<PAGE>
As filed with the Securities and Exchange Commission on February 18, 2000
Registration No. 333-93035
================================================================================
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
----------------
Amendment No. 2
FORM S-1
REGISTRATION STATEMENT
Under
The Securities Act of 1933
Iteris, Inc.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
Delaware 7379 95-2954623
(State or Other Jurisdiction of (Primary Standard Industrial (I.R.S. Employer
Incorporation or Organization) Classification Code Number) Identification Number)
</TABLE>
1515 S. Manchester Avenue,
Anaheim, CA 92802
(714) 758-0200
(Address, Including Zip Code, and Telephone Number, Including Area Code, of the
Registrant's Principal Executive Offices)
JACK JOHNSON
President and Chief Executive Officer
1515 S. Manchester Avenue
Anaheim, CA 92802
(714) 758-0200
(Name and Address, Including Zip Code, and Telephone Number, Including Area
Code, of Agent for Service)
Copies to:
<TABLE>
<S> <C>
NICK E. YOCCA, ESQ. LAWRENCE D. LEVIN, ESQ.
K.C. SCHAAF, ESQ. BRIAN M. HOYE, ESQ.
CHRISTOPHER D. IVEY, ESQ. Katten Muchin Zavis
Stradling Yocca Carlson & Rauth, 525 West Monroe Street, Suite 1600
A Professional Corporation Chicago, Illinois 60661
660 Newport Center Drive, Suite 1600 (312) 902-5200
Newport Beach, California 92660
(949) 725-4000
</TABLE>
Approximate date of commencement of proposed sale to the public: As soon as
practicable after this registration statement becomes effective.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_] ____________________
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_] ____________________
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_] ____________________
If delivery of the prospectus is expected to be made pursuant to Rule 434,
check the following box. [_]
----------------
<TABLE>
<CAPTION>
=================================================================================================
Proposed Maximum
Title of Each Class of Proposed Maximum Aggregate Amount of
Securities Amount to be Offering Price Offering Registration
to be Registered Registered(1) Per Unit Price(1)(2) Fee(3)
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, $.001 par
value......................... 4,945,000 $13.00 $64,285,000 $16,972
================================================================================================
</TABLE>
(1) Includes shares of common stock which may be purchased by the Underwriters
to cover over-allotments, if any.
(2) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(a) under the Securities Act of 1933, as amended.
(3) This fee includes $16,925 previously paid by the Registrant.
----------------
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
===============================================================================
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+The information in this preliminary prospectus is not complete and may be +
+changed. We may not sell these securities until the registration statement +
+filed with the Securities and Exchange Commission becomes effective. This +
+preliminary prospectus is not an offer to sell these securities nor a +
+solicitation of an offer to buy these securities in any jurisdiction where +
+the offer or sale is not permitted. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED FEBRUARY 18, 2000
PRELIMINARY PROSPECTUS
4,300,000 Shares
[LOGO OF ITERIS APPEARS HERE]
Common Stock
-----------
This is an initial public offering of shares of common stock of Iteris, Inc. Of
the 4,300,000 shares of common stock offered under this prospectus, we are
offering 4,173,616 shares and the selling stockholders are offering an
additional 126,384 shares. We will not receive any of the proceeds from the
shares of common stock sold by selling stockholders.
We anticipate that the initial public offering price will be between $11.00 and
$13.00 per share. We have applied to have our common stock approved for
quotation on the Nasdaq National Market under the symbol "ITER."
See "Risk Factors" beginning on page 6 to read about risks that you should
consider carefully before buying shares of our common stock.
Neither the Securities and Exchange Commission nor any other regulatory body
has approved or disapproved these securities or passed upon the adequacy or
accuracy of this prospectus. Any representation to the contrary is a criminal
offense.
-----------
<TABLE>
<CAPTION>
Per
Share Total
----- -----
<S> <C> <C>
Public offering price.............................................. $ $
Underwriting discounts and commissions............................. $ $
Proceeds, before expenses, to us................................... $ $
Proceeds to the selling stockholders............................... $ $
</TABLE>
-----------
The underwriters may purchase up to an additional 645,000 shares of common
stock from us at the initial public offering price, less the underwriting
discount, to cover over-allotments.
The underwriters expect to deliver the shares in New York, New York, on ,
2000.
-----------
Bear, Stearns & Co. Inc.
SG Cowen
Cruttenden Roth Incorporated
The date of this prospectus is , 2000.
<PAGE>
You may rely only on the information contained in this prospectus. Neither
we, the selling stockholders, nor any underwriter have authorized anyone to
provide prospective investors with different or additional information. This
prospectus is not an offer to sell nor is it seeking an offer to buy these
securities in any jurisdiction where the offer or sale is not permitted. The
information contained in this prospectus is correct only as of the date of this
prospectus, regardless of the time of the delivery of this prospectus or any
sale of these securities.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary....................................................... 1
Risk Factors............................................................. 6
Forward-Looking Statements............................................... 16
Use of Proceeds.......................................................... 17
Dividend Policy.......................................................... 17
Capitalization........................................................... 18
Dilution................................................................. 19
Selected Consolidated Financial Data..................................... 20
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 21
Business................................................................. 30
</TABLE>
<TABLE>
<CAPTION>
Page
----
<S> <C>
Arrangements with Odetics.................................................. 42
Management................................................................. 44
Principal and Selling Stockholders......................................... 51
Certain Transactions....................................................... 52
Description of Capital Stock............................................... 53
Shares Eligible for Future Sale............................................ 57
Underwriting............................................................... 59
Legal Matters.............................................................. 61
Experts.................................................................... 61
Where You Can Find Additional Information.................................. 62
Index to Consolidated Financial Statements................................. F-1
</TABLE>
Until , 2000, 25 days after the date of this prospectus, all
dealers that effect transactions in these securities, whether or not
participating in this offering, may be required to deliver a prospectus. This
is in addition to the dealers' obligation to deliver a prospectus when acting
as underwriters and with respect to their unsold allotments or subscriptions.
<PAGE>
PROSPECTUS SUMMARY
This summary highlights information found in greater detail elsewhere in
this prospectus. In addition to this summary, we urge you to read the entire
prospectus carefully, including the risks of investing in our common stock
discussed under "Risk Factors," before you decide to buy our common stock.
ITERIS, INC.
Our Company
We design, develop, market and implement software based solutions that
improve the safety and efficiency of vehicle transportation. Using our
proprietary software and industry expertise, we are a leading provider of video
sensor systems and transportation management and traveler information systems
for the intelligent transportation systems, or 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. Our systems and solutions are
designed to address three critical demands of vehicle transportation: improving
vehicle safety, reducing traffic congestion and increasing the availability of
personalized traveler information.
According to the U.S. Department of Transportation and the National Highway
Traffic Safety Administration, more than six million motor vehicle accidents
occurred in the United States in 1998. Accidents in 1998 resulted in more than
40,000 fatalities, approximately 39.4% of which were related to drivers
departing unintentionally from their designated lanes according to NHTSA. To
help prevent accidents caused by unintended lane departures, we developed
AutoVue, a small windshield mounted sensor that detects and warns drivers of
unintended lane departures. AutoVue is currently being installed in heavy
trucks for pre-production testing and marketed to passenger car and light and
medium truck manufacturers.
There were more than 200 million vehicles in operation in the United States
in 1998 according to Automotive News. The U.S. DOT estimated that in 1996
drivers on U.S. highways spent more than two billion hours in traffic
congestion. According to a study conducted for the U.S. DOT, traffic congestion
cost the American public $72 billion in 1997 in lost time and wasted fuel. As
an alternative to expanding a substantially built-out infrastructure of
highways, transportation agencies are turning to ITS to increase the efficiency
of the existing highway infrastructure. As a result, we developed our Vantage
video vehicle sensing systems to detect the presence of vehicles at signalized
intersections, enabling an efficient allocation of green signal time. In
addition, our transportation management and traveler information systems enable
traffic managers to monitor transportation networks in real-time and to
implement corrective actions to relieve traffic congestion.
Each of our AutoVue and Vantage systems incorporate our proprietary software
algorithms designed to maximize the accuracy of outdoor video imaging. We have
entered into strategic relationships with DaimlerChrysler Corporation and its
subsidiary, Freightliner Corporation, to jointly develop software applications
for AutoVue and to install AutoVue in their heavy trucks. We also intend to
sell AutoVue to manufacturers for installation on passenger cars and light and
medium trucks. We believe AutoVue is currently the only commercially-available
unintended lane departure warning system for vehicles and Vantage is a market
leader for video vehicle detection systems in the United States.
In addition to focusing on vehicle safety and traffic congestion, drivers
are increasingly demanding the availability of timely and accurate traffic
information. Traditionally, traffic information has been provided over the
radio and more recently over the Internet. Our transportation management and
traveler information systems enable the dissemination of information on current
traffic conditions through changeable message signs, radio, telephone, cable
television, paging networks and the Internet. We also are developing
personalized traveler information services that will be customized to the
travel patterns and information needs of individual travelers, to be delivered
in real-time through personal digital assistants, or PDAs, cellular telephones,
pagers, the mobile Internet and in-vehicle computers.
1
<PAGE>
We are one of only two companies awarded a contract to develop and maintain
the National ITS Architecture, a federal program designed to create a single
national architecture to enable seamless communication among ITS systems. We
believe our involvement in the National ITS Architecture provides us with
unique vision and insight into emerging market trends and product opportunities
and a significant competitive market advantage. We have the experience to
design and implement transportation management systems that perform the
functions necessary to conform with the National ITS Architecture. Through the
training programs we conduct on the Architecture, we have developed strong
relationships and credibility with national, regional, state and local
transportation agencies responsible for managing funds allocated for
ITS systems.
We have assembled an experienced management team and board of directors
focused on the ITS industry. Our management team and board of directors include
two former U.S. Secretaries of Transportation, a former Deputy Insurance
Commissioner for the State of California, a former General Manager for the
Los Angeles Department of Transportation and a founding board member of ITS
America, a leading industry trade association and federal advisory agency. Our
board also includes a former Technical Director of the ITS program for General
Motors Corporation and a former Chairman of Chrysler Technologies Corporation.
Our Strategy
Our objective is to enhance our position as a leading provider of software
based ITS systems and solutions for the safe and efficient movement of people
and goods. Our strategies to achieve this objective are:
. Combine our proprietary software with our ITS industry expertise to
provide transportation solutions;
. Establish AutoVue as the leading platform for in-vehicle video sensing;
. Provide personalized traveler information to travelers through wireless
communication devices and the mobile Internet;
. Pursue strategic acquisitions and alliances; and
. Broaden our systems and solutions offerings and expand our penetration
of international markets.
Corporate Information; Spin-Off from Odetics
We were formed in 1994 as a division of Odetics, Inc., a publicly-held
company based in Anaheim, California that serves as an incubator for
technology-oriented businesses. We were incorporated as Odetics ITS, Inc. in
October 1998 as a California corporation and reincorporated in Delaware as
Iteris, Inc. in January 2000. Odetics currently owns approximately 93% of our
outstanding common stock. Immediately prior to this offering, Odetics will
distribute to its stockholders all of the outstanding common stock of our
company owned by Odetics in a tax-free spin-off. The shares distributed in the
spin-off will not be transferable for a period of 180 days following the date
of this prospectus. In preparation for the spin-off, we will enter into the
following agreements with Odetics: separation and distribution agreement,
services agreement, tax allocation agreement, promissory note and technology
license agreement. Please see "Arrangements with Odetics."
Any references to "we," "our," "us" or "Iteris" refer to Iteris, Inc. and
our subsidiary. Our executive offices are located at 1515 S. Manchester Avenue,
Anaheim, California 98202. Our telephone number is (714) 758-0200. Our website
address is www.iteris.com. Information contained in our website does not
constitute part of this prospectus.
2
<PAGE>
AutoVue(TM), DATEX Toolkit(TM), EzHCM(TM), Lane Tracker(TM), Iteris(TM),
Odetics ITS(TM), SpecWizard(TM), Vantage(TM), Vantage One(TM), Vantage
Plus(TM), Vantage Edge(TM), Vantage Remote Access System(TM), VRAS(TM), Vantage
Wireless Systems(TM) and Vectura(TM) are our logos and trademarks. This
prospectus also includes the tradenames and trademarks of other companies whose
mention in this prospectus is with due recognition of and without intent to
misappropriate such names or marks.
Except as otherwise noted, all information in this prospectus assumes:
. outstanding options to purchase shares of common stock are not
exercised;
. the underwriters' over-allotment option is not exercised;
. that the spin-off from Odetics is consummated immediately prior to this
offering; and
. the issuance of 433,405 shares of common stock to DaimlerChrysler
Venture GmbH upon the conversion of the Subordinated Convertible
Promissory Note issued to DaimlerChrysler Venture on January 25, 2000,
assuming no adjustment to the number of shares issued upon conversion.
3
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Common stock offered by us..................... 4,173,616 shares
Common stock offered by selling stockholders... 126,384 shares
Common stock to be outstanding after this
offering...................................... 16,666,667 shares
Use of proceeds................................ We intend to use the net
proceeds from this offering
to repay $10.0 million of
debt payable to Odetics,
expand sales and marketing
activities, acquire or invest
in complementary businesses
and for working capital and
other general corporate
purposes.
Proposed Nasdaq National Market symbol......... ITER
</TABLE>
The number of shares of common stock outstanding after this offering is
based on shares outstanding on December 31, 1999 and excludes:
. 2,631,000 shares of common stock issuable upon exercise of options
outstanding with a weighted average exercise price of $2.02 per share.
773,000 of these options were exercisable as of December 31, 1999 and
the balance are subject to future vesting requirements; and
. 1,269,000 additional shares of common stock reserved for issuance under
our stock option plan.
If the underwriters exercise their over-allotment option in full, there will
be 17,311,667 shares outstanding after this offering.
RECENT DEVELOPMENT
On January 25, 2000, we entered into a subordinated convertible note
purchase agreement in which DaimlerChrysler Venture invested $3.75 million that
shall automatically convert immediately prior to the closing of this offering
into approximately 2.5% of our outstanding common stock after this offering.
This investment enhances our strategic relationship with DaimlerChrysler. As
part of the agreement, DaimlerChrysler Venture has agreed to facilitate the
adoption of AutoVue in DaimlerChrysler's commercial vehicles and passenger
cars. In addition, DaimlerChrysler Venture will support our efforts to develop
a personalized traveler information system targeted at DaimlerChrysler's
customer base. This investment is the first of its kind by DaimlerChrysler
Venture in North America. It is seen as a model for future investments in U.S.
firms with advanced technologies that are of strategic importance to
DaimlerChrysler.
The number of shares of common stock into which the promissory note is
convertible will fluctuate depending on the number of shares sold by us in this
offering and the initial public offering price per share. Assuming the sale by
us of 4,173,616 shares of common stock at an initial public offering price of
$12.00 per share, the promissory note will convert into 433,405 shares of our
common stock. If the price per share at which our common stock is sold or the
number of shares sold in this offering decrease, then DaimlerChrysler Venture
will be entitled to receive additional shares of common stock or the repayment
of a portion of the principal amount under the promissory note in an amount in
excess of the amount that, upon conversion, would result in DaimlerChrysler
Venture owning approximately 2.5% of our common stock after this offering. If
the price per share at which our common stock is sold or the number of shares
sold in this offering increase, then DaimlerChrysler Venture may elect to
receive fewer shares or pay an additional sum to us such that, upon conversion,
DaimlerChrysler Venture will own approximately 2.5% of our common stock after
this offering. All shares of common stock issued to DaimlerChrysler Venture
upon conversion of the promissory note shall be subject to restrictions on sale
and transfer, as contained in the related purchase agreement, until April 25,
2001. We have recorded a non-cash charge to interest expense of approximately
$1.45 million in January 2000 to give financial accounting recognition to the
beneficial conversion feature contained in the promissory note.
4
<PAGE>
SUMMARY FINANCIAL DATA
(in thousands, except share and per share data)
The following table summarizes the financial data for our business during
the periods indicated. The data set forth below should be read in conjunction
with "Management's Discussion and Analysis of Financial Condition and Results
of Operations" and our consolidated financial statements and related notes
included elsewhere in this prospectus.
Also, with respect to information relating to the number of shares used in
per share calculations, please see Note 1 of Notes to Consolidated Financial
Statements for an explanation of the determination of the number of shares used
in computing basic and diluted net loss per share.
<TABLE>
<CAPTION>
Nine Months Ended
Years Ended March 31, December 31,
---------------------------------------------------------- ----------------------
1995 1996 1997 1998 1999 1998 1999
---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Consolidated Statement
of Operations Data:
Total revenue........... $ 200 $ 287 $ 538 $ 5,841 $ 14,580 $ 10,400 $ 17,447
Gross profit (loss)..... 85 (71) 68 471 4,256 2,967 5,700
Loss from operations.... (742) (2,455) (3,826) (6,085) (5,206) (3,319) (3,391)
Net loss................ (849) (2,759) (4,506) (7,429) (7,373) (4,869) (5,582)
Basic and diluted net
loss per share......... (.08) (.25) (.40) (.66) (.63) (.42) (.46)
Shares used in
computation of net
losses per share, basic
and diluted............ 11,249,500 11,249,500 11,249,500 11,249,500 11,642,200 11,489,400 12,076,500
</TABLE>
<TABLE>
<CAPTION>
December 31, 1999
-------------------------------
Pro Forma
Actual Pro Forma As Adjusted
-------- --------- -----------
<S> <C> <C> <C>
Consolidated Balance Sheet Data:
Working capital (deficit)....................... $ 2,069 $(4,181) $41,497
Total assets.................................... 18,676 12,426 58,104
Total liabilities............................... 43,716 20,771 20,771
Total stockholders' equity (deficit)............ (25,040) (8,345) 37,332
</TABLE>
At December 31, 1999, the amount of indebtedness owed to Odetics was $37.6
million. Upon completion of this offering, Odetics will contribute to our
capital approximately $12.9 million in the form of cancellation of
indebtedness, which is reflected in the pro forma column. Also upon completion
of this offering, we will pay Odetics $10.0 million from the proceeds of this
offering and enter into a promissory note payable to Odetics in the principal
amount of $14.7 million, representing the balance of our obligations to
Odetics. This promissory note will be payable in interest only for the first
year and in 16 quarterly installments of principal and interest thereafter. The
actual amount of indebtedness cancelled by Odetics will vary from the amount
reflected in the pro forma column depending on the actual total amount of
indebtedness owed to Odetics at the completion of this offering.
In addition to the anticipated transactions with Odetics described above,
the pro forma consolidated balance sheet data reflects the issuance of 433,405
shares of common stock upon conversion of the promissory note issued to
DaimlerChrysler Venture for proceeds of $3.75 million, and the recognition of a
non-cash charge of $1.45 million to interest expense (accumulated deficit) and
an offsetting credit to additional paid-in capital to give financial accounting
recognition to the beneficial conversion feature contained in the promissory
note.
The pro forma as adjusted information also gives effect to the sale of
4,173,616 shares of common stock offered by us at an assumed initial public
offering price of $12.00 per share and after deducting estimated underwriting
discounts and commissions and estimated offering expenses.
5
<PAGE>
RISK FACTORS
Risks Related to Our Business
We have a history of losses, we expect losses in the future and we may not ever
become profitable
We have incurred significant losses in all prior fiscal periods since our
formation. We incurred net losses of $5.6 million in the nine months ended
December 31, 1999, $7.4 million in fiscal 1999, $7.4 million in fiscal 1998 and
$4.5 million in fiscal 1997. We had an accumulated deficit of $29.1 million as
of December 31, 1999. We also expect to incur losses in fiscal 2000. These
losses may be substantial, and we may not ever become profitable. In addition,
we expect to significantly increase our expenses in the near-term. In
particular, we expect to incur additional expenses to establish and maintain
our own administrative functions, expand research and development and increase
marketing. Therefore, our operating results will be harmed if our revenue does
not keep pace with our expected increase in expenses or is not sufficient for
us to achieve profitability. If we do achieve profitability in any period, we
cannot be certain that we will sustain or increase profitability on a quarterly
or annual basis. If we do not achieve and sustain profitability, the trading
price of our common stock will decline.
Variations in our quarterly operating results may cause our stock price to
decline
Our quarterly operating results are unpredictable and we expect them to
continue to fluctuate in the future due to a number of factors that are often
outside of our control. If our operating results in future quarters fall below
the expectations of market analysts and investors, the trading price of our
common stock will decline. Factors that may cause our operating results to
fluctuate on a quarterly basis are:
. variations in product roll-outs, purchasing lead times and production
quantities associated with the vehicle transportation industry;
. the size and timing of significant government contracts and customer
orders;
. the long lead times and lengthy sales cycles associated with government
contracts;
. our ability to develop, introduce, market and gain market acceptance of
our products and product enhancements in a timely and cost effective
manner;
. the introduction of new products by competitors;
. our success in securing additional transportation management and
traveler information systems projects;
. product developments by competitors in the ITS industry that may be
superior to our products;
. the availability of components used in the manufacture of our products;
. changes in pricing policies of our suppliers;
. the loss of significant customers;
. delays of orders from vehicle manufacturers due to events beyond our
control;
. the revenue mix between our systems and sensors; and
. general economic and market conditions.
The success of our products depends on the willingness of vehicle manufacturers
to incorporate AutoVue into their vehicles and market AutoVue to end users and
on dealers of traffic management systems to market Vantage to transportation
agencies
We are currently selling AutoVue systems to heavy truck manufacturers for
pre-production testing and marketing AutoVue to light and medium truck and
passenger car manufacturers. The success of AutoVue
6
<PAGE>
depends on the willingness of vehicle manufacturers to incorporate AutoVue into
their vehicles. Vehicle manufacturers may incur delays during testing and may
elect to delay product introductions, or limit the scope of vehicle platforms
on which AutoVue will be offered. These events could have a substantial adverse
impact on our results of operations. In addition, there can be no assurance
that we will be able to establish relationships with vehicle manufacturers for
the installation of AutoVue. Our Vantage video vehicle detection systems are
sold primarily through independent dealers who distribute a broad range of
traffic signal control products. Since we often have no direct contact with the
end user of our products, we depend on the ability of vehicle manufacturers to
market and sell AutoVue as an attractive, safe and effective feature and on
dealers of traffic management systems to sell Vantage as an effective means of
monitoring traffic. If these third parties with whom we develop relationships
fail to successfully market our products, they may not be accepted by consumers
and our sales may decline.
Some vehicle manufacturers may require us to achieve various quality
assurance standards, including QS 9000. QS 9000 defines the fundamental quality
requirements consistent with those required by Ford Motor Company,
DaimlerChrysler AG, General Motors Corporation and other vehicle manufacturers.
Compliance with QS 9000 helps to prevent defects and reduce variations and
waste of products. If we fail to receive QS 9000 certification, vehicle
manufacturers may not purchase our systems resulting in decreased sensor
revenues which would have a negative impact on our business.
Dependence on relationships with DaimlerChrysler and Freightliner
We have entered into strategic relationships with two vehicle manufacturers
to acquire key technologies and design expertise to expedite the development of
our AutoVue systems. AutoVue incorporates technology that we jointly developed
with DaimlerChrysler and integrates proprietary technologies of both companies.
We entered into an agreement with DaimlerChrysler to serve as its exclusive
production source until July 2000 for AutoVue systems installed in Mercedes'
European heavy trucks. We have also entered into an agreement with Freightliner
for the development of an AutoVue system modified for driving and road
conditions in North America. The success of AutoVue is dependent upon the
marketing efforts of DaimlerChrysler and Freightliner. If either of our
relationships with DaimlerChrysler or Freightliner was terminated, our ability
to market AutoVue to the end user and achieve market acceptance would be
negatively impacted, which could have a material adverse effect on our
business, financial condition and operating results.
If the market for AutoVue does not develop or AutoVue is not accepted by
consumers, we will not generate anticipated revenue
The market for in-vehicle lane departure warning systems is not well
developed. Also, our AutoVue system has only recently been made available to
heavy truck manufacturers and has not yet been made widely available to
passenger car and light and medium truck manufacturers. If the market for lane
departure warning systems does not develop, our AutoVue system is not accepted
or competitors develop alternative technology that is more effective than
AutoVue, the revenue we expect to generate from the sale of our AutoVue system
will not be realized.
The success of Vantage depends on our ability to overcome significant barriers
to entry as a result of an installed base of competing products used to achieve
the same purpose
Traffic monitoring has historically been addressed by inductive loops, which
require the installation of wires beneath the roadway surface. These inductive
loops are still the primary technology used to detect
vehicles at signalized intersections. As a result, we must convince
transportation authorities that our Vantage systems are more effective vehicle
detection systems. We may have difficulty selling Vantage systems if
transportation authorities do not consider it to be an effective alternative to
inductive loops. If we are unable to convince a sufficient number of
transportation authorities to replace their current vehicle detection systems
with Vantage or install Vantage at new intersections, our sales may decline.
7
<PAGE>
Revenue from our transportation management and traveler information systems may
fluctuate due to our dependence on government contracts that often involve long
purchase cycles, competitive bidding and fixed price contracts
A significant portion of our revenue has historically been derived from
traffic management contracts with governmental agencies, either as a prime
contractor, subcontractor or supplier. Obtaining government contracts may
involve long purchase cycles, competitive bidding, qualification requirements,
performance bond requirements, delays in funding, budgetary constraints,
extensive specification development and price negotiations and milestone
requirements. Each government agency also maintains its own rules and
regulations with which we must comply and which can vary significantly among
agencies. Governmental agencies also often retain a significant portion of fees
payable upon completion of a project and collection of such fees may be delayed
for several months.
In addition, an increasing number of our government contracts are fixed
price contracts which may prevent us from recovering costs incurred in excess
of our budgeted costs. 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 such costs accurately and complete the project on a timely
basis. In the event our actual costs exceed the fixed contractual cost, we will
not be able to recover the excess costs. If we fail to properly anticipate
costs on fixed priced contracts our profit margins will decrease. Some of our
government contracts are also subject to termination or renegotiation at the
convenience of the government, which could result in a large decline in revenue
in any given quarter.
We currently have a small number of customers and if any of our customers
discontinue use of our systems and solutions, experience business difficulties
or cause us to reduce prices, our revenues may decline
A relatively small number of customers, primarily governmental agencies,
have accounted for a substantial portion of our total revenue, and the identity
of such customers has varied from period to period. Similarly, our AutoVue
systems are being marketed primarily to a small group of vehicle manufacturers.
As a result, we expect that we will continue to be dependent upon a small
number of customers for a significant portion of our total revenue for the
foreseeable future. Revenue from the Federal Highway Administration accounted
for approximately 17%, and revenue from Rockwell Collins, Inc. accounted for
approximately 13%, of our systems revenue for the year ended March 31, 1999. No
other customer accounted for 10% or more of sensors or systems revenue. Our
largest five customers, however, accounted for an aggregate of approximately
55% of our systems revenue for the year ended March 31, 1999 and 56% of our
systems revenue for the nine month period ended December 31, 1999. If any of
these significant customers experience business difficulties or choose to no
longer purchase our systems and services, it could have a material adverse
effect on our business. In addition, our customers are large established
businesses and governmental agencies that aggressively negotiate prices and
related purchase terms. If any of our customers cause us to reduce our prices,
or negotiate other terms that are unfavorable to us, our revenues may decline.
If the system and service offerings we develop for the personalized traveler
information market are not accepted by consumers, we will not generate
anticipated revenue from these offerings
The market for personalized traveler information is not well developed and
our systems and services under development to address this market are in the
early stages of development. If this market does develop, but our systems are
not well received, or if competitors develop alternative products that are more
effective or render our systems and services obsolete, we will not generate the
amount of revenues we anticipate. In addition, we cannot assure you that we
will be able to develop a cost effective means of compiling useful travel
information from remote sources or that we will be able to develop or obtain an
effective means of delivering such information to consumers, which could have a
material adverse effect on our business, financial condition and operating
results.
8
<PAGE>
If we are unable to protect our intellectual property rights, this inability
could weaken our competitive position, reduce our revenue and increase our
costs
Our success depends in large part on our proprietary technology. We rely on
a combination of patent, copyright, trademark and trade secrets,
confidentiality procedures and licensing arrangements to establish and protect
our proprietary rights. We may be required to spend significant resources to
monitor and police our intellectual property rights. We hold five U.S. patents
and various foreign patents for image recognition technologies. We also have
applied for additional patents in the United States, Australia, Canada, Europe
and Japan and may in the future file patents. Our pending patent applications
and any patent application we file in the future may not be allowed or
competitors may successfully challenge the validity or scope of issued and
pending patents.
Even if competitors develop similar technology independently which infringes
our proprietary rights, we may not be able to detect infringement and may lose
our competitive position in the market before we do so. In addition,
competitors may design around our technology or develop substantially
equivalent or superior systems to our systems. Also, the laws of some foreign
countries do not protect proprietary rights to the same extent as do the laws
of the United States.
Litigation may be necessary in the future to enforce our intellectual
property rights, to determine the validity and scope of the proprietary rights
of others, or to defend against claims of infringement or invalidity by others.
An adverse outcome in such litigation or similar proceeding 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. In
addition, the cost of addressing any intellectual property litigation claim,
both in legal fees and expenses and the diversion of management resources,
regardless of whether the claim is valid, could be significant and could have a
material adverse effect on our business. If we fail to successfully enforce our
intellectual property rights, our competitive position may be harmed.
We depend on two subcontractors to produce our AutoVue systems and single
source suppliers of components for our Vantage systems
We have outsourced the manufacture of our AutoVue systems to two independent
subcontractors. We are dependent on these subcontractors to supply all of our
current needs to support orders from heavy truck manufacturers. Our current
manufacturers of AutoVue do not have the capacity to produce all of the
expected demand for AutoVue. We will be required to engage other third parties
to manufacture expected increases in volume for AutoVue. We also subcontract
the manufacture of certain components of our Vantage systems to independent
single source suppliers. Reliance on a limited number of subcontractors'
involves several risks, including the potential inadequacy of capacity,
interruptions in the subcontractors operations and reduced control over product
quality. Production capacity constraints, interruptions of our subcontractors'
businesses or delays due to quality control will impair our ability to ship
products and will result in decreased revenue until we are able to find a
substitute subcontractor. We may not be able to find a substitute subcontractor
at reasonable prices without incurring significant delays in production. Delays
in production could inhibit our ability to fulfill purchase orders, resulting
in a decrease in sensor revenues which would have a negative impact on our
business.
Our rapid growth may strain our management, operational and financial resources
We are currently experiencing a period of significant expansion and we
anticipate that we must expand further and continue to develop our business
plan to address potential growth in our customer base and market opportunities.
Our expansion has placed, and we expect it to continue to place, a significant
strain on our management, operating systems and financial resources. Also, as
our business plan evolves, we risk distracting management away from current
operations. We cannot assure you that our current and planned facilities,
computer systems, personnel and other resources will be adequate to support our
future operations. Any strain on our management, operational and financial
resources could have a material adverse effect on our business, financial
condition and operating results.
9
<PAGE>
Acquisitions may disrupt our business and require additional financing
If appropriate opportunities present themselves, we intend to acquire
additional businesses, technologies, services or products that we believe will
help us develop and expand our business. The process of integrating an acquired
business, technology, service or product may result in operating difficulties
and expenditures which we cannot anticipate and may absorb significant
management attention that would otherwise be available for further development
of our existing business. Moreover, the anticipated benefits of any acquisition
may not be realized. Any future acquisitions of other businesses, technologies,
services or products might require us to obtain additional equity or debt
financing, which might not be available to us on favorable terms or at all, and
might be dilutive. Additionally, we may not be able to successfully identify,
negotiate or finance future acquisitions or to integrate acquisitions with our
current business. If we are unable to manage our growth effectively, it could
have a material adverse effect on our business, financial condition and
operating results.
Our success depends on our ability to attract, retain and motivate management
and other skilled employees
Our success depends to a significant extent upon the continued service of
our executive officers and other key management and technical personnel, and on
our ability to continue to attract, retain and motivate qualified personnel,
such as experienced systems, software and image processing engineers and
transportation engineers. In addition, due to the relatively recent emergence
of the ITS industry, there is a shortage of qualified personnel with
significant ITS experience or a working knowledge of the National ITS
Architecture. The competition for such qualified personnel is intense. The
experience of individual key employees and their relationships with
governmental agencies is a critical factor in securing government contracts.
The loss of the services of one or more of our executive officers or other key
personnel or our inability to recruit replacements for such personnel or to
otherwise attract, retain and motivate qualified personnel could have a
material adverse effect on our business.
We may suffer losses due to claims against our product and systems warranties
We generally warrant the continued operation and performance of our
transportation management and traveler information systems following initial
acceptance, and offer extended warranty contracts under certain circumstances.
