Image Sensing Systems Incorporated (ISNS)
2004 Interview with:
James Murdakes, Chairman, President and CEO
Business News, Financial News, Stocks, Money & Investment Ideas, CEO Interview
and Information on their
Autoscope(R) for Machine Vision technology for Traffic Management.

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Image Sensing Systems is the world leader in video-based vehicle detection and traffic data collection with applications for bridges, tunnels, highways, and surveillance

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Technology
Scientific and Technical Instruments
(ISNS-NASD)

Image Sensing Systems Incorporated

500 Spruce Tree Centre
Saint Paul, MN 55104
Phone: 651-603-7700


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James Murdakes
Chairman, President and CEO

Interview conducted by:
Walter Banks
Co-Publisher

CEOCFOinterviews.com
February 2004

BIO:
James Murdakes - CEO and President (70)
Mr. Murdakes has been a Director of the Company since May 1995.  Mr. Murdakes was elected Chairman of the Board in February 2002 and was appointed interim Chief Executive Officer and President of ISS in April 2002.  He served as President and CEO of LSC, Inc., a Minneapolis-based software company 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.   Prior to this he retired from Control Data in 1987 after 25 years and from Clyde Digital in 1992.  He retired from full-time employment in 1998.

Company Profile:
 
Image Sensing Systems, Inc. (ISNS-NASD) is the world leader in products applying video imaging technology for implementation in advanced traffic management systems (ATMS), freeway incident detection and traffic data collection to help reduce traffic congestion, improve roadway planning, and reduce travel time. The Company’s cornerstone Autoscope products provide traffic managers the means to reduce roadway congestion, improve roadway planning, and increase cost efficiencies. With 20 years of development experience and equipment installed for over 25,000 cameras in more than 50 countries and most U.S. cities, ISS is considered to be the world leader in video-based vehicle detection and traffic data collection, with an extensive network of distributors and agents. Econolite Control Products, Inc., based in Anaheim, California, has been the exclusive distributor of Autoscope products throughout North America since 1991 and recently was awarded exclusive sales distribution for Latin America.

Video image processing, also known as machine vision, is a technology that captures and analyzes video images through sophisticated algorithms using off-the-shelf components and dedicated hardware and software. Video and data can be transmitted by using connections as simple as a phone line, as fast as fiber, or as convenient as wireless and has the versatility to satisfy incident management applications for bridges, tunnels, and highways, as well as surveillance applications.

The Autoscope Solo Pro II is a unique product in the market, setting the industry standard in video vehicle detection systems for high performance combined with ease of use and cost-effectiveness. The Autoscope Solo Pro integrates a robust zoom-lens color camera that can operate in low light with a powerful video image processor. The Autoscope Solo Pro NC uses the same high-performance detection algorithms and network communications as the Autoscope Solo Pro, but in a self-contained unit that can be shelf- or rack- mounted. The Autoscope RackVision™ is a single-camera video detection system that is available in two models, Euro Model and US Model. The Autoscope 2020™ is the successor to the four-camera Autoscope 2004.  The Autoscope 2020 can be shelf or rack mounted in a traffic cabinet or in a central office.  The AIS (Autoscope Image Sensor) Camera™ is a durable, high-resolution traffic camera specially optimized for the Autoscope RackVision models, Autoscope Solo Pro NC, and Autoscope 2020.  The AIS Camera has a built in zoom lens and color imager with high sensitivity to ensure accurate vehicle detection at night.

Autoscope Software Suite version 7 is now shipping with all Autoscope products. A major feature of version 7 is the Autoscope WIZARD which automates setup and configuration of Autoscope video vehicle detection systems. This initial version of the Autoscope WIZARD simplifies setup for intersection control stop-line detection applications.

Additionally, Version 7 now provides the German standard TLS Protocol used for traffic data communications for highway applications. The TLS protocol is used in Germany, Austria, and Switzerland.”

CEOCFOinterviews: Mr. Murdakes, when interviewed last year, you were listed as the Interim CEO of Image Sensing Systems. Is that title still in effect and if so, are there plans in the future for the title to become permanent?

Mr. Murdakes: “Interim was the title we agreed upon back in April of 2002. I indicated at the time that it would take six quarters to get the Company back on track and profitable. We have done that.   The interim portion of the title has been dropped. As of now, I am going to stay as long as the good Lord and the Board want me to stick around.”

