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SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-K

 


 

FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTIONS 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

 

(Mark One)

 

ý

 

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

 

 

 

 

For the fiscal year ended March 31, 2004

 

 

 

OR

 

 

 

o

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

 

 

 

 

For the transition period from                  to

 

Commission file number 001-08762

 

ITERIS HOLDINGS, INC.

(Exact Name of Registrant as Specified in Its Charter)

 

Delaware

 

95-2588496

(State or Other Jurisdiction
of Incorporation or Organization)

 

(I.R.S. Employer
Identification No.)

 

1515 South Manchester Avenue, Anaheim, California 92802

(Address of Principal Executive Offices) (Zip Code)

 

Registrant’s Telephone Number, Including Area Code: (714) 774-5000

 

Securities registered pursuant to Section 12(b) of the Act: None

 

Securities registered pursuant to Section 12(g) of the Act:

 

Class A common stock, $.10 par value

Class B common stock, $.10 par value

(Title of Class)

 


 

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 ý No o

 

Indicate by a check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K ý

 

Indicate by a check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12(b-2).  Yes o No ý

 

Based on the closing sale price on the OTC Bulletin Board on September 30, 2003, the last business day of the registrant’s most recently completed second fiscal quarter, the aggregate market value of the voting common stock held by nonaffiliates of the registrant was $14,668,955. For the purposes of this calculation, shares owned by officers, directors and 10% stockholders known to the registrant have been deemed to be owned by affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes.

 

Iteris Holdings, Inc. has two classes of common stock outstanding, the Class A common stock and the Class B common stock. The rights, preferences and privileges of each class of common stock are identical in all respects, except for voting rights. Each share of Class A common stock entitles its holder to one-tenth of one vote per share and each share of Class B common stock entitles its holder to one vote per share. As of June 21, 2004, there were 22,117,930 shares of Class A common stock and 922,067 shares of Class B common stock outstanding. Unless otherwise indicated, all references to common stock collectively refer to the Class A common stock and the Class B common stock.

 

DOCUMENTS INCORPORATED BY REFERENCE

 

Information required by Items 10 through 14 of Part III of this report is incorporated herein by reference to portions of the registrant’s definitive proxy statement for its 2004 Annual Meeting of Stockholders, which will be filed with the Securities and Exchange Commission not later than 120 days after the end of the fiscal year ended March 31, 2004.

 



 

ITERIS HOLDINGS, INC.

FORM 10-K ANNUAL REPORT

TABLE OF CONTENTS

 

PART I
 

 

 

 

ITEM 1.

BUSINESS

 

 

 

 

ITEM 2.

PROPERTIES

 

 

 

 

ITEM 3.

LEGAL PROCEEDINGS

 

 

 

 

ITEM 4.

SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

 

 

 

 

PART II

 

 

 

 

ITEM 5.

MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASERS OF EQUITY SECURITIES

 

 

 

 

ITEM 6.

SELECTED CONSOLIDATED FINANCIAL DATA

 

 

 

 

ITEM 7.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

 

 

 

 

RISK FACTORS

 

 

 

 

ITEM 7A.

QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

 

 

 

 

ITEM 8.

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

 

 

 

 

ITEM 9.

CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

 

 

 

 

ITEM 9A.

CONTROLS AND PROCEDURES

 

 

 

 

PART III

 

 

 

 

ITEM 10.

DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

 

 

 

 

ITEM 11.

EXECUTIVE COMPENSATION

 

 

 

 

ITEM 12.

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

 

 

 

 

ITEM 13.

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

 

 

 

 

ITEM 14.

PRINCIPAL ACCOUNTANT FEES AND SERVICES

 

 

 

 

PART IV

 

 

 

 

ITEM 15.

EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K

 

 

In this report, the “Company,” the “Registrant,” “we,” “us” and “our” collectively refers to Iteris Holdings, Inc. and its subsidiaries.

 



 

Cautionary Statement

 

This report contains forward-looking statements, which include but are not limited to, statements concerning projected revenue, expenses and gross profit; our accounting estimates, assumptions and judgments; the market acceptance and performance of our products; manufacturing capacity; the competitive nature of and anticipated growth in our markets; our ability to acquire the remaining minority interest and to complete the merger of Iteris, Inc. into Iteris Holdings, Inc.; the status of evolving technologies and their growth potential; the timing of new product introductions; the adoption of future industry standards and the need for additional capital.  These forward-looking statements are based on our current expectations, estimates and projections about our industry, management’s beliefs, and certain assumptions made by us, all of which are subject to change. Forward-looking statements can often be identified by words such as “anticipates,” “expects,” “intends,” “plans,” “predicts,” “believes,” “seeks,” “estimates,” “may,” “will,” “should,” “would,” “could,” “potential,” “continue,” similar expressions, and variations or negatives of these words. These statements are not guarantees of future performance and are subject to risks, uncertainties and assumptions that are difficult to predict. Therefore, our actual results could differ materially and adversely from those expressed in any forward-looking statements as a result of various factors, some of which are listed under the section “Risk Factors” at the end of Item 7 of this Report. These forward-looking statements speak only as of the date of this Report. We undertake no obligation to revise or update publicly any forward-looking statement for any reason.

 

PART I

 

ITEM 1.                             BUSINESS

 

Overview

 

Iteris Holdings, Inc. is the majority stockholder of Iteris, Inc., a leading provider of outdoor machine vision systems and sensors that optimize the flow of traffic and enhance driver safety. Using our proprietary software and Intelligent Transportation Systems (“ITS”) industry expertise, we provide video sensor systems and transportation management and traveler information systems for the ITS industry. The ITS industry is comprised of companies applying a variety of technologies to enable the safe and efficient movement of people and goods. We use our outdoor image recognition software expertise to develop proprietary algorithms for video sensor systems that improve vehicle safety and the flow of traffic. Using our knowledge of the ITS industry, we design and implement transportation management systems that help public agencies reduce traffic congestion and provide greater access to traveler information.

 

Our proprietary image recognition systems include AutoVueTM and VantageTM.  AutoVue is a small windshield mounted sensor that uses proprietary software to detect and warn drivers of unintended lane departures. Iteris has approximately 6,000 production AutoVue units that are in use on truck platforms in the European market and are offered as an option on certain Actros trucks, which are part of the Daimler group. We believe that AutoVue is a broad sensor platform that, through additional software development, may be expanded to incorporate additional safety and convenience features. Vantage is a video vehicle sensing system that detects the presence of vehicles at signalized intersections enabling a more efficient allocation of green signal time.

 

Our transportation management systems include the design, development and implementation of our software-based systems that integrate sensors, video surveillance, computers and advanced communications equipment to enable public agencies to monitor, control and direct traffic flow, assist in the quick dispatch of emergency crews and distribute real-time information about traffic conditions. Our services include planning and other engineering for the implementation of transportation related communications systems, analysis and study related to goods movement and commercial vehicle operations, and parking systems designs.

 

Sales, Marketing and Principal Customers

 

We sell our Vantage vehicle detection systems primarily through indirect sales channels comprised of independent dealers in the United States and Canada who sell integrated systems and related products to the traffic intersection market. Our independent dealers are primarily responsible for sales, installation and support of Vantage systems. These dealers maintain an inventory of demonstration traffic products including the Vantage vehicle detection systems and sell directly to government agencies and installation contractors. These dealers often have

 

1



 

long-term arrangements with the government agencies in their territory for the supply of various products for the construction and renovation of traffic intersections. We hold technical training classes for dealers and maintain a full-time staff of customer support technicians to provide technical assistance when needed.

 

Our marketing strategy for AutoVue is to establish it as the leading platform for in vehicle video sensing for trucks and passenger cars. We sell AutoVue directly to vehicle manufacturers and major automotive suppliers. We also market to the manufacturers of automobiles through a strategic relationship with Valeo Group, an independent automotive supplier.

 

We market and sell our transportation management systems and services directly to government agencies pursuant to negotiated contracts that involve competitive bidding and specific qualification requirements. Most of our contracts with federal, state and municipal customers provide for cancellation or renegotiation at the option of the customer upon reasonable notice and fees paid for modification. We use selected members of our engineering team divided on a regional basis to serve in sales and business development functions. We do not engage in international ITS sales. Sales of our systems contracts generally involve long lead times and require extensive specification development, evaluation and price negotiations. No single customer of Iteris, Inc. accounted for more than 10% of our total net sales and contract revenues.

 

Manufacturing and Materials

 

We use local manufacturers based near our Anaheim, California facility to build subassemblies that are used in our Vantage products. These subassemblies are delivered to our Anaheim facility where they go through final assembly and testing prior to shipment to our customers. Our manufacturing activities are conducted in approximately 6,000 square feet of space at our Anaheim facility.  Certain of our cameras used in our products have historically been provided by a Japanese supplier who is sole sourced; however, we are currently qualifying other sources of supply. Production volume at our subcontractors is based upon quarterly forecasts that we adjust on a monthly basis to control inventory. For sales to the truck market, we subcontract the manufacture of our AutoVue systems to one manufacturer, and our internal processes are limited primarily to testing and final verification.  For sales to the passenger car market, we anticipate that all manufacturing will be done by the Valeo Group.  We currently do not manufacture any of the hardware used in the transportation management and traveler information systems that we design and implement. Our production facility is currently ISO 9001 certified.

 

Customer Support and Services

 

We provide warranty service and support for each of our products and follow-up service and support, for which we charge separately. Service revenue accounted for less than 1.0% of total net sales and contract revenues for the year ended March 31, 2004 (“fiscal 2004”).  We believe customer support is a key competitive factor.

 

Backlog

 

Our backlog of unfulfilled firm orders was approximately $21.6 million as of March 31, 2004 and was approximately $24.8 million as of March 31, 2003. Approximately 63.0% of our backlog at March 31, 2003 was recognized as revenues in the fiscal year ended March 31, 2004, and approximately 60.0% of our backlog at March 31, 2004 is expected to be recognized as revenues in the fiscal year ended March 31, 2005.  Pursuant to the customary terms of our agreements with government contractors and other customers, customers can generally cancel or reschedule orders with little or no penalties. Lead times for the release of purchase orders depend upon the scheduling and forecasting practices of our individual customers, which also can affect the timing of the conversion of our backlog into revenues. For these reasons, among others, our backlog at a particular date may not be indicative of our future revenues.

 

Product Development

 

Most of our development activities are conducted at our principal facilities in Anaheim, California. Our company-sponsored research and development costs and expenses were approximately $3.4 million for the year ended March 31, 2002 ("Fiscal 2002"), $3.9 million in for the year ended March 31, 2003 ("Fiscal 2003") and $3.9 million in fiscal 2004.  We expect to continue to pursue significant product development programs and incur significant research and development expenditures.

 

2



 

Competition

 

We generally face significant competition in each of our target markets. Increased competition may result in price reductions, reduced gross margins and loss of market share, any of which could have a material adverse effect on our business, financial condition and results of operations. We believe that AutoVue is the only commercially-available lane departure warning system used in the U.S. and in Europe.  Potential competitors of AutoVue include Delphi Automotive Systems Corporation domestically, NEC Corporation and Hitachi Ltd. in Japan and Robert Bosch Gmbh in Europe, which could be currently developing video sensor technologies for the vehicle industry that could be used for lane departure warning systems. In the market for our Vantage vehicle detection systems, we compete with manufacturers of other “above ground” video camera detection systems such as Econolite Control Products, Inc., Trafficon, N.V., Peek Traffic Systems, and other non-intrusive detection devices including microwave, infrared, ultrasonic and magnetic detectors, as well as manufacturers and installers of in-pavement inductive loop products. Our competitors for Vantage products do not disclose specific sales numbers, either because they are private companies or because they are part of larger companies. Based on our interface with them in the market, we believe that we are leading our competitors in annual sales volume for video detection products.

 

The transportation management and traveler information systems market is highly fragmented and is subject to evolving national and regional quality and safety standards. Our competitors vary in number, scope and breadth of the products and services they offer. Our competitors in advanced transportation management and traveler information systems include large multi-national corporations such as Transcore, Lockheed Martin Corporation, PB Farradyne Inc., Kimley-Horn and Associates, Inc. and National Engineering Technology, Inc. Iteris, Inc.’s competitors in transportation engineering, planning and design include major firms such as Parsons Brinkerhoff, Inc. and Parsons Transportation Group Inc., as well as many smaller regional engineering firms.

 

In general, the markets for the products and services offered by our businesses are highly competitive and are characterized by rapidly changing technology and evolving standards. Many of our current and prospective competitors have longer operating histories, greater name recognition, access to larger customer bases and significantly greater financial, technical, manufacturing, distribution and marketing resources than us. As a result, they may be able to adapt more quickly to new or emerging standards or technologies or to devote greater resources to the promotion and sale of their products. It is also possible that new competitors or alliances among competitors could emerge and rapidly acquire significant market share. We believe that our ability to compete effectively in our target markets will depend on a number of factors, including the success and timing of our new product development, the compatibility of our products with a broad range of computing systems, product quality and performance, reliability, functionality, price, and service and technical support. Our failure to provide services and develop and market products that compete successfully with those of other suppliers and consultants in our target markets would have a material adverse effect on our business, financial condition and results of operations.

 

Intellectual Property and Proprietary Rights

 

Our ability to compete effectively depends in part on our ability to develop and maintain the proprietary aspects of our technology. Our policy is to obtain appropriate proprietary rights protection for any potentially significant new technology acquired or developed by us.  We currently hold six U.S. patents, which expire commencing in 2012, and have eighteen U.S. patent applications pending, mostly relating to our outdoor image processing techniques used in our AutoVue and Vantage systems. Two of our patents relate specifically to our AutoVue technology and provide a basis for enhanced functionality for rain sensing and improved performance. We believe that our other patents, while important for our technology platforms are less critical to near term product strategy. We cannot assure you that any new patents will be granted pursuant to any outstanding or subsequent applications.