These warranties typically include the continued operation and maintenance of
the systems, and in certain circumstances are unlimited in amount. In addition,
we may guarantee the completion of certain projects by a specified date or the
achievement of certain functional specifications. Claims on our warranties or
failures to meet any such schedule or performance requirements could result in
significant additional costs, the amount of which could exceed project profit
margins or even project revenues, which would have a negative impact on our
business.
We may incur significant development and production costs prior to recognizing
significant revenue on our AutoVue systems due to long sales and testing cycles
with vehicle manufacturers
The sale to vehicle manufacturers of AutoVue for new vehicles often requires
substantial lead times and will require us to invest heavily in producing
prototypes and conduct extensive testing before any equipment is accepted by
the vehicle manufacturer. We have little control over how long the testing may
take or what quantities will be ordered for product roll-out. Once the
manufacturer decides to include AutoVue in a new model, several years may pass
before vehicles containing AutoVue are manufactured and any revenue is
recognized. As a result, we will be required to invest heavily in establishing
and solidifying relationships with vehicle manufacturers without any
corresponding increase in revenue at that time. These expenditures could
negatively impact our profit margins, which would have a negative impact on our
business.
Potential year 2000 problems with our internal systems, our products or the
products with which our products are integrated could adversely affect our
business
Many existing computer systems and applications, and other control devices
were designed to use two digits rather than four digits to define an applicable
year. As a result, such systems and applications may be unable to recognize the
year 2000 and could fail or create erroneous results. These problems are
commonly referred to as the year 2000 problem. Through February 17, 2000, we
have not experienced any significant problems from the year 2000 issue.
10
<PAGE>
The year 2000 problem could affect the systems, transaction processing
computer applications and devices that we use to operate and monitor all major
aspects of our business, including financial systems (such as general ledger,
accounts payable, and payroll), customer services, infrastructure, master
productions scheduling, materials requirement planning, test equipment,
security systems, networks and telecommunications systems.
We estimate that Odetics has expended approximately $500,000 addressing year
2000 issues for its consolidated group, a portion of which was allocated to us.
Assuming that we have already identified our most significant year 2000 issues,
and that the plans of our third party suppliers will be fulfilled in a timely
manner without cost to us, we do not expect to incur any additional significant
costs to address year 2000 issues. We cannot be sure that these assumptions are
accurate, and actual results could differ materially from those we anticipate.
We have developed contingency plans to address the year 2000 issues that may
pose a significant risk to our on-going operations. These plans include
accelerated replacement of affected equipment and software, temporary use of
back-up equipment and software or the implementation of manual procedures to
compensate for system deficiencies. We cannot be certain that any contingency
plans implemented by us are adequate to meet our needs without materially
impacting our operations, that any such plan will be successful or that our
results of operations would not be materially and adversely affected by the
delays and inefficiencies inherent in conducting operations in an alternative
manner.
Risks Related to Our Separation from Odetics, Inc.
Our historical financial information may not be representative of our results
as a separate company
We operated as a business unit of Odetics from 1994 to 1998, and thereafter
as a subsidiary of Odetics. Accordingly, we have had no independent operating
history. Our financial results as a division of Odetics may not be
representative of what financial results would have been had we been a
separate, stand-alone company during the periods presented or be indicative of
future results. Differences in financial results may be attributable to:
. expense adjustments and allocations as a result of not being operated as
a single stand-alone business for all periods presented; and
. changes that will occur in our funding and operations as a result of our
separation from Odetics.
These differences may have a material adverse effect on our business, financial
condition and operating results.
We may incur unanticipated expenses and suffer business interruptions if
Odetics does not provide transition support services
We are currently dependent upon Odetics for significant support functions,
including operational, financial, management, administrative, information
systems and manufacturing support, as well as other resources or systems. These
functions are necessary to operate as an independent company and we may not be
able to develop these functions independently. Prior to consummation of the
offering, we will enter into a services agreement with Odetics intended to
facilitate our transition to an independent public company, pursuant to which
Odetics will continue to provide treasury, accounting, tax, internal audit,
legal and human resources services for up to 18 months following the
consummation of this offering. If Odetics does not provide the support we need
pursuant to the services agreement, we may be forced to incur additional
expenses to replace such support services and our business operations could be
interrupted. In addition, loss of access to the senior management of Odetics
could impair our ability to operate as a separate company. Unanticipated
expenses or interruptions in our operations could have a negative effect on our
business by decreasing our revenues.
Failure of representations and assumptions underlying the IRS tax ruling could
cause the spin-off not to be tax-free to Odetics or to Odetics' stockholders
and may require us to indemnify Odetics
While the tax ruling relating to the qualification of the spin-off as a tax-
free distribution within the meaning of Section 355 of the Internal Revenue
Code of 1986, as amended (the "Code"), generally is binding
11
<PAGE>
on the IRS, the continuing validity of the tax ruling is subject to certain
factual representations and assumptions. We are not aware of any facts or
circumstances that would cause such representations and assumptions to become
untrue.
If the spin-off were not to qualify as a tax-free distribution within the
meaning of Section 355 of the Code, Odetics would recognize taxable gain
generally equal to the amount by which the fair market value of the Iteris
common stock distributed to Odetics' stockholders exceeded the tax basis in our
assets. In addition, the distribution of our common stock to each Odetics
stockholder would generally be treated as taxable to such stockholder in an
amount equal to the fair market value of the Iteris common stock they receive.
If the spin-off qualified as a distribution under Section 355 of the Code
but was disqualified as tax-free to Odetics because of certain post-spin-off
circumstances (such as an acquisition of Iteris), Odetics would recognize
taxable gain as described above, but the distribution of our common stock in
the spin-off would generally be tax-free to each Odetics stockholder.
The Tax Allocation Agreement provides that we will indemnify Odetics for any
taxes imposed on and other amounts paid by Odetics, its agents and
representatives or its stockholders as a result of the failure of the spin-off
to qualify as a tax-free distribution within the meaning of Section 355 of the
Code if the failure or disqualification is caused by certain post-spin-off
actions by or with respect to us (including our subsidiaries) or our
stockholders. For example, the acquisition of Iteris by a third party during
the two-year period following the spin-off could cause such a failure or
disqualification. If any of the taxes or other amounts described above were to
become payable by us, the payment could have a material adverse effect on our
business, results of operations, financial position, and cash flow and could
exceed our net worth by a substantial amount. See "Arrangements with Odetics--
Tax Allocation Agreement."
We will incur significant costs in connection with our separation from Odetics
Our obligations to Odetics, which consisted of advances from Odetics to
support our working capital requirements, fund our operating losses and support
acquisition activities, were approximately $37.6 million as of December 31,
1999. Upon completion of this offering Odetics will contribute to our capital
approximately $12.9 million to us in the form of cancellation of indebtedness,
we will pay Odetics $10.0 million from the proceeds of this offering and we
will enter into a promissory note payable to Odetics in the principal amount of
$14.7 million, representing the balance of our existing obligations to Odetics.
We have also entered into a services agreement under which we are obligated to
pay Odetics for services rendered at a rate consistent with amounts charged by
Odetics to us in prior periods. We will also incur expenses to develop our own
treasury, accounting, tax, internal audit, legal and human resources services.
These expenses may be substantial and may adversely impact our results of
operations.
Risks Related to Our Industry
Failure to develop technologies to adapt to new technological advancements in
the ITS industry could harm our business
The ITS industry has been subject to fundamental changes recently reflecting
the adoption of the National ITS Architecture and the overburdening of the
existing transportation infrastructure. Our ability to remain competitive will
depend in part on our ability to develop systems and solutions that incorporate
the new standards and advanced traffic management technologies. In addition,
since our AutoVue and Vantage systems are currently based on image recognition
technology, any change in such capabilities or the emergence and acceptance of
any new technologies may require us to incur substantial unanticipated costs to
incorporate technologies. In addition, the introduction of a new, non-intrusive
technology to address vehicle detection could replace video as a leading
alternative to inductive loops. We may not be able to develop or obtain the
technology necessary to address these changes in a timely manner or at all. Our
inability to modify our systems and solutions to reflect changes in technology
on a timely and cost-effective basis, or at all, could have a material adverse
effect on our business.
12
<PAGE>
New product introductions and pricing strategies by our competitors could
adversely affect our ability to sell our systems and solutions and could result
in pressure to price our systems and solutions in a manner that reduces our
margins
Competitive pressures could prevent us from growing, obtaining market share
or require us to reduce prices on our systems and solutions, any of which could
harm our business. Many of our current and potential competitors have longer
operating histories, greater name recognition, access to larger customer bases
and significantly greater financial, technical, manufacturing, distribution and
marketing resources than we do. As a result, they may be able to adapt more
quickly to new or emerging standards of technologies or to devote greater
resources to the promotion and sale of their products than we can. Accordingly,
it is possible that new competitors or alliances among competitors could emerge
and rapidly acquire significant market share, resulting in price reductions,
reduced margins and greater operating losses, any of which could materially and
adversely affect our business.
AutoVue lane departure warning systems
While we believe that AutoVue is the only commercially-available lane
departure warning system currently available, potential competitors, including
Delphi Automotive Systems Corporation domestically, NEC Corporation and Hitachi
Ltd. in Japan and Robert Bosch Gmbh in Europe are currently developing video
sensor technology for the vehicle transportation industry that could be used
for lane departure warning systems.
Vantage vehicle detection systems
In the market for vehicle detection systems, we compete with both
manufacturers of "above ground" video camera detection systems, such as Image
Sensing Systems, Inc., Econolite Control Products, Inc. and the Peek Traffic
Systems division of Thermo Electron Corporation, 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. These competitors may offer products that offer more functions
at less expensive prices.
Traffic management and traveler information systems
The intelligent transportation management and traveler information systems
market is highly fragmented and characterized by rapidly changing technology
and evolving national and regional technical standards. Our competitors vary in
number, scope and breadth of the products and services they offer. Our
competitors in advanced management and traveler information systems include
corporations like Transcore, Lockheed Martin Corporation, PB Farradyne Inc.,
Kimley-Horn and Associates, Inc., TRW, Inc. and National Engineering
Technology, Inc. Our competitors in transportation engineering, planning and
design include major firms like Parsons Brinkerhoff, Inc. and Parsons
Transportation Group Inc., as well as many regional engineering firms.
We could incur significant losses as a result of product liability claims
We face an inherent business risk of exposure to product liability claims in
the event that our systems and solutions malfunction resulting in personal
injury or death. We may be named in these actions even if there is no evidence
our systems and solutions caused the accident. Product liability claims could
result in significant losses as a result of expenses incurred in defending
claims and as a result of damage awards. The sale of systems and solutions for
the vehicle transportation industry entails a high risk of such claims. In
addition, if any of our systems prove to be defective, we may be required to
participate in a recall involving such systems, or due to various industry or
business practices or the need to maintain good customer relationships, may be
placed in a position whereby we may voluntarily initiate a recall or make
payments related to such claims. We currently maintain product liability
insurance. However, there can be no assurance that product liability claims
will be covered by such insurance, that such claims will not exceed insurance
coverage limits or that such insurance will continue to be available on
commercially reasonable terms, if at all. Any product liability claim brought
against us could have a material adverse effect on our reputation and business.
13
<PAGE>
Our ability to expand into international markets is limited by regulatory,
cultural, economic and other differences
We intend to expand our international marketing and sales efforts. If our
international sales increase, we will be subject to additional risks inherent
in international operations. These risks include:
. adapting our products to foreign road conditions and regulations;
. longer buying cycles associated with sales to foreign governments;
. imposition of governmental controls;
. performance bond requirements;
. challenges related to cultural differences, including language barriers;
. exposure to different legal standards, particularly with respect to
government contracting requirements and intellectual property;
. burdens of complying with a variety of foreign laws and trade
restrictions;
. currency exchange fluctuations;
. unexpected changes in regulatory requirements;
. foreign technical standards;
. political, social and economic instability;
. changes in tariffs;
. difficulties in staffing and managing international operations;
. potentially adverse tax consequences; and
. difficulties in finding and managing local dealers.
While substantially all of our international sales to date have been
denominated in U.S. dollars, some foreign countries may experience dramatic
currency devaluation, stock price declines and general market instability,
leading to significant economic problems in the affected region. As a result,
an increase in the value of the U.S. dollar relative to foreign currencies
could make our systems and solutions less competitive in international markets.
These risks may limit our ability to expand into international markets
successfully or require us to modify significantly our current business
practices.
Risks Related to This Offering
The liquidity of our common stock is uncertain since it has not been publicly
traded
There has not been a public market for our common stock. We cannot predict
the extent to which investor interest in our company will lead to the
development of an active, liquid trading market. Active trading markets
generally result in lower price volatility and more efficient execution of buy
and sell orders for investors. The price of our common stock that will prevail
in the market after this offering may be lower than the price you pay. The
initial public offering price for the shares will be determined by negotiations
between us and the representatives of the underwriters and may not be
indicative of prices that will prevail in the trading market.
Since we have broad discretion in how we use the proceeds from this offering,
we may use some of the proceeds in ways with which you disagree
We have not allocated specific amounts of the net proceeds from this
offering for any specific purpose other than repayment of a portion of our debt
to Odetics. Accordingly, our management will have significant discretion in
applying the net proceeds of this offering. The failure of our management to
use such funds effectively could have a material adverse effect on our
business, financial condition and operating results.
14
<PAGE>
Our need for additional financing is uncertain as is our ability to raise
further financing, if required
We currently anticipate that our available cash resources combined with the
net proceeds from this offering will be sufficient to meet our anticipated
working capital and capital expenditure requirements for at least two years
after the date of this prospectus. We may need to raise additional funds,
however, to respond to business contingencies which may include the need to:
. fund more rapid expansion;
. fund additional marketing expenditures;
. enhance our operating infrastructure;
. respond to competitive pressures; or
. acquire complementary businesses or technologies.
We cannot assure you that additional financing will be available on terms
favorable to us, or at all. If adequate funds are not available or are not
available on acceptable terms, our ability to fund our operations, take
advantage of opportunities, develop systems or solutions or otherwise respond
to competitive pressures could be significantly limited.
Future financing could adversely affect your ownership interest and rights in
comparison with those of other shareholders
If additional funds are raised through the issuance of equity or convertible
debt securities, the percentage ownership of our stockholders will be reduced,
and these newly issued securities may have rights, preferences or privileges
senior to those of existing stockholders, including you.
Future sales of our common stock could cause our stock price to decline
The market price for our common stock could drop as a result of sales of a
large number of shares of common stock in the market after the offering or the
perception that such sales could occur. These factors also could make it more
difficult for us to raise funds through future offerings of common stock.
There will be 16,666,667 shares of common stock outstanding immediately
after this offering. The shares sold in this offering will be freely
transferable without restriction or further registration under the Securities
Act. In connection with the offering all current stockholders and substantially
all of our option holders have agreed that, with certain exceptions, they will
not sell any shares of common stock or enter into similar transactions for 180
days after the date of this prospectus without the consent of Bear, Stearns &
Co. Inc. Similarly, all shares of our common stock distributed to stockholders
of Odetics, Inc. will not be transferable for 180 days after the date of this
prospectus. After the expiration of the 180 day period, all shares of common
stock will be freely transferable, subject to volume and other restrictions on
shares held by affiliates or held for less than two years, and additional
shares of common stock issued upon exercise of options granted under our stock-
based compensation plans will be available for sale in the public market.
Future sales of our common stock could cause our stock price to decline. See
"Shares Eligible For Future Sale."
New investors will suffer immediate and substantial dilution in the tangible
net book value of their shares
We expect the initial public offering price to be substantially higher than
the net tangible book value per share of the common stock. The pro forma net
tangible book value of a share of common stock purchased at an assumed initial
public offering price of $12.00 per share will be only $1.70. You may incur
additional dilution if holders of stock options, whether currently outstanding
or granted after the closing of this offering, exercise their options to
purchase common stock.
15
<PAGE>
Provisions in our charter documents may make an acquisition of us more
difficult
Provisions of our Certificate of Incorporation and Bylaws, as well as
provisions under Delaware law, could make it more difficult for a third party
to acquire us, even if doing so would be beneficial to stockholders. See
"Description of Capital Stock."
Additional Information on Risk Factors
The following disclaimers pertain to and should be read in conjunction with
the risk factors discussed above. These disclaimers further explain the effect
that the occurence of these risks may have on your investment:
. An investment in our common stock involves a high degree of risk.
. You should carefully consider the risks described above and the other
information contained in this prospectus before deciding to invest in
our common stock.
. The risks described above are not the only ones facing our company.
. Additional risks not presently known to us or which we currently
consider immaterial may also adversely affect our company.
. If any of these risks actually occur, our business, financial condition
and operating results could be materially adversely affected. In such
case, the trading price of our common stock could decline, and you could
lose part or all of your investment.
FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements that involve risks and
uncertainties. Forward-looking statements generally can be identified by the
use of forward-looking terminology such as "believes," "expects," "may,"
"will," "intends," "plans," "should," "seeks," "pro forma," "anticipates,"
"estimates," "continues," or other variations thereof, including their use in
the negative, or by discussions of strategies, opportunities, plans or
intentions. Such statements include but are not limited to statements under the
captions "Risk Factors," "Use of Proceeds," "Management's Discussion and
Analysis of Financial Condition and Results of Operations," and "Business." A
number of factors could cause results to differ materially from those
anticipated by such forward-looking statements, including those discussed under
"Risk Factors" and "Business" and elsewhere in this prospectus.
In addition, such forward-looking statements are necessarily dependent upon
assumptions and estimates that may prove to be incorrect. Although we believe
that the assumptions and estimates reflected in such forward-looking statements
are reasonable, we cannot guarantee that our plans, intentions or expectations
will be achieved. The information contained in this prospectus, including the
section discussing risk factors, identifies important factors that could cause
such differences.
The cautionary statements made in this prospectus are intended to be
applicable to all related forward-looking statements wherever they appear in
this prospectus. We assume no obligation to update such forward-looking
statements or to update the reasons why actual results could differ materially
from those anticipated in such forward-looking statements.
16
<PAGE>
USE OF PROCEEDS
The net proceeds we will receive from the sale of the 4,173,616 shares of
common stock offered at an assumed public offering price of $12.00 per share by
us are estimated to be approximately $45.7 million, $52.9 million if the
underwriters' over-allotment option is exercised in full, after deducting the
underwriting discounts and commissions and the estimated offering expenses
payable by us.
We currently intend to use the proceeds of this offering to:
. repay $10.0 million of debt payable to Odetics;
. expand our sales and marketing activities;
. fund acquisitions or investments in businesses, products, services or
technologies complementary to our business;
. provide working capital; and
. fund other general corporate expenses.
Upon consummation of this offering, we will enter into a promissory note
payable to Odetics representing the balance of our obligations to Odetics,
which will be $14.7 million after payment of $10.0 million from the proceeds of
this offering and the cancellation of an estimated $12.9 million of debt that
will be treated as a contribution to our capital. This note will accrue
interest at the lowest rate charged to Odetics from time to time by its
principal lender, which was 10.5% at December 31, 1999, and will be payable in
interest only for the first year and 16 quarterly installments of principal and
interest thereafter. Portions of the proceeds from this offering will be used
to make payments under this promissory note. All obligations payable to Odetics
consist of advances from Odetics for services and support provided to us by
Odetics and for working capital requirements, to fund our operating losses and
support acquisition activities.
We have not yet determined the amount of expenditures for sales and
marketing activities, acquisitions or investments, or for working capital and
other general corporate purposes, and thus cannot estimate the amounts to be
used for each purpose. The amounts and timing of these expenditures will vary
significantly depending on a number of factors, including, but not limited to,
the amount of cash generated by our operations. Accordingly, our management
will retain broad discretion as to the allocation of the net proceeds of this
offering. Also, we currently have no specific agreements or commitments and are
not currently engaged in any negotiations with respect to any significant
acquisitions or investments.
Pending the above uses, we intend to invest the net proceeds of this
offering in interest-bearing investment grade securities, including taxable
securities such as governmental securities, asset-backed securities, corporate
bonds and certificates of deposit and tax exempt securities such as municipal
bonds and notes.
DIVIDEND POLICY
We have never paid cash dividends on our common stock. We currently
anticipate that we will retain earnings, if any, to support operations and to
finance the growth and development of our business and do not anticipate paying
cash dividends in the foreseeable future. Declaration or payment of future
dividends, if any, will be at the discretion of our board of directors after
taking into account various factors, including our financial condition,
operating results, current and anticipated cash needs and plans for expansion.
17
<PAGE>
CAPITALIZATION
The following table sets forth our capitalization as of December 31, 1999,
. on an actual basis;
. on a pro forma basis to reflect:
. the payment of $10.0 million to Odetics that will be paid from the
proceeds of this offering;
. the cancellation of $12.9 million of debt. This amount is an
estimate of the amount of indebtedness in excess of $14.7 million
that will be payable under a promissory note to Odetics after the
payment of $10.0 million to Odetics paid from the proceeds of this
offering. The actual amount of indebtedness cancelled by Odetics
will vary depending on the actual amount of indebtedness owed to
Odetics at the completion of the offering; and
. the issuance of 433,405 shares of common stock upon conversion of
the promissory note issued to DaimlerChrysler Venture for proceeds
of $3.75 million, and the recognition of a non-cash charge of $1.45
million to interest expense (accumulated deficit) and an offsetting
credit to additional paid-in capital to give financial accounting
recognition to the beneficial conversion feature contained in the
promissory note.
. on a pro forma basis as adjusted to reflect the sale of 4,173,616 shares
of common stock being offered by us at an assumed initial public
offering price of $12.00 per share, and after deducting estimated
underwriting discounts and commissions and estimated offering expenses
payable by us.
This information should be read in conjunction with our financial statements
and the notes relating to those statements appearing elsewhere in this
prospectus.
<TABLE>
<CAPTION>
December 31, 1999
----------------------------------------
Pro Forma
Actual Pro Forma As Adjusted
----------- ----------- --------------
(in thousands, except share data)
<S> <C> <C> <C>
Obligation payable to Odetics.......... $ 37,645 $ 14,700 $ 14,700
Other debt............................. 12 12 12
----------- ----------- ----------
Total debt............................. 37,657 14,712 14,712
----------- ----------- ----------
Stockholders' equity (deficit):
Preferred Stock, $.001 par value;
5,000,000 shares authorized; no
shares issued and outstanding....... -- -- --
Common Stock, $.001 par value,
40,000,000 shares authorized; shares
issued and outstanding: 12,060,000
actual, 12,493,000 pro forma and
16,666,667 pro forma as
adjusted(1)(2)...................... 1 1 6
Additional paid-in capital(2)........ 4,039 22,184 67,856
Accumulated deficit.................. (29,080) (30,530) (30,530)
----------- ----------- ----------
Total stockholders' equity
(deficit)......................... (25,040) (8,345) 37,332
----------- ----------- ----------
Total capitalization............... $ 12,617 $ 6,367 $ 52,044
=========== =========== ==========
</TABLE>
- --------
(1) Excludes 2,631,000 shares of common stock issuable upon the exercise of
options outstanding with a weighted average exercise price of $2.02 per
share. 773,000 of these options were exercisable as of December 31, 1999
and the balance are subject to future vesting requirements.
(2) The conversion of the DaimlerChrysler Venture promissory note is subject to
adjustment if the price per share of common stock differs from $12.00 or
the number of shares sold by us in this offering changes.
18
<PAGE>
DILUTION
Our pro forma net tangible book value as of December 31, 1999, was ($17.4
million) or ($1.39) per share of common stock. Pro forma net tangible book
value per share is equal to our pro forma total tangible assets less pro forma
total liabilities, divided by the pro forma number of shares of common stock
outstanding on December 31, 1999. Assuming the sale by us of 4,173,616 shares
of common stock at an initial public offering price of $12.00 per share and
after deducting the underwriting discount and commissions and the estimated
offering expenses payable by us, our pro forma net tangible book value at
December 31, 1999 would have been $28.3 million, or $1.70 per share of common
stock. This represents an immediate increase in pro forma net tangible book
value of $3.09 per share to existing stockholders and an immediate dilution of
$10.30 per share to new investors. The following table illustrates this per
share dilution.
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share............... $ 12.00
Pro forma net tangible book value per share as of December
31, 1999................................................... $(1.39)
Increase in pro forma net tangible book value attributable
to new investors........................................... 3.09
------
Pro forma net tangible book value per share after this
offering..................................................... $ 1.70
--------
Dilution per share to new investors........................... $ 10.30
========
</TABLE>
The following table summarizes the total number of shares of common stock
purchased from us, the pro forma total consideration paid to us and the pro
forma average price per share paid by existing stockholders, by DaimlerChrysler
and by new investors purchasing shares in this offering.
<TABLE>
<CAPTION>
Shares Purchased(1) Total Consideration(2)
--------------------- -------------------------- Average Price
Number Percent Amount Percent Per Share
------------ -------- --------------- ---------- --------------
<S> <C> <C> <C> <C> <C>
Existing stockholders... 12,059,646 72.4% $ 16,985,000 24.0% $ 1.41
DaimlerChrysler......... 433,405 2.6 3,750,000 5.3 8.65
New investors........... 4,173,616 25.0 50,083,000 70.7 12.00
------------ ------- -------------- --------
Total................... 16,666,667 100.0% $ 70,818,000 100.0%
============ ======= ============== ========
</TABLE>
- --------
(1) Excludes 2,631,000 shares of common stock issuable upon exercise of options
outstanding as of December 31, 1999 at a weighted average exercise price of
$2.02 per share. 773,000 of these options were exercisable as of December
31, 1999 and the balance are subject to future vesting requirements. To the
extent options are exercised, there will be further dilution to new
investors.
(2) Does not reflect any deductions for commissions or expenses paid or
incurred in connection with the issuance of such shares of common stock.
Pro forma net tangible book value is comprised of our historical net
tangible book value at December 31, 1999 plus the assumed contribution to
capital of $12.9 million by Odetics through forgiveness of amounts due to
Odetics and the assumed sale of 433,405 shares of common stock to
DaimlerChrysler for total proceeds of $3.75 million. The pro forma transactions
are expected to occur immediately prior to the closing of the sale of shares to
new investors pursuant to this prospectus. On a historical basis, Net tangible
book value per share, dilution to new investors, and total consideration paid
by existing stockholders are $(2.83), $11.29, and $4,040,000, respectively.
19
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The following consolidated selected financial data as of March 31, 1998 and
1999 and December 31, 1999 and for each of the years ended March 31, 1997, 1998
and 1999 and the nine months ended December 31, 1999 has been derived from our
consolidated financial statements audited by Ernst & Young LLP, independent
auditors, included elsewhere in this prospectus. Selected consolidated
financial data as of March 31, 1995, 1996 and 1997 and for each of the years
ended March 31, 1995 and 1996 has been derived from our unaudited consolidated
financial statements not included in this prospectus. Selected consolidated
financial data as of and for the nine months ended December 31, 1998 has been
derived from our unaudited consolidated financial statements for such period
included elsewhere in this prospectus. The unaudited financial information
includes adjustments, consisting only of normal recurring adjustments, that we
consider necessary for a fair presentation of this information in accordance
with generally accepted accounting principles. The consolidated statement of
operations data for the nine month period ended December 31, 1999 are not
necessarily indicative of the results to be expected for the full fiscal year
ending March 31, 2000 or any future period. The following data should be read
in conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and our consolidated financial statements
and related notes included elsewhere in this prospectus.
<TABLE>
<CAPTION>
Nine Months Ended
Years Ended March 31 December 31
---------------------------------------------------------- ----------------------
1995 1996 1997 1998 1999 1998 1999
---------- ---------- ---------- ---------- ---------- ---------- ----------
(in thousands, except share and per share data)
<S> <C> <C> <C> <C> <C> <C> <C>
Consolidated Statement
of Operations Data:
Revenue:
Sensors................ $ 200 $ 287 $ 538 $ 1,607 $ 4,339 $ 3,051 $ 5,880
Systems................ 0 0 0 4,234 10,241 7,349 11,567
---------- ---------- ---------- ---------- ---------- ---------- ----------
Total revenue........ 200 287 538 5,841 14,580 10,400 17,447
Cost of sales:
Sensors................ 115 358 470 2,555 3,129 2,342 3,282
Systems................ 0 0 0 2,815 7,195 5,091 8,465
---------- ---------- ---------- ---------- ---------- ---------- ----------
Total cost of sales.. 115 358 470 5,370 10,324 7,433 11,747
Gross profit:
Sensors................ 85 (71) 68 (948) 1,210 709 2,598
Systems................ 0 0 0 1,419 3,046 2,258 3,102
---------- ---------- ---------- ---------- ---------- ---------- ----------
Total gross profit... 85 (71) 68 471 4,256 2,967 5,700
Operating expenses:
Research and
development........... 652 1,269 2,378 2,037 2,152 1,441 2,498
Selling, general and
administrative........ 160 1,055 1,411 3,414 5,729 3,844 4,717
Charges allocated by
Odetics............... 15 60 105 458 881 562 1,057
Other expenses......... 0 0 0 647 700 439 819
---------- ---------- ---------- ---------- ---------- ---------- ----------
Loss from operations.... (742) (2,455) (3,826) (6,085) (5,206) (3,319) (3,391)
Interest charge
allocated by Odetics... 107 304 680 1,344 2,167 1,550 2,191
---------- ---------- ---------- ---------- ---------- ---------- ----------
Loss before income
taxes.................. (849) (2,759) (4,506) (7,429) (7,373) (4,869) (5,582)
Income taxes............ 0 0 0 0 0 0 0
---------- ---------- ---------- ---------- ---------- ---------- ----------
Net loss................ $ (849) $ (2,759) $ (4,506) $ (7,429) $ (7,373) $ (4,869) $ (5,582)
========== ========== ========== ========== ========== ========== ==========
Net loss per share,
basic and diluted...... $ (0.08) $ (0.25) $ (0.40) $ (0.66) $ (0.63) $ (0.42) $ (0.46)
========== ========== ========== ========== ========== ========== ==========
Shares used in
computation of net loss
per share, basic and
diluted................ 11,249,500 11,249,500 11,249,500 11,249,500 11,642,200 11,489,400 12,076,500
<CAPTION>
As of March 31, As of December 31,
---------------------------------------------------------- ----------------------
1995 1996 1997 1998 1999 1998 1999
---------- ---------- ---------- ---------- ---------- ---------- ----------
(in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Consolidated Balance
Sheet Data:
Working capital
(deficit).............. $ (1,431) $ 481 $ (672) $ (3,315) $ (96) $ (192) $ 2,069
Total assets............ 0 576 1,675 11,433 17,482 15,442 18,676
Total liabilities....... 1,431 4,766 10,371 27,557 36,711 31,984 43,716
Total stockholders'
equity (deficit)....... (1,431) (4,190) (8,696) (16,124) (19,229) (16,542) (25,040)
</TABLE>
20
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with our
financial statements and notes included elsewhere in this prospectus. This
prospectus contains forward-looking statements that involve risks and
uncertainties. Our actual results could differ materially from those discussed
in such forward-looking statements. Factors that could cause or contribute to
such differences include those discussed below and in "Risk Factors" and
"Business."
Overview
We design, develop, market and implement software based solutions which
improve the safety and efficiency of vehicle transportation. Our current
customers include federal, state, and other public agencies as well as vehicle
manufacturers from which we have limited revenue. We currently operate in two
business segments: sensors and systems. Our sensors segment has historically
consisted of our Vantage video vehicle detection systems and more recently our
AutoVue lane departure warning system. Our systems segment consists of our
transportation management and traveler information systems. For the fiscal
years ended March 31, 1998 and 1999 and the nine months ended December 31, 1998
and 1999, approximately 66% to 72% of our total revenue has been derived from
our systems segment. However, with the recent introduction of AutoVue and with
the continued growth of Vantage, we expect that revenue from our sensors
segment will represent an increasing percentage of total revenue.
We began as a division of Odetics, Inc. in 1994 and incorporated as a
subsidiary of Odetics in October 1998. Odetics currently owns approximately 93%
of our outstanding common stock. Immediately prior to this offering, Odetics
will distribute all of its shares of our common stock to its stockholders in a
tax-free spin-off. During the periods presented and through the period prior to
the spin-off, we have been charged by Odetics for expenses allocable to our
business and interest on debt owed to Odetics. Concurrent with the spin-off, we
will enter into a services agreement with Odetics for the provision of
treasury, accounting, tax, audit, legal and human resources services, which
will be charged to us on terms consistent with past practices.
Prior to June 1997, our revenue consisted solely of sales from our Vantage
systems. In June 1997, we acquired certain assets from the transportation
systems business of Rockwell, which expanded our product offerings to include
transportation systems consulting and design services. The acquisition of
assets from Rockwell also provided us with some of the technologies for the
AutoVue system. We further augmented our transportation management and traveler
information systems design and consulting capabilities with the acquisition of
Meyer Mohaddes Associates, Inc. in October 1998, and the acquisition of the
assets of Viggen Corporation in January 1999.