CEOCFOinterviews: Do you still maintain the exclusive license with the University of Minnesota and will the exclusivity continue after the term expires?

Mr. Murdakes: “The exclusive license was signed with the University of Minnesota back in July of 1989 and runs through July of 2006, at which point that patent expires and we will no longer be required to pay royalties. By that time, we will have paid them in excess of three million dollars.  The technology has evolved over the past 15 years and today we have a totally different product.  Eliminating royalty cost will obviously add to our bottom line.”

CEOCFOinterviews: Has the competitive environment in the machine vision products market changed over the last year?

Mr. Murdakes: “I would say that the competitive environment has indeed changed. Recently Quixote Corporation (QUIX) purchased the North American operation of Peek Traffic (Peek Corporation). They were not in the machine business before but they are now. CITY LOG is a French company who has opened an office on the East coast.  Odetics, now known only as Iteris Holdings Inc. (ITRSA & ITRSB) eliminated a number of non-profitable operations and are totally focused on machine vision. As new entries come into the market it only enhances the overall perception that this is a big market.  They are confirming that there is a significant machine vision market. Having companies entering what we like to think was our space is great and I have no problem with it. Yes, the competitive environment has changed over the last year.”

CEOCFOinterviews: Are you selling to governments or private companies?

Mr. Murdakes: “We sell to the Departments of Transportation (DOTs). We are really selling to the metropolitan city governments and the state governments, which are funded primarily by federal and state government. We also sell through consultants, systems integrators and distributors but, as I said, the money comes from the federal and state governments.”

CEOCFOinterviews: Has the implementation of your new products affected sales and has it made a big difference?

Mr. Murdakes: “The Autoscope Solo Pro II and the RackVision Products are doing great.  The 2020 is a 2004 replacement that is sold primarily in North America.  The TLS Protocol was released along with the WIZARD in October of 2003.  The WIZARD is a GUI interface that allows you to automatically lay out detectors. The TLS is a communications protocol.   It is a German/Austrian/ Switzerland requirement, which we believe will help us in those markets. The Autoscope RackVision™ has also been selling well.”

CEOCFOinterviews: Would you say that revenue growth is more through current customers with newer implementations and upgrades or would you say it is because of newer customers?

Mr. Murdakes: “The answer to your question is a bit of both.  To give you an example, we have doubled the business in Europe.  We have two new distributors, SWARCO Holding AG and Weiss-Electronics GmbH (part of the M-Tech AG (ISIN: DE0007236309) group of companies). Graham Heywood, our managing director there, doubled his business in 2003.  These are new customers who have purchased our new RackVision product.  The Autoscope Solo Pro has been a phenomenal product for us. It will continue to sell, but that does not mean we are going to quit coming up with new products. I already said to stay competitive you must continue to invest and build new products.  We started the development process for two new hardware products in August of 2003 and we hope by the end of the third quarter of 2004 we will have these products to take to market. We are also building a new product for 2005.  Again, if you want to continue to grow both revenue and profit, you must continue to invest in technology.”

CEOCFOinterviews: What is your current R&D spending?

Mr. Murdakes: “We are consistently spending from 18-20% of the sales dollar for R&D. As I preach fundamentals, high-tech companies have to focus on technology, marketing, and on what you are good at, which in our case is traffic machine vision. We also have two excellent strategic partners. Add to these fundamentals, managing financials such as cash management, and continued growth of shareholder value. You’ll have a viable company.. You have to balance shareholder value, employees, and technology. Last July, we developed a three-year bottom-up product strategy.  You have to listen and make sure you can meet the market requirements of what your customers need.”

CEOCFOinterviews: Is Econolite Control Products your only distributor in North and Latin America?

Mr. Murdakes: “Absolutely, Econolite Control Products Inc. of Anaheim, California has a great direct sales force.   In North America they have distributors working with their direct sales force. In Latin America, we are represented in Venezuela, Argentina, Peru, and Brazil with local distributors.  Econolite has a professional who manages those local distributors; he speaks fluent Portuguese and Spanish. When you ask if Econolite is our only North American distributor, the answer is a resounding yes.”