 

In addition to patent laws, we rely on copyright and trade secret laws to protect our proprietary rights. We attempt to protect our trade secrets and other proprietary information through agreements with customers and suppliers, proprietary information agreements with our employees and consultants, and other similar measures. We do not have any material licenses or trademarks other than those relating to product names. We cannot be certain that we will be successful in protecting our proprietary rights. While we believe our patents, patent applications, software and other proprietary know-how have value, changing technology makes our future success dependent principally upon our employees’ technical competence and creative skills for continuing innovation.

 

Litigation has been necessary in the past and may be necessary in the future to enforce our proprietary rights, to determine the validity and scope of the proprietary rights of others, or to defend us against claims of infringement or invalidity by others. An adverse outcome in such litigation or similar proceedings could subject us to significant liabilities to third parties, require disputed rights to be licensed from others or require us to cease marketing or using certain products, any of which could have a material adverse effect on our business, financial condition and results of operations. In addition, the cost of addressing any intellectual property litigation claim, both in legal fees and expenses, as well as from the diversion of management’s resources, regardless of whether the claim is valid, could be significant and could have a material adverse effect on our business, financial condition and results of operations.

 

3



 

Employees

 

We refer to our employees as associates. As of June 3, 2004, we employed an aggregate of 204 associates, including 50 associates in general management, administration and finance; 20 associates in sales and marketing; 104 associates in product development; 21 associates in operations, manufacturing and quality; and nine associates in customer service. None of our associates are represented by a labor union, and we have never experienced a work stoppage.

 

Government Regulation

 

Our manufacturing operations are subject to various federal, state and local laws and regulations, including those restricting the discharge of materials into the environment. We are not involved in any pending or, to our knowledge, threatened governmental proceedings, which would require curtailment of our operations because of such laws and regulations. We continue to expend funds in connection with our compliance with applicable environmental regulations. These expenditures have not, however, been significant in the past, and we do not expect any significant expenditure in the near future. Currently, compliance with foreign laws has not had a material impact on our business and is not expected to have a material impact in the near future.

 

Legal Proceedings

 

We are not currently a party to any material legal proceedings.

 

ITEM 2.                             PROPERTIES

 

Our headquarters and principal operations consist of  86,000 square feet of space located at 1515 South Manchester Boulevard in Anaheim, California.  The Anaheim facility is leased by us under three separate agreements and houses our administrative offices (approximately 15,000 dedicated square feet), the operations of our former subsidiary, MAXxess Systems, Inc. (approximately 10,000 dedicated square feet), as well as the operations of Iteris, Inc. (approximately 58,000 dedicated square feet).  Two of the three Anaheim leases representing 80,000 of the 86,000 square feet commenced on July 1, 2003 and have four year terms at a monthly lease rate of $56,908 for 65,000 square feet and $13,133 per month for 15,000 square feet.  Approximately 10,000 square feet is sub-leased to MAXxess at a rate of $10,000 per month.  On March 1, 2004, Iteris, Inc. entered into a third lease in Anaheim for 6,000 additional square feet at a rate of $3,300 per month.  All three Anaheim leases expire on October 31, 2007.

 

ITEM 3.                             LEGAL PROCEEDINGS

 

From time to time, we have been involved in litigation relating to claims arising out of our operations in the normal course of business.  We are not currently a party to any material legal proceedings.

 

ITEM 4.                             SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.

 

No matters were submitted to a vote of our security holders during the three months ended March 31, 2004.

 

4



 

PART II

 

ITEM 5.                             MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

 

Our Class A common stock and Class B common stock are quoted on the OTC Bulletin Board under the symbols “ITRSA.OB” and “ITRSB.OB,” respectively. Our Class A common stock and our Class B common stock were delisted from the Nasdaq SmallCap Market in August 2003, and April 2003, respectively, and is currently quoted on the OTC Bulletin Board.  Prior to that, our Class A common stock and Class B common stock were listed on the Nasdaq National Market.  The following table sets forth for the fiscal periods indicated the high and low sales prices for the Class A common stock and Class B common stock as reported by the Nasdaq SmallCap Market or the OTC Bulletin Board for applicable periods.

 

 

 

Class A Common Stock

 

Class B Common Stock

 

 

 

High

 

Low

 

High

 

Low

 

Fiscal 2003

 

 

 

 

 

 

 

 

 

Quarter Ended June 30, 2002

 

$

1.70

 

$

1.27

 

$

2.57

 

$

1.85

 

Quarter Ended September 30, 2002

 

1.52

 

.85

 

2.00

 

1.00

 

Quarter Ended December 31, 2002

 

1.03

 

.45

 

1.00

 

.42

 

Quarter Ended March 31, 2003

 

.74

 

.51

 

.75

 

.52

 

 

 

 

 

 

 

 

 

 

 

Fiscal 2004

 

 

 

 

 

 

 

 

 

Quarter Ended June 30, 2003

 

$

.89

 

$

.45

 

$

.53

 

$

.20

 

Quarter Ended September 30, 2003

 

1.75

 

.51

 

.20

 

.20

 

Quarter Ended December 31, 2003

 

2.60

 

1.36

 

.40

 

.20

 

Quarter Ended March 31, 2004

 

4.15

 

1.91

 

3.00

 

.40

 

 

 

 

 

 

 

 

 

 

 

Fiscal 2005

 

 

 

 

 

 

 

 

 

Quarter Ending June 30, 2004  (through June 29, 2004)

 

$

4.10

 

$

2.60

 

$

3.00

 

$

3.00

 

 

As of June 21, 2004, we had 508 holders of record of Class A common stock and 96 holders of record of Class B common stock according to information furnished by our transfer agent.

 

Dividend Policy

 

We have never paid or declared cash dividends on either class of our common stock, and have no current plans to pay such dividends in the foreseeable future. We currently intend to retain any earnings for working capital and general corporate purposes. The payment of any future dividends will be at the discretion of our Board of Directors, and will depend upon a number of factors, including, but not limited to, future earnings, the success of our business, activities, our capital requirements, our general financial condition and future prospects, general business conditions, the consent of our lender and such other factors as the Board may deem relevant.

 

Recent Sales of Unregistered Securities

 

During the quarter ended March 31, 2004, we issued 89,332 unregistered shares of our Class A common stock valued at $151,000 to an accredited investor to settle a trade payable incurred during our fiscal year ended March 31, 2002.  The offer and sale of the securities described above were effected without registration in reliance on the exemption afforded by Regulation D promulgated under the Securities Act of 1933, as amended.

 

5



 

ITEM 6.                             SELECTED CONSOLIDATED FINANCIAL DATA

 

The following table sets forth our selected consolidated financial data for each of the five fiscal years ended March 31, 2004.  The statement of operations and balance sheet data for the years ended and as of March 31, 2000, 2001, 2002, 2003 and 2004 are derived from our audited consolidated financial statements.  The accompanying consolidated financial statements have been restated to reflect the classification and presentation of Broadcast, Inc., Zyfer Inc., Mariner Networks, Inc., Gyyr, Inc. and MAXxess Systems, Inc. as discontinued operations for all periods presented.  See Note 1 to the accompanying consolidated financial statements.  The following information should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and with our consolidated financial statements and the related notes thereto included elsewhere in this report.

 

 

 

Fiscal Year Ended March 31,

 

 

 

2000

 

2001

 

2002

 

2003

 

2004

 

 

 

(in thousands, except per share data)

 

Consolidated Statement of Operations Data:

 

 

 

 

 

 

 

 

 

 

 

Net sales and contract revenues:

 

 

 

 

 

 

 

 

 

 

 

Net sales

 

$

7,740

 

$

10,626

 

$

17,104

 

$

19,112

 

$

23,470

 

Contract revenues

 

15,671

 

17,430

 

20,205

 

22,283

 

21,813

 

Total net sales and contract revenues

 

23,411

 

28,056

 

37,309

 

41,395

 

45,283

 

Costs and expenses:

 

 

 

 

 

 

 

 

 

 

 

Cost of net sales

 

4,308

 

5,558

 

8,401

 

9,366

 

12,758

 

Cost of contract revenues

 

11,310

 

11,463

 

12,043

 

15,110

 

14,712

 

Selling, general and administrative expenses

 

15,201

 

15,882

 

14,627

 

14,105

 

12,844

 

Research and development expenses

 

3,698

 

5,526

 

3,434

 

3,908

 

3,923

 

Restructuring charges

 

 

367

 

1,142

 

 

 

Total costs and expenses

 

34,517

 

38,796

 

39,647

 

42,489

 

44,237

 

Income (loss) from operations

 

(11,106

)

(10,740

)

(2,338

)

(1,094

)

1,046

 

Non-operating income (expense):

 

 

 

 

 

 

 

 

 

 

 

Royalty income

 

38,437

 

17,825

 

 

 

 

Other income (expense), net

 

 

188

 

(1,365

)

417

 

1,003

 

Interest expense, net

 

(1,919

)

(1,762

)

(4,190

)

(761

)

(123

)

Income (loss) before income tax

 

25,412

 

5,511

 

(7,893

)

(1,438

)

1,926

 

Income tax benefit (provision)

 

 

 

785

 

 

(100

)

Income (loss) from continuing operations before minority interest

 

25,412

 

5,511

 

(7,108

)

(1,438

)

1,826

 

Minority interest in earnings of subsidiary

 

 

 

(1,910

)

(3,818

)

(3,034

)

Income (loss) from continuing operations

 

25,412

 

5,511

 

(9,018

)

(5,256

)

(1,208

)

Income (loss) from discontinued operations,  net of taxes of $0

 

(27,691

)

(38,051

)

(17,120

)

(7,892

)

1,215

 

Extraordinary loss from early extinguishment debt, net of taxes of $0

 

 

 

(450

)

 

 

Net income (loss)

 

$

(2,279

)

$

(32,540

)

$

(26,588

)

$

(13,148

)

$

7

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic earnings (loss) per share:

 

 

 

 

 

 

 

 

 

 

 

Continuing operations

 

$

2.80

 

$

0.55

 

$

(0.80

)

$

(0.37

)

$

(0.06

)

Discontinued operations

 

(3.05

)

(3.81

)

(1.52

)

(0.55

)

0.06

 

Extraordinary loss

 

 

 

(0.04

)

 

 

Basic earnings (loss) per share

 

$

(0.25

)

$

(3.26

)

$

(2.36

)

$

(0.92

)

$

0.00

 

 

 

 

 

 

 

 

 

 

 

 

 

Diluted earnings (loss) per share:

 

 

 

 

 

 

 

 

 

 

 

Continuing operations

 

$

2.69

 

$

0.54

 

$

(0.80

)

$

(0.37

)

$

(0.06

)

Discontinued operations

 

(2.93

)

(3.73

)

(1.52

)

(0.55

)

0.06

 

Extraordinary loss

 

 

 

(0.04

)

 

 

Diluted earnings (loss) per share

 

$

(0.24

)

$

(3.19

)

$

(2.36

)

$

(0.92

)

$

0.00

 

Shares used in calculating basic earnings (loss) per share

 

9,089

 

9,977

 

11,267

 

14,276

 

19,454

 

Shares used in calculating diluted earnings (loss) per share

 

9,444

 

10,209

 

11,267

 

14,276

 

19,680

 

 

6



 

 

 

At March 31,

 

 

 

2000

 

2001

 

2002

 

2003

 

2004

 

 

 

(in thousands)

 

Consolidated Balance Sheet Data:

 

 

 

 

 

 

 

 

 

 

 

Working capital (deficit)

 

$

26,830

 

$

2,114

 

$

(7,349

)

$

3,368

 

$

9,369

 

Total assets

 

81,850

 

68,061

 

52,238

 

34,842

 

30,051

 

Long-term debt (less current portion)

 

10,649

 

4,791

 

2,042

 

1,265

 

849

 

Accumulated deficit

 

(26,192

)

(58,732

)

(85,320

)

(98,468

)

(98,461

)

Total stockholders’ equity (deficit)

 

36,110

 

20,378

 

5,255

 

(4,288

)

623

 

 

ITEM 7.                        MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

You should read the following discussion and analysis in conjunction with our Consolidated Financial Statements and related Notes thereto included in Part IV, Item 15 of this report and the “Risk Factors” section at the end of this Item 7, as well as other cautionary statements and risks described elsewhere in this report, before deciding to purchase, hold or sell our common stock.

 

Overview

 

We have historically operated multiple business units. During the fiscal year ended March 31, 2003 (“fiscal 2003”), we operated in three business segments consisting of ITS, video products and telecom products. The ITS segment consisted of our majority-owned subsidiary, Iteris, Inc., which designs, develops, markets and implements video sensor systems and transportation management and traveler information systems for the ITS industry. The video products segment consisted of our former wholly-owned subsidiaries, MAXxess Systems, Inc. (previously known as Gyyr Incorporated), which designed and manufactured security management systems, and Broadcast, Inc., which developed and supplied software based systems to automate and control the multiple classes of equipment used in broadcast studios and satellite uplink facilities. Our telecom segment consisted of our wholly-owned subsidiary, Zyfer, Inc., which developed and manufactured timing and synchronization products and which, prior to its incorporation, was operated as our Communications division.

 

Beginning in the fiscal year ended March 31, 2001 (“fiscal 2001”), we began divesting certain of our business units in order to reduce our operating expenses and to focus on what we believe is our core business, Iteris, Inc.  These divestitures and related restructuring included the following transactions:

 

                  In September 2001, we sold substantially all of the assets and certain liabilities of the Gyyr CCTV Products line for $8.8 million and changed the name of Gyyr to MAXxess Systems, Inc.

 

                  In September 2001, we discontinued the operations of Mariner Networks, Inc., our former wholly-owned subsidiary that was historically part of our telecom segment.