Revenue from the sale of sensors and the related costs of sales are
generally recognized on the date of shipment. Systems revenue is derived
primarily from long-term contracts with government agencies. Systems 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. Revenue from follow-on service and
support after installation is recognized when earned.
In our sensors business we design, assemble and test components of Vantage
and subcontract the manufacturing of AutoVue. As a result, cost of sales for
sensors include subassemblies purchased from outside sources, related
manufacturing overhead and direct labor. Our systems business is labor
intensive and often involves a significant amount of custom software
development. As a result, cost of sales for systems consists primarily of
wages, overhead and subcontracting costs. We do not manufacture or procure any
of the hardware components used in the systems that we design and implement.
Our operating expenses are comprised of:
. research and development, which consist primarily of wages,
subcontracting expenses, prototype materials and related overhead costs
to support new systems development for AutoVue and Vantage;
21
<PAGE>
. selling, general and administrative, which consist primarily of wages
and related benefits, advertising and promotional expenses and travel
expenses;
. charges allocated by Odetics, which consist of accounting, auditing,
payroll processing, treasury functions, administration of employee
incentive programs, marketing support, facilities and facilities
management, certain legal services, insurance costs and other
miscellaneous expenses; and
. other expenses, which primarily consists of goodwill amortization and
non-recurring charges.
Our operating expenses have increased significantly in recent periods as a
result of business acquisitions and growth in both our sensors and systems
segments. We expect our operating expenses to continue to increase to support
growth and as we separate from Odetics.
We also pay interest charges on debt we owe to Odetics. Odetics has
historically advanced funds to meet our capital requirements and charged
interest on the resulting intercompany account balance using Odetics' cost of
the related borrowed funds, which was 10.5% at December 31, 1999.
Income tax expenses for each member of the Odetics consolidated group has
been allocated only to companies in the group with separate taxable income. As
of the date of our separation we will not have received any taxable benefit for
our accumulated losses. We expect to derive benefit from taxable losses
incurred in the future and will incur liabilities for future taxable income.
We have incurred net operating losses and negative cash flows since our
inception. To date, our losses and working capital needs have been funded by
Odetics. We expect to continue to incur net losses and negative cash flows as
we seek to grow our business and implement our strategy.
Results of Operations
The following table sets forth certain statements of operations data
expressed as a percentage of total revenue for the periods indicated, except
for cost of sales and gross profit, which are each expressed as a percentage of
the corresponding segment revenue.
<TABLE>
<CAPTION>
Nine Months
Years Ended March 31 Ended December 30
----------------------------- -----------------
1997 1998 1999 1998 1999
-------- -------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Revenue:
Sensors.................. 100.0 % 27.5 % 29.8 % 29.3 % 33.7 %
Systems.................. 0.0 72.5 70.2 70.7 66.3
-------- -------- ------- ------- -------
Total revenue.......... 100.0 100.0 100.0 100.0 100.0
Cost of sales:
Sensors.................. 87.4 159.0 72.1 76.8 55.8
Systems.................. 0.0 66.5 70.3 69.3 73.2
Total costs of sales... 87.4 91.9 70.8 71.5 67.3
Gross profit:
Sensors.................. 12.6 (59.0) 27.9 23.2 44.2
Systems.................. 0.0 33.5 29.7 30.7 26.8
Total gross profit..... 12.6 8.1 29.2 28.5 32.7
Operating expenses:
Research and
development............. 442.0 34.9 14.8 13.9 14.3
Selling, general and
administrative.......... 262.3 58.4 39.3 37.0 27.0
Charges allocated by
Odetics................. 19.5 7.8 6.0 5.4 6.1
Other expenses........... 0.0 11.1 4.8 4.2 4.7
-------- -------- ------- ------- -------
Loss from operations....... (711.2) (104.1) (35.7) (32.0) (19.4)
Interest charges
allocated by Odetics.... 126.4 23.0 14.9 14.9 12.6
-------- -------- ------- ------- -------
Loss before income taxes... (837.6) (127.1) (50.6) (46.9) (32.0)
Income tax expense....... 0.0 0.0 0.0 0.0 0.0
-------- -------- ------- ------- -------
Net loss................... (837.6)% (127.1)% (50.6)% (46.8)% (32.0)%
======== ======== ======= ======= =======
</TABLE>
22
<PAGE>
Nine Months Ended December 31, 1999 Compared with Nine Months Ended December
31, 1998
Total Revenue. Total revenue increased by 67.8% to $17.4 million for the
nine months ended December 31, 1999 from $10.4 million for the nine months
ended December 31, 1998.
Sensors revenue increased by 92.7% to $5.9 million for the nine months ended
December 31, 1999 from $3.1 million for the nine months ended December 31,
1998. Vantage sales comprised approximately 92% of sensors revenues in the nine
months ended December 31, 1999 with the remainder comprised of sales of
AutoVue. The increase primarily represented increased sales as a result of
growth in our installed user base.
Systems revenue increased by 57.4% to $11.6 million for the nine months
ended December 31, 1999 from $7.4 million for the nine months ended December
31, 1998. Included in the 1999 period was $4.5 million of systems revenue from
the acquisitions of Meyer Mohaddes and of Viggen, and included in the 1998
period was $1.6 million of revenue derived from a contract with the City of
Jinan, China. Excluding these items, systems revenue increased $1.3 million due
to a general increase in systems activity. Approximately 54% of our systems
revenue was derived from cost plus fee contracts, with the remainder
represented by fixed price contracts.
Gross Profit. Total gross profit increased to $5.7 million, or 32.7% of
total revenue, for the nine months ended December 31, 1999 from $3.0 million,
or 28.5% of total revenue, for the nine months ended December 31, 1998.
Gross profit from sensors revenue increased to $2.6 million, or 44.2% of
sensors revenue, for the nine months ended December 31, 1999 from $709,000 or
23.2% of sensors revenue, for the nine months ended December 31, 1998. The
increase in gross profit on sensors revenue reflected increased sales of
Vantage and improved absorption of manufacturing overhead. In addition,
improved gross profit performance reflected the benefits of Vantage cost
reduction efforts.
Gross profit from systems revenue increased to $3.1 million, or 26.8% of
systems revenue, for the nine months ended December 31, 1999 from $2.3 million,
or 30.7% of systems revenue, for the nine months ended December 31, 1998. The
dollar increase in gross profits of systems revenue reflected the 57.4%
increase in systems revenue in the nine months ended December 31, 1999. The
decline in gross profit as a percentage of systems revenue reflected the lower
relative gross profits of contracts acquired as part of the acquisition of
Meyer Mohaddes and of Viggen as well as lower gross profit from certain fixed
priced contracts during the nine months ended December 31, 1999.
Research and Development Expenses. Research and development expenses
increased by 73.4% to $2.5 million, or 14.3% of total revenue, for the nine
months ended December 31, 1999 from $1.4 million, or 13.9% of total revenue,
for the nine months ended December 31, 1998. Research and development expenses
reflected new product development to support AutoVue and Vantage. These two
development programs consumed approximately equal levels of research and
development expenses in the nine months ended December 31, 1998. The increase
in research and development expenses in the nine months ended December 31, 1999
primarily reflected a 178% increase in expenses to support AutoVue development
as we continued to enhance performance, add features and functionality and
improve packaging, which was partially offset by reduced expenses for
development of Vantage.
Selling, General and Administrative Expenses. Selling, general, and
administrative expenses increased by 22.7% to $4.7 million, or 27.0% of total
revenue, for the nine months ended December 31, 1999 from $3.8 million, or
37.0% of total revenue, for the nine months ended December 31, 1998. The
acquisitions of Meyer Mohaddes and of Viggen constituted approximately $730,000
of the increase. Approximately $890,000 of the increase primarily reflected the
addition of personnel and infrastructure to support Vantage and AutoVue sales.
These increases were offset in part by cost savings resulting from our
completion and withdrawal of activities to support market activity in China.
23
<PAGE>
Charges Allocated by Odetics. Charges allocated by Odetics increased by
88.1% to $1.1 million or 6.1% of total revenue, for the nine months ended
December 31, 1999 from $562,000, or 5.4% of total revenue, for the nine months
ended December 31, 1998. The increase was attributable to our expanding wage
base, higher square footage occupancy of facilities, and higher revenue
relative to Odetics' consolidated group revenue.
Other Expenses. Other expenses increased by 86.6% to $819,000, or 4.7% of
total revenue, for the nine months ended December 31, 1999 from $439,000, or
4.2% of total revenue, for the nine months ended December 31, 1998. The
increase primarily represented the amortization of goodwill arising from the
acquisitions of Meyer Mohaddes in October 1998 and Viggen in January 1999.
Interest Charges Allocated by Odetics. Interest charges allocated by Odetics
increased by 41.4% to $2.2 million, or 12.6% of total revenue, in the nine
months ended December 31, 1999 from $1.6 million, or 14.9% of total revenue, in
the nine months ended December 31, 1998. The increase reflected increased
intercompany borrowings necessary to support our working capital requirements
and fund our operating losses.
In addition, in connection with the issuance of the $3.75 million promissory
note to DaimlerChrysler Venture, during the quarter ended March 31, 2000 the
Company will recognize a $1.45 million non-cash interest charge to give
financial accounting recognition to the beneficial conversion feature contained
in the promissory note.
Year Ended March 31, 1999 Compared with Year Ended March 31, 1998
Total Revenue. Total revenue increased by 149.6% to $14.6 million for the
fiscal year ended March 31, 1999 from $5.8 million for the fiscal year ended
March 31, 1998.
Sensors revenue increased by 170.0% to $4.3 million in fiscal 1999 from $1.6
million in fiscal 1998. The increase in sensors revenue reflects increased unit
sales volume of Vantage across a broad customer base.
Systems revenue increased by 141.9% to $10.2 million in fiscal 1999 from
$4.2 million in fiscal 1998. All of our systems revenue in fiscal 1998
reflected services performed by us on contracts acquired from Rockwell in June
1997. Fiscal 1999 systems revenue includes $1.6 million derived from a contract
with the City of Jinan, China. Approximately 21.2% of our systems revenue in
fiscal 1999 reflected revenue from the acquisitions of Meyer Mohaddes in
October 1998 and the assets of Viggen Corporation in January 1999. 59.0% of the
system revenue in fiscal 1999 was generated under cost plus fee and time and
material contracts, while the remaining revenue was derived from fixed price
contracts.
Gross Profit. Total gross profit increased by 803.6% to $4.3 million, or
29.2% of total revenue, for fiscal 1999 from $471,000, or 8.1% of total
revenue, for fiscal 1998.
Gross profit on sensors revenue totaled $1.2 million, or 27.9% of sensors
revenue in fiscal 1999 as compared to a gross profit (loss) of ($948,000), or
(59%) of sensors revenue, in fiscal 1998. Through fiscal 1998 Vantage had
limited sales volume and we incurred significant costs for direct labor,
manufacturing overhead and other manufacturing costs relative to its limited
sales. During fiscal 1998, gross profit on sensor revenue was also negatively
impacted by $800,000 of costs for upgrades to the installed base of an earlier
generation of Vantage, in addition to charges for inventory obsolescence
related to earlier design versions of Vantage. The improvement in gross profit
on sensors revenue in fiscal 1999 also reflected the benefit of increased sales
volume and manufacturing efficiencies. Also during fiscal 1999, we introduced
certain design changes to lower total cost.
Gross profit on systems revenue increased by 114.7% to $3.0 million, or
29.7% of systems revenue, in fiscal 1999 from $1.4 million, or 33.5% of systems
revenue, in fiscal 1998. The slight decrease in gross profit as a percentage of
systems revenue in fiscal 1999 reflected the contribution of contracts from the
acquisitions of Meyer Mohaddes and the assets of Viggen. These acquired
contracts had associated lower gross profit percentages compared to our other
ongoing systems activities.
24
<PAGE>
Research and Development Expenses. Research and development expense
increased by 5.6% to $2.2 million, or 14.8% of total revenue, in fiscal 1999
from $2.0 million, or 34.9% of total revenue, in fiscal 1998. The increase in
research and development expense reflected the acceleration of development of
AutoVue during fiscal 1999, which was partially offset by a reduction in
development activities supporting Vantage. Approximately 47% of our research
and development expense in fiscal 1999 was incurred to support AutoVue
development efforts. As a percentage of total revenue, research and development
expenses declined sharply in fiscal 1999 as a result of substantial increases
in systems and sensors revenue in fiscal 1999.
Selling, General and Administrative Expense. Selling, general and
administrative expense increased by 67.8% to $5.7 million, or 39.3% of total
revenue, in fiscal 1999 from $3.4 million, or 58.4% of total revenue, in fiscal
1998. Approximately $500,000 of the increase resulted from increased expenses
associated with the acquisition of Meyer Mohaddes and the assets of Viggen.
During fiscal 1999, we also expanded our sales and marketing efforts to support
increases in both systems and sensor revenue. As a percentage of total revenue,
selling, general and administrative expenses declined in fiscal 1999 as a
result of substantial increases in systems and sensors revenue in fiscal 1999.
Charges Allocated by Odetics. Charges allocated by Odetics increased by
92.4% to $881,000, or 6.0% of total revenue, in fiscal 1999 from $458,000, or
7.8% of total revenue, in fiscal 1998. The increase was attributable to our
expanding wage base, higher square footage occupancy of facilities, and higher
revenue relative to Odetics' consolidated group revenue.
Other Expenses. Other expenses increased by 8.2% to $700,000, or 4.8% of
total revenue, in fiscal 1999 from $647,000, or 11.1% of total revenue, in
fiscal 1998. Other expenses in fiscal 1999 consisted of goodwill amortization
related to the acquisition of certain assets of the transportation systems
business from Rockwell in June 1997 and the acquisitions of Meyer Mohaddes in
October 1998 and the assets of Viggen in January 1999. Other expenses in fiscal
1998 included goodwill amortization related to the acquisition of certain
assets of Rockwell and non-recurring charges of approximately $200,000 related
to the wind-down of our business development activities in China in fiscal
1998.
Interest Charges Allocated by Odetics. Interest charges allocated by Odetics
increased by 61.2% to $2.2 million in fiscal 1999, or 14.9% of total revenue,
from $1.3 million, or 23.0% of total revenue, in fiscal 1998. The increase
reflected increased intercompany borrowings necessary to support our working
capital requirements and fund our operating losses.
Year Ended March 31, 1998 Compared with Year Ended March 31, 1997
Total Revenue. Total revenue increased by 985.7% to $5.8 million for the
fiscal year ended March 31, 1998 from $538,000 for the fiscal year ended March
31, 1997.
Sensors revenue increased by 198.7% to $1.6 million in fiscal 1998 from
$538,000 in fiscal 1997. The increase in sensors revenue primarily reflected
increased unit sales of Vantage.
Systems revenue of $4.2 million in fiscal 1998 reflects services performed
by us on contracts acquired from Rockwell. No systems revenue was recognized in
fiscal 1997. 72% of the systems revenue in fiscal 1998 was generated under cost
plus fee and time and material contracts, while the remaining systems revenue
was derived from fixed price contracts.
Gross Profit. Total gross profit increased by 592.6% to $471,000, or 8.1% of
total revenue, for fiscal 1998 from $68,000, or 12.6% of total revenue, for
fiscal 1997.
Gross profit (loss) on sensors revenue totaled ($948,000), or (59%) of
sensors revenue, in fiscal 1998 as compared to a gross profit of $68,000, or
12.6% of sensors revenue, in fiscal 1997. Prior to fiscal 1998, all of our
gross profit (loss) was derived from sales of Vantage. During fiscal 1998
Vantage had limited sales volume and we incurred significant costs for direct
labor, manufacturing overhead and other manufacturing costs
25
<PAGE>
relative to its limited volume. During fiscal 1998, gross profit on sensors
revenue was also negatively impacted by $800,000 of costs for upgrades to the
installed base of an earlier generation of Vantage, in addition to charges for
inventory obsolescence related to earlier design versions of Vantage systems.
Gross profit on systems revenue was 33.5% of systems revenue in fiscal 1998.
Research and Development Expenses. Research and development expenses
decreased by 14.3% to $2.0 million, or 34.9% of total revenue, in fiscal 1998
from $2.4 million, or 442.0% of total revenue, in fiscal 1997. The decrease
primarily reflected the completion of development of Vantage Plus during fiscal
1998, which was partially offset by new product development activities related
to AutoVue. Approximately 23.0% of our research and development expenses in
fiscal 1998 were incurred to support AutoVue development efforts. As a
percentage of total revenue, research and development expenses declined sharply
in fiscal 1998 as a result of a substantial increase in systems revenue in
fiscal 1998.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased by 142.0% to $3.4 million, or 58.4% of total
revenue, in fiscal 1998 from $1.4 million, or 262.3% of total revenue, in
fiscal 1997. The increase was due primarily to the acquisition of certain
assets of the transportation systems business of Rockwell in June 1997 in
addition to increased spending to support our marketing and sales proposal
efforts in China.
Charges Allocated by Odetics. Charges allocated by Odetics increased by
336.2% to $458,000, or 7.8% of total revenue, in fiscal 1998 from $105,000, or
19.5% of total revenue, in fiscal 1997. The increase was attributable to our
expanding wage base, higher square footage occupancy of facilities, and higher
revenues relative to Odetics' consolidated group revenues.
Other Expenses. Other expenses for fiscal 1998 represented goodwill
amortization related to the acquisition of certain assets of the transportation
systems business from Rockwell in June 1997 and other non-recurring charges of
approximately $200,000 related to the wind-down of our market development
activities in China.
Interest Charges Allocated by Odetics. Interest charges allocated by Odetics
increased by 97.6% to $1.3 million, or 23.0% of total revenue, in fiscal 1998
from $680,000, or 126.4% of total revenue, in fiscal 1997. The increase
reflected increased intercompany borrowings necessary to support our working
capital requirements, fund our operating losses and support acquisition
activities.
26
<PAGE>
Selected Quarterly Results of Operations
The following tables present selected quarterly financial information for
each of the seven quarters through December 31, 1999. This information has been
prepared by us on a basis consistent with our audited financial statements
appearing elsewhere in this prospectus. The information includes all
adjustments, consisting only of normal recurring adjustments, that we consider
necessary for a fair presentation of this information in accordance with
generally accepted accounting principles. Such quarterly results are not
necessarily indicative of future results of operations.
<TABLE>
<CAPTION>
Three Months Ended
----------------------------------------------------------------------------------------
June 30, Sept. 30, Dec. 31, Mar. 31, June 30, Sept. 30, Dec. 31,
1998 1998 1998 1999 1999 1999 1999
---------- ---------- ---------- ---------- ---------- ---------- ----------
(unaudited, in thousands except per share data)
<S> <C> <C> <C> <C> <C> <C> <C>
Revenue:
Sensors................ $ 793 $ 759 $ 1,499 $ 1,288 $ 1,487 $ 2,019 $ 2,374
Systems................ 2,721 1,644 2,984 2,892 3,610 4,089 3,868
---------- ---------- ---------- ---------- ---------- ---------- ----------
Total revenue........ 3,514 2,403 4,483 4,180 5,097 6,108 6,242
Cost of sales:
Sensors................ 659 812 871 787 699 1,130 1,453
Systems................ 2,108 1,009 1,974 2,104 2,565 3,196 2,704
---------- ---------- ---------- ---------- ---------- ---------- ----------
Total cost of sales.. 2,767 1,821 2,845 2,891 3,264 4,326 4,157
Gross profit:
Sensors................ 134 (53) 628 501 788 889 921
Systems................ 613 635 1,010 788 1,045 893 1,164
---------- ---------- ---------- ---------- ---------- ---------- ----------
Total gross profit... 747 582 1,638 1,289 1,833 1,782 2,085
Operating expenses:
Research and
development........... 453 486 502 711 743 892 863
Selling, general and
administrative........ 1,244 1,143 1,457 1,885 1,604 1,483 1,630
Charges allocated by
Odetics............... 121 189 252 319 303 367 387
Other expenses......... 150 86 203 261 275 271 273
---------- ---------- ---------- ---------- ---------- ---------- ----------
Loss from operations.... (1,221) (1,322) (776) (1,887) (1,092) (1,231) (1,068)
Interest charges
allocated by Odetics... 471 517 562 617 679 728 784
---------- ---------- ---------- ---------- ---------- ---------- ----------
Loss before income
taxes.................. (1,692) (1,839) (1,338) (2,504) (1,771) (1,959) (1,852)
Income tax expense...... 0 0 0 0 0 0 0
---------- ---------- ---------- ---------- ---------- ---------- ----------
Net loss................ $ (1,692) $ (1,839) $ (1,338) $ (2,504) $ (1,771) $ (1,959) $ (1,852)
========== ========== ========== ========== ========== ========== ==========
Net loss per share,
basic and diluted...... $ (0.15) $ (0.16) $ (0.11) $ (0.21) $ (0.15) $ (0.16) $ (0.15)
========== ========== ========== ========== ========== ========== ==========
Shares used in computing
net loss per share,
basic and diluted...... 11,250,000 11,250,000 11,964,000 12,106,000 12,106,000 12,064,000 12,060,000
The following table sets forth certain statements of operations data
expressed as a percentage of total revenue for the periods indicated, except
for cost of sales and gross profit, which are each expressed as a percentage of
the corresponding segment revenue.
Revenue:
Sensors................ 22.6 % 31.6 % 33.4 % 30.8 % 29.2 % 33.1 % 38.0 %
Systems................ 77.4 68.4 66.6 69.2 70.8 66.9 62.0
---------- ---------- ---------- ---------- ---------- ---------- ----------
Total revenue........ 100.0 100.0 100.0 100.0 100.0 100.0 100.0
Cost of sales:
Sensors................ 83.1 107.0 58.1 61.1 47.0 56.0 61.2
Systems................ 77.5 61.4 66.2 72.8 71.1 78.2 69.9
Total cost of sales.. 78.7 75.8 63.5 69.2 64.0 70.8 66.6
Gross profit:
Sensors................ 16.9 (7.0) 41.9 38.9 53.0 44.0 38.8
Systems................ 22.5 38.6 33.8 27.2 28.9 21.8 30.1
Total gross profit... 21.3 24.2 36.5 30.8 36.0 29.2 33.4
Operating expenses:
Research and
development........... 12.9 20.2 11.2 17.0 14.6 14.6 13.8
Selling, general and
administrative........ 35.4 47.6 32.5 45.1 31.5 24.3 26.1
Charges allocated by
Odetics............... 3.4 7.9 5.6 7.6 5.9 6.0 6.2
Other expenses......... 4.3 3.6 4.5 6.2 5.4 4.4 4.4
---------- ---------- ---------- ---------- ---------- ---------- ----------
Loss from operations.... (34.7) (55.0) (17.3) (45.1) (21.4) (20.2) (17.1)
Interest charges
allocated by Odetics... 13.4 21.5 12.5 14.8 13.3 11.9 12.6
---------- ---------- ---------- ---------- ---------- ---------- ----------
Loss before income
taxes.................. (48.2) (76.5) (29.8) (59.9) (34.7) (32.1) (29.7)
Income tax expense...... 0.0 0.0 0.0 0.0 0.0 0.0 0.0
---------- ---------- ---------- ---------- ---------- ---------- ----------
Net loss................ (48.2)% (76.5)% (29.8)% (59.9)% (34.7)% (32.1)% (29.7)%
========== ========== ========== ========== ========== ========== ==========
</TABLE>
27
<PAGE>
Quarterly Results of Operations
Total Revenue. Sensors revenue in all quarters presented primarily reflected
sales of Vantage with the exception of the quarter ended December 31, 1999
which included $382,000 of revenue from sales of AutoVue. Systems revenue in
the quarter ended June 30, 1998 included $1.4 million of revenue derived from a
contract with the City of Jinan, China which was substantially completed in
such quarter. Systems revenue in the quarter ended December 31, 1998 includes
the contributions of revenue from the acquisition of Meyer Mohaddes.
Gross Profit. Gross profit as a percentage of sensors revenue rose to 53.0%
in the quarter ended June 30, 1999, reflecting the benefit of direct sales of
Vantage to a customer that yielded higher than customary gross profit margins.
Quarterly gross profits on systems revenue are subject to fluctuation as a
result of changes in estimates used in percentage of completion accounting.
Expenses. Our operating expenses have generally increased over each of the
last seven quarters ended December 31, 1999 as we have increased investments in
our sales, marketing and administrative infrastructure to support growth.
Research and development expenses have increased to support expansion of
Vantage and to support investments in AutoVue. In the quarter ended March 31,
1999 selling, general, and administrative expenses included a charge of
approximately $353,000 representing deferred financing costs.
Liquidity and Capital Resources
From April 1, 1996 through December 31, 1999, we have incurred cumulative
losses of $24.9 million. Our cumulative negative cash flow from operating
activities, primarily as a result of those losses for such period, was $27.2
million. During fiscal 1998, we used $2.2 million in cash to acquire certain
assets of the transportation systems business from Rockwell. To date, we have
relied upon interest bearing advances from Odetics to provide the necessary
cash to support our working capital requirements, fund our operating losses and
support acquisition activities. Days sales in accounts receivable were 73 days
at December 31, 1999 compared to 96 days at March 31, 1999 and 38 days at March
31, 1998. The increase at March 31, 1999 resulted primarily from incremental
accounts receivable that accompanied the acquisitions of Meyer Mohaddes and of
Viggen. At December 31, 1999, we owed Odetics approximately $37.6 million as a
result of the net advances made to us since our inception including accrued
interest. $10.0 million of the net proceeds received from this offering will be
paid by us to Odetics as a reduction of principal on this obligation. An
additional principal amount of approximately $12.9 million will be cancelled by
Odetics and treated as a contribution to capital. The balance of the obligation
then due will be $14.7 million, which will be converted to a promissory note,
payable in interest only for the first year and in 16 quarterly installments of
principal and interest thereafter.
We are currently co-borrowers with Odetics under a joint Loan and Security
Agreement with Transamerica Business Credit Corporation and are jointly and
severally liable for all amounts advanced. The maximum amount available under
this credit facility is $17.0 million, of which no borrowings were outstanding
at December 31, 1999. This facility provides for borrowings at a prime rate as
defined in the agreement, (8.5% at December 31, 1999) plus 2.00%. The
borrowings under this facility are secured by substantially all of our assets.
Upon consummation of the spin-off we will no longer be a co-borrower under this
facility and the security interests in our assets will be released. Shortly
after this offering, we intend to establish a line of credit. However, we
cannot ensure that we will be successful in obtaining this line of credit on
acceptable terms, if at all.
At December 31, 1999, we had a net capital deficiency of $25.0 million as a
result of accumulated losses since our inception. Upon completion of this
offering, we anticipate that we will have sufficient capital to fund our
operations for a period of at least two years. We may in the future require
additional funds through bank financings, debt or equity offerings or other
sources of capital. Such additional funding may not be available when needed or
on terms acceptable by us, which would have a material adverse effect on our
business, financial condition and results of operations.
28
<PAGE>
Impact of the Year 2000
Many existing computer systems and applications, and other control devices
were designed to use two digits rather than four digits to define an applicable
year. As a result, such systems and applications may be unable to recognize the
year 2000 and could fail or create erroneous results. These problems are
commonly referred to as the year 2000 problem. Through February 17, 2000, we
have experienced no significant problems resulting from the year 2000 issue.
We have evaluated each of our products and believe that each is
substantially year 2000 compliant. We have adopted the British Standards
Institute standard for its statements of compliance regarding the year 2000
problem. We believe that it is not possible to determine whether all of our
customers' products into which our products are incorporated will be year 2000
compliant because we have little or no control over the design, production and
testing of our customers' products.
The year 2000 problem could affect the systems, transaction processing
computer applications and devices that we use to operate and monitor all major
aspects of our business, including financial systems (such as general ledger,
accounts payable, and payroll), customer services, infrastructure, master
productions scheduling, materials requirement planning, test equipment,
security systems, networks and telecommunications systems. We believe that we
have identified and corrected substantially all of the major systems, software
applications and related equipment used in connection with our internal
operations that required modification or upgrading in order to minimize the
possibility of a material disruption to our business. Because most of our
software applications are recent versions of vendor supported, commercially
available products, we have not incurred, and do not expect in the future to
incur, significant costs to upgrade these applications.
We estimate that Odetics has expended approximately $500,000 addressing year
2000 issues for its consolidated group, a portion of which was allocated to us.
Assuming we have identified our most significant year 2000 issues and that the
plans of our third party suppliers will be fulfilled in a timely manner without
cost to us, we do not expect to incur any additional significant costs to
address year 2000 issues. We cannot be sure that these assumptions are
accurate, and actual results could differ materially from those we anticipate.
We have developed contingency plans to address the year 2000 issues that may
pose a significant risk to our on-going operations. These plans include
accelerated replacement of affected equipment and software, temporary use of
back-up equipment and software or the implementation of manual procedures to
compensate for system deficiencies. We cannot be certain that any contingency
plans implemented by us are adequate to meet our needs without materially
impacting our operations, that any such plan will be successful or that our
results of operations would not be materially and adversely affected by the
delays and inefficiencies inherent in conducting operations in an alternative
manner.
Quantitative and Qualitative Disclosures About Market Risk
Market risk represents the risk of loss that may impact our financial
position, operating results or cash flows due to adverse changes in financial
and commodity market prices and rates. We are exposed to market risk due to
changes in United States interest rates. This exposure is directly related to
our normal operating and funding activities. Historically and as of December
31, 1999, we have not used derivative instruments or engaged in hedging
activities.
The interest payable on our obligation payable to Odetics is variable based
on the prime rate, and, therefore, affected by changes in market interest
rates. We have managed interest rate risk by remitting all cash we received to
Odetics to minimize the amount of such obligation outstanding at any point in
time. Following the completion of this offering, we expect to reduce our
outstanding indebtedness to Odetics to $14.7 million, which will be evidenced
by a note payable over the 20 fiscal quarters following completion of this
offering with interest payable at variable rates. As a result, we expect to
continue to have exposure to interest rate risk.
29
<PAGE>
BUSINESS
Our Company
We design, develop, market and implement software based solutions that
improve the safety and efficiency of vehicle transportation. Using our
proprietary software and ITS industry expertise, we are a leading provider of
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. Our knowledge of the ITS industry enables us to
design and implement transportation solutions that help public agencies reduce
traffic congestion and provide greater access to traveler information. Our ITS
systems and solutions include:
. Sensors. Our proprietary image recognition systems include AutoVue and
Vantage. AutoVue is a small windshield mounted sensor that utilizes
proprietary software to detect and warn drivers of unintended lane
departures. Through new software development we are expanding the
AutoVue platform 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.
. Transportation Management and Traveler Information Systems. We design,
develop and implement software based systems that integrate sensors,
video surveillance, computers and advanced communications equipment
enabling 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 and alternative routes.
Market Overview
According to a study conducted for the U.S. Department of Transportation,
traffic congestion cost the American public more than $72 billion in 1997 in
lost time and wasted fuel in the United States. Over 40,000 people are killed
and 3 million more injured each year in traffic accidents in the United States
according to 1998 National Highway Traffic Safety Administration data. The
total economic cost of motor vehicle crashes in the United States was $150.5
billion according to the most recent data published by NHTSA in 1994, and the
personal costs due to lost lives and injuries are incalculable. To address the
high economic and personal costs associated with traffic congestion and
accidents, the ITS industry has identified technological solutions which can
cost effectively add capacity to our roads and improve roadway safety.
The U.S. DOT, believes that a combination of ITS and new road construction
will accommodate future traffic growth at a 35% savings as opposed to meeting
the same demand with construction alone. The federal government has stimulated
the implementation of ITS systems by allocating significant federal funding for
research and development of ITS related projects, including approximately $1.28
billion over six years through 2003. Conformance with the National ITS
Architecture standards gives access to additional federal funding for ITS
projects from subsequent legislative appropriations. Additionally, state and
local funding is available for ITS projects.
The U.S. DOT estimates the benefit-to-cost ratio of deploying ITS
infrastructure in the 75 largest metropolitan areas to be approximately eight-
to-one. The U.S. DOT also estimates that ITS applications will eliminate 1.2
million crashes per year, saving thousands of lives and $26 billion in lost
productivity.
We believe the key market drivers for the ITS industry are the demand for
improved vehicle safety, the demand for reduced traffic congestion and the
demand for the availability of personalized traveler information.
Demand for Improved Vehicle Safety
Consumers are concerned with safety on roadways and are increasingly
demanding that the vehicles they buy include effective safety features.
