISS Europe paid total initial consideration of $7.9 million in cash and issued 57,000 restricted shares of the Company’s common stock (valued at $727,000 based on its closing price on June 18, 2010 as quoted on The NASDAQ Capital Market).  Under the Purchase Agreement, the shares of Company common stock were placed in escrow (the “Escrowed Shares”).  The Purchase Agreement provides for earn-out payments (the “Earn-Out Payments”) over approximately 18 months, broken into two periods.  If revenue and gross margins from the CitySync products are at the highest target tiers, the Sellers would receive an additional $2.0 million cash in Earn-Out Payments; however, the amount of the Earn-Out Payments is not capped, and with superior revenue and gross margin achievem ent, the amount of the Earn-Out Payments could exceed this amount.  The first earn-out period begins on June 22, 2010 and ends on December 31, 2010, and the second earn-out period begins on January 1, 2011 and ends on December 31, 2011.  The Purchase Agreement provides that if the Company or ISS Europe has a judgment in respect of any claim made under the Purchase Agreement against the Sellers, it may set off the amount of such judgment against the Escrowed Shares and the Earn-Out Payments.  Any Escrowed Shares remaining in escrow 18 months after June 21, 2010 will then be released to the Sellers.  CitySync now is a wholly-owned subsidiary of ISS Europe.

Section 2 – Financial Information

Item 2.01.  Completion of Acquisition or Disposition of Assets.

On June 21, 2010, the Company closed on its purchase of the shares of CitySync under the Purchase Agreement and the Options.  The information set forth in Item 1.01(a) of this Current Report on Form 8-K is incorporated into this Item 2.01 by reference.

Item 2.03.  Creation of a Direct Financial Obligation or an Obligation under an Off-Balance Sheet Arrangement of a Registrant.

(a)  As described in “Item 1.01 – Entry into a Material Definitive Agreement,” under the Purchase Agreement, if revenue and gross margin from sales of the CitySync products are at the highest target tiers, ISS Europe is obligated to pay to the Sellers $2.0 million cash in Earn-Out Payments for the two earn-out periods; however, the amount of the Earn-Out Payments is not capped, and with superior revenue and gross margin achievement, the amount of the Earn-Out Payments could exceed this amount.  The Earn-Out Payments are tied to achieving target levels of “Actual Eligible Revenue” and “GM” from sales of the CitySync products.  As used in the Purchase Agreement, “Actual Eligible Revenue” means the revenue from products in respect of “Business” earned by the Company, on a consolidated basis.  The term “Busi ness” is defined in the Purchase Agreement as the business of developing, marketing, distributing, selling and supporting automatic number plate recognition and automatic license plate recognition hardware and software.  The term “GM” is defined as the average associated gross margin earned by the Company on the Actual Eligible Revenue.  Depending on the amount of Actual Eligible Revenue and GM for the first earn-out period, the Earn-Out Payment for that period can range from $0 to $767,000 plus an amount equal to 10% of Actual Earned Revenue above that period’s highest target tier.  Depending on the amount of Actual Eligible Revenue and GM for the second earn-out period, the Earn-Out Payment for that period can range from $0 to $1,229,000 plus an amount equal to 10%  of Actual Earned Revenue above that period’s highest target tier.  Any Earn-Out Payments with respect to an earn-out period are due within 90 days after the end of the earn-out period for which the Earn-Out Payment is due. 

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Section 3 – Securities and Trading Markets

Item 3.02  Unregistered Sales of Equity Securities.

Under the Purchase Agreement, the Company issued the 57,000 Escrowed Shares in the names of the Sellers (that is, 19,000 Escrowed Shares in the name of each Seller) that are being held in escrow.  The Escrowed Shares constitute approximately 1.2% of the outstanding shares of common stock of the Company.  The Escrowed Shares were issued without registration under the Securities Act of 1933 (the “Securities Act”) in reliance upon the exemption from registration provided under Section 4(2) of the Securities Act.  The issuance did not involve any public offering; no general solicitation or general advertising was used in connection with such issuance; each of the Sellers represented that he was acquiring the Escrowed Shares for his own account and without a view toward distribution of the Escrowed Shares; and the stock certificates evidencing the Escrowed Shares were issued with restrictive securities legends.  

Section 9 – Financial Statements and Exhibits

Item 9.01.  Financial Statements and Exhibits.

(a)  Financial Statements of Business Acquired.  The financial statements required by Item 9.01(a) of Form 8‑K will be filed with an amendment to this Current Report on Form 8-K no later than 71 days after the date this Current Report on Form 8-K is required to be filed with the Securities and Exchange Commission (“SEC”). 

(b)  Pro Forma Financial Information.The pro forma financial information required by Item 9.01(b) of Form 8‑K will be filed with an amendment to this Current Report on Form 8-K no later than 71 days after the date this Current Report on Form 8-K is required to be filed with the SEC.

(c)  Exhibits.  The following document is hereby filed as an exhibit to this Current Report on Form 8-K:

Exhibit No.

99.1                 Press Release dated June 23, 2010.

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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 hereunto duly authorized.