 

                  As a result of the sale of the Gyyr CCTV Products line and the discontinuation of Mariner Networks, we reorganized our European operations and further reduced our overall staffing levels. The reorganization of the European operations included the discontinuation of our Odetics Europe Ltd., Gyyr Europe Ltd., Mariner France and Mariner Europe Ltd. operations, and the transition of our Broadcast and MAXxess international operations to branch office operations with the intent of lowering our international costs. In connection with this restructuring, 34 employees were terminated in the quarter ended December 31, 2001 and 78 employees were terminated in the quarter ended March 31, 2002.

 

7



 

                  In March 2003, we ceased the development and sale of any new Broadcast products and in September 2003, we sold the balance of our Broadcast business.

 

                  In May 2003, we sold the assets of Zyfer for a purchase price of $2.3 million in cash and the assumption of liabilities, plus future incentive payments of up to $1.0 million in each of the twelve months ended April 30, 2004 and 2005. The amount of these future incentive payments will be based on the revenues generated by the sale of Zyfer’s products or the license of its technologies.

 

                  In September 2003, we sold substantially all of the assets of MAXxess to an investor group that included certain members of the MAXxess management group. The consideration for the sale consisted of the assumption of $2.7 million of liabilities, resulting in a net gain of $2.3 million on this sale.

 

Our financial statements for all periods presented in this report have been restated to reflect the discontinuation of the operations of Gyyr, Broadcast, Zyfer, Mariner Networks and MAXxess and, accordingly, only reflect the operations of Iteris, Inc.

 

In May 2004, we completed the private placement of $10.1 million in subordinated convertible debentures and a $5.0 million senior term credit facility and purchased all of the outstanding preferred stock of our Iteris, Inc. subsidiary for $17.5 million in cash, which shares were held by DaimlerChrysler Ventures (“DCV”) and Hockensheim Investment Pte. Ltd. (“Hockenheim”).  DCV exchanged its common stock in Iteris, Inc. for shares of Class A common stock of Iteris Holdings as a part of this transaction.

 

We intend to enter into an exchange agreement with certain of the holders of the common stock of Iteris, Inc., pursuant to which these holders agreed to exchange an aggregate of 1,319,541 shares of Iteris, Inc. common stock for an aggregate of 2,639,082 shares of Iteris Holdings Class A common stock.  We anticipate that this exchange will be completed in June 2004.  Upon completion of this exchange, we plan to merge Iteris, Inc. into Iteris Holdings and all of the outstanding shares of common stock of Iteris, Inc. will convert into shares of Class A common stock of Iteris Holdings.  The final step in this roll-up transaction is anticipated to be completed within the next six months and is subject to the approval of the stockholders of Iteris, Inc. and the California Department of Corporations.  The foregoing transactions are part of our plan of reorganization to consolidate Iteris, Inc. into and with Iteris Holdings.

 

Iteris Holdings currently operates in two reportable segments: Sensors and Systems. The Sensors segment includes Vantage vehicle detection systems for traffic intersection control and AutoVue sensors for in vehicle safety.  The Systems segment includes transportation engineering and consulting activities.

 

Critical Accounting Policies And Estimates

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations is based on our consolidated financial statements included herein, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and related disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. On an ongoing basis, we evaluate these estimates and assumptions, including those related to the collectibility of accounts receivables, the valuation of inventories, the recoverability of long-lived assets, including goodwill, and reserves for restructuring and related activities. We base these estimates on historical experience and on various other factors that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. These estimates and assumptions by their nature involve risks and uncertainties, and may prove to be inaccurate. In the event that any of our estimates or

 

8



 

assumptions are inaccurate in any material respect, it could have a material adverse effect on our reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.

 

The following critical accounting policies affect our more significant judgments and estimates used in the preparation of our consolidated financial statements.

 

Revenue Recognition.  We record product revenues and related cost of sales upon transfer of title, which is generally upon shipment or, if required, upon acceptance by the customer, provided that we believe collectibility of the net sales amount is probable. Accordingly, at the date revenue is recognized, the significant uncertainties concerning the sale have been resolved. Unless otherwise stated, we provide a one to two year warranty from the original invoice date on all product material and workmanship.  Defective products are either repaired or replaced, at our option, upon meeting certain criteria.  We accrue a provision for the estimated costs that may be incurred for product warranties relating to a product as a component of cost of sales at the time revenue for that product is recognized.  Should actual experience of warranty returns be higher than anticipated, additional warranty reserves may be required, and may adversely affect our operating results.

 

Contract revenue is derived primarily from long-term contracts with governmental agencies. Contract revenue includes costs incurred plus a portion of estimated fees or profits determined on the percentage of completion method of accounting based on the relationship of costs incurred to total estimated costs.  Any anticipated losses on contracts are charged to earnings when identified.  Changes in job performance and estimated profitability, including those arising from contract penalty provisions and final contract settlements, may result in revisions to cost and revenue and are recognized in the period in which the revisions are determined.  Profit incentives are included in revenue when their realization is reasonably assured.

 

In addition to product and contract revenue, we derive revenue from technology access fees and the provision of specific non-recurring contract engineering services. Technology access fees are amortized to revenue over the life of the related agreement and are based on contractual values. Contract engineering revenues are recognized in the period in which services are performed based on contractual billing terms. Technology access fee revenues and contract engineering revenues are included in net sales on the accompanying statements of operations.

 

Revenues from follow-on service and support, for which we charge separately, is recorded in the period in which the services are performed.

 

Accounts Receivable.  We estimate the collectibility of customer receivables on an ongoing basis by periodically reviewing invoices outstanding greater than a certain period of time. We have recorded reserves for receivables deemed to be at risk for collection as well as a general reserve based on our historical collections experience. A considerable amount of judgment is required in assessing the ultimate realization of these receivables, including the current credit-worthiness of each customer. If the financial condition of our customers deteriorates, resulting in an impairment of their ability to make required payments, additional allowances may be required which could adversely affect our operating results.

 

Inventory.  We state our inventories at the lower of cost or market and provide reserves for potentially excess and obsolete inventory. In assessing the ultimate realization of inventories, we make judgments as to future demand requirements and compare that with the current or committed inventory levels. Reserves are established for inventory levels that exceed future demand. It is possible that reserves over and above those already established may be required in the future if market conditions for our products deteriorate.

 

Goodwill and Purchased Intangible Assets.  The purchase method of accounting for acquisitions requires extensive use of accounting estimates and judgments to allocate the purchase price to the fair value of the net tangible and intangible assets acquired. Goodwill and intangible assets deemed to have

 

9



 

indefinite lives are no longer amortized but are subject to annual impairment tests. The amounts and useful lives assigned to other intangible assets impact future amortization. If the assumptions and estimates used to allocate the purchase price are not correct or if business conditions change, purchase price adjustments or future asset impairment charges could be required.

 

Impairment of Assets and Restructuring.  During fiscal 2003, we recorded reserves and asset write-downs in connection with the sale of substantially all of the assets of Zyfer and the discontinuation of Broadcast. These include estimates pertaining to the fair value of assets and facility closure costs. Although we do not anticipate significant changes, the actual assets values and closure costs may differ from the amounts estimated.

 

Results of Operations

 

The following table sets forth certain statement of operations data as a percentage of total net sales and contract revenues for the periods indicated. The following table should be read in conjunction with Management’s Discussion and Analysis of Financial Condition and Results of Operations.

 

 

 

Fiscal Year Ended March 31,

 

 

 

2002

 

2003

 

2004

 

Net sales and contract revenues:

 

 

 

 

 

 

 

Net sales

 

45.8

%

46.2

%

51.8

%

Contract revenues

 

54.2

 

53.8

 

48.2

 

Total net sales and contract revenues

 

100.0

%

100.0

%

100.0

%

 

 

 

 

 

 

 

 

Costs and expenses:

 

 

 

 

 

 

 

Cost of net sales

 

22.5

 

22.6

 

28.2

 

Cost of contract revenues

 

32.3

 

36.5

 

32.5

 

Selling, general and administrative expenses

 

39.2

 

34.1

 

28.4

 

Research and development expenses

 

9.2

 

9.4

 

8.7

 

Restructuring charges

 

3.1

 

 

 

Total costs and expenses

 

106.3

 

102.6

 

97.8

 

Income (loss) from operations

 

(6.3

)

(2.6

)

2.2

 

 

 

 

 

 

 

 

 

Non-operating income (expense):

 

 

 

 

 

 

 

Other income (expense), net

 

(3.7

)

1.0

 

2.2

 

Interest expense, net

 

(11.2

)

(1.8

)

(0.2

)

Income (loss) before tax

 

(21.2

)

(3.4

)

4.2

 

 

 

 

 

 

 

 

 

Income tax benefit (provision)

 

2.1

 

 

(0.2

)

Income (loss) from continuing operations before minority interest

 

(19.1

)

(3.4

)

4.0

 

Minority interest in earnings of subsidiary

 

(5.1

)

(9.2

)

(6.7

)

Loss from continued operations

 

(24.2

)

(12.6

)

(2.7

)

 

 

 

 

 

 

 

 

Income (loss) from discontinued operations, net of income taxes of $0

 

(45.9

)

(19.1

)

2.7

 

Extraordinary loss from early extinguishment of debt, net of income taxes of $0

 

(1.2

)

 

 

Net income (loss)

 

(71.3

)%

(31.7

)%

0.0

%

 

Years Ended March 31, 2004, 2003 and 2002

 

Net Sales and Contract Revenues.  Net sales and contract revenues consist principally of (i) sales of products and services to commercial customers and municipal agencies (“net sales”) and primarily consists of sales of our Vantage video detection systems and AutoVue lane departure warning

 

10



 

systems, as well as technology access fees and contract engineering revenues; and (ii) revenues derived from systems integration and ITS consulting services with state, county and municipal agencies (“contract revenues”). We currently have a diverse customer base and no customer constituted over 10% of our total net sales and contract revenues in fiscal 2004. Total net sales and contract revenues increased 9.4% to $45.3 million for the fiscal year ended March 31, 2004 (“fiscal 2004”) compared to $41.4 million in fiscal 2003, and increased 11.0% for the fiscal year ended March 31, 2003 (“fiscal 2003”) compared to $37.3 million for the fiscal year ended March 31, 2002 (“fiscal 2002”).

 

Net sales increased 22.8% to $23.5 million in fiscal 2004 compared to $19.1 million in fiscal 2003, and increased 11.7% in fiscal 2003 compared to $17.1 million in fiscal 2002. The increase in net sales in each of the periods primarily reflected an increase in the unit sales of our Vantage vehicle detection systems and increased sales of our AutoVue lane departure warning systems.  Net sales from AutoVue products increased 173.1% in fiscal 2004 compared to fiscal 2003, and represented 17.9% of total net sales in fiscal 2004 and 8.0% of total net sales in fiscal 2003.  The increase in sales of AutoVue products principally reflected license fee revenue and fees for non-recurring engineering costs derived from Valeo, our strategic partner for the passenger car OEM customer base, and increased unit sales of lane departure warning systems in the European commercial truck market. Vantage sales comprised 89.6%, 92.0%, and 82.1% of net sales in each of the three fiscal years ended 2002, 2003, and 2004, respectively. All of the Vantage revenues were derived from sales within North America. The sales growth was primarily due to increased market adoption of video based detection technologies for traffic intersection management.

 

Contract revenues decreased 2.1% to $21.8 million in fiscal 2004 compared to $22.3 million in fiscal 2003, and increased 10.3% compared to $20.2 million in fiscal 2002.  Contract revenues reflect a broad range of fixed price and cost plus fixed fee contracts for engineering study and design, systems integration and system implementation.  Contract revenues are dependent upon the continued availability of funding on both the State and Federal levels from the various departments of transportation.  The decrease in fiscal 2004 compared to 2003 principally reflects budget constraints in both the Federal and California markets, where a significant portion of our contract revenues have been derived during the last several fiscal years,   The increase in contract revenues in fiscal 2003 compared to fiscal 2002 primarily reflects an increase in volume of ITS projects. The growth in contract revenues in fiscal 2003 reflected a general expansion of our systems consulting and integration business. This expansion was characterized by the addition of new offices into additional geographic regions including Georgia, Colorado and Idaho. All of our contract revenue is currently derived from North America.

 

Gross Profit.  Total gross profit increased 5.3% to $17.8 million in fiscal 2004 compared to $16.9 million in fiscal 2003, and was unchanged at $16.9 million in fiscal 2003 compared to fiscal 2002. Total gross profit as a percent of net sales and contract revenues decreased to 39.3% in fiscal 2004 compared to 40.8% in fiscal 2003 and 45.2% in fiscal 2002.

 

Gross profit as a percentage of net sales decreased to 45.6% in fiscal 2004 compared to 51.0% in fiscal 2003 and 50.9% in fiscal 2002. The decrease in gross profit in fiscal 2004 compared to 2003 reflects lower unit pricing on large, high volume, state contracts for Vantage products, in addition to lower gross profits on AutoVue products as a result of increased unit sales of product to the commercial truck market.  The increase in gross profit as a percent of net sales in fiscal 2003 compared to 2002 reflects the net effect of increased gross profit on Vantage product sales, which was partially offset by decreased margins on AutoVue product sales. We achieved a 200 basis point increase in gross profit on sales of Iteris’ Vantage video detection systems in fiscal 2003, in conjunction with a 14.7% increase in sales of these products in fiscal 2003 compared to 2002. In fiscal 2003, however, AutoVue product sales began transitioning from low volume, high margin sample sales to early production volume of units for the truck market.

 

Gross profit as a percent of contract revenues increased to 32.6% in fiscal 2004 compared to 32.2% in fiscal 2003 and 40.4% in fiscal 2002.  We recognize contract revenues and related gross profit using percentage of completion contract accounting, and the underlying mix of contract activity  affects the related gross profit recognized in any given year.  The decrease in fiscal 2003 reflects a mix of lower

 

11



 

margin contracts in fiscal 2003 as compared to fiscal 2002. Furthermore, gross profit on contract revenues in fiscal 2002 benefited approximately 610 basis points from a $1.4 million reduction in loss reserves on certain long-term contracts resulting from changes in the scope of work defined by a major customer, most of which were nonrecurring in fiscal 2003.