Traditionally, many of the safety features designed for vehicles have
30
<PAGE>
focused on protecting occupants from injury caused by an accident, such as seat
belts and air bags, as opposed to accident prevention. Now, however, we believe
vehicle manufacturers are focusing on safety features that are designed to
prevent accidents. This trend has accelerated the demand for "collision
avoidance" technologies to enhance vehicle safety.
There were more than 12 million passenger cars, trucks and buses produced in
the United States in 1997. We believe that lane departure warning systems may
be deployed in a significant number of these types of vehicles produced in the
future. As vehicle manufacturers and their customers increasingly focus on
vehicle safety, the market for collision avoidance sensor systems is expected
to grow from $45 million in 1997 to $320 million in 2002 according to the
Freedonia Group, a market research company. These statistics do not include
international markets.
Demand for Reduced Traffic Congestion
In 1998, there were more than 200 million vehicles in operation in the
United States according to Automotive News. Better Roads, an ITS trade
publication, estimates that in the past 10 years the amount of travel on
interstate highways has grown by 30% and that the demand for roadway travel is
expected to increase by another 50% over the next 20 years. For drivers this
means more lost time and problems. According to the U.S. DOT, in 1995,
Americans spent more than two billion hours in traffic jams. In addition to
economic costs, traffic congestion leads to frustration among travelers and
adverse effects on the environment due to increased emissions from wasted fuel
burning. The Texas Transportation Institute estimates that over 6 billion
gallons of fuel were wasted in 1997 due to traffic congestion.
Increased traffic congestion is primarily the result of more vehicles on
U.S. highways and the difficulty of expanding or creating new roadways due to a
substantially built-out infrastructure. As a result, governmental
transportation agencies are increasingly using ITS to monitor and regulate
traffic. Transport Technology Publishing, a leading industry market research
firm, projects the market for vehicle detection systems to grow from an average
of approximately $500 million per year in the period from 1994 to 1998 to over
$800 million per year in the period from 1998 to 2003 and that the market for
alternative technologies to in-pavement inductive loops, including video based
systems, is growing at over 26% per year.
Recognizing the potential impact of traffic congestion on our economy and
environment, the federal government has been active in drafting legislation to
decrease traffic congestion and increase the safety and efficiency of U.S.
highways. A primary example is the development of the National ITS
Architecture, which defined a framework for systems integration and identified
a set of standards to be used by transportation agencies when designing their
transportation management systems. Additionally, in 1996, the U.S. DOT launched
Operation Time Saver with the objective of implementing an intelligent
transportation infrastructure in 75 of the largest metropolitan areas within 10
years. Hagler Bailly, a leading market research firm for the ITS industry,
estimates that the market for ITS infrastructure will be in excess of $4
billion in 2000.
Demand for the Availability of Personalized Traveler Information
Traditionally, a limited amount of traffic information has been disseminated
over the radio. This information is typically untimely and impersonal. Because
of increased traffic congestion, drivers are demanding more timely and accurate
traffic information. Drivers want to know traffic conditions on their intended
route to assist them in deciding when to start a trip, what their estimated
arrival time will be, which route to take and whether a change in route is
necessary. This increase in the demand for traffic information is evidenced by
the proliferation of web sites that now offer traffic information.
Our Solution
We believe we are a market leader in the ITS industry in the United States.
We design, develop, market and implement software based solutions to address
the demands of the vehicle transportation industry, including
31
<PAGE>
improving vehicle safety, reducing traffic congestion and increasing the
availability of personalized traffic information. Our proprietary outdoor image
processing software and algorithms are incorporated into our AutoVue and
Vantage video sensor systems. AutoVue is currently the only commercially-
available lane departure warning system and Vantage is a leader in the market
for video vehicle detection systems.
We are also a leading provider of transportation management and traveler
information systems, which incorporate our customized systems integration
software and commercial software that we have developed. We are one of the two
companies selected by the U.S. DOT to develop and maintain the National ITS
Architecture. This has enabled us to develop invaluable experience with the
standards mandated by the federal government and to establish a reputation as
an expert on the National ITS Architecture.
Our ITS systems and solutions address the demands to improve safety and
efficiency of vehicle transportation in the following manner:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------
Market Demand Our Solution
- -----------------------------------------------------------------------------------------
<C> <S>
Improve Vehicle Safety . AutoVue warns drivers of unintended lane departures and
addresses the largest contributing factor in fatal
motor vehicle accidents in the United States.
. We are expanding the AutoVue platform to include
additional safety features.
- -----------------------------------------------------------------------------------------
Reduce Traffic Congestion . Vantage systems monitor and provide efficient control
of traffic flow at signalized intersections and on
highways.
. Our transportation management and traveler information
systems enable management of transportation networks
with real-time monitoring of traffic conditions and the
ability to implement corrective actions to relieve
traffic congestion.
- -----------------------------------------------------------------------------------------
Increase Access to . Our transportation management and traveler information
Information systems enable the dissemination of information on
current traffic conditions through changeable message
signs, highway advisory radio and telephones, cable
television, commercial radio, paging networks and the
Internet.
. We are developing personalized traveler information
services for delivery over wireless communication
devices and the mobile Internet.
- -----------------------------------------------------------------------------------------
</TABLE>
By combining our proprietary software with our ITS industry expertise, we
believe we are uniquely positioned to deliver a broad array of innovative ITS
systems and solutions.
Our Strategy
Our objective is to enhance our position as a leading provider of software
based ITS systems and solutions to the vehicle transportation industry by
leveraging our ITS expertise and capitalizing on industry trends. The key
elements of our strategy include:
Combine Our Proprietary Software with Our ITS Industry Expertise to Provide
Transportation Solutions. Consumers and transportation authorities are looking
for safer, non-intrusive technological transportation solutions. As a result,
we developed our Vantage system to provide a more efficient means of monitoring
and controlling traffic at signalized intersections and on highways. In
addition, our transportation management and traveler information systems reduce
traffic congestion, improve vehicle safety and disseminate traveler
information. We intend to use our proprietary software and ITS industry
expertise to provide fully-integrated intelligent transportation management and
traveler information systems that enable traffic managers
32
<PAGE>
to monitor efficiently and direct traffic flow, promptly dispatch emergency
vehicles to clear accidents, continuously monitor highway operations and
accurately provide information to travelers about delays or alternative routes.
Establish AutoVue as the Leading Platform for In-vehicle Video Sensing. We
designed AutoVue to accommodate software upgrades that provide sensing
functions in addition to warning drivers of unintended lane departures.
Initially these additional functions will be focused on safety and convenience.
Our proprietary software algorithms and the scalable design of the AutoVue
system enable us to add these functions at low marginal costs. Therefore, the
AutoVue system not only has the capacity to provide improved safety and
additional convenience features, but may also significantly reduce the cost to
vehicle manufacturers who otherwise might purchase multiple sensors from
different suppliers. We also intend to expand our direct sales force and
applications engineering capability to further increase market penetration for
AutoVue systems.
Provide Personalized Traveler Information to Travelers Through Wireless
Communication Devices and the Mobile Internet. We intend to utilize our
knowledge and experience in the areas of transportation management and traveler
information systems, the Internet and wireless communications to provide a new,
higher level of information to travelers. Personalized traveler information
includes information on road and weather conditions, traffic congestion, travel
times and suggested routes provided directly to travelers based on their
personal profiles. We intend to disseminate timely and accurate information
compiled from data collected from a variety of sources, such as video
surveillance, vehicle sensor systems and transportation management systems.
Pursue Strategic Acquisitions and Alliances. Since 1995, we acquired three
ITS firms and have been jointly developing technology for AutoVue with
DaimlerChrysler. These acquisitions and alliances have provided us with new
technologies, customers and experienced technical personnel. We intend to
pursue new strategic acquisitions and alliances with:
. other developers of sensor systems and software technologies that will
complement our existing business by delivering increased functionality
and allow us to market our systems and solutions to new customers;
. other firms that design transportation management and traveler
information systems to expand our presence into areas where we can gain
significant contracts, valuable personnel and exposure to state and
local transportation agencies; and
. wireless communications and Internet service providers who have
interests in the delivery of personalized traveler information.
Broaden Our Systems and Solutions Offerings and Expand Our Penetration of
International Markets. We intend to generate additional revenue by expanding
our systems and solutions to address related applications and market segments
which utilize our proprietary software technologies, increasing our geographic
coverage and leveraging our sales and distribution channels. For example, we
intend to market wireless Vantage systems that enhance our ability to address
retrofit applications. Similarly, we are targeting new applications and
geographic expansion opportunities for the software and system designs we
incorporate in our transportation management and traveler information systems.
We also intend to increase our sales and marketing efforts internationally,
particularly in Europe and Asia, where trends such as increased demand for
vehicle safety and increased traffic congestion are similar to those in the
United States.
Our Products and Services
Sensor Systems
Our sensor systems combine our proprietary software and algorithms with
advanced outdoor video image processing to deliver roadway image recognition
and vehicle detection systems that contribute to increase vehicle safety and
reduce traffic congestion.
AutoVue. We have developed what we believe to be currently the only
commercially-available unintended lane departure warning system for heavy
trucks and are marketing AutoVue for installation also in passenger cars
33
<PAGE>
and light and medium trucks. AutoVue is a windshield mounted device that is
approximately the size of a deck of cards which serves as a platform for an
image processing camera and on-board computer system. AutoVue utilizes software
based upon our proprietary algorithms to predict effectively driving behavior
and driver reactions in order to differentiate between intended and unintended
lane departures. For example, the use of a directional signal or sudden lane
changes will not elicit a warning. We integrated these software applications
with our video image processing technologies to create an image sensing
platform that recognizes the difference between the roadway and lane markings
and accurately monitors a vehicle's placement within the lane markings. As a
vehicle travels down a roadway, the AutoVue system tracks both solid and dashed
lane markings. The AutoVue computer processor combines this data with the
vehicle's speed to calculate the proper lane positioning of the vehicle. When a
vehicle traveling at 35 miles per hour or more begins to drift towards an
unintended lane departure, AutoVue sends a distinctive rumble strip sound
through the vehicle's audio system, alerting the driver to make a correction.
AutoVue works effectively both day and night and in most weather conditions
where the lane markings are visible. AutoVue incorporates technology that we
and DaimlerChrysler Corporation have been jointly developing for over four
years.
The illustration below demonstrates the perspective of AutoVue while
tracking lane markings:
[LOGO APPEARS HERE]
Through new software development we are expanding the AutoVue platform to
incorporate additional safety and convenience features. Our proprietary
algorithms and the scalable design of AutoVue enable us to add these additional
features at low marginal costs. AutoVue not only allows vehicle manufacturers
to respond to increasing safety demands, but also provides the opportunity to
reduce costs, increase functionality and consolidate their supplier base.
We expect to ship AutoVue for installation in selected models of Mercedes'
European heavy trucks in the first half of calendar year 2000. We have also
developed an AutoVue system modified for driving and road conditions in North
America and also expect to begin shipments to Freightliner in the first half of
calendar year 2000. In addition, we have delivered AutoVue system prototypes to
other leading vehicle manufacturers for evaluation and test. Our software
engineers are currently developing upgrades to the AutoVue system that will
work with existing AutoVue image sensing technology to deliver additional
safety and convenience features.
Vantage. Our Vantage system is a market leader for video vehicle detection.
Vantage incorporates proprietary image processing technologies to provide
reliable and easy to implement vehicle detection at
34
<PAGE>
signalized intersections and on highways. Vantage cameras, mounted on the arm
of street lights or traffic signals at intersections, send video images to a
Vantage processor located in a roadside cabinet. The processor analyzes the
image to detect vehicle presence enabling the traffic controller to allocate
effectively green signal time. The Vantage video processor includes built-in
programming capability, eliminating the need for a separate computer. This
makes our system very easy to use by traffic system maintenance technicians.
The illustration below demonstrates a two approach camera placement of a
Vantage system:
[LOGO APPEARS HERE]
We believe that Vantage provides a more reliable, flexible and easy to use
and maintain solution than in-pavement inductive loops. In addition to vehicle
detection, Vantage offers functions including remote programming of detection
zones and remote real-time monitoring. Vantage can also provide an attractive
cost of ownership in comparison to inductive loops, which are vulnerable to
failure due to road construction, weather conditions and ground movement.
Maintenance and repair costs for these inductive loops are significant.
Additionally, because inductive loops are buried beneath the roadway surface,
entire lanes of traffic must be diverted when inductive loops are installed,
replaced or serviced and they are ineffective when traffic is diverted during
road repairs and resurfacing projects. Vantage systems are currently used in
over 150 cities in the United States and nine cities in Canada and Asia.
Vantage has been adopted as a method of vehicle detection in cities such as
Santa Barbara, California; Las Vegas, Nevada; St. Louis, Missouri; Omaha,
Nebraska; and Philadelphia, Pennsylvania and by such transportation agencies as
the Colorado Department of Transportation, the Nevada Department of
Transportation, the Texas Department of Transportation, the Virginia Department
of Transportation and the Ministry of Transportation in Ontario, Canada.
We currently offer the following Vantage systems, each of which addresses a
distinct market segment:
. Vantage Plus consists of an advanced processor that can be deployed with
one to six video cameras mounted at an intersection for vehicle
detection on up to six different roadway approaches. Each of these
cameras can accurately provide up to 24 detection zones in a single
roadway approach. Vantage Plus is often deployed at new or fully
refurbished intersections.
. Vantage One incorporates the vehicle detection technology of Vantage
Plus into a modular, single camera system for affordable video detection
on a flexible, per camera basis. Vantage One provides video detection
for a single intersection approach, enabling our customers to retrofit
cost effectively in-pavement inductive loops one approach to an
intersection at a time.
35
<PAGE>
. Vantage Edge incorporates the same vehicle detection algorithms found in
Vantage Plus and Vantage One into a processor designed to plug easily
into standard Type 170 cabinets, a widely used type of traffic control
cabinet in the United States.
. Vantage Remote Access System, or VRAS, is a software application that
may be installed on any personal computer equipped with a modem. Traffic
agencies typically use VRAS to perform system diagnostics and
reconfigure detection zones for each Vantage camera from a remote
location. The VRAS allows traffic control personnel to view images to
visually verify traffic conditions and emergency situations.
. Vantage Wireless Systems incorporate the full functionality of the
Vantage family of systems in a wireless architecture, obviating the need
to run coaxial cables from the camera to the traffic control cabinets.
Transportation Management and Traveler Information Systems
We design, implement and maintain transportation management and traveler
information systems for local, state and federal agencies to improve vehicle
safety, reduce traffic congestion and disseminate information. We also design
customized software applications to link independent transportation management
and traveler information systems. These systems allow transportation agencies
to manage their transportation networks in a real-time and coordinated fashion
by using a variety of detection, communication, and information technologies.
Our systems also provide traffic information necessary to enable drivers to
avoid traffic congestion. As one of only two companies awarded a contract to
develop and maintain the National ITS Architecture, we have the experience to
design, implement and maintain transportation management and traveler
information systems that conform with the National ITS Architecture. We believe
this experience provides us with unique insight into emerging market trends and
product opportunities and a significant competitive market advantage.
Transportation management and traveler information systems are the basic
building blocks of successful intelligent transportation systems.
The illustration below demonstrates some of the typical elements of a fully
integrated transportation management and traveler information system which
enables traffic control officials to monitor continuously highway operations,
efficiently manage traffic flow, promptly dispatch emergency assistance and
provide information to travelers about delays or alternative routes:
[LOGO APPEARS HERE]
36
<PAGE>
Systems Design and Implementation. A transportation management system
typically consists of a transportation management center that houses computers,
software and video surveillance monitors used to process and display traffic
data gathered from roadway sensors, video surveillance cameras, and other
sources. This data is delivered to the transportation management center through
communication pathways, including fiber optic lines and wireless technologies.
Transportation management center staff analyze the data using software
applications that convert the raw data into useful information. This
information may be disseminated through changeable message signs, highway
advisory radios and telephones, cable television, commercial radio, paging
networks and the Internet for a variety of commercial and government uses.
These uses include traffic management, freight and fleet management, toll
administration, emergency services, commercial vehicle operations, traveler
information services and transit management. We believe there will be demand
for this information by consumers through PDAs, cellular telephones, pagers,
in-vehicle computers and the mobile Internet.
We often serve as the primary contractor throughout the development of the
customer's entire transportation management and traveler information system.
For example, we worked with the Michigan Department of Transportation to deploy
and maintain one of the nation's largest integrated traffic management and
traveler information systems located in the metropolitan Detroit area. Our
software enabled the integration of more than 1,200 vehicle detectors, 43
changeable message signs, 12 highway advisory radios, 145 closed-circuit
television surveillance cameras and 10 ramp metering stations. Our innovative
design, incorporating an existing fiber optic ring with wireless communication
technologies to collect information from roadway detection devices and
disseminate traffic advisories to drivers, resulted in an affordable and
effective freeway management system that serves as a model for other
transportation departments.
Maintenance. In addition to designing and implementing transportation
management and traveler information systems, our staff of engineers and
technicians maintains and upgrades existing systems on a contract basis. We
believe that our significant experience in the design and implementation of ITS
projects uniquely positions us to maintain and upgrade existing systems on
behalf of transportation agencies on a cost effective basis. Our maintenance
teams utilize specialized software to diagnose malfunctioning equipment and
provide automated documentation and reporting when problems are detected. Our
staff of engineers and technicians are available 24 hours a day to perform
preventive maintenance, remedial maintenance and emergency maintenance on
damaged systems.
Commercial Software. We design customized software applications that link
independent transportation management centers to enable a comprehensive
monitoring of regional traffic conditions and to provide communications among
transportation agencies. We have also developed and license several
commercially-available proprietary software applications to facilitate systems
design and integration. Our DATEX Toolkit software assists in the
implementation of a communications protocol to enable the sharing of traffic
data among transportation management centers using the Datex-Asn standard,
while our SpecWizard software assists transportation engineers in designing ITS
systems that comply with National ITS Architecture based standards. In
addition, our VECTURA Internet data publishing software utilizes "push"
technology which moves information from a central database to web and custom
application servers to accommodate user requests for information. VECTURA
enables the availability of information without degrading the performance or
compromising the security of a central database. Our EzHCM software assists
transportation engineers in performing complex highway capacity calculations.
Technology and Intellectual Property
We have developed expertise in several important technology areas, including
software to enhance the applications of outdoor image processing cameras,
communication linkage software for the integration of management systems, and
low cost image processing hardware design and assembly techniques. Our advanced
expertise of algorithms and outdoor imaging technologies form the foundation
upon which AutoVue and Vantage systems are built. The software applications
installed in our sensors incorporate image processing algorithms for outdoor
image recognition based upon complex mathematical calculations in order to
operate in
37
<PAGE>
diverse lighting and inclement weather conditions and to mitigate the effects
of camera motion. We have developed these image processing algorithms
internally for Vantage and jointly with DaimlerChrysler over a period of four
years for AutoVue. We also employ our design expertise to develop electronic
components for AutoVue to mitigate the effects of severe automotive operating
environments.
We have developed expertise in system integration techniques, data
communication protocols, and emerging ITS architecture standards as a result of
designing and implementing transportation management and traveler information
systems. We use state-of-the-art database and distributed computing
architectures, including CORBA and Enterprise JavaBean, to facilitate the
distribution of information over the Internet for our transportation management
and traveler information systems customers.
We currently have five U.S. patents and various other foreign patents for
image recognition technologies that we use in our ITS business. We intend to
aggressively pursue patent protection for our proprietary technologies
incorporated in our AutoVue and Vantage systems. We also rely on a combination
of copyright, trademark, and trade secret laws, confidentiality procedures and
contractual provisions to protect our intellectual property.
Key Relationships with Vehicle Manufacturers
We intend to use our relationships to build upon brand awareness and
worldwide distribution channels of major vehicle manufacturers and to further
penetrate our target markets. We have entered into the following key
relationships:
DaimlerChrysler
AutoVue incorporates technology that we jointly developed with the
DaimlerChrysler Corporation and integrates proprietary technologies of both
companies. As part of our development agreement, DaimlerChrysler granted us a
license to use their driver heuristics algorithms for the software applications
incorporated in AutoVue. While our right to use this license is perpetual, we
have agreed to pay DaimlerChrysler a 3% royalty of net sales of all lane
departure warning applications of AutoVue systems sold to non-DaimlerChrysler
vehicle manufacturers through July 1, 2002.
We recently completed successful testing of AutoVue in Mercedes' European
heavy trucks, and entered into an agreement with DaimlerChrysler to serve as
DaimlerChrysler's exclusive production source until July 2000 for AutoVue
systems installed in Mercedes' European heavy trucks.
On January 25, 2000 we entered into a subordinated convertible note purchase
agreement with DaimlerChrysler Venture in which DaimlerChrysler Venture
invested $3.75 million that shall automatically convert into approximately 2.5%
of our outstanding common stock immediately prior to the closing of this
offering. This investment enhances our strategic relationship with
DaimlerChrysler. As part of the agreement, DaimlerChrysler Venture has agreed
to facilitate the adoption of AutoVue in DaimlerChrysler commercial vehicles
and passenger cars. DaimlerChrysler Venture has also agreed to support our
efforts to develop a personalized traveler information system targeted at
DaimlerChrysler's customer base.
Freightliner
In January 1999, we entered into an agreement with Freightliner for the
development of an AutoVue system modified for driving and road conditions in
North America. We have shipped several prototypes to Freightliner and they have
started commercial testing of the systems in their Class 3-8 trucks. As part of
our Freightliner agreement, we granted Freightliner an exclusive three year
right, following the commercial availability of AutoVue in North America, to
purchase AutoVue from us for resale to manufacturers of Class 3-8 trucks
destined for use in North America.
Sales and Marketing
Sensor Systems
Our marketing strategy for AutoVue is to establish it as the leading
platform for in-vehicle video sensing for trucks and passenger cars. We believe
the AutoVue system not only has the capacity to provide improved
38
<PAGE>
safety and additional convenience features, but may also significantly reduce
the cost to vehicle manufacturers who otherwise might purchase multiple
sensors from different suppliers. AutoVue is sold directly by us to vehicle
manufacturers. We have a direct sales force of three product managers. We
intend to expand our sales force in the future to include engineers and
product managers who will be responsible for sales and customer service to
specific vehicle manufacturers. Since our target customer base is well known,
we do not engage in large scale marketing campaigns.
Our marketing strategy for Vantage is to focus customers on the competitive
advantages of Vantage, which we believe to be price, performance and ease of
use. Vantage systems are primarily marketed and sold through independent
dealers. To enhance our market presence, we exhibit at a variety of national
and regional trade shows and encourage our dealers to conduct technical
seminars on our products. We currently have 25 dealers in the United States,
two in Canada and three in Asia. In addition, we intend to increase our
existing sales force of five regional and district sales managers.
Our independent dealers are primarily responsible for sales, installation
and support of Vantage systems. Our dealers maintain an inventory of
demonstration traffic products including the Vantage vehicle detection systems
and sell directly to government agencies and installation contractors. Our
dealers often have 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
our dealers and maintain a full time staff of customer support technicians to
provide technical assistance when needed.
Transportation Management and Traveler Information Systems
We market and sell our transportation management and traveler information
systems and services directly to government agencies pursuant to negotiated
contracts which involve competitive bidding and specific qualification
requirements. To enhance our presence in this market we actively participate
in various professional organizations, such as ITS America and the Institute
of Transportation Engineers, conduct presentations on issues involving
transportation management and ITS and attend trade shows. We also advertise in
professional trade magazines and participate in ITS conferences, workshops and
symposiums. We currently have eight offices throughout the United States and
plan to open three to five additional offices over the next 24 months.
We are one of only two companies awarded a contract to develop and maintain
the National ITS Architecture. We believe our involvement in the National ITS
Architecture provides us with unique vision and insight into emerging market
trends and product opportunities and a significant competitive market
advantage. Through the training programs we conduct on the National ITS
Architecture, we have developed strong relationships and credibility with
national, regional, state and local transportation agencies responsible for
managing funds allocated for intelligent transportation systems.
We are currently expanding our marketing efforts to enter the rural ITS
market, where we have already been awarded several contracts. In addition, we
are broadening the application of our transportation management and traveler
information systems and services to apply to transit priority projects and
personalized traveler information.
Our traffic engineering and transportation planning services staff works
closely with over 100 local, regional, and state agencies. Their efforts help
identify and define projects where ITS technologies could be an effective
solution and help us establish relationships with those agencies who desire
our system design, software development, and system integration services.
Competition
Sensor Systems
The market for vehicle sensor systems is intensely competitive. Vehicle
manufacturers comprise our target market for the AutoVue system. These
companies generally purchase products from first time suppliers only to
39
<PAGE>
lower costs or access technology that is not otherwise available from their
existing suppliers. While we believe that AutoVue is the only commercially-
available lane departure warning system, potential competitors, including
Delphi Automotive Systems Corporation domestically, NEC Corporation and Hitachi
Ltd. in Japan and Robert Bosch Gmbh in Europe are currently developing video
sensor technology 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
both manufacturers of "above ground" video camera detection systems, such as
Econolite Control Products, Inc. and the Peek Traffic Systems division of
Thermo Electron Corporation, 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. We believe
that we are a market leader in many key competitive categories including price,
ease of use, and detection accuracy in a broad range of intersection
architecture geometries and varying weather and lighting conditions. However,
we must continue to develop and expand upon existing Vantage technologies, as
more end user agencies are requiring additional video detection functions.
Transportation Management and Traveler Information Systems
The transportation management and traveler information systems market is
highly fragmented and characterized by rapidly changing technology and 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 corporations like TRW, Inc., Transcore, Lockheed Martin
Corporation, PB Farradyne Inc., Kimley-Horn and Associates, Inc. and National
Engineering Technology, Inc. Our competitors in transportation engineering,
planning and design include major firms like Parsons Brinkerhoff, Inc. and
Parsons Transportation Group Inc., as well as many regional engineering firms.
We believe that the principal competitive factors for securing contracts are
the experience of key individuals and their relationships with government
agencies, project management experience, name recognition and the ability to
develop software and to integrate systems. We expect the competition in the
transportation management and traveler information systems market to increase
as additional competitors gain experience and expertise.
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 we do. 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 than we do. Accordingly,
it is possible that new competitors or alliances among competitors could emerge
and rapidly acquire a significant market share. Our failure to provide services
and develop and market products that compete successfully with those of other
suppliers and consultants in the market would have a material adverse effect on
our business, financial condition and results of operations.
Production
We design, assemble and test the components of our Vantage systems. Our
facility consists of approximately 5,000 square feet of space located in
Anaheim, California. Production equipment consists of assembly lines and test
apparatus for final assembly and testing of the manufactured product.
Production volume is based upon quarterly forecasts that we readjust on a
monthly basis to control inventory. We subcontract the manufacture of AutoVue
systems to two manufacturers. We expect these manufacturers to produce unit
volume sufficient to support sales to heavy truck manufacturers. We intend to
engage additional manufacturers with expertise in high volume production to
produce higher volumes for light and medium trucks and passenger cars. We do
not produce any of the hardware used in the transportation management and
traveler information systems that we design and implement. Our production
facility is ISO 9001 certified.
Associates
We refer to our employees as associates. As of December 31, 1999, we had 148
associates, including 101 in engineering, 15 in sales and marketing, 9 in
production and 23 in other business and administrative services.
40
<PAGE>
Our associates are not subject to any collective bargaining agreements, and we
generally have good relations with them.
Facilities
As of December 31, 1999, we leased eight facilities, all located within the
United States. Our principal executive and corporate offices are located in
Anaheim, California. We also have offices for our support staff and development
teams in Madison Heights, Michigan, Sterling, Virginia, Long Beach, California,
Las Vegas, Nevada, Los Angeles, California, San Bruno, California and Boise,
Idaho. We believe that our facilities are adequate for our current operations
and that additional leased space can be obtained if needed.
Legal Proceedings
There are no legal proceedings pending to which we are a party and our
management is unaware of any contemplated legal actions against us.
41
<PAGE>
ARRANGEMENTS WITH ODETICS
Odetics currently owns 93% of our outstanding common stock. Immediately
prior to this offering, Odetics will distribute all of its shares of our common
stock to its stockholders in a tax-free spin-off. Odetics has been responsible
for providing us with financial, management, administrative and other
resources. Odetics also maintains substantial control over our operations and
provides us with significant management functions and services, including
treasury, accounting, tax, internal audit, legal, human resources, marketing
and other support services. As a result of these services we incurred charges
allocated by Odetics of $1.1 million for the nine month period ended December
31, 1999, $105,000 in fiscal 1997, $458,000 in fiscal 1998 and $881,000 in
fiscal 1999. The costs of these services have been directly charged and/or
allocated using methods that we believe are reasonable. Odetics has
historically allocated these corporate costs, which are applicable and common
to all of its businesses. Allocation of these costs has been based upon a
formula that takes into account payroll, revenues and assets of each individual
business. However, these charges are not necessarily indicative of the costs we
would have incurred to obtain these services from an independent entity.
For the purpose of governing certain of the relationships between us and
Odetics relating to the spin-off, to provide for an orderly transition and for
other matters, we have entered or intend to enter into the agreements described
below with Odetics. The following summaries of the material terms of these
agreements are qualified by reference to the complete agreements that have been
filed as exhibits to the registration statement of which this prospectus is a
part.
These agreements were negotiated in the context of a parent-subsidiary
relationship and therefore are not the result of negotiations between
independent parties. It is our intention that these agreements should
accommodate the parties' interests in a manner that is fair to both parties,
while continuing certain mutually beneficial joint arrangements. The parties
intend that these agreements provide fair market value to them on terms no less
favorable to either party as would otherwise be available from unaffiliated
parties.
Additional or modified arrangements and transactions may be entered into by
us with Odetics after this offering. Any of these future arrangements and
transactions will be determined through negotiation with Odetics. We have
adopted a policy that all future agreements between the parties be on terms
that we believe are no less favorable to us than we believe would be available
from unaffiliated parties. Any future agreements will also require the approval
of a majority of our directors who are not officers, directors or significant
stockholders of Odetics.
Separation and Distribution Agreement; Technology License Agreement
We have entered into a Separation and Distribution Agreement with Odetics
that provides for the principle corporate transactions required to effect the
separation of our business from those of Odetics, the spin-off and certain
other matters governing the relationship between us and Odetics after the spin-
off.
To separate our business from other businesses of Odetics, Odetics has
transferred to us those assets used in our business that were held by Odetics
without representation or warranty on an "as is" basis. We have assumed all
liabilities associated with our business, including those arising from the
operation of our business both before and after the spin-off. Part of the
assets transferred to us by Odetics included all intellectual property,
including patents and pending patent applications, related to our business. We
will license back to Odetics, on a nonexclusive, royalty free basis, a portion
of such intellectual property.
We will release Odetics from all other obligations and liabilities owed to
us existing on the date of the spin-off, other than liabilities and obligations
arising under the Separation and Distribution Agreement and the other
agreements entered into in connection with the spin-off. Likewise, each of
Odetics and Iteris will indemnify the other for liabilities arising from a
breach of these agreements or the failure to pay or discharge the liabilities
assumed by such party under the Separation and Distribution Agreement.
42
<PAGE>
The Separation and Distribution Agreement also provides that each party will
take all reasonable steps necessary and appropriate to cause all conditions to
the distribution to be satisfied and to effect the distribution. The directors
of Odetics have set the record date for the distribution as the date on which
the registration statement of which this prospectus is a part is declared
effective, and the date on which shares will be distributed as the first
business day after the record date. Odetics has agreed to consummate the
distribution as promptly as practicable after the satisfaction or waiver by its
board of directors, in its sole discretion, of the following conditions:
. effectiveness of the registration statement of which this prospectus is
a part;
. any material governmental approvals and consents necessary or required
under material contracts to consummate the distribution shall have been
obtained and be in full force and effect;
. no order, injunction or decree issued by any court or agency of
competent jurisdiction or other legal restraint or prohibition
preventing the consummation of the distribution shall be in effect, and
no other event outside the control of Odetics shall have occurred or
failed to occur that prevents the consummation of the distribution; and
. no other events or developments shall have occurred that, in the
judgment of the Board of Directors of Odetics, would result in the
distribution having a material adverse effect on Odetics or on its
stockholders.
The Separation and Distribution Agreement also provides that all shares of
common stock of our company distributed to Odetics stockholders shall be marked
with a legend restricting the public transfer of the shares for a period of 180
days following the date of this prospectus and that stop transfer instructions
will be placed with the transfer agent for these shares.
The Separation and Distribution Agreement requires that we complete a public
offering of our common stock immediately following the spin-off. It also
requires that we use proceeds of the offering to repay $10.0 million of debt
payable to Odetics and for the other purposes described under the heading "Use
of Proceeds" in this prospectus.