	Image Sensing Systems, Inc.
Date:  June 23, 2010.
	By	/s/ Gregory R. L. Smith
		Gregory R. L. Smith Chief Financial Officer (Principal Financial Officer)

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EXHIBIT INDEX

Exhibit No.		Description
99.1	Press Release dated June 23, 2010.

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EX-99.1

Exhibit 99.1

500 Spruce Tree Centre
1600 University Avenue West
St. Paul, Minnesota 55104-3825 USA
651.603.7700 Fax:  651.603.7795
www.imagesensing.com

NEWS RELEASE

Contact: Greg Smith, Chief Financial Officer
Image Sensing Systems, Inc. Phone:  651.603.7700

FOR IMMEDIATE RELEASE

Image Sensing Systems Acquires CitySync

Acquisition brings ISS leading ANPR  product set and furthers strategic thrust

Saint Paul, Minn., June 23, 2010-- Image Sensing Systems, Inc. (“ISS” or the “Company”) (NASDAQ: ISNS) announced today that it has acquired all of the outstanding stock of CitySync Limited, a UK based, privately-held developer and marketer of automatic license (or number) plate recognition technology (“ANPR”), for initial consideration of $7.9 million in cash and 57,000 restricted shares of ISS common stock (valued at $727,000 as of the previous day’s closing price).  In addition, the sellers have an 18 month earn-out agreement under which they could receive an additional $2.0 million or more based on revenue and gross margin achievement from CitySync products.  Also, ISS will repay $437,000 in borrowings to CitySync from certain sellers in June.

ANPR applications include police, security, Intelligent Transportation Systems (ITS) (such as journey time measurement and congestion charging), tolling and parking.  In its most recent fiscal year, CitySync had revenue of $7.4 million. 

Ken Aubrey, CEO of ISS, said, “We’re again pleased to add a well-respected detection technology to our product portfolio.  CitySync ANPR products are highly rated by users in Europe and North America.  CitySync’s technology is a great fit for ISS as it is founded on software-based machine vision and we also value CitySync’s employee base which will give us important critical mass in the EMEA marketplace.

“As part of our study of the combination, we believe we have identified a number of key synergies, both technological and financial.  Financially, we believe the acquisition will be accretive to earnings in 2011 (at minimum on a non-GAAP basis where acquisition related intangibles amortization is removed from operating expenses) as we anticipate benefiting from ISS’ worldwide sales footprint and realizing operational efficiencies.  Technically, we see numerous opportunities for improving our current product set and developing new features.”

Frank Thomson, CEO of CitySync added, “We are excited to join forces with ISS.  CitySync has had a track record of strong year-on-year revenue growth and we can now enhance our opportunities by taking advantage of ISS’ sales reach and financial strength.”

Strategic Thrust

Mr. Aubrey continued, “Our core competency is computer-enabled detection (CED) which we define as a group of technologies in which software, rather than humans, examines the outputs of complex sensors through the use of software-based algorithms to determine what’s happening in the field of view in real-time.

“Along with the video and radar technologies we possess, the addition of ANPR, with its core object tracking and classification capabilities, expands our opportunities to develop ever more sophisticated hybrid products as well as make enhancements to our existing Autoscope video products.  These new products will combine the best features of each of the parent technologies, using data fusion to overcome their individual shortfalls.  This will produce a new breed of detectors that can achieve levels of accuracy that we believe are simply not available in the market today.

“We will continue to leverage our strength in ITS to capture additional market share in this attractive world-wide market.  Ultimately, we see a convergence of ITS, security and environmental markets and we aim to be well positioned to be a leading provider of CED components to management systems providers.  We anticipate following our same path of combining continued internal development and selected product and channel acquisition strategies to best position the Company.”

About Image Sensing

Image Sensing Systems, Inc. is a provider of software-based detection solutions for the Intelligent Transportation Systems (ITS) sector and adjacent markets including security, police and parking. We have sold more than 110,000 units of our industry leading Autoscope® machine-vision, RTMS® radar and CitySync automatic number plate recognition (ANPR) products in over 60 countries worldwide.  The depth of our experience coupled with the breadth of our product portfolio uniquely positions us to provide powerful hybrid technology solutions and to exploit the convergence of the traffic, security and environmental management markets. We are headquartered in St. Paul, Minnesota. Visit us on the web at imagesensing.com.

Safe Harbor Statement:  Statements made in this release concerning the Company’s or management’s intentions, expectations, or predictions about future results or events are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements reflect management’s current expectations or beliefs, and are subject to risks and uncertainties that could cause actual results or events to vary from stated expectations, which variations could be material and adverse. Factors that could produce such a variation include, but are not limited to, the following: the inherent unreliability of earnings, revenue and cash flow predictions due to numerous factors, many of which are beyond the Company’s control; developments in the demand for the Company’s products and services; relationships with the Company’s major customers and suppliers; unanticipated delays, costs and expenses inherent in the development and marketing of new products and services; the impact of governmental laws and regulations; and competitive factors. Our forward-looking statements speak only as of the time made, and we assume no obligation to publicly update any such statements. Additional information concerning these and other factors that could cause actual results and events to differ materially from the Company’s current expectations are contained in the Company’s reports and other documents filed with the Securities and Exchange Commission, including its Annual Report on Form 10-K for the year ended December 31, 2009.