 

Selling, General and Administrative Expense.  Selling, general and administrative expense decreased 8.9% to $12.8 million (or 28.4% of total net sales and contract revenues) in fiscal 2004 compared to $14.1 million (or 34.1% of total net sales and contract revenues) in fiscal 2003, and decreased 3.6% in fiscal 2003 compared to $14.6 million (or 39.2% of total net sales and contract revenues) in fiscal 2002.  The decrease in fiscal 2004 compared to fiscal 2003 reflects principally increased costs to support expanded sales and marketing efforts in Vantage and AutoVue products in fiscal 2004, offset by decreased facilities lease expense related to the restructuring of lease commitments for our Anaheim facilities in June 2003, and reduced salaries expenses for corporate support personnel related to the divestiture of our Broadcast, Zyfer and MAXxess Systems businesses in fiscal 2004.  The decrease in selling, general and administrative expense in fiscal 2003 compared to fiscal 2002 reflects general cost reductions related to staffing and outside services for legal and accounting expenses, which was partially offset by increased sales and marketing costs to support Vantage and AutoVue products.

 

Research and Development Expense.  Research and development expense increased 0.4% to  $3.9 million (or 8.7% of total net sales and contract revenues) in fiscal 2004 compared to $3.9 million (or 9.4% of total net sales and contract revenues) in fiscal 2003, and increased 13.8% in fiscal 2003 compared to $3.4 million (or 9.2% of total net sales and contract revenues) in fiscal 2002. The increase in research and development expense in fiscal 2004 compared to 2003 reflects increased spending to support the development of Vantage products which was partially offset by decreased spending to support the development of AutoVue products.  Vantage product development primarily reflects activities for product line extensions to support new communications platforms and to accommodate new camera designs.  The increases were primarily in the areas of personnel costs and related benefits and overhead, prototype material costs, and consulting fees.

 

The increase in research and development expense in fiscal 2003 compared to 2002 primarily reflects software algorithm development and new hardware designs for enhancements to our existing product family of Vantage video detection systems.

 

For competitive reasons, we closely guard the confidentiality of specific development projects.

 

Restructuring Charges.  The restructuring charge of $1.1 million in fiscal 2002 reflects costs related to the reorganization of our European operations and costs for severance for labor reductions domestically and abroad totaling approximately $400,000 in addition to $700,000 related to severance charges incurred upon the retirement of the former Chief Executive Officer of Iteris Holdings.

 

Other Income (Expense), Net.  Other income (expense), net reflects the following (in thousands):

 

 

 

Year Ended March 31,

 

 

 

2002

 

2003

 

2004

 

 

 

 

 

 

 

 

 

Gain on sale of real estate

 

$

 

$

640

 

$

970

 

Loss on sale of Iteris common stock

 

(1,596

)

(310

)

 

Other

 

231

 

87

 

33

 

Other income (expense), net

 

$

(1,365

)

$

417

 

$

1,003

 

 

Other income (expense), net in fiscal 2003 and 2004 included a gain of $640,000 and $970,000, respectively, recognized on the sale and leaseback of our Anaheim, California facility, which was consummated in May 2002. We sold shares of our Iteris subsidiary common stock that yielded gross proceeds of $3.8 million and $900,000 in fiscal 2002 and 2003, respectively.

 

12



 

Interest Expense, Net.  Interest expense, net reflects the net of interest expense and interest income as follows (in thousands):

 

 

 

Year Ended March 31,

 

 

 

2002

 

2003

 

2004

 

 

 

 

 

 

 

 

 

Interest expense

 

$

4,190

 

$

761

 

$

125

 

Interest income

 

 

 

(2

)

Interest expense, net

 

$

4,190

 

$

761

 

$

123

 

 

Interest expense decreased 83.8% in fiscal 2004 compared to fiscal 2003 and decreased 81.8% in fiscal 2003 compared to fiscal 2002. The decrease in fiscal 2004 reflected lower average outstanding borrowings during fiscal 2004.  The decrease in fiscal 2003 reflected the sale and leaseback of our Anaheim, California facilities, and our subsequent repayment in May 2002 of a $16.4 million promissory note.

 

Extraordinary Item.  The extraordinary loss incurred in fiscal 2002 relates to a prepayment penalty we incurred in fiscal 2002 in connection with the retirement of our mortgage note payable upon the refinancing of our Anaheim real property.

 

Income Taxes.  During fiscal 2004, we recognized income tax expense of $100,000 and a related deferred tax asset of $821,000 directly related to the profitable operations of our subsidiary Iteris, Inc.  The ability to record the deferred tax asset was based on the more likely than not criteria of FAS 109 since Iteris, Inc. has historically been profitable and it has utilized all its federal net operating loss carryovers and thus, can carryback and realize the reversal of future tax deductions.  No income tax benefit for losses incurred in fiscal 2003 was recorded due to uncertainty as to the ultimate realization of the related benefit.  A $785,000 tax benefit was recognized in fiscal 2002 for the recovery of net operating loss carrybacks made available under the Job Creation Workers Associate Act of 2002.

 

Minority Interest in Subsidiary.  The minority interest represents the minority stockholders’ share of Iteris, Inc.’s net income or loss and the accretion of the redemption preference of Iteris’s Series A preferred stock.  Upon our acquisition of the remaining minority interest in Iteris, Inc. and the related roll-up merger, we will no longer report a minority interest.

 

Liquidity and Capital Resources

 

During fiscal 2004, we used $718,000 of cash to fund our operations.  Net cash used in operating activities principally reflected our net income of $7,000, increased for non-cash charges of $857,000 for depreciation and amortization, and $3.0 million in non-cash charges related to the minority interest in our Iteris subsidiary, and decreased $855,000 for non-cash gains related to amortization of deferred gain on real-estate sales and the usage of $4.0 million in cash to fund changes in operating assets and liabilities.  Most of the cash requirements for operating assets and liabilities during fiscal 2004 related to $2.4 million in cash used to reduce trade accounts payable, accrued payroll, accrued expenses and income tax payable, associated with the downsizing and reorganization of our business model.

 

In May 2002, we completed the sale and leaseback of our Anaheim, California facility for an aggregate sale price of $22.6 million. Approximately $16.4 million of the proceeds from this sale were used to repay the outstanding indebtedness under a promissory note, which was secured by a first deed of trust on our Anaheim facility. In connection with the sale and leaseback, we pledged cash of $2.5 million to secure our obligations under the lease. The pledged amounts were to be released to us based upon our continued compliance with financial covenants and performance under the lease. The balance of the proceeds from this sale was used for general working capital purposes. We committed to lease one of the two buildings on this property for a period of ten years, and to lease the other building for a period of 30 months.

 

In May 2003, we completed the sale of substantially all the assets of our wholly-owned subsidiary, Zyfer, Inc., for $2.3 million in cash plus the assumption of certain liabilities. The cash

 

13



 

proceeds were used to fund working capital requirements and pay short-term liabilities. The asset purchase agreement provides for future incentive payments to us of up to $1.0 million in each of the twelve months ended April 30, 2004 and 2005.  The amount of these future incentive payments will be based on the revenues generated by the sale of Zyfer’s products or the license of its technologies.  Based on the terms of the sale agreement, Zyfer, Inc. has 60 days to provide us with support for the incentive payments.  We expect to receive information for fiscal 2004 by the end of June 2004.

 

In July 2003, we concluded a restructuring of our facility lease obligations for our principal operating facility located in Anaheim, California. Under the revised terms, Iteris Holdings and its Iteris, Inc. subsidiary entered into two separate leases for space totaling 80,000 square feet located at our current Anaheim location. We have been relieved of a continuing lease obligation on approximately 257,000 square feet. In consideration for the restructured agreement, we paid approximately $2.5 million in cash that had been previously pledged as collateral on the lease, in addition to issuing to the lessor 425,000 shares of Iteris Holdings Class A common stock valued at $255,000 and a note payable for $811,000.

 

Also, in July 2003, we completed a private placement of 3,666,666 of our Class A common stock to seven accredited investors for net proceeds of $1.9 million in cash. In connection with this offering, we also issued warrants to the investors to purchase up to another 366,666 shares at an exercise price of $1.50 per share. The fair value of these warrants was $55,000 calculated using the Black Scholes Model.  The warrants are considered a cost of raising capital and were recorded in equity as an offset to additional paid-in capital.  The warrants expire in July 2006 and became exercisable in January 2003. The proceeds from the transaction were used to fund our general working capital requirements.

 

In September 2003, we completed the sale of the assets of our MAXxess subsidiary to an investor group that included certain members of the MAXxess management group. The consideration for the sale consisted of the assumption by the buyer of $2.7 million of liabilities, resulting in a net gain to Iteris Holdings of approximately $2.3 million. We did not receive any cash in this transaction.

 

On May 28, 2004, we completed the purchase of all of the outstanding shares of the Series A preferred stock of Iteris, Inc., which shares were held by DaimlerChrysler Ventures GmbH ("DCV") and Hockenheim Investment Pte. Ltd. (“Hockenheim”), in exchange for a payment of approximately $17.5 million in cash.  In addition, we acquired all of the shares of the common stock of Iteris, Inc. held by DCV in exchange for the issuance of 1,219,445 shares of our Class A common stock.  The purchase and exchange of the shares were made pursuant to a Stock Purchase and Exchange Agreement, dated March 31, 2004, by and among Iteris Holdings, Iteris, Inc., DCV and Hockenheim (the “Purchase and Exchange Agreement”).

 

Pursuant to the Purchase and Exchange Agreement, we purchased 3,124,913 shares of Series A Preferred Stock of Iteris from DCV and Hockeneheim for a purchase price of $5.61 per share.  The purchase price represented the stated redemption value of the preferred stock.  The purchase of the shares was financed principally with a $10.1 million convertible debenture financing completed in May 2004 with a group of institutional investors, in addition to a $5.0 million senior credit facility arranged through a bank.

 

In accordance with the Purchase and Exchange Agreement, we issued 1,219,445 shares of our Class A common stock (the “Exchange Shares”) to DCV in exchange for 547,893 shares of the common stock of Iteris, Inc. held by DCV.  Subject to certain exceptions, DCV has agreed not to sell or otherwise transfer the Exchange Shares during the year following the Closing Date.  However, beginning on November 28, 2005, DCV may require us to repurchase up to 50% of the Exchange Shares at a purchase price of $1.438 per share; and beginning on May 28, 2007, DCV may require us to repurchase up to 100% of the Exchange Shares at a purchase price of $1.438 per share.  All such rights to require the repurchase of the Exchange Shares expire on September 28, 2007.

 

Beginning on May 28, 2005, DCV will have the right to request registration of all of the shares of the Class A common stock of Iteris Holdings held by it.  In the event we decide not to file a registration statement for all such shares, DCV may require repurchase of any or all of its shares of our

 

14



 

common stock at a purchase price of $1.438 per share.

 

In order to finance the purchase of the shares of Iteris, Inc. preferred stock, we entered into a Debenture and Warrant Purchase Agreement dated May 19, 2004 (the “Debenture Purchase Agreement”) with a group of institutional investors, which included certain of our officers, pursuant to which it sold and issued subordinated convertible debentures in the aggregate principal amount of $10.1 million and issued warrants to purchase an aggregate of 639,847 shares of our Class A common stock.

 

The debentures are due in five years, provide for 6.0% annual interest, payable quarterly, and are convertible into our Class A common stock at an initial conversion price of $3.61 per share, subject to certain adjustments, including adjustments for dilutive issuances.  From May 19, 2007 until May 18, 2008, the debentures may be redeemed by us, at our option, at 120% of the principal amount being redeemed; and from May 19, 2008 until the maturity date of May 18, 2009, the debentures may be redeemed at 110% of the principal amount being redeemed.

 

Pursuant to the Debenture Purchase Agreement, each investor also received two warrants to purchase shares of the Class A common stock.  For every dollar of debenture purchased, each investor received one warrant to purchase approximately 0.03235 shares of our Class A common stock at an exercise price of $3.83 per share and a second warrant to purchase approximately 0.03100 shares of our Class A common stock at an exercise price of $4.03 per share.  The exercise prices are subject to certain adjustments, including adjustments for dilutive issuances.  The warrants expire on May 18, 2009.

 

In conjunction with the Debenture and Warrant Purchase Agreement we issued 34,036 warrants to purchase shares of our Class A Common Stock at $3.61 per share as commissions related to the transaction.  The warrants expire on May 18, 2009.

 

We have agreed to register for resale the shares underlying the debentures and the warrants.  Under the terms of the Debenture Purchase Agreement, we may be required to make certain payments to the investors if we do not file a registration statement with the Securities and Exchange Commission on or prior to July 14, 2004 or if we do not respond to comments to such registration statement, if any, from the SEC within certain time limits.  In addition, we have granted to each investor a right of first offer with respect to new issuances of its securities, subject to certain exceptions.

 

Concurrent with the issuance of the debentures, we, through our subsidiary Iteris, Inc., entered into a $5.0 term note payable with a bank. Proceeds form the note payable were used to purchase Iteris, Inc. preferred stock as described above. The note is due in four years, on May 27, 2008, and provides for monthly payments of principal and interest of approximately $104,000. Interest accrues at the current stated prime rate plus 0.5% through June 30, 2004 and then at the current stated prime rate plus 0.25% thereafter.

 

As part of the Purchase and Exchange Agreement of the Series A preferred stock, we also exchanged an aggregate of 547,893 shares of Iteris, Inc. common stock held by DCV for an aggregate of 1,219,445 shares of Iteris Holdings Class A common stock.