We are currently an additional named insured under various Odetics insurance
policies. Under the Separation and Distribution Agreement, we will be entitled
to the benefit of pre-spin-off historical coverage under Odetic's property,
liability and certain other insurance policies to the extent coverage is
applicable or potentially available and where limits of liability have not been
exhausted, either on a per occurrence or aggregate basis. The terms and
conditions of these policies, including limits of liability, will not be
amended as a consequence of the spin-off. Going forward, we will be responsible
for maintaining separate policies of insurance, which we will obtain prior to
this offering.
Services Agreement
We will enter into a Services Agreement with Odetics upon consummation of
the spin-off, pursuant to which Odetics will continue to provide limited
services to us, including treasury, accounting, tax, internal audit, legal and
human resources functions. Under the Services Agreement, Odetics will also
provide us with the facilities at which our principle executive and corporate
offices are located. The cost of services under the Service Agreement is
expected to be consistent with costs allocated to us by Odetics during prior
periods. The actual expenditures will depend on numerous factors, some of which
are beyond our control.
Tax Allocation Agreement
We will enter into a Tax Allocation Agreement with Odetics upon the
consummation of the spin-off, pursuant to which tax liability for any given
taxable period prior to the spin-off will be apportioned among the members of
the Odetics consolidated group that generated taxable income for that period.
The tax liability will be allocated according to each member's share of taxable
income of the consolidated group. No tax liability will be allocated to us if
we generate a taxable loss during such period and we will not receive any
benefit from the use of any such loss by other members of the Odetics
consolidated group. We will be responsible for all of our tax liabilities after
the spin-off.
43
<PAGE>
MANAGEMENT
Executive Officers and Directors
Our executive officers and directors are as follows:
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
Joel Slutzky............ 60 Chairman of the Board
Jack Johnson............ 52 Chief Executive Officer, President and Director
Victor Rumana........... 49 Chief Financial Officer
Stephen E. Rowe......... 64 Sr. Vice President and Director of Transportation Systems
Donald W. Sinnar........ 56 Sr. Vice President of Marketing and Products
Abbas Mohaddes.......... 42 Vice President and Deputy Director of Transportation Systems
Andrew H. Card, Jr...... 52 Director
Gary Hernandez.......... 41 Director
Gregory A. Miner........ 45 Director
Samuel K. Skinner....... 61 Director
William M. Spreitzer.... 70 Director
Paul E. Wright.......... 68 Director
</TABLE>
Joel Slutzky has served as our Chairman of the Board since inception and has
served as Chairman of the Board and Chief Executive Officer of Odetics since he
co-founded Odetics in 1969. From August 1993 until January 1994, Mr. Slutzky
served as the Chief Financial Officer of Odetics, and as President of Odetics
from 1969 to 1975. Prior to founding Odetics, Mr. Slutzky was an engineering
manager at Leach Corporation, now part of the Lockheed Electronics Division of
Lockheed Corporation. Mr. Slutzky holds a B.S. in both Electrical Engineering
and Mechanical Engineering and an M.S. in Mechanical Engineering from the
University of Illinois.
Jack Johnson has served as our President since May 1998, our Chief Executive
Officer since January 1999 and a director since our inception. From October
1996 through May 1998, Mr. Johnson served as our Vice President and General
Manager. Mr. Johnson is a Vice President of Odetics and has also served in
various capacities at Odetics including the General Manager of the Odetics
Customer Service Division from 1990 to 1996, the Vice President and General
Manager of Odetics' Omutec division from 1986 to 1990, the Director of
Contracts for the Space Division from 1980 to 1986, the Controller of
Infodetics, a former subsidiary of Odetics, from 1975 to 1980 and the
Controller of Odetics from 1974 to 1975. Prior to joining Odetics, Mr. Johnson
served as a certified public accountant with Peat Marwick and Mitchell. Mr.
Johnson holds a B.S. in Accounting from Northern Illinois University.
Victor Rumana has served as our Chief Financial Officer since December 1999.
From February 1997 until September 1999, Mr. Rumana served as a Vice President,
Telecommunication Products Division, at Ball Aerospace & Technologies, Inc.
From April 1995 to November 1996, Mr. Rumana served as Vice President, Finance
and Administration, at Efratom Time & Frequencing, Inc., a subsidiary of Datum,
Inc. Mr. Rumana holds a B.S. in Accounting from the University of Colorado and
an M.B.A. from the University of California, Irvine.
Stephen E. (Ed) Rowe joined us in June 1997 as Director of Transportation
Systems, and has served as Senior Vice President since January 1999. From 1958
to 1993, Mr. Rowe was employed by the Los Angeles Department of Transportation
in various capacities, most recently as its General Manager from 1987 to 1993.
At the Los Angeles Department of Transportation, Mr. Rowe directed the planning
and implementation of the Automated Traffic Surveillance and Control System as
well as the City's 1984 Olympic Games Transportation Program. Mr. Rowe was also
largely responsible for Los Angeles' participation in the Los Angeles Smart
Corridor Project, which was one of the early field-operational tests of ITS
concepts. From 1993 to 1997, Mr. Rowe provided ITS consultation services for
federal, state and municipal government agencies, in addition to private
corporations such as Rockwell International. Such consulting projects included
the National ITS Architecture Development Program. Mr. Rowe is a current and
founding member of ITS America, a member of the California Alliance for
Advanced Transportation Systems, and past Chairman of the ITS Council of the
44
<PAGE>
Institute of Transportation Engineers. Mr. Rowe is also a recipient of the
prestigious ITE Matson award for contributions to the science and technology of
transportation engineering. Mr. Rowe holds a Bachelor degree in Engineering
from the University of Southern California and a Masters in Engineering from
the University of California, Los Angeles.
Donald W. Sinnar has served as our Senior Vice President, Marketing and
Products since January 1998, and prior to that served as the Corporate Director
of Business Communications of Odetics since February 1997, and as the General
Manager of Odetics Telecom from 1995 to 1997. From 1993 until 1995, Mr. Sinnar
served as the Vice President, Marketing and Sales of Efratom Time and Frequency
Products, which was subsequently acquired by Datum, Inc. Mr. Sinnar also served
as the Vice President, Sales and Marketing of First Pacific Networks, Inc. from
1991 to 1993, Fiberstars, Inc. from 1989 to 1990 and American Telecorp., Inc.
from 1987 to 1989. Mr. Sinnar holds a B.S. in Accounting and Finance from
Benjamin Franklin University.
Abbas Mohaddes has served as our Vice President, Transportation Systems,
since October 1998. Prior to joining us, since January 1991, Mr. Mohaddes
served as Chief Executive Officer of our wholly owned subsidiary Meyer,
Mohaddes Associates, Inc., a consulting firm specializing in ITS and traffic
engineering. Mr. Mohaddes is a founding member of ITS America. Mr. Mohaddes is
also Chairman of the Committee on innovative procurement methods for traffic
control and a member of the traffic flow committee of the Transportation
Research Board. Mr. Mohaddes holds a B.S. in Civil Engineering and an M.S. in
Transportation Engineering from the University of Nebraska.
Andrew H. Card, Jr. has been a Director since January 1999. Since June 1999,
Mr. Card has served as Vice President, Government Relations, for General
Motors. From September 1993 to January 1999, Mr. Card served as President and
Chief Executive Officer of the American Automobile Manufacturers Association.
Mr. Card was U.S. Secretary of Transportation from February 1992 to January
1993 and White House Deputy Chief of Staff from January 1989 to February 1992.
Mr. Card has also been a Distinguished Fellow of the U.S. Chamber of Commerce
since January 1999. Mr. Card holds a B.S. in Engineering from the University of
South Carolina and an M.S. in Government from Harvard University.
Gary Hernandez has been a Director since January 1999. Mr. Hernandez has
been a partner in the law firm of Sonnenschein, Nath and Rosenthal since
December 1997. From December 1995 to December 1997, Mr. Hernandez was a partner
in the law firm of Long & Levit. Mr. Hernandez served as the Deputy Insurance
Commissioner of California from April 1991 to November 1995. Mr. Hernandez
received his B.A. from the University of California, Berkeley and his J.D. from
the University of California, Davis.
Gregory A. Miner has been a director since April 1998 and served as our
Chief Financial Officer and Secretary from our incorporation in September 1998
to December 1999. Mr. Miner is the Vice President, Finance and Chief Financial
Officer of Odetics and has served in those capacities since January 1994. In
April 1998, Mr. Miner also assumed the duties of Chief Operating Officer of
Odetics. Prior to joining Odetics, Mr. Miner served as Vice President, Chief
Financial Officer and a member of the Board of Directors of Laser Precision
Corporation, a manufacturer of telecommunications test equipment, from January
1984 until December 1993. Mr. Miner holds a B.A. degree from California
Polytechnic State University, San Luis Obispo, and is a certified public
accountant.
Samuel K. Skinner has been a Director since April 1999. From December 1991
to September 1992, Mr. Skinner served as Chief of Staff to President George
Bush and from February 1989 to December 1991 served as U.S. Secretary of
Transportation. Mr. Skinner served as President of Unicom and Commonwealth
Edison from February 1993 to April 1998. Mr. Skinner is currently co-chairman
of the law firm of Hopkins & Sutter. Mr. Skinner holds a B.A. in Accounting
from the University of Illinois and his J.D. from DePaul University.
William M. Spreitzer has been a Director since January 1999. From March 1991
to January 1998, Mr. Spreitzer was Technical Director of the ITS program for
General Motors. From 1966 to 1989, Mr. Spreitzer served as head of General
Motors Transportation Research Department. Mr. Spreitzer was also a founding
member of ITS America. Mr. Spreitzer holds a B.S. and an Honorary Professional
Degree in Aeronautical Engineering from the University of Detroit.
45
<PAGE>
Paul E. Wright has been a Director since January 1999. Since 1996, Mr.
Wright has served as President of Wright Associates, Inc. From 1988 to 1996,
Mr. Wright served as Chairman of Chrysler Technologies Corporation. Mr. Wright
is also a member of the board of directors of Odetics. Mr. Wright holds a B.S.
in Engineering from California Polytechnic State University, San Luis Obispo
and an M.S. in Engineering from the University of Pennsylvania.
In accordance with our certificate of incorporation, the terms of office of
the members of our board of directors are divided into three classes. Mr. Miner
and Mr. Skinner serve as Class I directors (whose terms expire in 2000), Mr.
Hernandez, Mr. Slutzky and Mr. Wright serve as Class II directors (whose terms
expire in 2001), and Mr. Card, Mr. Johnson and Mr. Spreitzer serve as Class III
directors (whose terms expire in 2002). At each annual meeting of our
stockholders, the successors to directors whose terms then expire will be
elected to serve from the time of election and qualification until the third
annual meeting following elections. If we add additional directors, they will
be distributed among the three classes so that, as nearly as possible, each
class will consist of one-third of the total number of directors. The
classification of our board of directors may have the effect of delaying or
preventing changes in control of our management.
Other Key Employees
Our other key employees are as follows:
James C. Barbaresso has served as our Midwest Regional Vice President,
Transportation Systems since June 1997. Prior to joining us, from April 1996 to
June 1997, Mr. Barbaresso served as Regional Manager, Midwest Region, for
Rockwell Transportation Systems. From February 1988 to April 1996, Mr.
Barbaresso served as Director, Planning and Development, for Oakland County,
Michigan. Mr. Barbaresso holds a B.S. in Sociology and an M.S. in
Transportation Planning from the University of Iowa.
Richard D. Crawshaw has served as our Vice President, Engineering, since
January 1999, and prior to that served as our Director of Engineering since
January 1998, and as Product Manager from November 1995 to December 1997. Mr.
Crawshaw worked as a Senior Software Engineer at Hewlett Packard. Mr. Crawshaw
holds a B.S. in Physics from Oregon State University and an M.S. in Physics
from the University of Oregon.
Clifford D. Heise has served as our Eastern Regional Vice President,
Transportation Systems, since January 1999. Mr. Heise served as our Regional
Manager, Eastern Region, from July 1997 to December 1999. From July 1996 to
June 1997, Mr. Heise served as Regional Manager, Eastern Region, and from
January 1994 to June 1996 was a Systems Engineer for Rockwell International
Corporation. Mr. Heise holds a B.S. in Mathematics from Oklahoma State
University.
Richard P. Hooper, Ph.D. has served as our Chief Scientist since June 1997
and Vice President since January 1999. Prior to joining us, Dr. Hooper served
as Chief Technologist at Rockwell International Corporation since April 1994.
Dr. Hooper holds a B.A. in Mathematics-Computer Science, and an M.S. and Ph.D.
in Computer Science from the University of California, Los Angeles.
Gregory McKhann has served as our Vice President of Strategic Business
Development since December 1999 and our Director of Strategic Business
Development from October 1999 to December 1999. From July 1997 to October 1999,
Mr. McKhann served as our Marketing Director. Prior to joining us from 1990 to
1997 Mr. McKhann served as a Marketing Manager at Rockwell International. Mr.
McKhann holds a B.S. degree in Computer Science from Duke University and an
M.B.A. from the University of California, Irvine.
Francis Memole has served as our Vice President of Vehicle Sensors since
December 1998. From June 1997 to December 1998, Mr. Memole served as our
Marketing Director. Prior to joining us, from January 1994 to June 1997, Mr.
Memole was a Vehicle Products Manager at Rockwell International. Mr. Memole
holds a B.S.E.E. from the University of South Florida and an M.B.A. from
Claremont Graduate School.
Michael P. Meyer serves as Vice President of Meyer, Mohaddes Associates,
Inc. From January 1991 until our acquisition of Meyer, Mohaddes, Mr. Meyer
served as both President and Secretary of Meyer, Mohaddes. Mr. Meyer holds a
B.S. and an M.S. in Civil Engineering from the University of California,
Berkeley.
46
<PAGE>
Arya Rohani has served as our Western Regional Vice President,
Transportation Systems, since 1997. Prior to joining us, from 1991 until 1997,
Mr. Rohani served as Manager of Transportation for the city of Irvine,
California. Mr. Rohani holds a B.S. in Engineering from the University of
Florida.
Board Committees
Our board of directors currently has two committees, a compensation
committee and an audit committee. The compensation committee consists of Mr.
Hernandez, Mr. Miner, Mr. Skinner and Mr. Slutzky. The compensation committee
reviews and recommends the salaries and bonuses of our officers and certain key
employees, establishes compensation and incentive plans, authorizes and
approves the granting of stock options and restricted stock in accordance with
our stock option and incentive plans and determines other fringe benefits.
The audit committee consists of Mr. Card, Mr. Spreitzer and Mr. Wright. The
audit committee recommends engagement of our independent public accountants and
is primarily responsible for approving the services performed by our
independent accountants and for reviewing and evaluating our accounting
principles and our system of internal controls.
Director Compensation
Directors who are not employed by us receive cash compensation of $12,000
per year for service on our board of directors, in addition to $1,500 for each
board meeting attended in person and $250 for each telephonic board meeting.
Directors are also reimbursed for out of pocket expenses incurred in connection
with service on our board of directors. In addition, each non-employee director
received an option to purchase 18,749 shares of our common stock upon
appointment as a director and are eligible to receive periodic stock option
grants under our 1998 Stock Incentive Plan. Upon completion of this offering,
Mr. Slutzky and Mr. Miner shall receive cash compensation equal to amounts
received by other non-employee directors and will be eligible to receive
periodic stock option grants under our 1998 Stock Incentive Plan.
Compensation Committee Interlocks and Insider Participation
Mr. Slutzky and Mr. Miner, each directors, are stockholders, executive
officers and directors of Odetics. Mr. Miner was also our Chief Financial
Officer until December 1999. No other relationship exists between our Board of
Directors or Compensation Committee and the Board of Directors of any other
company.
Executive Compensation
The following table summarizes all compensation earned by or paid to our
Chief Executive Officer and the other executive officers whose total salary and
bonus exceeded $100,000 for services rendered in all capacities to us during
the year ended March 31, 1999. We refer to these officers as our named
executive officers in other parts of this prospectus.
Summary Compensation Table
<TABLE>
<CAPTION>
Long Term
Compensation
Awards
Annual ------------
Compensation(1) Securities
--------------- Underlying All Other
Name and Principal Position(2) Salary(3) Bonus Options (#) Compensation(4)
- ------------------------------ --------- ----- ------------ ---------------
<S> <C> <C> <C> <C>
Jack Johnson ..................... $152,115 -- -- $3,920
Chief Executive Officer and
President
Gregory A. Miner(5)............... 156,751 -- -- 4,613
Chief Financial Officer and
Secretary
Stephen E. Rowe................... 136,794 -- -- 2,726
Senior Vice President and
Director of Transportation
Systems
Donald W. Sinnar ................. 157,198 -- -- 4,430
Senior Vice President, Marketing
and Products
</TABLE>
47
<PAGE>
- --------
(1) Other than salary and bonus described herein, we did not pay any named
executive officer, any fringe benefits, perquisites or other compensation
in excess of 10% of such executive officer's salary and bonus during
fiscal 1999.
(2) Mr. Mohaddes, our Vice President and Deputy Director of Transportation
Systems, joined us in October 1998. His annual salary is $127,200.
(3) Represents amounts paid by Odetics and its subsidiaries on an aggregated
basis. Odetics charged us for the salaries of Mr. Johnson, Mr. Rowe and
Mr. Sinnar and a portion of the salary for Mr. Miner.
(4) Represents Odetics matching contribution under the Odetics Section 401(k)
Plan.
(5) Mr. Miner resigned as the Chief Financial Officer and Secretary in
December 1999. Mr. Rumana joined us as Chief Financial Officer in
December 1999. Mr. Rumana's annual salary is $135,000.
Option Grants
There were no stock options granted to our named executive officers during
the fiscal year ended March 31, 1999.
Option exercises and fiscal year-end values
Our named executive officers did not exercise any stock options during the
fiscal year ended March 31, 1999. The following table sets forth the number and
value of the named executive officers' unexercised options at March 31, 1999,
based upon an exercise price of $1.07 per share. The value of unexercised in-
the-money options at March 31, 1999 represents an amount equal to the
difference between the assumed initial public offering price of $12.00 per
share and the option exercise price, multiplied by the number of unexercised
in-the-money options.
Aggregated Option Exercises In Last Fiscal Year and Fiscal Year End Option
Values
<TABLE>
<CAPTION>
Number of Securities Value of Unexercised
Underlying Unexercised in-the-money Options
Options at March 31, 1999 at March 31, 1999
------------------------- -------------------------
Name Exercisable Unexercisable Exercisable Unexercisable
- ---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Jack Johnson................ 56,247 168,742 614,780 1,844,350
Gregory A. Miner............ -- -- -- --
Stephen W. Rowe............. 46,872 140,618 512,311 1,536,955
Donald W. Sinnar............ 23,436 70,309 256,155 768,477
</TABLE>
Employment Agreements
Mr. Mohaddes is employed as our Vice President and Deputy Director of
Systems under a four-year employment agreement. The employment agreement
provides for the payment to him of a base salary of $120,000 per year. Mr.
Mohaddes may participate in all employee benefit plans or programs generally
available to our employees, and we will pay or reimburse him for all reasonable
and necessary out-of-pocket expenses he incurs in the performance of his
duties. If Mr. Mohaddes is terminated without cause or he voluntarily
terminates for good reason, he is entitled to severance pay in an amount equal
to the lesser of twelve months salary or the amount of salary remaining under
the term of his employment agreement.
1998 Stock Incentive Plan
Our 1998 Stock Incentive Plan was adopted by our board of directors on April
13, 1998 and was approved by our stockholders on April 14, 1998. Our 1998 Stock
Incentive Plan provides for awards or sales of shares, incentive stock options
and nonstatutory stock options. We have authorized a total of 3,000,000 shares
of common stock for issuance under our 1998 Stock Incentive Plan.
48
<PAGE>
Our 1998 Stock Incentive Plan consists of:
. the Discretionary Option Grant program under which eligible individuals
in our employ or service, including officers, non-employee board members
and consultants and independent advisors, may be granted options to
purchase shares of common stock at an exercise price not less than 85%
of their fair market value on the grant date;
. the Stock Issuance Program under which such individuals may be issued
shares of common stock directly, through the purchase of such shares at
a price not less than 85% of their fair market value at the time of
issuance or as a bonus tied to the performance of services; and
. the Automatic Option Grant Program under which option grants will
automatically be made at periodic intervals to eligible non-employee
members of our board of directors to purchase shares of common stock at
an exercise price per share equal to 100% of their fair market value on
the option grant date.
The Discretionary Option Grant and Stock Issuance Programs will be
administered by our board of directors prior to the effectiveness of our
registration statement under Section 12(g) of the 1934 Act and will be
administered by the compensation committee after that time. The compensation
committee or the plan administrator will have complete discretion to administer
the 1998 Stock Option Plan. The Automatic Option Grant Program will be self-
executing in accordance with the terms of that program, and neither the
compensation committee nor the board of directors will exercise any
administrative discretion with respect to option grants under that program.
In the event that we are acquired by merger or a sale of substantially all
of our assets, each outstanding option under the Discretionary Option Grant
Program which is not to be assumed by the successor corporation or replaced
with a cash incentive program of the successor corporation which preserves the
spread existing at the time of the transaction for any shares for which the
option is not otherwise at that time exercisable will automatically accelerate
in full, and all unvested shares under the Discretionary Option Grant and Stock
Issuance Programs will immediately vest, except to the extent our repurchase
rights with respect to those shares are assigned to the successor corporation.
The plan administrator will have complete discretion to grant one or more
options under the Discretionary Option Grant Program which will become
exercisable on an accelerated basis for all or part of the option shares if we
are acquired, whether or not those options are assumed, or if an optionee is
terminated within a designated period following an acquisition in which those
options are assumed. The vesting of outstanding shares under the Stock Issuance
Program may be accelerated upon similar terms and conditions.
We have authorized stock appreciation rights under the Discretionary Option
Grant Program which provide the optionholders with the election to surrender
their outstanding options for an appreciation distribution from us equal to the
excess of the fair market value of the vested shares of common stock subject to
the surrendered option over the aggregate exercise price payable for such
shares. Such appreciation distribution may be made in cash or in shares of
common stock.
The plan administrator will have the authority to effect the cancellation of
outstanding options under the Discretionary Option Grant Program in return for
the grant of new options for the same or different number of option shares with
an exercise price per share based upon the fair market value of the common
stock on the new grant date.
Under the Automatic Option Grant Program, as amended, each individual who
first becomes a non-employee member of our board of directors at any time
thereafter receives a 20,000 share option grant on the date such individual
joins the board of directors, provided such individual has not been employed by
us or any parent or subsidiary corporation. On the date of each annual
stockholders meeting, beginning with the annual meeting held in the calendar
year immediately following the effective date of this offering, each non-
employee member of our board of directors who is to continue to serve as non-
employee board member will automatically be granted an option to purchase
10,000 shares of common stock, provided such individual has
49
<PAGE>
served on our board of directors for at least six months. The shares subject to
each automatic grant will immediately vest in full upon certain changes in
control or ownership of us or upon the optionee's death or disability while a
member of our board of directors.
The board of directors may amend or modify the 1998 Stock Incentive Plan at
any time, subject to any required shareholder approval. The 1998 Stock
Incentive Plan will terminate on the earliest of April 13, 2008, the date on
which all shares available for issuance under the 1998 Stock Incentive Plan
have been issued as fully-vested shares or the termination of all outstanding
options in connection with certain changes in control or ownership of us.
Options Issued Outside of the 1998 Stock Incentive Plan
Prior to the adoption of our 1998 Stock Incentive Plan, we issued
nonqualified options to purchase 899,960 shares of our common stock to selected
employees, including executive officers. The purchase price under these
nonqualified option agreements is equal to the fair market value of our shares
of common stock at the time of grant.
Employee Stock Purchase Plan
In December 1999, our board of directors adopted our Employee Stock Purchase
Plan, to be effective upon completion of this offering. A total of 1,500,000
shares of common stock have been reserved for issuance under our Employee Stock
Purchase Plan. Our Employee Stock Purchase Plan, which is intended to qualify
under Section 423 of the Internal Revenue Code of 1986, as amended, will be
administered by the board of directors or by a committee appointed by the
board. Employees are eligible to participate if they are customarily employed
for at least 20 hours per week and for more than five months in any calendar
year. Employees who own more than 5% of our outstanding stock may not
participate. Our Employee Stock Purchase Plan permits eligible employees to
purchase common stock through payroll deductions which may not exceed the
lesser of 15% of any employee's compensation, or $25,000.
Our Employee Stock Purchase Plan will be implemented by six month offering
periods with purchases occurring at six month intervals commencing on the date
of this prospectus.
The purchase price of the common stock under our Employee Stock Purchase
plan will be equal to 85% of the fair market value per share of common stock on
either the start date of the offering period or on the purchase date, whichever
is less. Employees may end their participation in an offering period at any
time during that period, and participation ends automatically on termination of
employment with us. In the event of a proposed dissolution or liquidation of
our company, the offering periods terminate immediately prior to the
consummation of the proposed action, unless otherwise provided by our board of
directors. If there is a proposed sale of all or substantially all of our
assets or the merger of our company with or into another company, then the
offering period in progress will be shortened and a new exercise date will be
set that is before the sale or merger. Our Employee Stock Purchase Plan will
terminate in 2009, unless sooner terminated by the board of directors.
Section 401(k) Plan
We intend to adopt a 401(k) Plan covering our full-time employees following
the offering. Our 401(k) Plan is intended to qualify under Section 401(k) of
the Internal Revenue Code of 1986, as amended, so that contributions to the
401(k) Plan by employees or by us, and the investment earnings thereon, are not
taxable to employees until withdrawn from the 401(k) Plan, and so that we can
deduct any contributions that we make, at the time they are made. Pursuant to
the 401(k) Plan, employees may elect to reduce their current compensation by up
to the statutorily prescribed annual limit and to have the amount of such
reduction contributed to the 401(k) Plan. The 401(k) Plan permits us, but does
not require us to make, additional matching contributions to the 401(k) Plan on
behalf of all participants in the 401(k) Plan.
50
<PAGE>
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth specified information with respect to the
beneficial ownership of our common stock as of December 31, 1999:
. each person, or group of affiliated persons, who is known by us to
beneficially own 5% or more of the common stock;
. each of our selling stockholders;
. each of our directors;
. each of our named executive officers; and
. all of our directors and executive officers as a group.
Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission and includes voting and investment power
with respect to shares. Unless otherwise indicated, the persons named in the
table have sole voting and sole investment control with respect to all shares
beneficially owned. The number and percentage of shares beneficially owned are
based on 12,493,051 shares of common stock outstanding as of December 31, 1999.
The number and percentage of shares beneficially owned also assumes that:
. shares of common stock subject to options that are currently exercisable
or exercisable within 60 days of December 31, 1999 are deemed to be
outstanding and beneficially owned;
. the spin-off from Odetics has been consummated;
. 433,405 shares of common stock have been issued to DaimlerChrysler
Venture GmbH upon the conversion of the promissory note issued to
DaimlerChrysler Venture on January 25, 2000, assuming no adjustment to
the number of shares issued upon conversion; and
. executive officers, directors and selling stockholders who hold options
to purchase Odetics common stock have fully exercised their options.
<TABLE>
<CAPTION>
Shares Beneficially
Owned
Prior to the Shares Beneficially Owned
Offering Number of After the Offering
Name and Address of -------------------- Shares ------------------------------
Beneficial Owners Number Percentage Being Offered Number Percentage
------------------- --------- ---------- ------------- --------------- --------------
<S> <C> <C> <C> <C> <C>
Jack Johnson(1)......... 178,380 1.4 -- 178,380 1.0
Stephen E. Rowe(2)...... 105,091 * -- 105,091 *
Donald W. Sinnar(3)..... 58,612 * -- 58,612 *
Andrew Card(4).......... 6,249 * -- 6,249 *
Gary Hernandez(4)....... 6,249 * -- 6,249 *
Gregory A. Miner(5)..... 150,651 1.2 -- 150,651 *
Samuel K. Skinner....... 0 -- --
Joel Slutzky(6)......... 1,107,580 8.9 -- 1,107,580 6.6
William M.
Spreitzer(4)........... 6,249 * -- 6,249 *
Paul E. Wright(7)....... 68,014 * -- 68,014 *
Abbas Mohaddes(8)....... 405,989 3.2 58,511 347,478 2.1
Michael P. Meyer(9)..... 414,053 3.3 58,511 355,542 2.1
Gary Hamrick(10)........ 49,900 * 6,143 43,757 *
Viggen Davidian(11)..... 30,575 * 3,219 27,356 *
All executive officers
and directors as a
group (11 persons)..... 2,093,064 16.4 -- 2,034,553 12.0
</TABLE>
- --------
*Less than 1%
(1) Consists of options to purchase 112,494 shares of common stock exercisable
within 60 days of December 31, 1999 and 65,886 shares distributed in the
spin-off.
(2) Consists of options to purchase 93,745 shares of common stock exercisable
within 60 days of December 31, 1999 and 11,346 shares distributed in the
spin-off.
51
<PAGE>
(3) Consists of options to purchase 46,872 shares of common stock exercisable
within 60 days of December 31, 1999 and 11,740 shares distributed in the
spin-off.
(4) Consists of options to purchase 6,249 shares of common stock exercisable
within 60 days of December 31, 1999.
(5) Consists of 150,621 shares distributed in the spin-off.
(6) Consists of 1,107,580 shares distributed in the spin-off.
(7) Consists of options to purchase 6,249 shares of common stock exercisable
within 60 days of December 31, 1999 and 61,765 shares distributed in the
spin-off.
(8) Includes 30,919 shares distributed in the spin-off.
(9) Includes 38,983 shares distributed in the spin-off.
(10) Includes options to purchase 9,374 shares of common stock exercisable
within 60 days of December 31, 1999 and 1,145 shares distributed in the
spin-off.
(11) Includes options to purchase 7,030 shares of common stock exercisable
within 60 days of December 31, 1999 and 2,913 shares distributed in the
spin-off.
CERTAIN TRANSACTIONS
Odetics has provided us with significant management functions and services,
including treasury, accounting, tax, internal audit, legal, human resources,
sales and marketing and other support services. As a result of these services,
we incurred charges allocated by Odetics of $105,000 in fiscal 1997, $458,000
in fiscal 1998 and $881,000 in fiscal 1999 and $1.1 million for the nine months
ended December 31, 1999. We directly charged and/or allocated the costs of
these services using methods that we believe are reasonable, but these charges
are not necessarily indicative of the costs we would have incurred to obtain
these services from an independent agency. We will enter into the following
agreements with Odetics in connection with the spin-off: separation and
distribution agreement, services agreement, tax allocation agreement,
technology license agreement and promissory note. See "Arrangements with
Odetics."
We have agreed to take all reasonable steps necessary and appropriate to
satisfy the conditions to and effect the spin-off of our shares by Odetics. As
a result of the spin-off and assuming all Odetics stock options held by the
following persons are exercised, Mr. Johnson will receive 65,886 shares, Mr.
Miner will receive 150,621 shares, Mr. Mohaddes will receive 30,919 shares, Mr.
Rowe will receive 11,346 shares, Mr. Sinnar will receive 11,740 shares, Mr.
Slutzky will receive 1,107,580 shares and Mr. Wright will receive 61,765 shares
of our common stock.
52
<PAGE>
DESCRIPTION OF CAPITAL STOCK
Upon the closing of this offering, our authorized capital stock will consist
of 40,000,000 shares of common stock, $.001 par value, and 5,000,000 shares of
preferred stock, $.001 par value.
The following is a summary of certain provisions of our common stock,
preferred stock, certificate of incorporation and bylaws.
Common Stock
As of December 31, 1999, there were 12,059,646 shares of common stock
outstanding, held by five stockholders of record. In addition, upon completion
of this offering, 433,405 shares will be issued upon conversion of the
DaimlerChrysler Venture promissory note. All outstanding shares of our common
stock are, and the common stock to be issued in this offering will be, fully
paid and nonassessable.
The following summarizes the rights of holders of our common stock:
. each holder of shares of common stock is entitled to one vote per share
on all matters to be voted on by stockholders generally, including the
election of directors;
. there are no cumulative voting rights;
. the holders of our common stock are entitled to dividends and other
distributions as may be declared from time to time by the board of
directors out of funds legally available for that purpose, if any;
. upon our liquidation, dissolution or winding up, the holders of shares
of common stock will be entitled to share ratably in the distribution of
all of our assets remaining available for distribution after
satisfaction of all our liabilities and the payment of the liquidation
preference of any outstanding preferred stock;
. the holders of common stock have no preemptive or other subscription
rights to purchase shares of our stock, nor are they entitled to the
benefits of any redemption or sinking fund provisions; and
. shares of our common stock that will be distributed by Odetics in the
spin-off will not be publicly transferable for the period ending 180
days after the date of this prospectus.