CEOCFOinterviews: How does your distribution system work in the European and Eastern markets?

Mr. Murdakes: “A few years ago, we bought our Asian distributor (Flow Traffic Limited). We have nine (sales and engineers) working in China, three in Hong Kong and six on the mainland. We are adding three more in 2004.  We are the dominant player in Korea.  China is a huge emerging market. Our Managing Director, Johan Billow, is located in Hong Kong.  Johan is Swedish and speaks two or three different Chinese dialects. Flow Traffic Limited is a wholly owned subsidiary of ISS and profitable, I might add. In Europe, our Managing Director is located in the U.K.  We have technical support headquartered in Barcelona and are budgeting for additional sales and support personnel in 2004.  Graham has done a great job in Europe. He has gotten SWARCO that handles northern Europe, Weiss-Electronics that handles Germany and we have expanded their territory to include Russia. We have distributors in the Netherlands, the U.K., Poland, Switzerland, Austria, Spain, Italy and Greece.  We are well represented in all of Europe.”

We have excellent distributors but we need more people to help in the sales and support effort. In Europe, we’ve targeted tunnels as a major thrust. We acquired twelve new tunnel projects last year; eleven in Europe and one in China.  Machine vision detection for traffic has been an emerging market that ISS and Econolite, as partners, started back in 1991 and it has taken ten to twelve years for this new market segment to begin blossoming. When you look at the market, the companies entering into it will tell you that it is a big market and ISS and Econolite want to continue to be the dominant player.”

CEOCFOinterviews: When we talked last year you were in about forty countries, how many countries are you in now?

Mr. Murdakes: “We are now in fifty countries.  I mentioned Europe and Norh and Latin America earlier.  In Asia, Flow Traffic Ltd, is focused primarily in China and Korea however they have activities in New Zealand, Australia and Malaysia.”

CEOCFOinterviews: How many cameras do you have out there now and is that the full story of your product sales?

Mr. Murdakes: “We believe we have 25,000 cameras out there but that does not tell the full story. For example, in China and parts of Europe we sell Autoscope Solo Pro NC without cameras.  The reason is that they can buy cameras locally.  So we developed a product a couple years ago called the Autoscope NC (No Camera), where customers can buy and install their own camera locally. We also sell the Autoscope RackVision with no camera.”

CEOCFOinterviews: Do you have recurring revenue from this?

Mr. Murdakes: “I’m not sure what you mean by recurring revenue. Our revenue is mainly derived from replacement and new accounts.  The market is huge. I don’t know if we even have 15 or 20% of the available market. We have (as an example) not even touched the Freeway market which we need to look into as a company.”

CEOCFOinterviews: When we spoke last we talked about flame detection markets and homeland security markets; has there been any movements in those areas?

Mr. Murdakes: “There has been no hardware or software activity as far as homeland security.  Econolite keeps abreast of what is going on in that sector. If you look at homeland security, the majority if not all of the budgeting by the federal government is being allocated to terrorism and very little, if any, is for machine vision per se. I know Econolite has attended a number of seminars and meetings but as far as any real business, the answer is no. That is on the back burner for now.  Econolite has the lead and we will follow suit.”

As far as DetTronics (a division of Kiddie PLC), they submitted their explosion proof product to the European Regulatory Agency for approval.  They also have submitted to a different laboratory for an independent evaluation against their competitors. Based on the findings of the regulatory agency and the independent laboratory, DetTronics will then put together their launch plan. Am I disappointed? Yes, I’m not surprised what one has to go through for this kind product.  Flame detection is not the easiest thing to do. Right now it is in DetTronics court, and not in ours.  If it happens sooner than later that’s great.  It is incremental revenue for ISS in 2004.”

CEOCFOinterviews: In closing, what is it that you can point to that shows that you understand how to grow your business?

Mr. Murdakes: “We have been in the machine vision traffic market since 1984. Jake Jacobson, VP Engineering, who runs our engineering group has been here from the beginning and has hired just about everybody in our engineering group.  Our founder, Panos Michalopoulos, and Econolite pioneered the machine vision traffic market.  We know what we have to do, we know we have to continue to grow the business, manage cash, and work with our partners. I believe our recent record demonstrates we know the traffic market and we know how to be profitable.”

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