 

Also on May 28, 2004, Iteris, Inc. renegotiated its existing line of credit agreement and entered into a new line of credit agreement with the same bank. The new agreement has a one year term that expires on August 1, 2005 and a maximum available credit line of $5.0 million. Under the terms of the new agreement, Iteris, Inc. may borrow against its eligible accounts receivable and the value of its eligible inventory, as defined. Interest on borrowed amounts is payable monthly at the prime rate.  Additionally, Iteris, Inc. is obligated to pay an unused line fee of 0.25% per annum applied to the amount by which the maximum credit amount exceeds the average daily principal balance during the preceding month. There is no monthly collateral management fee associated with the new line of credit and no pre-payment or early termination fees. The 1.0% cancellation fee to terminate the prior line was waived by the bank.

 

Both the term note payable and the line of credit are secured by substantially all of the assets of Iteris, Inc.

 

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Our contractual obligations are as follows at March 31, 2004 (in thousands):

 

 

 

Payments Due by Period

 

 

 

Total

 

2005

 

2006

 

2007

 

After
2007

 

 

 

 

 

 

 

 

 

 

 

 

 

Line of credit

 

$

100

 

$

100

 

$

 

$

 

$

 

Capital lease obligations

 

12

 

4

 

4

 

4

 

 

Notes payable

 

921

 

38

 

50

 

630

 

203

 

Operating leases

 

3,599

 

1,205

 

984

 

897

 

513

 

Total

 

$

4,632

 

$

1,347

 

$

1,038

 

$

1,531

 

$

716

 

 

Subsequent to the repurchase of the preferred stock and the exchange of the common stock held by DCV, the minority interest in Iteris, Inc. has been reduced to approximately 16.6%.  Our intention is to exchange the residual outstanding 16.6% common stockholding minority interest in Iteris Inc. for Class A common stock of Iteris Holdings and merge the two entities.

 

Although we have achieved operating income and earnings before interest, taxes, depreciation and amortization during the fiscal year ended March 31, 2004, our operations may continue to use net cash. At March 31, 2004, our Iteris subsidiary had a revolving line of credit with its principal bank, which expired August 2004, and which provided for available borrowings up to $5.0 million subject to a borrowing formula based upon qualified accounts receivable as defined in the agreement. Borrowings on the line of credit bear interest at prime plus 2.0% (6.0% at March 31, 2004). There were no borrowings on the line at March 31, 2004, and $4.5 million was available for borrowing subject to the borrowing base in the credit agreement. In May 2004, we entered into a new $5.0 million line of credit with our principal bank to replace the former revolving line, subject to similar borrowing formulas.  Borrowings under the new line of credit bear interest at the bank’s prime rate (4.0% at May 31, 2004).   We believe that the combination of available borrowings on our line of credit and our internally generated cash flows will be sufficient to enable us to execute our operating plans and meet our obligations on a timely basis.

 

Recent Accounting Pronouncements

 

In November 2002, the Emerging Issues Task Force (“EITF”) issued EITF No. 00-21, “Revenue Arrangements with Multiple Deliverables,” which provides guidance on the timing and method of revenue recognition for sales arrangements that include the delivery of more than one product or service. EITF No. 00-21 is effective prospectively for arrangements entered into in fiscal periods beginning after June 15, 2003. The adoption of EITF No. 00-21 did not have a material effect on our financial position, results of operations or cash flows.

 

In December 2002, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards No. 148, “Accounting for Stock-Based Compensation-Transition and Disclosure” (“SFAS No. 148”) which is effective for fiscal years ending after December 15, 2002. SFAS No. 148 amends Statement of Financial Accounting Standards No. 123, “Accounting for Stock-Based Compensation” (“SFAS No. 123”) to provide alternative methods of transition to SFAS No. 123’s fair value method of accounting for stock-based employee compensation if a company elects to account for its equity awards under this method. SFAS No. 148 also amends the disclosure provisions of SFAS No. 123 and Accounting Principles Board Opinion No. 28, “Interim Financial Reporting” (“APB 25”) to require disclosure effects of an entity’s accounting policy with respect to stock-based employee compensation on reported net income (loss) and net income (loss) per share in both annual and interim financial statements. We follow the disclosure-only provisions of SFAS No. 123, as amended by SFAS No. 148, and, accordingly, account for our stock-based compensation plans using the intrinsic value method under Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” and related interpretations.

 

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In January 2003, the FASB issued Interpretation No. 46, Consolidation of Variable Interest Entities (“FIN 46”). This Interpretation changes the method of determining whether certain entities should be included in our Consolidated Financial Statements. An entity is subject to FIN 46 and is called a variable interest entity (“VIE”) if it has (1) equity that is insufficient to permit the entity to finance its activities without additional subordinated financial support from other parties, or (2) equity investors that cannot make significant decisions about the entity’s operations, or that do not absorb the expected losses or receive the expected returns of the entity. All other entities are evaluated for consolidation under SFAS No. 94, Consolidation of All Majority-Owned Subsidiaries. The provisions of FIN 46 are to be applied immediately to VIEs created after January 31, 2003, and to VIEs in which an enterprise obtains an interest after that date. For VIEs in which an enterprise holds a variable interest that it acquired before February 1, 2003, FIN 46 applies in the first fiscal period beginning after June 15, 2003.  Adoption of FIN 46 did not have a material impact on our financial position, results of operations or cash flows.

 

In May 2003, the FASB issued SFAS 150, “Accounting For Certain Financial Instruments with Characteristics of Both Liabilities and Equity” (“SFAS No. 150”) which establishes standards for how an issuer of financial instruments classifies and measures certain financial instruments with characteristics of both liabilities and equity. It requires that an issuer classify a financial instrument that is within its scope as a liability (or an asset in some circumstances) if, at inception, the monetary value of the obligation is based solely or predominantly on a fixed monetary amount known at inception, variations in something other than the fair value of the issuer’s equity shares or variations inversely related to changes in the fair value of the issuer’s equity shares. SFAS No. 150 is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. The adoption of SFAS 150 did not have a material impact on our financial position, results of operations or cash flows.

 

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RISK FACTORS

 

Our business is subject to a number of risks, some of which are discussed below.  Other risks are presented elsewhere in this report and in the information incorporated by reference into this report.  You should consider the following risks carefully in addition to the together information contained in this report and our other filings with the SEC, including our subsequent reports on Forms 10-Q and 8-K before deciding to buy, sell or hold our common stock. The risks and uncertainties described below are not the only ones facing our company.  Additional risks and uncertainties not presently known to us or that we currently deem immaterial may also affect our business operations.  If any of these risks actually occurs, our business, financial condition or results of operations could be seriously harmed.  In that event, the market price for our common stock could decline and you may lose all or part of your investment.

 

We Have Experienced Substantial Losses And May Continue To Experiencing Losses For The Foreseeable Future.  We experienced net income of $7,000 in the year ended March 31, 2004 and a net loss of $13.1 million in the year ended March 31, 2003.  While we have divested all of our business units other than our Iteris, Inc. subsidiary, we cannot assure you that our efforts to downsize our operations or reduce our operating expenses will improve our financial performance, or that we will be able to achieve profitability on a quarterly or annual basis in the future. Most of our expenses are fixed in advance. As such, we generally are unable to reduce our expenses significantly in the short-term to compensate for any unexpected delay or decrease in anticipated revenues. As a result, we may continue to experience operating losses and net losses, which would make it difficult to fund our operations and achieve our business plan, and could cause the market price of our common stock to decline.

 

We May Need To Raise Additional Capital In The Future, But We May Not Be Able To Secure Adequate Funds On Terms Acceptable To Us, Or At All.  We have generated significant net losses and operating losses in recent periods, and have experienced negative cash flows from operations of $718,000 in the year ended March 31, 2004, $4.8 million in the year ended March 31, 2003 and $18.2 million in the year ended March 31, 2002. Although in May 2004, we completed a $10.1 million convertible debenture financing and closed a $5.0 million term loan, the majority of the proceeds from such financings were used to purchase the preferred stock of Iteris, Inc. held by outside investors.  We may need to raise additional capital in the future to fund our operations or to purchase the minority interests in Iteris, Inc. Our Iteris, Inc. subsidiary currently maintains a line of credit with a maximum availability of $5.0 million, which expires in August 2005. Substantially all of the assets of Iteris, Inc. have been pledged to the lender to secure the outstanding indebtedness under this facility ($0 was outstanding under the line of credit at March 31, 2004).

 

We may raise additional capital in the near future, either through bank borrowings, or other debt or equity financings. We cannot assure you that any additional capital will be available on a timely basis, on acceptable terms, or at all.

 

Our capital requirements will depend on many factors, including, but not limited to:

 

                  our ability to control costs;

 

                  market acceptance of our products and the overall level of sales of our products;

 

                  our ability to generate operating income;

 

                  increased research and development funding, and required investments in our Iteris, Inc. subsidiary;

 

                  increased sales and marketing expenses;

 

                  technological advancements and our competitors’ response to our products;

 

                  capital improvements to new and existing facilities;

 

 

18



 

                  potential acquisitions of businesses and product lines;

 

                  our relationships with customers and suppliers; and

 

                  general economic conditions, including the effects of the current economic slowdown and international conflicts.

 

If our capital requirements are materially different from those currently planned, we may need additional capital sooner than anticipated. If additional funds are raised through the issuance of equity or convertible debt securities, the percentage ownership of our stockholders will be reduced and such securities may have rights, preferences and privileges senior to our common stock. Additional financing may not be available on favorable terms or at all. If adequate funds are not available or are not available on acceptable terms, we may be unable to continue our operations as planned, develop or enhance our products, expand our sales and marketing programs, take advantage of future opportunities or respond to competitive pressures,

 

We Have Adopted A New Operating Strategy, Which Is Untried And Exposes Us To New Risks.  We recently divested ourselves of many of our business units and significantly scaled back our operations in order to focus on the business of our Iteris, Inc. subsidiary. We have abandoned our strategy of incubating emerging companies, which historically required us to make significant investments in new business units. Our current business strategy is narrow and untried, and there is no assurance that our new business strategy or the continued execution of the Iteris, Inc. business will be successful.

 

The Trading Price Of Our Common Stock Is Highly Volatile And Our Shares Are Listed On The OTC Bulletin Board.  As Such, It May Be Difficult To Resell Your Shares Of Stock At Or Above The Price You Paid For Them Or At All.  The trading price of our common stock has been subject to wide fluctuations in the past. Since January 2000, our Class A common stock has traded at prices as low as $0.45 per share and as high as $29.44 per share and our Class B common stock has traded at prices as low as $0.20 per share and as high as $29.62 per share. In 2003, because we failed to meet the minimum stockholder’s equity and minimum share price requirements for continued listing on the Nasdaq SmallCap Market, both our Class A common stock and Class B common stock were delisted from the Nasdaq SmallCap Market and currently trade on the OTC Bulletin Board. As such, the average daily trading volume of common stock has decreased, and it may be more difficult for you to sell your shares in the future at or above the price you paid for them, or at all. This delisting may also make it more difficult for us to raise additional funds in the future. In addition, our securities are subject to “penny stock” restrictions, including Rule 15g-9 under the Securities Exchange Act of 1934, as amended, which imposes additional sales practice requirements on broker-dealers, such as requirements pertaining to the suitability of the investment for the purchaser and the delivery of specific disclosure materials and monthly statements. Consequently, the liquidity of our securities could be impaired, not only in the number of securities that can be bought and sold, but also through delays in the timing of the transactions, reduction in security analysts’ and the news media’s coverage of us, adverse effects on the ability of broker-dealers to sell our securities, and lower prices for our securities than might otherwise be obtained.

 

The market price of our common stock could continue to fluctuate in the future in response to various factors, including, but not limited to:

 

                  quarterly variations in operating results;

 

                  our ability to control costs and improve cash flow;

 

                  our ability to raise additional capital or repurchase the minority interest in Iteris, Inc.;

 

                  shortages announced by suppliers;

 

                  announcements of technological innovations or new products or applications by our competitors, customers or us;

 

19



 

                  acquisitions or businesses, products or technologies;

 

                  the impact of any litigation;

 

                  changes in investor perceptions;

 

                  changes in earnings estimates or investment recommendations by securities analysts; and

 

                  international conflicts, political unrest and acts of terrorism.

 

The stock market in general has recently experienced volatility, which has particularly affected the market prices of equity securities of many technology companies. This volatility has often been unrelated to the operating performance of these companies. These broad market fluctuations may adversely affect the market price of our common stock. In the past, companies that have experienced volatility in the market price of their securities have been the subject of securities class action litigation. If we were to become the subject of a class action lawsuit, it could result in substantial losses and divert management’s attention and resources from other matters.

 

We Depend On Government Contracts And Subcontracts, And Because Many Of Our Government Contracts Are Fixed Price Contracts, Higher Than Anticipated Costs Will Reduce Our Profit And Could Adversely Impact Our Operating Results.   A significant portion of the sales by Iteris, Inc. were derived from contracts with governmental agencies, either as a general contractor, subcontractor or supplier. Government contracts represented approximately 54.0%, 54.0% and 48.0% of our total net sales and contract revenues for the years ended March 31, 2002, 2003 and 2004, respectively. We anticipate that revenue from government contracts will continue to increase in the near future. Government business is, in general, subject to special risks and challenges, including:

 

                  long purchase cycles or approval processes;

 

                  competitive bidding and qualification requirements;

 

                  the impact of international conflicts;

 

                  performance bond requirements;

 

                  changes in government policies and political agendas;

 

                  delays in funding, budgetary constraints and cut-backs; and

 

                  milestone requirements and liquidated damage provisions for failure to meet contract milestones

 

In addition, a large number of our government contracts are fixed price contracts. As a result, we may not be able to recover any cost overruns we may incur.  These fixed price contracts require us to estimate the total project cost based on preliminary projections of the project’s requirements. The financial viability of any given project depends in large part on our ability to estimate these costs accurately and complete the project on a timely basis. In the event our costs on these projects exceed the fixed contractual amount, we will be required to bear the excess costs. These additional costs adversely affect our financial condition and results of operations. Moreover, certain of our government contracts are subject to termination or renegotiation at the convenience of the government, which could result in a large decline in our net sales in any given quarter. Our inability to address any of the foregoing concerns or the loss or renegotiation of any material government contract could seriously harm our business, financial condition and results of operations.