Preferred Stock
There are no shares of preferred stock outstanding. Our certificate of
incorporation authorizes our board of directors to create and issue one or more
series of preferred stock and determine the rights and preferences of each
series within the limits set forth in our certificate of incorporation and
applicable law. Among other rights, the board of directors may determine,
without further vote or action by our stockholders:
. the number of shares constituting the series and the distinctive
designation of the series;
. the dividend rate on the shares of the series, whether dividends will be
cumulative, and if so, from which date or dates, and the relative rights
of priority, if any, of payment of dividends on shares of the series;
. whether the series will have voting rights in addition to the voting
rights provided by law and, if so, the terms of the voting rights;
. whether the series will have conversion privileges and, if so, the terms
and conditions of conversion;
. whether or not the shares of the series will be redeemable or
exchangeable, and, if so, the dates, terms and conditions of redemption
or exchange, as the case may be;
. whether the series will have a sinking fund for the redemption or
purchase of shares of that series, and, if so, the terms and amount of
the sinking fund; and
. the rights of the shares of the series in the event of our voluntary or
involuntary liquidation, dissolution or winding up and the relative
rights or priority, if any, of payment of shares of the series.
53
<PAGE>
Unless otherwise provided by our board of directors, the shares of all
series of preferred stock will rank on a parity with respect to the payment of
dividends and to the distribution of assets upon liquidation. Although we have
no present plans to issue any shares of preferred stock, any future issuance of
shares of preferred stock, or the issuance of rights to purchase preferred
shares, may have the effect of delaying, deferring or preventing a change of
control in our company or an unsolicited acquisition proposal. The issuance of
preferred stock also could decrease the amount of earnings and assets available
for distribution to the holders of common stock or could adversely affect the
rights and powers, including voting rights, of the holders of the common stock.
Registration Rights
After the offering, the holders of 683,769 shares of our common stock have
the right to cause us to register their shares under the Securities Act of 1933
anytime we file a registration statement to register any of our securities for
our own account. Such registration opportunities are unlimited but the number
of shares that can be registered may be eliminated entirely or cut back in
certain situations by the underwriters of such offering.
After April 25, 2001, DaimlerChrysler Venture or any transferee of the
shares of common stock issued to DaimlerChrysler Venture upon the conversion of
the promissory note issued to DaimlerChrysler Venture on January 25, 2000, has
the right to cause us to register its shares under the Securities Act of 1933
any time we file a registration statement to register any of our securities for
our own account. In addition, after April 25, 2001, and after we have qualified
for registration on Form S-3, DaimlerChrysler Venture or any transferee of the
DaimlerChrysler Venture shares may request that we register its shares under
the Securities Act of 1933 if the aggregate offering price is more than $2.0
million. We are not obligated to register such shares on Form S-3 more than
twice during any 12 month period.
Anti-Takeover Effects of Provisions of Delaware Law and Our Certificate of
Incorporation and Bylaws
We are subject to the provisions of Section 203 of the Delaware General
Corporation Law. Subject to certain exceptions, Section 203 prohibits a
publicly-held Delaware corporation from engaging in a "business combination"
with an "interested stockholder" for a period of three years after the date of
the transaction in which the person became an interested stockholder, unless
the interested stockholder attained such status with the approval of the board
of directors or the business combination is approved in a prescribed manner. A
"business combination" includes mergers, asset sales and other transactions
resulting in a financial benefit to the interested stockholder. Subject to
certain exceptions, an "interested stockholder" is a person who, together with
affiliates and associates, owns, or within three years did own, fifteen percent
or more of a corporation's voting stock. This statute could prohibit or delay
the accomplishment of mergers or other takeover or change in control attempts
relating to our company and, accordingly, may discourage attempts to acquire
us.
In addition, some provisions of our certificate of incorporation and bylaws
may be deemed to have an anti-takeover effect and may delay, defer or prevent a
tender offer or takeover attempt that a stockholder might consider in its best
interest, including those attempts that might result in a premium over the
market price for the shares held by our stockholders. These provisions include:
. Board of Directors. Our board of directors is divided into three classes
of directors serving staggered terms. Our certificate of incorporation
authorizes our board of directors to fill vacant directorships or
increase the size of the board of directors. Accordingly, even if a
stockholder succeeds in a proxy contest, he would likely only be able to
elect a minority of our board of directors at any one annual meeting.
. Stockholder Action; Special Meeting of Stockholders. Our certificate of
incorporation provides that stockholders may not take action by written
consent, but only at a duly called annual or special meeting of
stockholders. Our certificate of incorporation further provides that
special meetings of our stockholders may be called only by the Chairman
of the Board of directors, by a committee of the board of directors or a
majority of the board of directors, and in no event may the stockholders
call a special meeting. Thus, without approval by the board of directors
or Chairman, stockholders may take no action between annual meetings.
54
<PAGE>
. Advance Notice Requirements for Stockholder Proposals and Director
Nominations. The bylaws provide that stockholders seeking to bring
business before an annual meeting of stockholders, or to nominate
candidates for election as directors at an annual meeting of
stockholders, must provide timely notice of this intention in writing.
To be timely, a stockholder's notice must be delivered to or mailed and
received at our principal executive offices not less than 120 days prior
to the first anniversary of the date of our notice of annual meeting
provided with respect to the previous year's annual meeting of
stockholders. However, if no annual meeting of stockholders was held in
the previous year or the date of the annual meeting of stockholders has
been changed to be more than 30 calendar days from the time contemplated
at the time of the previous year's proxy statement, then a proposal
shall be received no later than the close of business on the tenth day
following the date on which notice of the date of the meeting was mailed
or a public announcement was made, whichever first occurs. The bylaws
also include a similar requirement for making nominations at special
meetings and specify requirements as to the form and content of a
stockholder's notice. These provisions may preclude stockholders from
bringing matters before an annual meeting of stockholders or from making
nominations for directors at an annual or special meeting of
stockholders.
. Authorized but Unissued Shares. The authorized but unissued shares of
our common stock and preferred stock are available for future issuance
without stockholder approval, subject to certain limitations imposed by
the Nasdaq National Market. These additional shares may be utilized for
a variety of corporate purposes, including future public offerings to
raise additional capital, corporate acquisitions and employee benefit
plans. The existence of authorized but unissued and unreserved common
stock and preferred stock could render more difficult or discourage an
attempt to obtain control of our company by means of a proxy contest,
tender offer, merger or otherwise.
Delaware law provides generally that the affirmative vote of a majority of
the shares entitled to vote on any matter is required to amend a corporation's
certificate of incorporation or bylaws, unless a corporation's certificate of
incorporation or bylaws, as the case may be, requires a greater percentage. We
have provisions in our certificate of incorporation and bylaws which require a
vote of 66 2/3% of the holders of the outstanding common stock to amend, revise
or repeal anti-takeover provisions.
Limitations of Liability and Indemnification Matters
Our certificate of incorporation provides that, except to the extent
permitted by Delaware law, our directors shall not be personally liable to us
or our stockholders for monetary damages for any breach of fiduciary duty as a
director. Under Delaware law, the directors have a fiduciary duty to us that is
not eliminated by this provision of our certificate and, in appropriate
circumstances, equitable remedies such as injunctive or other forms of
nonmonetary relief will remain available. In addition, each director will
continue to be subject to liability under Delaware law for breach of the
director's duty of loyalty to us for acts or omissions which are found by a
court of competent jurisdiction to be not in good faith or that involve
intentional misconduct, or knowing violations of law, for actions leading to
improper personal benefit to the director, and for payment of dividends or
approval of stock repurchases or redemptions that are prohibited by Delaware
law. This provision also does not affect the director's responsibilities under
any other laws, such as the federal securities laws.
Section 145 of the Delaware corporate law empowers a corporation to
indemnify its directors and officers and to purchase insurance with respect to
liability arising out of their capacity or status as directors and officers,
provided that this provision shall not eliminate or limit the liability of a
director:
. for any breach of the director's duty of loyalty to the corporation or
its stockholders;
. for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law;
. arising under Section 174 of the Delaware corporate law; or
. for any transaction from which the director derived an improper personal
benefit.
55
<PAGE>
Delaware law provides further that the indemnification permitted by that law
shall not be deemed exclusive of any other rights to which the directors and
officers may be entitled under a corporation's bylaws, any agreement, a vote of
stockholders or otherwise. Our certificate of incorporation eliminates the
personal liability of directors to the fullest extent permitted by Section
102(b)(7) of the Delaware corporate law and provides that we may fully
indemnify any person who was or is a party or is threatened to be made a party
to any threatened, pending or completed action, suit or proceeding, whether
civil, criminal, administrative or investigative, by reason of the fact that
such person is or was our director or officer or is or was serving at our
request as an employee, director or officer of another corporation,
partnership, joint venture, trust, employee benefit plan or other enterprise,
against expenses, judgments, fines and amounts paid in settlement actually and
reasonably incurred by such person in connection with such action, suit or
proceeding.
We have entered into agreements to indemnify our directors and officers, in
addition to the indemnification provided for in the bylaws. We believe that
these provisions and agreements are necessary to attract and retain qualified
directors and officers. Our bylaws also permit us to secure insurance on behalf
of any officer, director, employee or other agent for any liability arising out
of his or her actions, regardless of whether Delaware law would permit
indemnification.
Transfer Agent and Registrar
The transfer agent and registrar for our common stock will be EquiServe, LP.
56
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering there has been no public market for our common stock.
No predictions can be made regarding the effect, if any, that sales of shares
or the availability of shares for sale will have on the market price prevailing
from time to time. As described below, only a limited number of shares will be
available for sale shortly after this offering due to certain contractual and
legal restrictions on resale. Sales of substantial amounts of our common stock
in the public market after the restrictions lapse could adversely affect the
prevailing market price.
Upon completion of this offering, we will have 16,666,667 shares of common
stock outstanding based on 12,059,646 shares outstanding at December 31, 1999
and 433,405 shares to be issued upon conversion of the DaimlerChrysler
promissory note. The 4,300,000 shares of common stock being sold in this
offering will be freely tradable, other than by our "affiliates" as such term
is defined in the Securities Act, without restriction or registration under the
Securities Act. The remaining 12,366,667 shares includes 1,117,174 shares
issued and sold by us in private transactions and 11,249,493 shares to be
distributed by Odetics to its stockholders in the spin-off. The shares sold in
private transactions are restricted shares and are eligible for public sale if
registered under the Securities Act or sold in accordance with Rule 144 under
the Securities Act. The shares distributed in the spin-off will be freely
tradable, other than by persons deemed to be our affiliates, 180 days after the
date of this prospectus.
In general, under Rule 144 as currently in effect, beginning 90 days after
the date of this prospectus, a person not deemed to be our affiliate, or a
person holding restricted shares who beneficially owns shares that were not
acquired from us or our affiliates within the previous year, would be entitled
to sell within any three-month period a number of shares that does not exceed
the greater of:
. 1% of the then outstanding shares of common stock, or
. the average weekly trading volume of the common stock during the four
calendar weeks preceding the date on which notice of the sale is filed
with the Securities and Exchange Commission.
Sales under Rule 144 are subject to requirements relating to manner of sale,
notice and availability of current public information about us. However, if a
person, or persons whose shares are aggregated, is not deemed to have been our
affiliate at any time during the 90 days immediately preceding the sale, he or
she may sell his or her restricted shares under Rule 144(k) without regard to
the limitations described above if at least two years have elapsed since the
later of the date the shares were acquired from us or from our affiliates. The
foregoing is a summary of Rule 144 and is not intended to be a complete
description of it.
In connection with this offering, all current stockholders and substantially
all of our option holders will be subject to lock-up agreements with the
underwriters under which the holders of the shares and options to purchase
shares have agreed they will not sell any common stock owned by them, other
than the shares being sold by the selling stockholders identified in this
prospectus, without the prior written consent of Bear, Stearns & Co. Inc. for a
period of 180 days from the date of this prospectus.
The following table indicates approximately when the shares of our common
stock that are not being sold in the offering, but which will be outstanding
after the offering is completed, will be eligible for sale into the public
market.
Eligibility for Resale into Public Market of Restricted and Other Shares
<TABLE>
<CAPTION>
Time Number of Shares
---- ----------------
<S> <C>
Effective Date............................................. 0
180 days after Effective Date.............................. 11,933,262
After April 25, 2001....................................... 12,366,667
</TABLE>
2,166,697 of the shares eligible for sale after the 180 day period will be
subject to volume and other restrictions pursuant to Rule 144 because the
holders are our affiliates or have held their shares for less than two years.
57
<PAGE>
Subject to limitations on the aggregate offering price of a transaction and
other conditions, Rule 701 may be relied upon with respect to the resale of
securities originally purchased from us by our employees, directors, officers,
consultants or advisers prior to the closing of this offering, pursuant to
written compensatory benefit plans or written contracts relating to the
compensation of such persons. In addition, the Securities and Exchange
Commission has indicated that Rule 701 will apply to stock options granted by
us before this offering, along with the shares acquired upon exercise of these
options. Securities issued in reliance on Rule 701 are deemed to be restricted
shares and, beginning 90 days after the date of this prospectus, unless subject
to the contractual restrictions described above, may be sold by persons other
than affiliates subject only to the manner of sale provisions of Rule 144 and
by affiliates under Rule 144 without compliance with its one-year minimum
holding period requirements.
We intend to file a registration statement on Form S-8 under the Securities
Act to register shares of common stock reserved for issuance under our 1998
Stock Incentive Plan and Employee Stock Purchase Plan, thus permitting the
resale by non-affiliates of shares issued under the plans in the public market
without restriction under the Securities Act. Such registration statement will
become effective immediately upon filing which is expected shortly after the
closing of this offering. As of December 31, 1999, options to purchase
2,631,444 shares of common stock were outstanding, substantially all of which
are subject to lock-up agreements described above.
58
<PAGE>
UNDERWRITING
Subject to the terms and conditions set forth in an underwriting agreement
among the underwriters, the selling stockholders and us, each of the
underwriters named below, through their representatives Bear, Stearns & Co.
Inc., SG Cowen Securities Corporation and Cruttenden Roth Incorporated, has
severally agreed to purchase from us and the selling stockholders the aggregate
number of shares of common stock set forth opposite its name below:
<TABLE>
<CAPTION>
Number
Underwriter of Shares
----------- ---------
<S> <C>
Bear, Stearns & Co. Inc............................................
SG Cowen Securities Corporation....................................
Cruttenden Roth Incorporated.......................................
---------
Total............................................................ 4,300,000
=========
</TABLE>
The obligations of the underwriters under the underwriting agreement are
several and not joint. This means that each underwriter is obligated to
purchase from us only the number of shares of common stock set forth opposite
its name in the table above. Except in limited circumstances set forth in the
underwriting agreement, an underwriter has no obligation in relation to the
shares of common stock which any other underwriter has agreed to purchase.
The underwriting agreement provides that the obligations of the several
underwriters are subject to approval of various legal matters by their counsel
and to various other conditions including delivery of legal opinions by our
counsel, the delivery of a letter by our independent auditors and the accuracy
of the representations and warranties made by us in the underwriting agreement.
Under the underwriting agreement, the underwriters are obliged to purchase and
pay for all of the above shares of common stock if any are purchased.
Public Offering Price
The underwriters propose to offer the shares of common stock directly to the
public at the offering price set forth on the cover page of this prospectus and
at that price less a concession not in excess of $ per share of common
stock to other dealers who are members of the National Association of
Securities Dealers, Inc. The underwriters may allow, and those dealers may
reallow, concessions not in excess of $ per share of common stock to other
dealers. After the offering, the offering price, concessions and other selling
terms may be changed by the underwriters. Our common stock is offered subject
to receipt and acceptance by the underwriters and subject to other conditions,
including the right to reject orders in whole or in part. The underwriters have
informed us that the underwriters do not intend to confirm sales to any
accounts over which they exercise discretionary authority.
The following table summarizes the per share and total public offering price
of the shares of common stock in the offering, the underwriting compensation to
be paid by us and the selling stockholders to the underwriters by us and the
proceeds of the offering, before expenses, to us. The information presented
assumes either no exercise or full exercise by the underwriters of their over-
allotment option.
<TABLE>
<CAPTION>
Total
-----------------------------
Without With
Per Share Over-Allotment Over-Allotment
----------- -------------- --------------
<S> <C> <C> <C>
Public offering price............... $ $ $
Underwriting discounts and
commissions payable by us.......... $ $ $
Proceeds, before expenses, to us.... $ $ $
</TABLE>
The underwriting discount and commission per share is equal to the public
offering price per share of common stock less the amount paid by the
underwriters to us per share of common stock. The underwriting commissions and
fees are expected to represent % of the public offering price per share of
common stock.
59
<PAGE>
The following table indicates the expenses payable by us in the offering.
All amounts are estimates other than the Securities and Exchange Commission
registration fee, the NASD fee and the Nasdaq listing fee.
<TABLE>
<S> <C>
Securities Exchange Commission registration fee.................... $ 16,972
National Association of Securities Dealers, Inc. fee............... 6,911
Nasdaq listing fee................................................. 95,000
Accounting fees and expenses....................................... 325,000
Legal fees and expenses............................................ 250,000
Printing and engraving............................................. 150,000
Transfer agent fees and expenses................................... 15,000
Miscellaneous expenses............................................. 41,117
--------
Total............................................................ $900,000
========
</TABLE>
Over-Allotment Option to Purchase Additional Shares
We have granted a 30-day over-allotment option to the underwriters to
purchase an amount, up to an aggregate of 15% of the aggregate number of shares
appearing above, of additional shares of our common stock exercisable at the
offering price less the underwriting discounts and commissions, each as set
forth on the cover page of this prospectus. If the underwriters exercise this
option in whole or in part then each of the underwriters will become obligated,
subject to various conditions, to purchase approximately the same percentage of
such additional shares as is approximately the percentage of shares of common
stock that it is obligated to purchase of the total number of shares under the
underwriting agreement as shown in the table set for the above.
Indemnification and Contribution
The underwriting agreement provides that we and the selling stockholders
must indemnify the underwriters against liabilities arising out of any alleged
misstatements of fact or omissions in this prospectus and the registration
statement, including liabilities under the Securities Act, and contribute to
payments that the underwriters may be required to make in respect of those
liabilities.
Nasdaq National Market Quotation
Prior to the offering, there has been no public market for our common stock.
Consequently, the initial offering price for the common stock will be
determined by negotiations between us and the representatives of the
underwriters. Among the factors to be considered in those negotiations, the
primary factors will be our results of operations in recent periods, estimates
of our prospects and the industry in which we compete, an assessment of our
management, the general state of the securities markets at the time of the
offering and the prices of similar securities of generally comparable
companies. We have applied to have our common stock approved for quotation on
the Nasdaq National Market under the symbol "ITER." We cannot assure you,
however, that an active or orderly trading market will develop for the common
stock or that our common stock will trade in the public market subsequent to
the offering at or above the initial offering price.
Stabilization, Syndicate Short Position and Penalty Bids
In order to facilitate the offering, persons participating in the offering
may engage in transactions that stabilize, maintain or otherwise affect the
price of the common stock during and after the offering. Specifically, the
underwriters may over-allot or otherwise create a short position in the common
stock for their own account by selling more shares of common stock than we and
the selling stockholders have actually sold to them. The underwriters may elect
to cover any short position by purchasing shares of stock in the open market or
by exercising the over-allotment option granted to the underwriters. In
addition, the underwriters may stabilize or maintain the price of the common
stock by bidding for or purchasing shares of common stock in the open market
and may impose penalty bids, under which selling concessions allowed to
syndicate members or other
60
<PAGE>
broker-dealers participating in the offering are reclaimed if shares of common
stock previously distributed in the offering are repurchased in connection with
stabilization transactions or otherwise. The effect of these transactions may
be to stabilize or maintain the market price at a level above that which might
otherwise prevail in the open market. The imposition of a penalty bid may also
affect the price of the common stock to the extent that it discourages resales
of the common stock. No representation is made as to the magnitude or effect of
any of these activities.
Reserved Share Program
At our request, the underwriters have reserved for sale, at the initial
public offering price, up to 5% of the shares of common stock being offered by
this prospectus for employees and other persons or entities with when we have a
business relationship, and to their associates and related persons. The number
of shares available for sale to the general public in the offering will be
reduced to the extent those persons purchase these reserved shares. Purchases
of reserved shares are to be made through an account at Bear, Stearns & Co.
Inc. in accordance with Bear, Stearns & Co. Inc.'s procedures for opening an
account and transacting in securities. Any reserved shares not so purchased
will be offered by the underwriters to the general public on the same terms as
the other shares offered in this offering.
LEGAL MATTERS
The validity of the issuance of the shares of common stock offered hereby
will be passed upon for Iteris by Stradling Yocca Carlson & Rauth, a
Professional Corporation, Newport Beach, California. Certain legal matters in
connection with this offering will be passed upon for the representatives of
the underwriters by Katten Muchin Zavis, Chicago, Illinois.
EXPERTS
The consolidated financial statements and schedule of Iteris, Inc. as of
March 31, 1998 and 1999 and December 31, 1999, and for each of the three years
in the period ended March 31, 1999 and the nine months ended December 31, 1999,
and the financial statements of Meyer, Mohaddes Associates, Inc. for the year
ended December 31, 1997 and the period from January 1, 1998 to October 16,
1998, appearing in this prospectus and registration statement have been audited
by Ernst & Young LLP, independent auditors, as set forth in their reports
thereon appearing elsewhere herein, and are included in reliance on such
reports given on the authority of said firm as experts in accounting and
auditing.
61
<PAGE>
WHERE YOU CAN FIND ADDITIONAL INFORMATION
We have filed with the SEC a registration statement on Form S-1 with respect
to the common stock offered hereby. This prospectus, which constitutes a part
of the registration statement, does not contain all of the information set
forth in the registration statement or the exhibits and schedules which are
part of the registration statement. For further information with respect to us
and our common stock, reference is made to the registration statement and the
exhibits and schedules thereto. You may read and copy any document we file at
the SEC's public reference room in Washington, DC. Please call the SEC at 1-
800-SEC-0330 for further information on the public reference room. Our SEC
filings are also available to the public from the SEC's website at
http://www.sec.gov.
Upon completion of this offering, we will become subject to the information
and periodic reporting requirements of the Exchange Act and, in accordance
therewith, will file periodic reports, proxy statements and other information
with the SEC. Such periodic reports, proxy statements and other information
will be available for inspection and copying at the SEC's public reference
rooms, our website and the website of the SEC referred to above. Information on
our website does not constitute a part of this prospectus.
62
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
ITERIS, INC.
Report of Independent Auditors............................................. F-2
Consolidated Balance Sheets................................................ F-3
Consolidated Statements of Operations...................................... F-4
Consolidated Statements of Net Capital Deficiency.......................... F-5
Consolidated Statements of Cash Flows...................................... F-6
Notes to Consolidated Financial Statements................................. F-7
MEYER, MOHADDES ASSOCIATES, INC.
Report of Independent Auditors............................................. F-20
Balance Sheets............................................................. F-21
Statements of Income....................................................... F-22
Statements of Stockholders' Equity......................................... F-23
Statements of Cash Flows................................................... F-24
Notes to Financial Statements.............................................. F-25
ITERIS, INC.
Unaudited Pro Forma Statement of Operations................................ F-28
Notes to Unaudited Pro Forma Statement of Operations....................... F-29
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Stockholders and Board of Directors
Iteris, Inc.
We have audited the accompanying consolidated balance sheets of Iteris,
Inc., a subsidiary of Odetics, Inc., as of March 31, 1998 and 1999 and December
31, 1999, and the related consolidated statements of operations, net capital
deficiency, and cash flows for each of the three years in the period ended
March 31, 1999 and the nine months ended December 31, 1999. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the 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, Inc. at March 31, 1998 and 1999 and December 31, 1999, and the
consolidated results of its operations and its cash flows for each of the three
years in the period ended March 31, 1999 and the nine months ended December 31,
1999, in conformity with accounting principles generally accepted in the United
States.
Orange County, California Ernst & Young LLP
January 25, 2000, except for the
last paragraph of Note 7, as to
which date is February 10, 2000.
F-2
<PAGE>
ITERIS, INC.
(a subsidiary of Odetics, Inc.)
CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)
<TABLE>
<CAPTION>
March 31
------------------ December 31,
1998 1999 1999
-------- -------- ------------
<S> <C> <C> <C>
ASSETS
Current assets:
Cash......................................... $ 66 $ 1 $ 1
Trade accounts receivable, net of allowance
for doubtful accounts of $0 at March 1998,
$252 at March 1999 and $327 at December
1999........................................ 800 4,471 4,941
Costs and estimated earnings in excess of
billings on uncompleted contracts (Note 5).. 790 1,159 1,726
Inventories:
Finished goods.............................. 66 139 149
Work in process............................. 1,140 139 127
Materials and supplies...................... 912 585 1,018
Prepaid expenses and other................... 284 149 166
-------- -------- --------
Total current assets.......................... 4,058 6,643 8,128
Equipment, furniture and fixtures:
Equipment.................................... 1,551 1,915 2,329
Furniture and fixtures....................... 195 224 232
Building and improvements.................... -- 23 23
Allowances for depreciation.................. (325) (697) (1,095)
-------- -------- --------
1,421 1,465 1,489
Goodwill, net of accumulated amortization of
$448 at March 1998, $1,220 at March 1999 and
$2,035 at December 1999...................... 5,531 9,374 9,059
Other assets.................................. 423 -- --
-------- -------- --------
Total assets.................................. $ 11,433 $ 17,482 $ 18,676
======== ======== ========
LIABILITIES AND NET CAPITAL DEFICIENCY
Current liabilities:
Trade accounts payable....................... $ 1,006 $ 1,213 $ 1,320
Accrued payroll and related.................. 226 588 696
Accrued expenses............................. 517 686 141
Contract reserve............................. 4,541 3,892 3,264
Billings in excess of costs and estimated
earnings on uncompleted contracts (Note 5).. 1,083 333 609
Current portion of long-term debt............ -- 27 29
-------- -------- --------
Total current liabilities..................... 7,373 6,739 6,059
Long-term debt:
Payable to Parent............................ 20,184 29,950 37,645
Long-term, less current portion.............. -- 22 12
-------- -------- --------
Total long-term debt.......................... 20,184 29,972 37,657
Commitments and contingencies
Net capital deficiency:
Preferred stock, $.001 par value:
Authorized shares-5,000,000
Issued and outstanding shares-none.......... -- -- --
Common stock, $.001 par value:
Authorized shares-40,000,000
Issued and outstanding shares-11,250,000 at
March 31, 1998, 12,106,000 at March 31,
1999 and 12,060,000 at December 31, 1999... 1 1 1
Additional paid in capital................... -- 4,268 4,039
Accumulated deficit.......................... (16,125) (23,498) (29,080)
-------- -------- --------
Net capital deficiency........................ (16,124) (19,229) (25,040)
-------- -------- --------
Total liabilities and net capital deficiency.. $ 11,433 $ 17,482 $ 18,676
======== ======== ========
</TABLE>
See accompanying notes.
F-3
<PAGE>
ITERIS, INC.
(a subsidiary of Odetics, Inc.)
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share information)
<TABLE>
<CAPTION>
Nine months ended
Years ended March 31 December 31
------------------------- -------------------
1997 1998 1999 1998 1999
------- ------- ------- ----------- -------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Revenue:
Sensor...................... $ 538 $ 1,607 $ 4,339 $ 3,051 $ 5,880
Systems..................... -- 4,234 10,241 7,349 11,567
------- ------- ------- ------- -------
Total Revenue................. 538 5,841 14,580 10,400 17,447
Costs of sales:
Sensors..................... 470 2,555 3,129 2,342 3,282
Systems..................... -- 2,815 7,195 5,091 8,465
------- ------- ------- ------- -------
Total cost of sales........... 470 5,370 10,324 7,433 11,747
------- ------- ------- ------- -------
Gross profit.................. 68 471 4,256 2,967 5,700
Operating expenses:
Research and development.... 2,378 2,037 2,152 1,441 2,498
Selling, general and
administrative............. 1,411 3,414 5,729 3,844 4,717
Charges allocated by
Parent..................... 105 458 881 562 1,057
Other expense............... -- 647 700 439 819
------- ------- ------- ------- -------
Total operating expenses...... 3,894 6,556 9,462 6,286 9,091
------- ------- ------- ------- -------
Loss from operations.......... (3,826) (6,085) (5,206) (3,319) (3,391)
Interest charge allocated by
Parent....................... 680 1,344 2,167 1,550 2,191
------- ------- ------- ------- -------
Loss before income taxes...... (4,506) (7,429) (7,373) (4,869) (5,582)
Income taxes.................. -- -- -- -- --
------- ------- ------- ------- -------
Net loss...................... $(4,506) $(7,429) $(7,373) $(4,869) $(5,582)
------- ------- ------- ------- -------
Net loss per share of common
stock--basic and diluted..... $ (.40) $ (.66) $ (.63) $ (.42) $ (.46)
======= ======= ======= ======= =======
Shares used in computation of
net loss per share........... 11,250 11,250 11,642 11,489 12,077
======= ======= ======= ======= =======
</TABLE>
See accompanying notes.
F-4
<PAGE>
ITERIS, INC.
(a subsidiary of Odetics, Inc.)
CONSOLIDATED STATEMENTS OF NET CAPITAL DEFICIENCY
(In thousands)
<TABLE>
<CAPTION>
Common stock Additional
-------------- paid-in Accumulated
Shares Amount capital deficit Total
------ ------ ---------- ----------- --------
<S> <C> <C> <C> <C> <C>
Balance at March 31, 1996...... 11,250 $ 1 $ -- $ (4,190) $ (4,189)
Net loss..................... -- -- -- (4,506) (4,506)
------ --- ------ -------- --------
Balance at March 31, 1997...... 11,250 1 -- (8,696) (8,695)
Net loss..................... -- -- -- (7,429) (7,429)
------ --- ------ -------- --------
Balance at March 31, 1998...... 11,250 1 -- (16,125) (16,124)
Acquisition of MMA .......... 856 -- 4,268 -- 4,268
Net loss..................... -- -- -- (7,373) (7,373)
------ --- ------ -------- --------
Balance at March 31, 1999...... 12,106 1 4,268 (23,498) (19,229)
Purchase price adjustment.... (46) -- (249) -- (249)
Issuance of stock options.... -- -- 20 -- 20
Net loss..................... -- -- -- (5,582) (5,582)
------ --- ------ -------- --------
Balance at December 31, 1999... 12,060 $ 1 $4,039 $(29,080) $(25,040)
====== === ====== ======== ========
</TABLE>
See accompanying notes.
F-5
<PAGE>
ITERIS, INC.
(a subsidiary of Odetics, Inc.)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Nine months ended
Years ended March 31 December 31
------------------------- -------------------
1997 1998 1999 1998 1999
------- ------- ------- ----------- -------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Operating activities
Net loss...................... $(4,506) $(7,429) $(7,373) $(4,869) $(5,582)
Adjustments to reconcile net
loss to net cash used in
operating activities:
Depreciation and
amortization............... 64 696 1,144 775 1,213
Stock option expense........ -- -- -- -- 20
Changes in operating assets
and liabilities ........... (811) (379) (2,114) (1,360) (2,183)
------- ------- ------- ------- -------
Net cash used in operating
activities................... (5,253) (7,112) (8,343) (5,454) (6,532)
Investing activities
Purchases of equipment,
furniture and fixtures....... (233) (576) (239) (167) (422)
Cash paid in connection with
assumption of contracts ..... -- (2,183) -- -- --
------- ------- ------- ------- -------
Net cash used in investing
activities................... (233) (2,759) (239) (167) (422)
Financing activities
Net cash received from
Parent....................... 5,488 9,930 8,517 5,556 6,962
Payments on long-term debt.... -- -- -- -- (8)
------- ------- ------- ------- -------
Net cash provided by financing
activities................... 5,488 9,930 8,517 5,556 6,954
Increase (decrease) in cash... 2 59 (65) (65) --
Cash at beginning of year..... 5 7 66 66 1
------- ------- ------- ------- -------
Cash at end of year........... $ 7 $ 66 $ 1 $ 1 $ 1
======= ======= ======= ======= =======
</TABLE>
See accompanying notes.
F-6
<PAGE>
ITERIS, INC.
(a subsidiary of Odetics, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999
(1) Summary of Significant Accounting Policies
The Company
Iteris, Inc. (the Company), a 93% owned subsidiary of Odetics, Inc.
(Parent), designs, develops, markets and implements software based solutions
that improve the safety and efficiency of vehicle transportation. The Company
incorporates its software into sensor systems that it sells to vehicle
manufacturers in North America and Europe and to governmental agencies,
principally in the United States. It also develops transportation management
and traveler information systems for the intelligent transportation systems, or
ITS, industry; these systems are sold to local, state and national
transportation agencies in the United States.