 

Economic Slowdown And Related Uncertainties Could Adversely Impact The Demand For Our Products.  Concerns about inflation, decreased consumer confidence, reduced corporate profits and capital spending, and recent international conflicts and terrorist and military actions have resulted in a downturn in worldwide economic conditions, particularly in the United States. These unfavorable economic conditions may have a negative impact on customer orders, cancellations and rescheduling of backlog.  In addition, recent political and social turmoil related to international conflicts and terrorist acts

 

20



 

can be expected to put further pressure on economic conditions in the U.S. and worldwide. These political, social and economic conditions make it extremely difficult for our customers, our suppliers and us to accurately forecast and plan future business activities. If such conditions continue or worsen, our business, financial condition and results of operations will likely be materially and adversely affected.

 

Our Quarterly Operating Results Fluctuate As A Result Of Many Factors. Therefore, We May Fail To Meet Or Exceed The Expectations Of Securities Analysts And Investors, Which Could Cause Our Stock Price To Decline.  Our quarterly revenues and operating results have fluctuated and are likely to continue to vary from quarter to quarter due to a number of factors, many of which are not within our control. Factors that could affect our revenues include, among others, the following:

 

                  our ability to raise additional capital and repurchase the minority interest in Iteris, Inc.;

 

                  our ability to control costs;

 

                  international conflicts and acts of terrorism;

 

                  our ability to develop, introduce, market and gain market acceptance of new products, applications and product enhancements in a timely manner, or at all;

 

                  the size, timing, rescheduling or cancellation of significant customer orders;

 

                  the introduction of new products by competitors;

 

                  the availability of components used in the manufacture of our products;

 

                  changes in our pricing policies and the pricing policies by our suppliers and competitors, pricing concessions on volume sales, as well as increased price competition in general;

 

                  the long lead times associated with government contracts or required by vehicle manufacturers;

 

                  our success in expanding and implementing our sales and marketing programs; the effects of technological changes in our target markets;

 

                  our relatively small level of backlog at any given time;

 

                  the mix of our sales;

 

                  deferrals of customer orders in anticipation of new products, applications or product enhancements;

 

                  risks and uncertainties associated with our international business;

 

                  currency fluctuations and our ability to get currency out of certain foreign countries; and

 

                  general economic and political conditions.

 

Due to all of the factors listed above and, our future operating results could be below the expectations of securities analysts or investors. If that happens, the trading price of our common stock could decline. As a result of these quarterly variations, you should not rely on quarter-to-quarter comparisons of our operating results as an indication of our future performance.

 

21



 

If We Do Not Keep Pace With Rapid Technological Changes And Evolving Industry Standards, We Will Not Be Able To Remain Competitive And There Will Be No Demand For Our Products.    Our markets are in general characterized by the following factors:

 

                  rapid technological advances;

 

                  downward price pressure in the marketplace as technologies mature;

 

                  changes in customer requirements;

 

                  frequent new product introductions and enhancements; and

 

                  evolving industry standards and changes in the regulatory environment.

 

Our future success will depend upon our ability to anticipate and adapt to changes in technology and industry standards, and to effectively develop, introduce, market and gain broad acceptance of new products and product enhancements incorporating the latest technological advancements.

 

We believe that we must continue to make substantial investments to support ongoing research and development in order to remain competitive. We need to continue to develop and introduce new products that incorporate the latest technological advancements in outdoor image processing hardware, software and camera technologies in response to evolving customer requirements. Our business and results of operations could be adversely affected if we do not anticipate or respond adequately to technological developments or changing customer requirements. We cannot assure you that any such investments in research and development will lead to any corresponding increase in revenue.

 

If We Are Unable To Develop And Introduce New Products And Product Enhancements Successfully And In A Cost-Effective And Timely Manner, Or To Achieve Market Acceptance Of Our New Products, Our Operating Results Would Be Adversely Affected.    We believe our revenue growth and future operating results will depend on our ability to complete development of new products and enhancements, introduce these products in a timely, cost-effective manner, achieve broad market acceptance of these products and enhancements, and reduce our product costs. We may not be able to introduce any new products or any enhancements to our existing products on a timely basis, or at all. In addition, the introduction of any new products could adversely affect the sales of certain of our existing products. Our future success will also depend in part on the success of several products including AutoVueTM, our lane departure warning system. We currently outsource the manufacture of our AutoVue product line to a single manufacturer. This manufacturer may not be able to produce sufficient quantities of this product in a timely manner or at a reasonable cost, which could materially and adversely affect our ability to launch or gain market acceptance of AutoVue.

 

Market acceptance of our new products depends upon many factors, including our ability to accurately predict market requirements and evolving industry standards, our ability to resolve technical challenges in a timely and cost-effective manner and achieve manufacturing efficiencies, the perceived advantages of our new products over traditional products and the marketing capabilities of our independent distributors and strategic partners. Our business and results of operations could be seriously harmed by any significant delays in our new product development. Certain of our new products could contain undetected design faults and software errors or “bugs” when first released by us, despite our testing. We may not discover these faults or errors until after a product has been installed and used by our customers. Any faults or errors in our existing products or in any new products may cause delays in product introduction and shipments, require design modifications or harm customer relationships, any of which could adversely affect our business and competitive position.

 

The Markets In Which We Operate Are Highly Competitive And Have Many More Established Competitors, Which Could Adversely Affect Our Sales Or The Market Acceptance Of Our Products.  We compete with numerous other companies in our target markets including, but not

 

22



 

limited to, large, multinational corporations and many smaller regional engineering firms. We expect such competition to increase due to technological advancements, industry consolidations and reduced barriers to entry. Increased competition is likely to result in price reductions, reduced gross margins and loss of market share, any of which could seriously harm our business, financial condition and results of operations. Many of our competitors have far greater name recognition and greater financial, technological, marketing and customer service resources than we do. This may allow them to respond more quickly to new or emerging technologies and changes in customer requirements. It may also allow them to devote greater resources to the development, promotion, sale and support of their products than we can. Recent consolidations of end users, distributors and manufacturers in our target markets have exacerbated this problem. As a result of the foregoing factors, we may not be able to compete effectively in our target markets and competitive pressures could adversely affect our business, financial condition and results of operations.

 

We May Be Unable To Attract And Retain Key Personnel, Which Could Seriously Harm Our Business.  Due to the specialized nature of our business, we are highly dependent on the continued service of our executive officers and other key management, engineering and technical personnel, particularly Gregory A. Miner, our current Chief Executive Officer and Chief Financial Officer, and Jack Johnson, the Chief Executive Officer of Iteris, Inc.  In connection with the roll-up merger of Iteris, Inc. into Iteris Holdings, we announced that Mr. Johnson will be appointed to serve as the Chief Executive Officer of Iteris Holdings, and Mr. Miner will assume the role as Chairman of the Board of Iteris Holdings.  The loss of any of these individuals or the transition of Mr. Miner to his new role could adversely affect our business, financial condition or results of operations.  Our success will also depend in large part upon our ability to continue to attract, retain and motivate qualified engineering and other highly skilled technical personnel. Competition for employees, particularly development engineers, is intense. We may not be able to continue to attract and retain sufficient numbers of such highly skilled employees. Our inability to attract and retain additional key employees or the loss of one or more of our current key employees could adversely affect our business, financial condition and results of operations.

 

We May Not be Able To Adequately Protect Or Enforce Our Intellectual Property Rights, Which Could Harm Our Competitive Position.  If we are not able to adequately protect or enforce the proprietary aspects of our technology, competitors could be able to access our proprietary technology and our business, financial condition and results of operations will likely be seriously harmed. We currently attempt to protect our technology through a combination of patent, copyright, trademark and trade secret laws, employee and third party nondisclosure agreements and similar means. Despite our efforts, other parties may attempt to disclose, obtain or use our technologies or systems. Our competitors may also be able to independently develop products that are substantially equivalent or superior to our products or design around our patents. In addition, the laws of some foreign countries do not protect our proprietary rights as fully as do the laws of the United States. As a result, we may not be able to protect our proprietary rights adequately in the United States or abroad.

 

From time to time, we have received notices that claim we have infringed upon the intellectual property of others. Even if these claims are not valid, they could subject us to significant costs. We have engaged in litigation in the past, and litigation may be necessary in the future to enforce our intellectual property rights or to determine the validity and scope of the proprietary rights of others. Litigation may also be necessary to defend against claims of infringement or invalidity by others. An adverse outcome in litigation or any similar proceedings could subject us to significant liabilities to third parties, require us to license disputed rights from others or require us to cease marketing or using certain products or technologies. We may not be able to obtain any licenses on terms acceptable to us, or at all. We also may have to indemnify certain customers or strategic partners if it is determined that we have infringed upon or misappropriated another party’s intellectual property. Any of these results could adversely affect our business, financial condition and results of operations. In addition, the cost of addressing any intellectual property litigation claim, both in legal fees and expenses, and the diversion of management’s resources, regardless of whether the claim is valid, could be significant and could seriously harm our business, financial condition and results of operations.

 

 

23



 

We May Engage In Acquisitions Of Companies Or Technologies That May Require Us To Undertake Significant Capital Infusions And Could Result In Disruptions Of Our Business And Diversion Of Resources And Management Attention.  We have historically, and may in the future, acquire complementary businesses, products and technologies. Acquisitions may require significant capital infusions and, in general, acquisitions also involve a number of special risks, including:

 

                  potential disruption of our ongoing business and the diversion of our resources and management’s attention;

 

                  the failure to retain or integrate key acquired personnel;

 

                  the challenge of assimilating diverse business cultures, and the difficulties in integrating the operations, technologies and information system of the acquired companies;

 

                  increased costs to improve managerial, operational, financial and

 

                  administrative systems and to eliminate duplicative services;

 

                  the incurrence of unforeseen obligations or liabilities;

 

                  potential impairment of relationships with employees or customers as a result of changes in management; and

 

                  increased interest expense and amortization of acquired intangible assets.

 

Our competitors are also soliciting potential acquisition candidates, which could both increase the price of any acquisition targets and decrease the number of attractive companies available for acquisition. Acquisitions may also materially and adversely affect our operating results due to large write-offs, contingent liabilities, substantial depreciation, deferred compensation charges or intangible asset amortization, or other adverse tax or audit consequences. We cannot assure you that we will be able to identify or consummate any additional acquisitions, successfully integrate any acquisitions or realize the benefits anticipated from any acquisition.

 

Some Of Our Directors, Officers And Their Affiliates Can Control The Outcome Of Matters That Require The Approval Of Our Stockholders, And Accordingly We Will Not be Able To Engage In Certain Transactions Without Their Approval.  As of March 31, 2004, our officers and directors beneficially owned approximately 11.4% of the total combined voting power of the outstanding shares of our Class A common stock and Class B common stock. As a result of their stock ownership, our management will be able to significantly influence the election of our directors and the outcome of corporate actions requiring stockholder approval, such as mergers and acquisitions, regardless of how our other stockholders may vote. This concentration of voting control may have a significant effect in delaying, deferring or preventing a change in our management or change in control and may adversely affect the voting or other rights of other holders of common stock.

 

Our Stock Structure And Certain Anti-Takeover Provisions May Affect The Price Of Our Common Stock And Discourage A Third Party From Acquiring Us.   Certain provisions of our certificate of incorporation and our stockholder rights plan could make it difficult for a third party to acquire us, even though an acquisition might be beneficial to our stockholders. These provisions could limit the price that investors might be willing to pay in the future for shares of our common stock. Our Class A common stock entitles the holder to one-tenth of one vote per share and our Class B common stock entitles the holder to one vote per share. The disparity in the voting rights between our common stock, as well as our insiders’ significant ownership of the Class B common stock, could discourage a proxy contest or make it more difficult for a third party to effect a change in our management and control. In addition, our Board of Directors is authorized to issue, without stockholder approval, up to 2,000,000 shares of preferred stock with voting, conversion and other rights and preferences superior to those of our common stock, as well as additional shares of Class B common stock. Our future issuance of preferred stock or Class B common stock could be used to discourage an unsolicited acquisition proposal.

 

In March 1998, we adopted a stockholder rights plan and declared a dividend of preferred stock purchase rights to our stockholders. In the event a third party acquires more than 15% of the outstanding voting control of our company or 15% of our outstanding common stock, the holders of these rights will be able to purchase the junior participating preferred stock at a substantial discount off of the then current market price. The exercise of these rights and purchase of a significant amount of stock at below market prices could cause substantial dilution to a particular acquirer and discourage the acquirer from pursuing our company. The mere existence of a stockholder rights plan often delays or makes a merger, tender offer or proxy contest more difficult.

 

24



 

ITEM 7A.       QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

 

Our exposure to interest rate risk is limited to our lines of credit. Iteris Inc.’s and Iteris Holdings’ lines of credit bear interest at the prevailing prime rate, plus 2.0% and 4.0% (6.0% and 10.0% as of March 31, 2003), respectively.  We estimate that, based on amounts outstanding at March 31, 2004, a 10.0% increase in the prime rate would result in an increase in interest expense, on an annualized basis, of less than $100,000.

 

ITEM 8.          FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

 

The financial statements and supplementary data required by Regulation S-X are included in this Form 10-K commencing on page F-1.

 

ITEM 9.          CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

 

Not applicable.

 

ITEM 9A.                    CONTROLS AND PROCEDURES

 

Evaluation of Disclosure Controls and Procedures

 

Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) as of the end of the period covered by this report. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of the end of the period covered by this report, our disclosure controls and procedures were effective in timely alerting them to the material information relating to us (or our consolidated subsidiaries) required to be included in the reports we file or submit under the Securities Exchange Act of 1934.

 

Changes in Internal Controls

 

During the most recent completed fiscal quarter covered by this report, there has been no change in our internal controls over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934) that has materially affected, or is reasonably likely to materially affect, our internal controls over financial reporting.

 

PART III

 

ITEM 10.                      DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

 

(a)  Identification of Directors. The information under the caption “Election of Directors,” appearing in our proxy statement for the 2004 Annual Meeting of Stockholders, is incorporated herein by reference.

 

(b)  Identification of Executive Officers. The information under the caption “Executive Compensation and Other Information,” appearing in our proxy statement for the 2004 Annual Meeting of Stockholders, is incorporated herein by reference.

 

(c)  Compliance with Section 16(a) of the Exchange Act. The information under the caption “Executive Compensation and Other Information,” appearing in our proxy statement for the 2004 Annual Meeting of Stockholders, is incorporated herein by reference.

 

25



 

(d)  Code of Ethics.  The information under the caption “Corporate Governance and Board Composition,” appearing in our proxy statement for the 2004 Annual Meeting of Stockholders, is incorporated herein by reference.

 

ITEM 11.                      EXECUTIVE COMPENSATION

 

The information under the caption “Executive Compensation and Other Information,” appearing in our proxy statement for the 2004 Annual Meeting of Stockholders, is incorporated herein by reference.

 

ITEM 12.        SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

 

As of March 31, 2004, Iteris Holdings had only one plan, the 1997 Stock Incentive Plan, pursuant to which equity securities of Iteris Holdings are authorized for issuance. The following table sets forth certain information regarding this plan:

 

 

 

 

(a)
Number of
Securities
to be Issued
Upon Exercise of
Outstanding
Options,
Warrants and
Rights

 

(b)
Weighted Average
Exercise Price of
Outstanding
Options,
Warrants and
Rights

 

(c)
Number of Securities
Remaining Available
under Equity
Compensation
Plans (excluding some
securities reflected
in column (a))

 

Equity Compensation Plans Approved by Security Holders

 

 

 

 

 

 

 

1997 Stock Incentive Plan

 

$

1,132,101

 

$

2.98

 

518,499

 

 

 

 

 

 

 

 

 

Equity Compensation Plans Not Approved by Security Holders

 

 

 

 

 

 

 

None

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

1,132,101

 

$

2.98

 

518,499

 

 

The information under the caption “Principal Stockholders and Common Stock Ownership of Certain Beneficial Owners and Management,” appearing in our proxy statement for the 2004 Annual Meeting of Stockholders, is incorporated herein by reference.

 

ITEM 13.                      CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

 

The information under the caption “Certain Transactions,” appearing in our proxy statement for the 2004 Annual Meeting of Stockholders, is incorporated herein by reference.

 

ITEM 14.                      PRINCIPAL ACCOUNTANT FEES AND SERVICES

 

The information under the caption “Principal Accountant Fees and Services,” appearing in our proxy statement for the 2004 Annual Meeting of Stockholders, is incorporated herein by reference.

 

26



 

PART IV

 

ITEM 15.       EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.

 

(a)     Documents filed as part of this report:

 

1. Financial Statements. The following financial statements of Iteris Holdings, Inc. are included in a separate section of this Annual Report on Form 10-K commencing on the pages referenced below:

 

 

Report of Independent Registered Public Accounting Firm

 

Consolidated Balance Sheets as of March 31, 2003 and 2004

 

Consolidated Statements of Operations for the years ended March 31, 2002, 2003 and 2004

 

Consolidated Statements of Stockholders’ Equity (Deficit) for the years ended March 31, 2002, 2003 and 2004

 

Consolidated Statements of Cash Flows for the years ended March 31, 2002, 2003 and 2004

 

Notes to Consolidated Financial Statements

 

 

2.             Financial Statement Schedules.

 

Schedule II— Valuation and Qualifying Accounts

 

 

All other schedules have been omitted because they are not required or the required information is included in our consolidated financial statements and notes thereto.

 

(a)    Exhibits.

 

The following exhibits are filed herewith or incorporated by reference to the location indicated below:

 

Exhibit
Number

 

Description

 

Where Located

 

 

 

 

 

3.1

 

Certificate of Incorporation of Iteris Holdings, as amended

 

Exhibit 19.2 to the registrant’s Quarterly Report on Form 10-Q for the quarter ended September 30, 1987

 

 

 

 

 

3.2

 

Certificates of Amendment to the Certificate of Incorporation of Iteris Holdings, as filed with the Delaware Secretary of State on September 28, 1988 and November 7, 2001; Certificate of Designation as filed on April 29, 1998

 

Exhibit 3.2 to the registrant’s Annual Report on Form 10-K/A for the year ended March 31, 2003 as filed with the SEC on July 29, 2003.

 

 

 

 

 

3.3

 

Certificate of Amendment to the Certificate of Incorporation of Iteris Holdings, as filed with the Delaware Secretary of State on September 15, 2003.

 

Exhibit 3.3 to Amendment No. 1 to the registrant’s Registration Statement on Form S-1 as filed with the SEC on February 17, 2004.

 

 

 

 

 

3.4

 

Bylaws of Iteris Holdings, as amended

 

Exhibit 4.2 to the registrant’s Registration Statement on Form S-1 (Reg. No. 033-67932) as filed with the SEC on July 6, 1993.

 

 

 

 

 

3.5

 

Certificates of Amendment to Bylaws of Iteris Holdings dated April 24, 1998 and August 10, 2001

 

Exhibit 3.4 to the registrant’s Annual Report on Form 10-K/A for the year ended March 31, 2003 as filed with the SEC on July 29, 2003

 

27



 

Exhibit
Number

 

Description

 

Where Located

 

 

 

 

 

4.1

 

Specimen of Class A common stock and Class B common stock certificates.

 

Exhibit 4.3 to registrant’s Amendment No. 1 to the Registration Statement on Form S-1 (Reg. No. 033-67932) as filed with the SEC on September 30, 1993.

 

 

 

 

 

4.2

 

Form of rights certificate for preferred stock purchase rights

 

Exhibit A of Exhibit 4 to the registrant’s Current Report on Form 8-K as filed with the SEC on May 1, 1998

 

 

 

 

 

10.1

 

Profit Sharing Plan and Trust

 

Exhibit 10.3 to the registrant’s Amendment No. 2 to the Registration Statement on Form S-8 (Reg. No. 002-98656) as filed with the SEC on May 5, 1988

 

 

 

 

 

10.2

 

Amendment Nos. 3 and 4 to the Profit Sharing Plan and Trust

 

Exhibits 4.3.1 and 4.3.2, respectively, to Amendment No. 3 to Iteris Holdings’ Registration Statement on Form S-3 (Reg. No. 002-86220) as filed with the SEC on June 13, 1990

 

 

 

 

 

10.3

 

Form of Executive Deferral Plan between the registrant and certain employees of the registrant).

 

Exhibit 10.4 to the registrant’s Annual Report on Form 10-K for the year ended March 31, 1988

 

 

 

 

 

10.4

 

Form of Indemnity Agreement entered into by the registrant and certain of its officers and directors

 

Exhibit 19.4 to the registrant’s Quarterly Report on Form 10-Q for the quarter ended September 30, 1988

 

 

 

 

 

10.5

 

Form of Indemnification Agreement entered into by the registrant and certain of its officers and directors

 

Filed Herewith.

 

 

 

 

 

10.6

 

1997 Stock Incentive Plan of Iteris Holdings (as amended on May 3, 2002)

 

Exhibit 10.5 to the registrant’s Annual Report on Form 10-K for the year ended March 31, 2003 as filed with the SEC on June 30, 2003

 

 

 

 

 

107

 

Form of Notice of Grant of Stock Option

 

Exhibit 99.2 to the registrant’s Registration Statement on Form S-8 (File No. 333-30396) as filed with the SEC on February 14, 2000

 

 

 

 

 

10.8

 

Form of Stock Option Agreement

 

Exhibit 99.3 to the registrant’s Registration Statement on Form S-8 (File No. 333-30396) as filed with the SEC on February 14, 2000

 

 

 

 

 

10.9

 

Form of Addendum to Stock Option Agreement—Involuntary Termination Following Corporate Transaction or Change in Control

 

Exhibit 99.4 to the registrant’s Registration Statement on Form S-8 (File No. 333-30396) as filed with the SEC on February 14, 2000

 

 

 

 

 

10.10

 

Form of Addendum to Stock Option Agreement—Limited Stock Appreciation Rights

 

Exhibit 99.5 to the registrant’s Registration Statement on Form S-8 (File No. 333-30396) as filed with the SEC on February 14, 2000

 

 

 

 

 

10.11

 

Form of Stock Issuance Agreement

 

Exhibit 99.6 to the registrant’s Registration Statement on Form S-8 (File No. 333-30396) as filed with the SEC on February 14, 2000

 

28



 

Exhibit
Number

 

Description

 

Where Located

 

 

 

 

 

10.12

 

Form of Addendum to Stock Issuance Agreement—Involuntary Termination Following Corporate Transaction/Change in Control

 

Exhibit 99.7 to the registrant’s Registration Statement on Form S-8 (File No. 333-30396) as filed with the SEC on February 14, 2000

 

 

 

 

 

10.13

 

Form of Notice of Grant of Automatic Stock Option—Initial Grant)

 

Exhibit 99.8 to Exhibit 99.8 to registrant’s Registration Statement on Form S-8 (File No. 333-30396) as filed with the SEC on February 14, 2000

 

 

 

 

 

10.14

 

Form of Notice of Grant of Automatic Stock Option—Annual Grant

 

Exhibit 99.9 to the registrant’s Registration Statement on Form S-8 (File No. 333-30396) as filed with the SEC on February 14, 2000

 

 

 

 

 

10.15

 

Form of Automatic Stock Option Agreement.

 

Exhibit 99.10 to the registrant’s Registration Statement on Form S-8 (File No. 333-30396) as filed with the SEC on February 19, 2000

 

 

 

 

 

10.16

 

Amended and Restated Rights Agreement, dated as of May 10, 2004, by and between the registrant and U.S. Stock Transfer Corporation, including the exhibits thereto.

 

Exhibit 99.1 to the registrant’s Registration Statement on Form 8-A/A  as filed with the SEC on June 18, 2004.

 

 

 

 

 

10.17

 

1994 Long-Term Equity Plan Exhibit 4.3 to the registrant’s Registration Statement on Form S-8 (File No. 333-05735) as filed with the SEC on June 11, 1996).

 

Exhibit 4.3 to the registrant’s Registration Statement on Form S-8 (File No. 333-05735) as filed with the SEC on June 11, 1996

 

 

 

 

 

10.18

 

Amended and Restated Agreement of Purchase and Sale and Escrow Instructions, dated February 19, 2002, by and between Iteris, Inc. and 1515 South Manchester, LLC

 

Exhibit 2.1 to the registrant’s Current Report on Form 8-K as filed with the SEC on June 12, 2002

 

 

 

 

 

10.19

 

Sublease Agreement dated May 7, 2003 by and between Iteris, Inc. and FEI-Zyfer, Inc.

 

Exhibit 10.19 to registrant’s Annual Report on Form 10-K for the year ended March 31, 2003 as filed with the SEC on June 30, 2003

 

 

 

 

 

10.20

 

Loan and Security Agreement dated February 22, 2002 by and between the registrant and Technology Lending Partners, L.L.C.

 

Exhibit 10.20 to the registrant’s Annual Report on Form 10-K/A for the year ended March 31, 2003 as filed with the SEC on July 29, 2003

 

 

 

 

 

10.21

 

Receivables Purchase Agreement dated October 18, 2002 by and between the registrant and Technology Lending Partners, L.L.C., as amended by Amendment Number One dated November 27, 2002 and Amendment Number Two dated January 7, 2003

 

Exhibit 10.21 to the registrant’s Annual Report on Form 10-K/A for the year ended March 31, 2003 as filed with the SEC on July 29, 2003

 

 

 

 

 

10.22

 

Change in Control Agreement dated May 8, 2003 by and between the registrant and Gregory A. Miner

 

Exhibit 10.1 to the registrant’s Annual Report on Form 10-Q for the quarter ended June 30, 2003 as filed with the SEC on August 14, 2003

 

 

 

 

 

10.23

 

Change in Control Agreement dated May 20, 2003 by and between the registrant

 

Exhibit 10.23 to Amendment No. 1 to the registrant’s Registration Statement on Form S-1

 

29



 

Exhibit
Number

 

Description

 

Where Located

 

 

 

 

 

 

 

and Jack E. Johnson

 

as filed with the SEC on February 17, 2004.

 

 

 

 

 

21

 

Subsidiaries of the registrant

 

Filed Herewith

 

 

 

 

 

23.1

 

Consent of Independent Registered Public Accounting Firm

 

Filed Herewith

 

 

 

 

 

31

 

Certification of the Chief Executive Officer and Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

 

Filed Herewith

 

 

 

 

 

32

 

Certification of the Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

Filed Herewith

 

(b)   Reports on Form 8-K

 

1.          Form 8-K filed on January 30, 2004 to furnish disclosure under Item 12 of the Report regarding financial results for the quarter ended December 31, 2003.

 

30



 

SIGNATURES

 

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Anaheim, State of California, on June 29, 2004.

 

 

 

ITERIS HOLDINGS, INC.