Basis of Presentation
The accompanying financial statements include the accounts of the Company
and its wholly-owned subsidiary, Meyer, Mohaddes Associates, Inc., a California
corporation ("MMA"). All intercompany transactions and balances have been
eliminated in consolidation.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Significant estimates made in preparing the consolidated financial statements
include the allowance for doubtful accounts, inventory reserves, costs to
complete long-term contracts and income tax valuation allowances.
Revenue Recognition
Sensor revenue and related cost of sales are recognized on the date of
shipment or, if required, upon acceptance by the customer, provided that the
Company believes collectibility of the sales amount is probable. Accordingly,
at the date revenue is recognized, the significant uncertainties concerning the
sale have been resolved.
Systems revenue is derived primarily from long-term contracts with
governmental agencies. Systems 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.
Revenues from follow-on service and support, for which the Company charges
separately, are recognized when earned.
Concentration of Credit Risk
The Company performs periodic credit evaluations of its customers' financial
condition and generally does not require collateral. Credit losses have been
within management's expectations and within amounts provided through the
allowances for doubtful accounts. At March 31, 1998 and 1999 and December 31,
1999, accounts receivable from governmental agencies and prime government
contractors were approximately $586,000, $2,996,000, and $2,880,000,
respectively.
F-7
<PAGE>
ITERIS, INC.
(a subsidiary of Odetics, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Fair Values of Financial Instruments
The fair value of amounts payable to Parent approximates its carrying value
because interest charges thereon are based on the prevailing market rates of
interest charged to the Parent under related borrowings.
Inventory Valuation
Inventories are stated at the lower of cost or market. Cost is determined
on the first-in, first-out method.
Equipment, Furniture and Fixtures
Equipment, furniture and fixtures are recorded at cost and are depreciated
principally by the declining balance method over their estimated useful lives
(four to eight years).
Long-Lived Assets
Long-lived assets and certain identifiable intangibles held and used by the
Company are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. If required, the recoverability test is performed at the lowest
level practicable based on undiscounted net cash flows.
Goodwill
Goodwill, representing the excess of the purchase price over the fair value
of the net assets of acquired entities, is being amortized using the straight-
line method over the estimated useful life of 10 years.
Warranty
The Company provides a warranty of one to two years on all products and
records a related provision for estimated warranty costs at the date of sale.
The estimated warranty liability was $698,000, $95,000 and $95,000 at March
31, 1998 and 1999 and December 31, 1999, respectively.
Income Taxes
The Company is included in the consolidated federal income tax return of
its Parent. The Company and the Parent have entered into a tax sharing
arrangement whereby U.S. and state income taxes are computed in accordance
with consolidated return Section 1552(a)(1) of the Internal Revenue Code, as
if they were separate legal entities. Under this allocation, the consolidated
tax liability (including alternative minimum tax) for a given tax year is
allocated only to companies in the group which have separate taxable income
for that year. The tax liability is allocated pro rata based on each Company's
relative separate taxable income. Companies with losses are not allocated any
of the tax liability and are not given any benefit for their losses.
Deferred income tax assets and liabilities are computed for differences
between the financial statement and tax basis of assets and liabilities based
on enacted tax laws and rates applicable to the period in which differences
are expected to affect taxable income. Valuation allowances are established,
when necessary, to reduce deferred tax assets to amounts which are more likely
than not to be realized. The provision for income taxes consists of the taxes
payable or refundable for the period plus or minus the change during the
period in deferred income tax assets and liabilities.
F-8
<PAGE>
ITERIS, INC.
(a subsidiary of Odetics, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Stock-Based Compensation
The Company has elected to follow Accounting Principles Board Opinion No.
25, Accounting for Stock Issued to Employees (APB 25) and related
Interpretations in accounting for its employee stock options because the
alternative fair value accounting provided for under FASB Statement No. 123,
Accounting for Stock-Based Compensation, requires use of option valuation
models that were not developed for use in valuing employee stock options. Under
APB 25, if the exercise price of the Company's employee stock options equals
the market price of the underlying stock on the date of grant, no compensation
expense is recognized.
Earnings (Loss) Per Share
Basic and diluted earnings (loss) per share is computed using the weighted
average number of shares of common stock outstanding during the year and
excludes the anti-dilutive effects of options.
The following table sets forth the computation of loss per share:
<TABLE>
<CAPTION>
Nine months ended
Years ended March 31 December 31
---------------------------------- -----------------------
1997 1998 1999 1998 1999
---------- ---------- ---------- ----------- ----------
(Unaudited)
(In thousands, except share and per share information)
<S> <C> <C> <C> <C> <C>
Numerator: Net loss..... $ (4,506) $ (7,429) $ (7,373) $ (4,869) $ (5,582)
========== ========== ========== ========== ==========
Denominator: Weighted-
average shares
outstanding............ 11,249,500 11,249,500 11,642,200 11,489,400 12,076,500
========== ========== ========== ========== ==========
Basic and diluted loss
per share.............. $ (.40) $ (.66) $ (.63) $ (.42) $ (.46)
========== ========== ========== ========== ==========
</TABLE>
Research and Development Expenditures
Research and development expenditures are charged to expense in the period
incurred. The Company does not create computer software pursuant to a pre-
established detail program design. Accordingly, computer software costs
eligible for capitalization have been historically insignificant.
Advertising Expenses
The Company expenses advertising costs as incurred. Advertising expenses
totaled $16,000, $79,000, $261,000 and $266,000 in the years ended March 31,
1997, 1998 and 1999, and in the nine months ended December 31, 1999,
respectively.
Interim Financial Information
The financial statements for the nine months ended December 31, 1998 are
unaudited and condensed, but include all adjustments (consisting of only normal
recurring adjustments) which the Company considers necessary for a fair
statement of the financial position, operating results and cash flows for the
interim period.
Results for the nine month period ended December 31, 1999 are not
necessarily indicative of results to be expected for the entire fiscal year.
F-9
<PAGE>
ITERIS, INC.
(a subsidiary of Odetics, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(2) Transactions with Parent
The Company and its Parent have entered into an agreement whereby the
Company is charged for certain corporate general and administrative functions
performed by the Parent. These charges are included in the caption "Charges
allocated by Parent" in the accompanying statements of operations and consist
of significant management functions and services, including treasury,
accounting, tax, internal audit, legal, human resources, marketing and other
support services. Charges are allocated to the Company based on actual amounts
incurred on behalf of the Company as well as a proportionate amount of the
Parent's general and administrative expenses determined based on a weighted
average of the Company's revenue, payroll and fixed assets as compared to the
Parent's other subsidiaries and divisions. While Company management has no
practical means to estimate the costs that would have been incurred for such
services if it was a stand-alone company, management of the Company believes
the amount of such allocations are reasonable.
The Parent also manages domestic cash flows. Pursuant to this cash
management program the Company transfers any accumulated cash surplus to the
Parent's accounts and the Parent funds cash disbursements, as needed, to
maintain minimum account balances. The Company and its Parent have entered into
an agreement whereby the Parent charges the Company interest based on the
Company's net payable to the Parent balance calculated using the Parent's cost
of related borrowed funds (10.50% at December 31, 1999). The amounts due under
the payable are not due until after December 31, 2000, except in the case of an
initial public offering of the Company's common stock, which may accelerate the
repayment of certain amounts payable to the Parent. (Note 7)
The net payable to Parent represents the net of the following transactions:
cash advances to and from the Parent in connection with cash management policy;
the value of equity securities issued by the Parent in connection with the
Company's acquisitions; proceeds from sales to affiliates; payments for
purchases from affiliates; and corporate charges for rent, general corporate
overhead and interest.
(3) Assumption of Contracts
On June 20, 1997, the Company assumed certain contracts and acquired certain
assets from Rockwell Collins, Inc. (Rockwell). Revenues and costs related to
contracts assumed from Rockwell are included in the accompanying statement of
operations since the date of assumption. The total payment to Rockwell
associated with the assumption of contracts was approximately $2.2 million in
cash. In the transaction, a total of $1.3 million of assets were acquired, and
a $5.0 million provision for anticipated losses on a contract with the Michigan
Department of Transportation (MDOT), was assumed, which resulted in the
recognition of approximately $6.0 million of goodwill. Also, Rockwell agreed to
reimburse the Company for losses incurred on certain phases of the MDOT
contract. At December 31, 1999, the remaining provision for contract losses
totaled $3.3 million, which the Company expects to incur over the next two
years.
(4) Business Combinations
On October 16, 1998 the Company acquired MMA, a provider of transportation
engineering and planning services. Pursuant to the terms of the merger
agreement, the Company purchased all of the issued and outstanding shares of
common stock of MMA for $4.3 million by issuing 810,153 shares of the Company's
common stock (after giving effect to the purchase price adjustment required by
the merger agreement) and 55,245 shares of the Parent's Class A common stock
valued at $250,000. The value of the shares issued by the Parent is repayable
to the Parent and is included in "Payable to Parent" in the accompanying
balance sheet. The acquisition was accounted for as a purchase and,
accordingly, the results of operations for MMA are included in the Company's
consolidated results of operations from the date of acquisition.
F-10
<PAGE>
ITERIS, INC.
(a subsidiary of Odetics, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The merger agreement provides for MMA shareholders to receive additional
shares of the Parent's Class A common stock with a then market value of
$250,000 at each of April 16, 1999, October 16, 1999, April 16, 2000, October
16, 2000, and April 16, 2001 if an initial public offering of the Company's
common stock does not occur by each and any of those dates. In April and
October 1999, the Parent issued an additional 25,740 and 20,986 shares of its
Class A common stock to the MMA shareholders pursuant to this provision, which
was recorded by the Company as additional goodwill and an increase in the
Payable to Parent. In addition, if the Company does not complete its initial
public offering by October 2001, then the holders of the Company's common stock
issued in this transaction will have the right to require the Parent to
repurchase the Company's common stock for a purchase price of $10 per share.
On January 19, 1999 the Company acquired certain assets and assumed certain
liabilities of Viggen Corporation (Viggen), a provider of transportation
engineering and planning services, for an aggregate purchase price of $275,000
evidenced by the issuance of 27,603 shares of the Parent's Class A common
stock. The value of the shares issued is repayable by the Company and is
included in the "Payable to Parent" in the accompanying balance sheet. The
acquisition was accounted for as a purchase and accordingly, the results of
operations for Viggen are included in the Company's consolidated results of
operations from the date of acquisition.
The purchase price of the MMA and Viggen acquisitions was allocated to the
assets acquired and liabilities assumed as follows (in thousands):
<TABLE>
<CAPTION>
MMA Viggen
------- -------
<S> <C> <C>
Current assets............................................. $ 1,720 $ 1,045
Equipment, furniture and fixtures.......................... 84 77
Goodwill................................................... 3,870 746
Current liabilities........................................ (1,155) (1,593)
------- -------
$ 4,519 $ 275
======= =======
</TABLE>
The excess of cost over the fair value of net assets has been recorded as
goodwill and is being amortized over its expected benefit period of 10 years.
The following unaudited pro forma financial information presents the
consolidated results of operations as if the MMA acquisition had occurred at
the beginning of the year presented, and does not purport to be indicative of
the results that would have occurred had the acquisition occurred at such date
or of results which may occur in the future.
<TABLE>
<CAPTION>
Years ended
March 31
----------------
1998 1999
------- -------
<S> <C> <C>
Net revenue............................................... $10,067 $16,282
Net loss.................................................. $(7,125) $(7,851)
Net loss per share of common stock--basic and diluted..... $ (.59) $ (.67)
</TABLE>
Pro forma information for the Viggen acquisition is not material.
F-11
<PAGE>
ITERIS, INC.
(a subsidiary of Odetics, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(5) Costs and Estimated Earnings on Uncompleted Contracts
Costs incurred, estimated earnings and billings on uncompleted long-term
contracts are as follows:
<TABLE>
<CAPTION>
March 31
--------------- December 31,
1998 1999 1999
------- ------ ------------
(In thousands)
<S> <C> <C> <C>
Costs incurred on uncompleted contracts....... $ 3,214 $6,410 $ 9,575
Estimated earnings............................ 1,021 2,051 2,910
------- ------ -------
4,235 8,461 12,485
Less billings to date......................... 4,528 7,635 11,368
------- ------ -------
$ (293) $ 826 $ 1,117
======= ====== =======
Included in accompanying balance sheets:
Costs and estimated earnings in excess of
billings on uncompleted contracts.......... $ 790 $1,159 $ 1,726
Billings in excess of costs and estimated
earnings on uncompleted contracts.......... (1,083) (333) (609)
------- ------ -------
$ (293) $ 826 $ 1,117
======= ====== =======
</TABLE>
Costs and estimated earnings in excess of billings at March 31, 1998 and
1999 and at December 31, 1999 include $388,000, $182,000 and $702,000,
respectively, that were not billable as certain milestone objectives specified
in the contracts had not been attained.
Substantially all costs and estimated earnings in excess of billings at
December 31, 1999 are expected to be billed and collected during the year
ending December 31, 2000.
(6) Income Taxes
As a result of its tax sharing agreement with the Parent (Note 1), the
Company has received no tax benefit from its losses because it has not paid or
accrued federal or state income taxes. The Company's taxable losses from
inception through December 31, 1999 have been assumed by the Parent under the
Tax Sharing Arrangement and as a result are not available to the Company to
provide any tax benefit in future periods. If the Company had filed separate
tax returns, it would have had approximately $26.5 million of net operating
loss carryforwards that could have been used to reduce future taxable income.
F-12
<PAGE>
ITERIS, INC.
(a subsidiary of Odetics, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The components of the Company's deferred taxes are as follows:
<TABLE>
<CAPTION>
March 31
------------ December 31,
1998 1999 1999
----- ----- ------------
(In thousands)
<S> <C> <C> <C>
Deferred tax assets
Goodwill amortization........................... $ 162 $ 367 $ 446
Vacation pay/sick pay accrual................... 87 188 216
Inventory reserve............................... 93 28 53
Warranty reserve................................ 206 38 38
Bad debt reserve................................ -- 53 130
Other........................................... 4 16 17
----- ----- -----
Total deferred tax assets..................... 552 690 900
----- ----- -----
Deferred tax liability
Cash to accrual adjustment...................... -- (484) (323)
----- ----- -----
Total deferred tax liability.................. -- (484) (323)
----- ----- -----
Valuation allowance............................. (552) (206) (577)
----- ----- -----
Net deferred tax asset (liability)................ $ -- $ -- $ --
===== ===== =====
</TABLE>
Due to the Company's historical pattern of tax losses, management has
determined that a 100% valuation allowance against the Company's net deferred
tax assets is required. All changes in the valuation allowance result from this
determination.
The Company's effective tax rate differs from the U.S. statutory tax rate of
35% because of the establishment of the valuation allowance.
(7) Equity
In December 1999, in anticipation of an initial public offering of the
Company's common stock, and a concurrent spin-off of the Parent's investment in
the Company to the Parent's shareholders, the Company and the Parent entered
into a Separation and Distribution Agreement (Agreement), whereby the Parent
transferred the net assets and liabilities of its ITS division to the Company
in a transaction accounted for as a transfer between entities under common
control. Accordingly, such net assets and operations are reflected in the
Company's consolidated financial statements for all periods presented at the
historical amounts reported by the Parent in its consolidated financial
statements.
In addition to the transfer of assets, the Agreement requires the Company to
repay $10 million of its Payable to Parent immediately upon receipt of proceeds
from an initial public offering of the Company's common stock. The Agreement
also provides that all shares of the Company's common stock that the Parent may
distribute to its shareholders be restricted as to its transferability for a
period of 180 days from the effectiveness of the Company's registration
statement.
On January 25, 2000, the Company entered into an agreement with
DaimlerChrysler Venture GmbH (DaimlerChrysler Venture), pursuant to which
DaimlerChrysler Venture purchased a Subordinated Convertible Promissory Note
(Note) in the amount of $3.75 million. The Note is convertible into 433,405
shares of the Company's common stock either at the option of DaimlerChrysler
Venture at any time prior to the maturity, or automatically upon an initial
public offering of the Company's common stock or a change in control event, as
F-13
<PAGE>
ITERIS, INC.
(a subsidiary of Odetics, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
defined in the agreement. The number of shares issuable upon conversion is
subject to adjustment for changes in the fair value of the Company's common
stock from $12 per share. The Note matures on January 25, 2002 and bears
interest at 8 per cent per annum, which is to be forgiven if the conversion
feature is triggered. In January 2000, the Company recorded a noncash charge to
interest expense of approximately $1.45 million to give financial accounting
recognition to the beneficial conversion contained in the Note.
In January 2000, the Company reincorporated as a Delaware corporation and
changed its name to Iteris, Inc. Formerly the Company was known as Odetics ITS,
Inc. The Company also effected a 1.874916-to-1 common stock split on February
10, 2000. All share and per share information in the accompanying financial
statements have been restated to reflect this common stock split.
(8) Associates Incentive Programs
Under the terms of the Parent's Profit Sharing Plan, the Company contributes
to a trust fund such amounts as are determined annually by the Company's Board
of Directors. No contributions were made in the years ended March 31, 1998 or
1999 and in the nine months ended December 31, 1999. The Company's associates
participate in the Parent's 401(k) Plan. Under the 401(k) Plan, eligible
associates voluntarily contribute to the plan up to 15% of their salary through
payroll deductions. The Company matches 50% of contributions up to a stated
limit. Under the provisions of the 401(k) Plan, associates have four investment
choices, one of which is the purchase of Odetics' Class A common stock at
market price. Company matching contributions were approximately $40,000,
$114,000, $120,000 and $191,000 in the years ended March 31, 1997, 1998 and
1999, and in the nine months ended December 31, 1999, respectively.
The Company's employees with more than six months of eligible service
participate in the Parent's noncontributory Associate Stock Ownership Plan
(ASOP). The ASOP provides that Company contributions, which are determined
annually by the Board of Directors, may be in the form of cash or shares of the
Parent's stock. The Company contributions to the ASOP were approximately
$25,000, $51,000, $69,000 and none in the years ended March 31, 1997, 1998 and
1999 and in the nine months ended December 31, 1999, respectively.
Certain executives of the Company participate in the Parent's Executive
Deferral Plan under which a portion of their annual compensation may be
deferred. Compensation charged to operations and deferred under the plan
totaled $12,000, $12,000, $12,000 and $9,000 for the years ended March 31,
1997, 1998 and 1999 and in the nine months ended December 31, 1999,
respectively.
(9) Stock Options
In September 1997, the Company granted options to purchase up to 899,960
shares of common stock to certain members of senior management at an exercise
price of $1.07 per share. The options granted vested ratably at 25% on each of
the first four anniversaries of the grant date.
Subsequently, the Company's Board of Directors and its Parent adopted and
approved the 1998 Stock Incentive Plan (the "Plan"), as amended in February
2000 authorized 3,000,000 shares of the Company's common stock for issuance
under the Plan, and granted thereunder options to purchase 1,731,485 shares of
common stock at exercise prices of $1.60 to $9.07 per share, the fair value of
the underlying common stock as of the date of grant as determined by the Board
of Directors. Under terms of the Plan, eligible key employees, directors and
consultants can receive options to purchase shares of the Company's common
stock at prices not less than 100% for incentive stock options and not less
than 85% for nonqualified stock options of the fair value on the date of grant
as determined by the Board of Directors. Options expire ten years after date of
grant or 90 days after termination of employment. The options granted vested
ratably at 25% on each of the first four anniversaries of the grant date.
F-14
<PAGE>
ITERIS, INC.
(a subsidiary of Odetics, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
A summary of all Company stock option activity is as follows:
<TABLE>
<CAPTION>
Year ended March 31
--------------------------------------------------
Nine months ended
1997 1998 1999 December 31, 1999
---------------- ---------------- ---------------- -------------------
Weighted Weighted Weighted Weighted
Average Average Average Average
Exercise Exercise Exercise Exercise
Options Price Options Price Options Price Options Price
------- -------- ------- -------- ------- -------- -------- ---------
(In thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Options outstanding at
beginning of year...... -- $-- -- $ -- 900 $1.07 2,397 $ 1.86
Granted............... -- -- 900 1.07 1,497 2.34 234 3.62
Exercised............. -- -- -- -- -- -- -- --
Canceled.............. -- -- -- -- -- -- -- --
--- --- --- ----- ----- ----- -------- --------
Options outstanding at
end of year............ -- $-- 900 $1.07 2,397 $1.86 2,631 $ 2.02
=== === === ===== ===== ===== ======== ========
Exercisable at end of
year................... -- -- 225 773
=== === ===== ========
Available for grant at
end of year............ -- -- 1,484 1,269
=== === ===== ========
</TABLE>
During the nine month period ended December 31, 1999, the Company issued
158,000 options to employees for which the exercise price of the options was
less than the fair value of the Company's common stock at the date of grant. As
a result, the Company will incur compensation charges of $218,000, which will
be charged to operations over the four year vesting period of the options. In
the nine months ended December 31, 1999 the Company recorded $20,000 of expense
related to such options.
Pro Forma Disclosures of the Effect of Stock-Based Compensation Plans
Pro forma information regarding results of operations and net loss per share
is required by Statement No. 123 for stock-based awards to employees as if the
Company had accounted for such awards using a valuation method permitted under
Statement No. 123.
F-15
<PAGE>
ITERIS, INC.
(a subsidiary of Odetics, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Stock-based awards to employees under the Plan during the years ended March
31, 1999 and 1998, and for the nine months ended December 31, 1999, were valued
using the minimum value method, assuming no expected dividends and the
following weighted-averages:
<TABLE>
<CAPTION>
Years ended
March 31,
------------ Nine months ended
1998 1999 December 31, 1999
----- ----- -----------------
<S> <C> <C> <C>
Weighted Average:
Remaining contractual life--years.......... 9.50 9.41 8.42
Expected life--years....................... 5.50 5.41 4.42
Risk-free interest rate.................... 5.88% 4.83% 6.39%
Fair value of options granted.............. $0.59 $0.84 $2.04
</TABLE>
Should the Company complete an initial public offering of its common stock,
stock-based awards granted thereafter will be valued using the Black-Scholes
option pricing model. In addition to the factors used to estimate the fair
value of stock options issued using the minimum value method, the Black-Scholes
model considers the expected volatility of the Company's stock price,
determined in accordance with Statement No. 123, in arriving at an estimated
fair value. The minimum value method does not consider stock price volatility.
For purposes of pro forma disclosures, the estimated minimum value of the
Company's stock-based awards to employees is amortized over the options'
vesting period. The results of applying Statement No. 123 to the Company's
stock-based awards to employees would approximate the following (in thousands,
except per share data):
<TABLE>
<CAPTION>
Nine months ended
Years ended March 31, December 31,
------------------------- -------------------
1997 1998 1999 1998 1999
------- ------- ------- ----------- -------
(unaudited)
<S> <C> <C> <C> <C> <C>
Pro forma:
Net loss................. $(4,506) $(7,436) $(7,416) $(4,887) $(5,625)
Basic and diluted loss
per share............... $ (.40) $ (.66) $ (.64) $ (.43) $ (.47)
</TABLE>
(10) Commitments and Contingencies
The Company and its Parent are co-borrower and cross-guarantor under a loan
agreement with the Parent's banks. Virtually all of the Company's assets have
been pledged as collateral under the agreement. The maximum credit facility is
$17.0 million of which $11.0 million and no amount was outstanding at March 31,
1999 and December 31, 1999, respectively. The loan agreement expires December
31, 2000.
The Company has lease commitments for facilities in various locations
throughout the United States. The commitment under these noncancelable
operating leases at December 31, 1999 is as follows:
<TABLE>
<CAPTION>
Fiscal Year
-----------
<S> <C>
2000............................................................... $ 91,000
2001............................................................... 307,000
2002............................................................... 194,000
2003............................................................... 17,000
2004............................................................... --
--------
$609,000
========
</TABLE>
F-16
<PAGE>
ITERIS, INC.
(a subsidiary of Odetics, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Rent expense under operating leases totaled $42,000, $319,000, $424,000 and
$553,000, of which amounts charged under an agreement with the Parent were
$41,000, $138,000, $223,000 and $161,000, respectively for the years ended
March 31, 1997, 1998 and 1999 and in the nine months ended December 31, 1999.
(11) Significant Customer Information
Sales to major customers in the years ended March 31, 1997, 1998 and 1999
and the nine months ended December 31, 1999, and the related accounts
receivable balances at December 31, 1999 are as follows:
<TABLE>
<CAPTION>
Sales
-------------------------------------------
Nine Months Receivable
Ended Balance at
December 31, December 31,
Customer 1997 1998 1999 1999 1999
- -------- -------- ---------- ---------- ------------ ------------
<S> <C> <C> <C> <C> <C>
A.................... $ -- $1,946,000 $1,903,000 $1,962,000 $330,000
B.................... -- -- 1,579,000 -- --
C.................... -- 995,000 -- -- --
D.................... -- 656,000 2,497,000 2,058,000 265,000
E.................... 294,000 -- -- -- --
F.................... 111,000 -- -- -- --
</TABLE>
No other customer represented more than 10% of the Company's annual sales.
(12) Business Segment and Geographic Information
Effective April 1, 1998, the Company adopted the FASB Statement Financial
No. 131, Disclosure about Segments of an Enterprise and Related Information
(Statement 131). Statement No. 131 establishes standards for the way that
public business enterprises report information about operating segments both
for annual and interim financial periods. Operating segments are components of
an enterprise about which separate financial information is available that is
regularly evaluated by the chief operating decision maker in deciding how to
allocate resources and in assessing performance. Statement 131 also establishes
standards for related disclosures about products and services, geographic
areas, and major customers. The adoption of Statement 131 did not affect
results of operations or financial position, but did affect the following
disclosure of segment information.
The Company operates in two reportable segments: sensor and systems. The
accounting policies of the reportable segments are the same as those described
in the summary of significant accounting policies except that certain expenses,
such as interest, amortization of certain intangibles and certain corporate
expenses are not allocated to the segments. In addition, the Company's net
assets are not allocated to the segments.
The reportable segments are each managed separately because they manufacture
and distribute distinct products or services.
F-17
<PAGE>
ITERIS, INC.
(a subsidiary of Odetics, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Selected financial information for the Company's reportable segments for the
periods indicated are as follows:
<TABLE>
<CAPTION>
Sensors Systems Total
------- ------- -------
(In thousands)
<S> <C> <C> <C>
Year ended March 31, 1997
Revenue from external customers................. $ 538 $ -- $ 538
Depreciation and amortization................... 64 -- 64
Segment income (loss)........................... (3,721) -- (3,721)
Year ended March 31, 1998
Revenue from external customers................. $ 1,607 $ 4,234 $ 5,841
Depreciation and amortization................... 103 593 696
Segment income (loss)........................... (5,750) 123 (5,627)
Year ended March 31, 1999
Revenue from external customers................. $ 4,339 $10,241 $14,580
Depreciation and amortization................... 173 971 1,144
Segment income (loss)........................... (4,514) 189 (4,325)
Nine months ended December 31, 1998 (unaudited)
Revenue from external customers................. $ 3,051 $ 7,349 $10,400
Depreciation and amortization................... 116 659 775
Segment income (loss)........................... (2,390) (367) (2,757)
Nine months ended December 31, 1999
Revenue from external customers................. $ 5,880 $11,567 $17,447
Depreciation and amortization................... 189 1,024 1,213
Segment income (loss)........................... (2,278) (56) (2,334)
</TABLE>
The following reconciles segment income to consolidated income before income
taxes:
<TABLE>
<CAPTION>
Nine months ended
Year ended March 31 December 31
------------------------- -------------------
1997 1998 1999 1998 1999
------- ------- ------- ----------- -------
(Unaudited)
(In thousands)
<S> <C> <C> <C> <C> <C>
Total profit or loss for
reportable segments....... $(3,721) $(5,627) $(4,325) $(2,757) $(2,334)
Unallocated amounts:
Corporate and other
expenses................ (105) (458) (881) (562) (1,057)
Interest expense......... (680) (1,344) (2,167) (1,550) (2,191)
------- ------- ------- ------- -------
Income before income
taxes..................... $(4,506) $(7,429) $(7,373) $(4,869) $(5,582)
======= ======= ======= ======= =======
</TABLE>
Segment assets are not presented because the Company does not segregate its
assets by segment.
F-18
<PAGE>
ITERIS, INC.
(a subsidiary of Odetics, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Selected financial information for the Company's operations by geographic
segment is as follows:
<TABLE>
<CAPTION>
Years ended Nine months ended
March 31 December 31
------------------- -------------------
1997 1998 1999 1998 1999
---- ------ ------- ----------- -------
(Unaudited)
(In thousands)
<S> <C> <C> <C> <C> <C>
Geographic Area Revenue
United States....................... $538 $5,841 $13,002 $ 8,822 $17,361
Asia Pacific Rim.................... -- -- 1,578 1,578 86
---- ------ ------- ------- -------
Total net revenue................... $538 $5,841 $14,580 $10,400 $17,447
Geographic Area Long-Lived Assets
United States....................... $264 $6,953 $10,839 $ 9,827 $10,548
Asia Pacific Rim.................... 622 422 -- -- --
---- ------ ------- ------- -------
Total long-lived assets............. $886 $7,375 $10,839 $ 9,827 $10,548
==== ====== ======= ======= =======
</TABLE>
(13) Supplemental Cash Flow Information
<TABLE>
<CAPTION>
Nine months ended
Years ended March 31 December 31
---------------------- -------------------
1997 1998 1999 1998 1999
----- ------ ------- ----------- -------
(Unaudited)
(In thousands)
<S> <C> <C> <C> <C> <C>
Net cash used in changes in
operating assets and
liabilities:
Increase in accounts
receivable.................. $ (26) $ (499) $(1,242) $ (825) $ (470)
(Increase) decrease in net
costs and estimated earnings
in excess of billings....... 62 293 (653) (963) (291)
(Increase) decrease in
inventories................. (248) (1,290) 1,255 1,438 (431)
(Increase) decrease in
prepaid expenses and other
assets...................... (716) (56) 570 604 (33)
Increase (decrease) in
accounts payable and accrued
expenses.................... 117 1,173 (2,044) (1,614) (958)
----- ------ ------- ------- -------
Changes in operating assets and
liabilities................... $(811) $ (379) $(2,114) $(1,360) $(2,183)
===== ====== ======= ======= =======
Non-cash transaction during the
year:
Purchase of MMA for stock and
payable to Parent........... $ -- $ -- $ 4,638 $ -- $ 500
===== ====== ======= ======= =======
Purchase of Viggen for
payable to Parent........... $ -- $ -- $ 275 $ -- $ --
===== ====== ======= ======= =======
MMA purchase price
adjustment.................. $ -- $ -- $ -- $ -- $ 249
===== ====== ======= ======= =======
</TABLE>
F-19
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Shareholders and Board of Directors
Meyer, Mohaddes Associates, Inc.:
We have audited the accompanying balance sheets of Meyer, Mohaddes
Associates, Inc. (the Company), as of December 31, 1997 and October 16, 1998
and the related statements of income, shareholders' equity, and cash flows for
the year ended December 31, 1997 and the period from January 1, 1998 to October
16, 1998. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audits in accordance with auditing standards generally
accepted in the 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 audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Meyer, Mohaddes Associates,
Inc. at December 31, 1997 and October 16, 1998, and the results of its
operations and cash flows for the year ended December 31, 1997 and the period
from January 1, 1998 to October 16, 1998, in conformity with accounting
principles generally accepted in the United States.
/s/ Ernst & Young LLP
Orange County, California
November 11, 1998
F-20
<PAGE>
MEYER, MOHADDES ASSOCIATES, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, October 16,
1997 1998
------------ -----------
<S> <C> <C>
ASSETS
Current assets:
Cash................................................ $ -- --
Trade accounts receivable, net of allowance for
doubtful accounts of $22,000 at December 31, 1997
and $27,000 at October 16, 1998.................... 960,000 1,466,000
Costs and estimated earnings in excess of billings
on uncompleted contracts (Note 2).................. 580,000 420,000
---------- ----------
Total current assets.............................. 1,540,000 1,886,000
Equipment, furniture and fixtures:
Equipment........................................... 154,000 185,000
Furniture and fixtures.............................. 28,000 28,000
Allowances for depreciation......................... (147,000) (160,000)
---------- ----------
35,000 53,000
Other assets.......................................... 28,000 32,000
---------- ----------
Total assets.......................................... $1,603,000 $1,971,000
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Line of credit...................................... $ 100,000 --
Trade accounts payable.............................. 301,000 237,000
Bank overdraft...................................... 8,000 167,000
Deferred tax liabilities............................ 470,000 581,000
Accrued payroll and related......................... 82,000 140,000
Accrued expenses.................................... 16,000 81,000
---------- ----------
Total current liabilities......................... 977,000 1,206,000
Commitments and contingencies (Note 6)
Shareholders' equity:
Common stock, no par value:
Authorized shares 100,000
Issued and outstanding shares 2,160 at December
31, 1997 and October 16, 1998.................... 22,000 22,000
Retained earnings................................... 604,000 743,000
---------- ----------
Total shareholder's equity............................ 626,000 765,000
---------- ----------
Total liabilities and shareholders' equity............ $1,603,000 $1,971,000
========== ==========
</TABLE>
See accompanying notes.