 

 

 

By:

 

/s/ GREGORY A. MINER

 

 

 

 

 

 

Gregory A. Miner,

 

 

Chief Executive Officer

 

 

and Chief Financial Officer

 

 

POWER OF ATTORNEY
 

We, the undersigned officers and directors of Iteris Holdings, Inc., do hereby constitute and appoint James S. Miele and Gregory A. Miner, and each of them, our true and lawful attorneys-in-fact and agents, each with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign any and all amendments to this report, and to file the same, with exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite or necessary to be done in and about the premises, as fully to all intents and purposes as he might or could do in person, hereby, ratifying and confirming all that each of said attorneys-in-fact and agents, or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof.

 

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons in the capacities and on the dates indicated:

 

Signature

 

Title

 

Date

 

 

 

 

 

/s/ GREGORY A. MINER

 

Director, Chief Executive Officer

 

June 29, 2004

Gregory A. Miner

 

and Chief Financial Officer

 

 

(principal executive officer and
principal financial officer)

 

 

 

 

 

 

 

 

 

/s/ JOEL SLUTZKY

 

Chairman of the Board

 

June 29, 2004

Joel Slutzky

 

 

 

 

 

 

 

 

 

/s/ KEVIN C. DALY

 

Director

 

June 29, 2004

Kevin C. Daly, Ph.D

 

 

 

 

 

 

 

 

 

/s/ CRANDALL GUDMUNDSON

 

Director

 

June 29, 2004

Crandall Gudmundson

 

 

 

 

 

31



 

/s/ JERRY MUENCH

 

Director

 

June 29, 2004

Jerry Muench

 

 

 

 

 

 

 

 

 

/s/ JOHN SEAZHOLTZ

 

Director

 

June 29, 2004

John Seazholtz

 

 

 

 

 

 

 

 

 

/s/ JAMES S. MIELE

 

Controller and Secretary

 

June 29, 2004

James S. Miele

 

 

 

 

 

 

 

 

 

/s/ THOMAS L. THOMAS

 

Director

 

June 29, 2004

Thomas L. Thomas

 

 

 

 

 

 

 

 

 

/s/ PAUL E. WRIGHT

 

Director

 

June 29, 2004

Paul E. Wright

 

 

 

 

 

32


Iteris Holdings, Inc.

 

Index to Consolidated Financial Statements

 

 

Report of Independent Registered Public Accounting Firm

 

 

 

Consolidated Balance Sheets as of March 31, 2003 and 2004

 

 

 

Consolidated Statements of Operations for the years ended
March 31, 2002, 2003 and 2004

 

 

 

Consolidated Statements of Stockholders’ Equity (Deficit) for the years ended
March 31, 2002, 2003 and 2004

 

 

 

Consolidated Statements of Cash Flows for the years ended
March 31, 2002, 2003 and 2004

 

 

 

Notes to Consolidated Financial Statements

 

 

F-1



 

Report of Independent Registered Public Accounting Firm

 

Stockholders and Board of Directors
Iteris Holdings, Inc.

 

We have audited the accompanying consolidated balance sheets of Iteris Holdings, Inc. as of March 31, 2003 and 2004, and the related consolidated statements of operations, stockholders’ equity (deficit), and cash flows for each of the three years in the period ended March 31, 2004.  Our audits also included the financial statement schedule listed in the index at Item 15(a).  These financial statements and schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.

 

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

 

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Iteris Holdings, Inc. at March 31, 2003 and 2004, and the consolidated results of its operations and its cash flows for each of the three years in the period ended March 31, 2004, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, present fairly in all material respects the information set forth therein.

 

/S/ ERNST & YOUNG LLP

 

 

 

Orange County, California

June 8, 2004

 

F-2



 

Iteris Holdings, Inc.

 

Consolidated Balance Sheets

 

(In thousands)

 

 

 

March 31,

 

 

 

2003

 

2004

 

Assets

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

437

 

$

2,612

 

Trade accounts receivable, net of allowance for doubtful accounts of $156 in 2003 and $204 in 2004.

 

8,167

 

8,255

 

Costs and estimated earnings in excess of billings on uncompleted contracts

 

2,398

 

2,653

 

Notes receivable

 

 

125

 

 

 

 

 

 

 

Deferred tax assets

 

 

821

 

 

 

 

 

 

 

Inventories:

 

 

 

 

 

Finished goods

 

211

 

542

 

Work in process

 

393

 

294

 

Materials and supplies

 

3,299

 

2,762

 

Prepaid expenses and other

 

355

 

323

 

Assets of discontinued operations

 

5,237

 

 

Total current assets

 

20,497

 

18,387

 

 

 

 

 

 

 

Restricted cash

 

2,516

 

 

 

 

 

 

 

 

Property, plant and equipment:

 

 

 

 

 

Leasehold improvements

 

 

97

 

Equipment

 

7,263

 

7,724

 

Allowances for depreciation

 

(5,322

)

(6,179

)

 

 

1,941

 

1,642

 

 

 

 

 

 

 

Goodwill

 

9,807

 

9,807

 

Other assets

 

81

 

215

 

Total assets

 

$

34,842

 

$

30,051

 

 

See accompanying notes.

 

F-3



 

Iteris Holdings, Inc.

 

Consolidated Balance Sheets

 

(In thousands, except share and per share amounts)

 

 

 

March 31,

 

 

 

2003

 

2004

 

Liabilities and stockholders’ equity (deficit)

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Trade accounts payable

 

$

5,187

 

$

3,560

 

Accrued payroll and related expenses

 

5,622

 

3,218

 

Accrued expenses

 

785

 

838

 

Income taxes payable

 

 

485

 

Deferred revenue

 

 

226

 

Billings in excess of costs and estimated earnings on uncompleted contracts

 

304

 

549

 

Advances under receivables purchase agreement with related party

 

235

 

 

Revolving line of credit with related party

 

 

100

 

Liabilities of discontinued operations

 

4,996

 

 

Current portion of long-term debt

 

 

42

 

Total current liabilities

 

17,129

 

9,018

 

 

 

 

 

 

 

Revolving line of credit with related party

 

1,250

 

 

 

 

 

 

 

 

Deferred gain on sale of building

 

6,025

 

1,774

 

 

 

 

 

 

 

Long-term debt

 

15

 

891

 

 

 

 

 

 

 

Minority interest

 

14,711

 

17,745

 

 

 

 

 

 

 

Commitments and contingencies

 

 

 

 

 

 

 

 

 

 

 

Stockholders’ equity (deficit):

 

 

 

 

 

Preferred stock:

 

 

 

 

 

Authorized shares – 2,000,000

 

 

 

 

 

Issued and outstanding – none

 

 

 

Common stock, $.10 par value:

 

 

 

 

 

Authorized shares – 50,000,000 of Class A and 2,600,000 of Class B

 

 

 

 

 

Issued and outstanding shares – 14,080,914 of Class A and 1,035,841 of Class B at March 31, 2003; 20,476,568 of Class A and 928,317 of Class B at March 31, 2004.

 

1,512

 

2,141

 

Additional paid-in capital

 

92,819

 

96,989

 

Treasury stock – 93 shares in 2003 and 2004

 

(1

)

(1

)

Notes receivable from employees

 

(51

)

(45

)

Accumulated other comprehensive income

 

(99

)

 

Accumulated deficit

 

(98,468

)

(98,461

)

Total stockholders’ equity (deficit)

 

(4,288

)

623

 

Total liabilities and stockholders’ equity (deficit)

 

$

34,842

 

$

30,051

 

 

See accompanying notes.

 

F-4



 

Iteris Holdings, Inc.

 

Consolidated Statements of Operations

 

(In thousands, except per share information)

 

 

 

Year Ended March 31,

 

 

 

2002

 

2003

 

2004

 

Net sales and contract revenues:

 

 

 

 

 

 

 

Net sales

 

$

17,104

 

$

19,112

 

$

23,470

 

Contract revenues

 

20,205

 

22,283

 

21,813

 

Total net sales and contract revenues

 

37,309

 

41,395

 

45,283

 

 

 

 

 

 

 

 

 

Costs and expenses:

 

 

 

 

 

 

 

Cost of net sales

 

8,401

 

9,366

 

12,758

 

Cost of contract revenues

 

12,043

 

15,110

 

14,712

 

Selling, general and administrative expenses

 

14,627

 

14,105

 

12,844

 

Research and development expenses

 

3,434

 

3,908

 

3,923

 

Restructuring charges

 

1,142

 

 

 

Total costs and expenses

 

39,647

 

42,489

 

44,237

 

Income (loss) from operations

 

(2,338

)

(1,094

)

1,046

 

 

 

 

 

 

 

 

 

Non-operating income (expense)

 

 

 

 

 

 

 

Other income (expense), net

 

(1,365

)

417

 

1,003

 

Interest expense, net

 

(4,190

)

(761

)

(123

)

Income (loss) before income tax

 

(7,893

)

(1,438

)

1,926

 

Income tax benefit (provision)

 

785

 

 

(100

)

Income (loss) from continuing operations before minority interest

 

(7,108

)

(1,438

)

1,826

 

Minority interest in earnings of subsidiary

 

(1,910

)

(3,818

)

(3,034

)

Loss from continuing operations

 

(9,018

)

(5,256

)

(1,208

)

Income (loss) from discontinued operations, net of taxes of $0

 

(17,120

)

(7,892

)

1,215

 

Extraordinary loss from early extinguishment of debt, net of taxes of $0

 

(450

)

 

 

Net income (loss)

 

$

(26,588

)

$

(13,148

)

$

7

 

 

 

 

 

 

 

 

 

Basic earnings (loss) per share:

 

 

 

 

 

 

 

Continuing operations

 

$

(0.80

)

$

(0.37

)

$

(0.06

)

Discontinued operations

 

(1.52

)

(0.55

)

0.06

 

Extraordinary loss

 

(0.04

)

 

 

Basic earnings (loss) per share

 

$

(2.36

)

$

(0.92

)

$

0.00

 

 

 

 

 

 

 

 

 

Diluted earnings (loss) per share:

 

 

 

 

 

 

 

Continuing operations

 

$

(0.80

)

$

(0.37

)

$

(0.06

)

Discontinued operations

 

(1.52

)

(0.55

)

0.06

 

Extraordinary loss

 

(0.04

)

 

 

Diluted earnings (loss) per share

 

$

(2.36

)

$

(0.92

)

$

0.00

 

 

 

 

 

 

 

 

 

Shares used in computing basic earnings (loss) per share

 

11,267

 

14,276

 

19,454

 

Shares used in computing diluted earnings (loss) per share

 

11,267

 

14,276

 

19,680

 

 

See accompanying notes.

 

F-5



 

Iteris Holdings, Inc.

 

Consolidated Statements of Stockholders’ Equity (Deficit)

 

(In thousands)

 

 

 

Common stock

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Shares outstanding

 

Amount

 

Additional
paid-in
capital

 

Treasury
stock

 

Notes
receivable
from
employees

 

Accumulative
other compre-
hensive
income

 

Accumulated
deficit

 

Total
Stockholders'
equity
(deficit)

 

Compre-
hensive
income
(loss)

 

Class A
common
stock

 

Class B
common
stock

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at March 31, 2001

 

9,469

 

1,036

 

$

1,050

 

$

78,548

 

$

(1

)

$

(51

)

$

(436

)

$

(58,732

)

$

20,378

 

$

(33,238

)

Issuances of Iteris Holdings, Inc. Class A common stock

 

2,022

 

 

202

 

9,229

 

 

 

 

 

9,431

 

 

Issuance of warrants

 

 

 

 

1,357

 

 

 

 

 

1,357

 

 

Foreign currency translation adjustments

 

 

 

 

 

 

 

677

 

 

677

 

677

 

Net loss

 

 

 

 

 

 

 

 

(26,588

)

(26,588

)

(26,588

)

Balance at March 31, 2002

 

11,491

 

1,036

 

1,252

 

89,134

 

(1

)

(51

)

241

 

(85,320

)

5,255

 

$

(25,911

)

Issuances of Iteris Holdings, Inc. Class A common stock

 

2,590

 

 

260

 

3,685

 

 

 

 

 

3,945

 

 

Foreign currency translation adjustments

 

 

 

 

 

 

 

(340

)

 

(340

)

(340

)

Net loss

 

 

 

 

 

 

 

 

(13,148

)

(13,148

)

(13,148

)

Balance at March 31, 2003

 

14,081

 

1,036

 

1,512

 

92,819

 

(1

)

(51

)

(99

)

(98,468

)

(4,288

)

$

(13,488

)

Issuances of Iteris Holdings, Inc. Class A common stock and warrants

 

6,288

 

 

629

 

4,170

 

 

 

 

 

4,799

 

 

Conversion of Class B common stock

 

108

 

(108

)

 

 

 

 

 

 

 

 

Payments on notes receivable

 

 

 

 

 

 

6

 

 

 

6

 

 

Foreign currency  translation adjustments

 

 

 

 

 

 

 

99

 

 

99

 

99

 

Net income

 

 

 

 

 

 

 

 

7

 

7

 

7

 

Balance at March 31, 2004

 

20,477

 

928

 

$

2,141

 

$

96,989

 

$

(1

)

$

(45

)

$

 

$

(98,461

)

$

623

 

$

106

 

 

See accompanying notes.

 

F-6



 

Iteris Holdings, Inc.

 

Consolidated Statements of Cash Flows

(In thousands)

 

 

 

Year Ended March 31,

 

 

 

2002

 

2003

 

2004

 

Operating activities

 

 

 

 

 

 

 

Net loss from continuing operations

 

$

(9,018

)

$

(5,256

)

$

(1,208

)

Net income (loss) from discontinued operations

 

(17,120

)

(7,892

)

1,215

 

Extraordinary loss

 

(450

)

 

 

Adjustments to reconcile net income (loss) to net cash used in operating activities:

 

 

 

 

 

 

 

Depreciation and amortization

 

2,816

 

816

 

857

 

Amortization of warrants

 

1,230

 

246

 

 

Amortization of deferred gain on sale-leaseback