F-21
<PAGE>
MEYER, MOHADDES ASSOCIATES, INC.
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Period From
Year ended January 1, 1998 to
December 31, 1997 October 16, 1998
----------------- ------------------
<S> <C> <C>
Contract revenue......................... $3,625,000 $3,151,000
Cost of contract revenue................. 1,910,000 1,467,000
---------- ----------
Gross profit............................. 1,715,000 1,684,000
Selling, general and administrative
expenses................................ 1,457,000 1,432,000
---------- ----------
Income from operations................... 258,000 252,000
Interest expense......................... (10,000) (1,000)
Other income............................. 19,000 --
---------- ----------
Income before income taxes............... 267,000 251,000
Income taxes............................. 119,000 112,000
---------- ----------
Net income............................... $ 148,000 $ 139,000
========== ==========
</TABLE>
See accompanying notes.
F-22
<PAGE>
MEYER, MOHADDES ASSOCIATES, INC.
STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Common stock
-------------- Retained
Shares Amount earnings Total
------ ------- -------- --------
<S> <C> <C> <C> <C>
Balance at December 31, 1996.................. 2,160 $22,000 $456,000 $478,000
Net income.................................. -- -- 148,000 148,000
----- ------- -------- --------
Balance at December 31, 1997.................. 2,160 22,000 604,000 626,000
Net income.................................. -- -- 139,000 139,000
----- ------- -------- --------
Balance at October 16, 1999................... 2,160 $22,000 $743,000 $765,000
===== ======= ======== ========
</TABLE>
See accompanying notes.
F-23
<PAGE>
MEYER, MOHADDES ASSOCIATES, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Period from
January 1,
1998
Year ended to
December 31, October 16,
1997 1998
------------ -----------
<S> <C> <C>
Operating activities:
Net income........................................... $ 148,000 $139,000
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization...................... 25,000 17,000
Provision for losses on accounts receivable........ 22,000 5,000
Provision for deferred income taxes................ 118,000 111,000
Changes in operating assets and liabilities (Note
8)................................................ (280,000) (141,000)
--------- --------
Net cash provided by operating activities............ 33,000 131,000
Investing activities:
Purchases of equipment, furniture and fixtures....... (2,000) (31,000)
Financing activities:
Net payments on line of credit and note payable...... (110,000) (100,000)
--------- --------
Decrease in cash..................................... (79,000) --
Cash at beginning of year............................ 79,000 --
--------- --------
Cash at end of year.................................. $ -- $ --
========= ========
</TABLE>
See accompanying notes.
F-24
<PAGE>
MEYER, MOHADDES ASSOCIATES, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 1997
(1) Summary of Significant Accounting Policies
The Company
Meyer, Mohaddes Associates, Inc. (the Company), a California corporation,
provides transportation engineering and planning services to the public and
private sectors. The Company's customers consist mainly of state and local
government and related agencies, mainly in California.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Significant estimates made in preparing the financial statements include the
allowance for doubtful accounts, and costs to complete long-term contracts.
Revenue Recognition
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.
Equipment, Furniture and Fixtures
Equipment, furniture and fixtures are recorded at cost and are depreciated
principally by the declining balance method over their estimated useful lives
(four to eight years).
Concentration of Credit Risk
The Company performs periodic credit evaluations of its customers' financial
condition and generally does not require collateral. Credit losses have been
within management's expectations and within amounts provided through the
allowances for doubtful accounts. At December 31, 1997 and October 16, 1998,
accounts receivable from governmental agencies and prime government contractors
were approximately $764,000 and $1,120,000, respectively.
F-25
<PAGE>
MEYER, MOHADDES ASSOCIATES, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
(2) Costs and Estimated Earnings on Uncompleted Contracts
Costs and estimated earnings in excess of billings at December 31, 1997 and
October 16, 1998 include $127,000 and $147,000, respectively, that were not
billable as certain milestone objectives specified in the contracts had not
been attained. Substantially all costs and estimated earnings in excess of
billings at October 16, 1998 are expected to be billed and collected within one
year.
(3) Line of Credit
On April 3, 1997, the Company entered into a line of credit agreement with a
bank collateralized by substantially all of the Company's assets. Under the
terms of the agreement, the Company is required to comply with certain
financial covenants. The Company may borrow up to $300,000 with interest at the
bank's reference rate plus two percent (10.5% as of December 31, 1997 and
October 16, 1998). At December 31, 1997 and October 16, 1998, $100,000 and $0,
respectively, was outstanding. The agreement expires on March 1, 1999.
In addition, the Company entered into a loan agreement with a bank
collateralized by substantially all of the Company's assets. Under the terms of
the agreement, the Company is required to comply with certain financial
covenants. The Company may borrow up to $100,000 with interest at the bank's
reference rate plus three percent (11.5% as of December 31, 1997). The Company
had no borrowings outstanding under this agreement at December 31, 1997 and
October 16, 1998.
(4) Income Taxes
The Company utilizes the liability method of accounting for income taxes as
set forth in Statement of Financial Accounting Standards No. 109, Accounting
for Income Taxes. Under the liability method, deferred taxes are determined
based on the difference between the financial statement and tax bases of assets
and liabilities using enacted tax rates.
The components of the provision (benefit) for income taxes are as follows
for the year ended December 31, 1997 and the period from January 1, 1998 to
October 16, 1998:
<TABLE>
<CAPTION>
Period from
January 1,
Year ended 1998 to
December 31, October 16,
1997 1998
------------ -----------
<S> <C> <C>
Current:
Federal............................................ $ -- $ --
State.............................................. 1,000 1,000
-------- --------
1,000 1,000
Deferred:
Federal............................................ 92,000 84,000
State.............................................. 26,000 27,000
-------- --------
118,000 111,000
-------- --------
Provision for income taxes.......................... $119,000 $112,000
======== ========
</TABLE>
F-26
<PAGE>
MEYER, MOHADDES ASSOCIATES, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
The reconciliation of the income tax provision to taxes computed at the U.S.
federal statutory rate of 35% is as follows at December 31, 1997 and for the
period from January 1, 1998 to October 16, 1998:
<TABLE>
<CAPTION>
Period from
January 1,
Year ended 1998 to
December 31, October 16,
1997 1998
------------ -----------
<S> <C> <C>
Income tax at statutory rates..................... $ 93,000 $ 88,000
State income taxes, net of federal tax benefit.... 17,000 18,000
Other............................................. 9,000 6,000
-------- --------
$119,000 $112,000
======== ========
</TABLE>
The Company's deferred tax liabilities consists of an accrual to cash
conversion of $470,000 and $581,000, respectively at December 31, 1997 and
October 16, 1998.
The Company has federal and California net operating loss carryforwards of
approximately $7,000 and $2,000 respectively which begin to expire in 2011 and
2001, respectively.
(5) Employee Incentive Programs
The Company sponsors a 401(k) Plan in which all employees are eligible to
participate. Under the 401(k) Plan, eligible employees voluntarily contribute
to the plan up to 5% of their salary through payroll deductions. The Company
matches 45% of contributions up to a stated limit. Under the provisions of the
401(k) Plan, employees have six investment choices. Company matching
contributions were approximately $35,000 and $112,000, respectively, in the
year ended December 31, 1997 and in the period from January 1, 1998 to October
16, 1998.
Employees also participate in the Company's bonus program. The Company paid
approximately $134,000 and $250,000, respectively, in the year ended December
31, 1997 and in the period from January 1, 1998 to October 16, 1998.
(6) Commitments and Contingencies
The Company has entered into an operating leases for certain equipment and
facilities with varying terms and escalation clauses. Future minimum payments
under noncancelable operating losses with initial terms of one year or more are
as follows: $111,000 in 1999, $90,000 in 2000, $57,000 in 2001 and $45,000 in
2002.
Rent expense for the year ended December 31, 1997 and the period from
January 1, 1998 to October 16, 1999 aggregated $164,000 and $115,000,
respectively.
(7) Supplemental Cash Flow Information
<TABLE>
<CAPTION>
Period from
January 1,
Year ended 1998 to
December 31, October 16,
1997 1998
------------ -----------
<S> <C> <C>
Changes in operating assets and liabilities:
(Increase) decrease in accounts receivable....... $ 35,000 $(511,000)
Increase in net costs and estimated earnings in
excess of billings.............................. (297,000) 160,000
(Increase) decrease in prepaid expenses and other
assets.......................................... 8,000 (8,000)
Increase (decrease) in accounts payable and
accrued expenses................................ (26,000) 218,000
--------- ---------
Net cash used by changes in operating assets and
liabilities...................................... $(280,000) (141,000)
========= =========
Cash paid during the year:
Interest......................................... $ 10,000 $ 1,000
Income taxes paid................................ 1,000 1,000
</TABLE>
F-27
<PAGE>
ITERIS, INC.
UNAUDITED PRO FORMA STATEMENT OF OPERATIONS
Year ended March 31, 1999
On October 16, 1998, the Company acquired Meyer, Mohaddes Associates, Inc.,
a provider of transportation engineering and planning services. Pursuant to the
terms of the merger agreement, the Company purchased all of the issued and
outstanding shares of common stock of MMA for $4.3 million by issuing 810,153
shares of the Company's common stock (after giving effect to the purchase price
adjustment required by the merger agreement) and 55,245 shares of the Parent's
Class A common stock valued at $250,000. The value of the shares issued by the
Parent is repayable to the Parent. The acquisition was accounted for as a
purchase and, accordingly, the results of operations for MMA are included in
the Company's consolidated financial statements from the date of acquisition.
The following unaudited pro forma statement of operations presents the combined
results of the Company and of MMA as if the acquisition had occurred as of
April 1, 1998.
<TABLE>
<CAPTION>
Iteris MMA
Year ended April 1, 1998 to Pro Forma
March 31, 1999 October 16, 1998 Adjustments Pro Forma
-------------- ---------------- ----------- ----------
(in thousands, except share and per share amounts)
<S> <C> <C> <C> <C>
Revenue:
Sensor................ $ 4,339 $ $ $ 4,339
Systems............... 10,241 1,702 11,943
---------- ------ ----------
Total revenue..... 14,580 1,702 16,282
Costs of sales:
Sensors............... 3,129 3,129
Systems............... 7,195 857 8,052
---------- ------ ----------
Total costs of
sales............ 10,324 857 11,181
---------- ------ ----------
Gross profit............ 4,256 845 5,101
Operating expenses:
Research and
development.......... 2,152 2,152
Selling, general and
administrative....... 6,061 1,099 7,160
Charges allocated by
Parent (Note 2)...... 881 881
Other expenses........ 368 210 (a) 578
---------- ------ ------- ----------
Total operating
expenses............... 9,462 1,099 210 10,771
---------- ------ ------- ----------
Loss from operations.... (5,206) (254) (210) (5,670)
Interest charge
allocated by Parent.... 2,167 14 (b) 2,181
---------- ------ ------- ----------
Loss before income
taxes.................. (7,373) (254) (224) (7,851)
Income taxes (Note 6)... -- (113) 113 (c) --
---------- ------ ------- ----------
Net loss................ $ (7,373) $ (141) $ (337) $ (7,851)
========== ====== ======= ==========
Net loss per share of
common stock--basic and
diluted................ $ (0.63) $ (0.65)
========== ==========
Shares used in
computation of net loss
per share.............. 11,642,000 418,000 (d) 12,060,000
========== ======= ==========
</TABLE>
F-28
<PAGE>
ITERIS, INC.
NOTES TO UNAUDITED PRO FORMA STATEMENT OF OPERATIONS
(a) Pro forma amortization expense for period from April 1, 1999 to October
16, 1999 of $3.8 million of goodwill arising from acquisition based on
expected benefit period of 10 years.
(b) Pro forma interest expense for period from April 1, 1999 to October 16,
1999 on $250,000 of MMA purchase price paid by Parent. This amount is
included in "Payable to Parent" in the Company's consolidated balance
sheet at March 31, 1999. Interest expense is calculated at 10.5%, the
Parent's cost of related borrowed funds.
(c) Elimination of tax benefit recognized by MMA.
(d) Inclusion of 810,153 shares of the Company's common stock, which were
issued in the acquisition of MMA, in the weighted average number of
shares outstanding for the entire year used in calculating net income
(loss) per share.
(e) The merger agreement provides for the MMA shareholders to receive
additional shares from the Parent with a then market value of $250,000
at each of April 16, 1999, October 16, 1999, April 16, 2000, October
16, 2000 and April 16, 2001 if an initial public offering of the
Company's common stock does not occur by each and any of those dates.
In April 1999 and October 1998, the Parent issued an additional 25,740
and 20,986 shares of its Class A common stock valued $250,000 to the
MMA shareholders pursuant to this provision, which was recorded by the
Company as additional goodwill and an increase in the payable to
Parent.
F-29
<PAGE>
[LOGO OF ITERIS(TM) APPEARS HERE]
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution
The following table sets forth all costs and expenses, other than
underwriting discounts and commissions, payable by us in connection with the
sale of the common stock being registered hereunder. All of the amounts shown
are estimates except for the SEC registration fee, the Nasdaq National Market
application fee and the NASD filing fee.
<TABLE>
<S> <C>
SEC registration fee............................................... $ 16,972
NASD filing fee.................................................... 6,911
Nasdaq National Market application fee............................. 95,000
Accounting fees and expenses....................................... 325,000
Legal fees and expenses ........................................... 250,000
Printing and engraving............................................. 150,000
Transfer agent fees and expenses................................... 15,000
Miscellaneous...................................................... 41,117
--------
Total............................................................ $900,000
========
</TABLE>
Item 14. Indemnification of Directors and Officers
(a) As permitted by Delaware law, our certificate of incorporation
eliminates the liability of directors to us or our stockholders for monetary
damages for breach of fiduciary duty as directors, except to the extent
otherwise required by Delaware law.
(b) Our certificate of incorporation provides that we will indemnify each
person who was or is made a party to any proceeding by reason of the fact that
such person is or was a director or officer of the company against all expense,
liability and loss reasonably incurred or suffered by such person in connection
therewith to the fullest extent authorized by Delaware law. Our bylaws provide
for a similar indemnity to our directors and officers to the fullest extent
authorized by Delaware law.
(c) Our certificate of incorporation also gives us the ability to enter into
indemnification agreements with each of our directors and officers. We have
entered into indemnification agreements with certain of our directors and
officers, which provide for the indemnification of our directors or officers
against any and all expenses, judgments, fines, penalties and amounts paid in
settlement, to the fullest extent permitted by law.
Item 15. Recent Sale of Unregistered Securities
The following is a summary of transactions by us from November 30, 1996
through the date hereof involving sales of our securities that were not
registered under the Securities Act of 1933, as amended.
On October 16, 1998, we issued 856,836 shares of our common stock in
connection with our acquisition of Meyer, Mohaddes Associates, Inc. In July
1999, 46,685 of these shares were cancelled due to a purchase price adjustment.
The sales of the securities listed above were deemed to be exempt from
registration under the Securities Act in reliance on Section 4(2) of the
Securities Act, or Regulation D promulgated thereunder.
Since December 31, 1997, we have granted options to purchase an aggregate of
2,631,444 shares of common stock to employees and directors. The issuance of
these options was deemed to be exempt from registration under the Securities
Act in reliance on Rule 701 promulgated under Section 3(b) of the Securities
Act as transactions by an issuer not involving a public offering transaction
pursuant to compensatory benefit plans and contracts relating to compensation.
II-1
<PAGE>
On January 25, 2000 we entered into a Subordinated Convertible Note Purchase
Agreement with DaimlerChrysler Venture GmbH, pursuant to which DaimlerChrysler
purchased a Subordinated Convertible Promissory Note in the principal amount of
$3,750,000. The Promissory Note will automatically convert into shares of our
common stock immediately prior to the closing of our initial public offering of
common stock under this prospectus. The issuance of the Promissory Note and the
shares of common stock upon conversion are exempt from registration under the
Securities Act in reliance upon Regulation S promulgated thereunder.
We did not employ any underwriters, brokers or finders in connection with
these transactions.
The recipients of securities in each such transaction represented their
intentions to acquire the securities for investment only and not with a view to
or for sale in connection with any distribution thereof and appropriate legends
were affixed to the instruments representing such securities issued in such
transactions. All recipients had adequate access, through their relationships
with us, to information about us.
Item 16. Exhibits and Financial Statement Schedules
(a) Exhibits
<TABLE>
<C> <S>
1.1 Form of Underwriting Agreement.
2.1* Agreement and Plan of Reorganization, dated October 16, 1998, by and
among the Registrant, Odetics, Inc., MMA Acquisition Corp., and Meyer,
Mohaddes Associates, Inc. and its shareholders.
3.1* Certificate of Incorporation of Registrant.
3.2* Bylaws of Registrant.
4.1* Specimen common stock certificate.
4.2* Registration Rights Agreement between the Registrant and Abbas
Mohaddes, Michael Meyer, Viggen Davidian and Gary Hamrick, dated
October 16, 1998.
4.3* Registration Rights Agreement between Registrant and DaimlerChrysler
GmbH dated January 25, 2000.
5.1 Opinion of Stradling Yocca Carlson & Rauth, a Professional
Corporation.
10.1* 1998 Stock Incentive Plan.
10.2* Form of 1998 Stock Option Agreement.
10.3* Form of Indemnification Agreement.
10.4* Form of Employee Stock Purchase Plan.
10.5* Separation and Distribution Agreement between Registrant and Odetics,
dated December 31, 1999.
10.6* Form of Tax Allocation Agreement between Registrant and Odetics.
10.7* Form of Services Agreement between Registrant and Odetics.
10.8* Form of Promissory Note between Registrant and Odetics.
10.9* Form of Technology License Agreement between Registrant and Odetics.
10.10* Employment Agreement between Abbas Mohaddes, Meyer, Mohaddes
Associates, Inc., and Registrant, dated October 16, 1998.
10.11+* Cooperative Development Agreement between Registrant and Daimler-Benz
Aktlengesellschaft, dated July 22, 1998.
10.12+* Agreement between Freightliner Corporation and Registrant, dated
January 1, 1999.
10.13* Federal Highway Administration Agreement between the U.S. Department
of Transportation and Registrant, dated September 30, 1996.
10.14* Contract for Maintenance Services between the Michigan Department of
Transportation and Registrant, dated June 17, 1999.
10.15+* Firm Fixed Price Agreement for Odetics Services for MDOT ATMS/ATIS
Operational Deployment, Final Acceptance and Initial Two-Year
Warranty, between Rockwell Collins, Inc. and Registrant dated November
6, 1998.
</TABLE>
II-2
<PAGE>
<TABLE>
<C> <S>
10.16* Contract for ITS On-Call Technical Services Consultant Contract Number
699-WB between the Virginia Department of Transit and Registrant, dated
December 15, 1998.
10.17* Subordinated Convertible Note Purchase Agreement between Registrant and
DaimlerChrysler GmbH, dated January 25, 2000.
10.18* Subordinated Convertible Note between Registrant and DaimlerChrysler
GmbH, dated January 25, 2000.
21.1* List of Subsidiaries.
23.1 Consent of Stradling Yocca Carlson & Rauth, a Professional Corporation
(included in exhibit 5.1).
23.2 Consent of Independent Auditors.
24.1* Power of Attorney.
27.1 Financial Data Schedule.
</TABLE>
- --------
* Previously filed.
+ Portions of this exhibit are omitted and were filed separately with the
Securities and Exchange Commission pursuant to the Company's application
requesting confidential treatment under Rule 406 of the Securities Act of
1933.
(b) Financial Statement Schedules
Report of Independent Auditors on Financial Statement Schedule
Schedule II--Valuation And Qualifying Accounts
Other schedules are omitted because they are not applicable or because the
information is included in the financial statements or the related notes.
Item 17. Undertakings
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the registrant of expenses incurred
or paid by a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
The undersigned registrant hereby undertakes to provide to the underwriters
at the closing specified in the underwriting agreement certificates in such
denominations and registered in such names as required by the underwriters to
permit prompt delivery to each purchaser.
The undersigned registrant hereby undertakes:
(1) That, for purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as part of
this registration statement in reliance upon Rule 430A and contained in a form
of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act shall be deemed to be part of this registration
statement as of the time it was declared effective.
(2) That, for the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of prospectus
shall be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
II-3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this Amendment No. 2 to the registration statement to be signed
on its behalf by the undersigned, thereunto duly authorized, in the City of
Anaheim, State of California, on the 17th day of February 2000.
ITERIS, INC.
/s/ Jack Johnson
By: _________________________________
Jack Johnson
President and Chief Executive
Officer
Pursuant to the requirements of the Securities Act of 1933, this amendment
to the registration statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Jack Johnson Chief Executive Officer, February 17, 2000
______________________________________ President and Director
Jack Johnson (Principal Executive Officer)
/s/ Victor Rumana Chief Financial Officer and February 17, 2000
______________________________________ Vice President (Principal
Victor Rumana Financial and Accounting
Officer)
/s/ Joel Slutzky Chairman February 17, 2000
______________________________________
Joel Slutzky*
/s/ Andrew H. Card, Jr. Director February 17, 2000
______________________________________
Andrew H. Card, Jr.*
/s/ Gary Hernandez Director February 17, 2000
______________________________________
Gary Hernandez*
/s/ Gregory A. Miner Director February 17, 2000
______________________________________
Gregory A. Miner*
/s/ Samuel K. Skinner Director February 17, 2000
______________________________________
Samuel K. Skinner*
/s/ William M. Spreitzer Director February 17, 2000
______________________________________
William M. Spreitzer*
/s/ Paul E. Wright Director February 17, 2000
______________________________________
Paul E. Wright*
*By: /s/ Jack Johnson February 17, 2000
___________________________________
Jack Johnson
(Attorney-in-fact)
</TABLE>
II-4
<PAGE>
REPORT OF INDEPENDENT AUDITORS ON FINANCIAL STATEMENT SCHEDULE
Stockholders and Board of Directors
Iteris, Inc.
We have audited the financial statements of Iteris, Inc. as of March 31,
1998 and 1999 and December 31, 1999, and for each of the three years in the
period ended March 31, 1999 and the nine months ended December 31, 1999, and
have issued our report thereon dated January 25, 2000, except for the last
paragraph of Note 7, as to which the date is February 10, 2000 (included
elsewhere in this Registration Statement). Our audits also included the
financial statement schedule listed in Item 16(b) of this Registration
Statement. This schedule is the responsibility of the Company's management. Our
responsibility is to express an opinion based on our audits.
In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
/s/ Ernst & Young LLP
Orange County, California
January 25, 2000 except for the last paragraph of Note 7
as to which the date is February 10, 2000
II-5
<PAGE>
ITERIS, INC.
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
(in thousands)
<TABLE>
<CAPTION>
Balance at Additions to
beginning costs and Balance at
of year expense Deductions end of year
---------- ------------ ---------- -----------
<S> <C> <C> <C> <C>
Year ended March 31, 1997:
Accounts receivable
allowance................... $0 $0 $0 $0
Year ended March 31, 1998:
Accounts receivable
allowance................... $0 $0 $0 $0
Year ended March 31, 1999:
Accounts receivable
allowance................... $0 $252 $0 $252
Nine months ended December 31,
1999:
Accounts receivable
allowance................... $252 $75 $0 $327
</TABLE>
II-6
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
No. Description
------- -----------
<C> <S>
1.1 Form of Underwriting Agreement.
2.1* Agreement and Plan of Reorganization, dated October 16, 1998, by and
among the Registrant, Odetics, Inc., MMA Acquisition Corp., and Meyer,
Mohaddes Associates, Inc. and its shareholders.
3.1* Certificate of Incorporation of Registrant.
3.2* Bylaws of Registrant.
4.1* Specimen common stock certificate.
4.2* Registration Rights Agreement between the Registrant and Abbas
Mohaddes, Michael Meyer, Viggen Davidian and Gary Hamrick, dated
October 16, 1998.
4.3* Investor Rights Agreement between Registrant and DaimlerChrysler GmbH,
dated January 25, 2000.
5.1 Opinion of Stradling Yocca Carlson & Rauth, a Professional
Corporation.
10.1* 1998 Stock Incentive Plan.
10.2* Form of 1998 Stock Option Agreement.
10.3* Form of Indemnification Agreement.
10.4* Form of Employee Stock Purchase Plan.
10.5* Separation and Distribution Agreement between Registrant and Odetics,
dated December 31, 1999.
10.6* Form of Tax Allocation Agreement between Registrant and Odetics.
10.7* Form of Services Agreement between Registrant and Odetics.
10.8* Form of Promissory Note between Registrant and Odetics.
10.9* Form of Technology License Agreement between Registrant and Odetics.
10.10* Employment Agreement and Noncompetition Agreement between Abbas
Mohaddes, Meyer, Mohaddes Associates, Inc., and Registrant, dated
October 16, 1998.
10.11+* Cooperative Development Agreement between Registrant and Daimler-Benz
Aktlengesellschaft, dated July 22, 1998.
10.12+* Agreement between Freightliner Corporation and Registrant, dated
January 1, 1999.
10.13* Federal Highway Administration Agreement between the U.S. Department
of Transportation and Registrant, dated September 30, 1996.
10.14* Contract for Maintenance Services between the Michigan Department of
Transportation and Registrant, dated June 17, 1999.
10.15+* Firm Fixed Price Agreement for Odetics Services for MDOT ATMS/ATIS
Operational Deployment, Final Acceptance and Initial Two-Year
Warranty, between Rockwell Collins, Inc. and Registrant dated November
6, 1998.
10.16* Contract for ITS On-Call Technical Services Consultant Contract Number
699-WB between the Virginia Department of Transit and Registrant,
dated December 15, 1998.
10.17* Subordinated Convertible Note Purchase Agreement between Registrant
and DaimlerChrysler GmbH, dated January 25, 2000.
10.18* Subordinated Convertible Note between Registrant and DaimlerChrysler
GmbH, dated January 25, 2000.
21.1* List of Subsidiaries.
23.1 Consent of Stradling Yocca Carlson & Rauth, a Professional Corporation
(included in exhibit 5.1).
23.2 Consent of Independent Auditors.
24.1* Power of Attorney.
27.1 Financial Data Schedule.
</TABLE>
- -------
*Previously filed.
+ Portions of this exhibit are omitted and were filed separately with the
Securities and Exchange Commission pursuant to the Company's application
requesting confidential treatment under Rule 406 of the Securities Act of
1933.
<PAGE>
EXHIBIT 1.1
Iteris, Inc.
4,945,000 Shares of Common Stock
UNDERWRITING AGREEMENT
_______ __, 2000
BEAR, STEARNS & CO. INC.
SG COWEN SECURITIES CORPORATION
CRUTTENDEN ROTH INCORPORATED
<PAGE>
ITERIS, INC.
UNDERWRITING AGREEMENT
----------------------
, 2000
Bear, Stearns & Co. Inc.
SG Cowen Securities Corporation
Cruttenden Roth Incorporated
as Representatives of the
several Underwriters named in
Schedule I attached hereto
c/o Bear, Stearns & Co. Inc.
245 Park Avenue
New York, NY 10167
Ladies and Gentlemen:
Iteris, Inc., a corporation organized and existing under the laws of
Delaware (the "Company") and Viggen Davidian, Gary Hamrick, Michael P. Meyer,
and Abbas Mohaddes (each a "Selling Stockholder" and collectively the "Selling
Stockholders") propose, subject to the terms and conditions stated herein, to
issue and sell to the several underwriters named in Schedule I hereto (the
"Underwriters") an aggregate of 4,300,000 shares (the "Firm Shares") of its
Common Stock, par value $.001 per share (the "Common Stock"), and, for the sole
purpose of covering over-allotments in connection with the sale of the Firm
Shares, at the option of the Underwriters, up to an additional 645,000 shares
(the "Additional Shares") of Common Stock. Of the Firm Shares, 4,173,616 are
being offered by the Company and 126,384 are being offered by the Selling
Stockholders. All of the Additional Shares are being offered by the Company.
The Firm Shares and any Additional Shares purchased by the Underwriters are
referred to herein as the "Shares". The Shares are more fully described in the
Registration Statement referred to below.
Prior to the offering contemplated by this Agreement, the Company was a
subsidiary of Odetics, Inc. ("Parent"), a Delaware corporation. Shortly after
the registration statement covering the Shares is declared effective by the
Securities and Exchange Commission (the "Commission") Parent will distribute the
shares of Common Stock owned by Parent to its stockholders in a pro-rata
distribution intended to qualify as a tax-free distribution under Section 355 of
the Internal Revenue Code of 1986, as amended (the "Code") (such distribution,
the "Spin-Off").
2
<PAGE>
As part of the offering contemplated by this Agreement, Bear, Stearns & Co.
Inc. ("Bear Stearns") has agreed to reserve out of the Shares set forth opposite
its name on Schedule I to this Agreement, up to _____ shares, for sale to the
Company's employees, officers, directors and others with whom it has business
relationships (collectively, "Participants"), as set forth in the Prospectus
under the heading "Underwriting" (the "Directed Share Program"). The Shares to
be sold by Bear Stearns pursuant to the Directed Share Program (the "Directed
Shares") will be sold by Bear Stearns pursuant to this Agreement at the public
offering price. Any Directed Shares not orally confirmed for purchase by any
Participants by the end of the first business day after the date on which this
Agreement is executed will be offered to the public by Bear Stearns as set forth
in the Prospectus.
1. Representations and Warranties of the Company.
---------------------------------------------
A. The Company represents and warrants to, and agrees with, the
Underwriters that:
(a) The Company has filed with the Commission a registration
statement, and amendments thereto, on Form S-1 (No. 333-93035), for the
registration of the Shares under the Securities Act of 1933, as amended (the
"Act"). Such registration statement, including the prospectus, financial
statements and schedules, exhibits and all other documents filed as a part
thereof, as amended at the time of effectiveness of the registration statement,
including any information deemed to be a part thereof as of the time of
effectiveness pursuant to paragraph (b) of Rule 430A or Rule 434 of the Rules
and Regulations of the Commission under the Act (the "Regulations"), is herein
called the "Registration Statement". Any registration statement filed pursuant
to Rule 462(b) of the Regulations is herein called the "462(b) Registration
Statement", and after such filing the term "Registration Statement" shall
include the Rule 462(b) Registration Statement. The prospectus, in the form
first filed with the Commission pursuant to Rule 424(b) of the Regulations or
filed as part of the Registration Statement at the time of effectiveness if no
Rule 424(b) or Rule 434 filing is required, is herein called the "Prospectus".
The term "preliminary prospectus" as used herein means a preliminary prospectus
as described in Rule 430 of the Regulations. The Commission has not issued a
stop order suspending the effectiveness of the Registration Statement,
preventing or suspending the use of any preliminary prospectus, the Prospectus,
the Registration Statement or any amendment or supplement thereto, refusing to
permit the effectiveness of the Registration Statement, nor, to the Company's
knowledge, has the Commission instituted or threatened to institute any
proceedings with respect to a stop order.
(b) At the respective time of the effectiveness of the Registration
Statement or any 462(b) Registration Statement or the effectiveness of any post-
effective amendment to the Registration Statement, when the Prospectus is first
filed with the Commission pursuant to Rule 424(b) or Rule 434 of the
Regulations, when any supplement to or amendment of the Prospectus is filed with
the Commission and at the Closing Date and the Additional Closing Date, if any
(as hereinafter respectively defined), the Registration Statement and the
Prospectus and any amendments thereof and supplements thereto (including any
prospectus wrapper) complied or will comply in all material respects with the
applicable provisions of the Act and the Regulations and does not or will not
contain an untrue statement
3
<PAGE>
of a material fact and does not or will not omit to state any material fact
required to be stated therein or necessary in order to make the statements
therein (i) in the case of the Registration Statement, not misleading and (ii)
in the case of the Prospectus, in light of the circumstances under which they
were made, not misleading, and the Prospectus, any preliminary prospectus and
any supplement thereto or prospectus wrapper prepared in connection therewith,
at their respective times of issuance and at the Closing Date, complied and will
comply in all material respects with any applicable laws or regulations of
foreign jurisdictions in which the Prospectus and such preliminary prospectus,
as amended or supplemented, if applicable, are distributed in connection with
the offer and sale of the Directed Shares. When any related preliminary
prospectus was first filed with the Commission (whether filed as part of the
registration statement for the registration of the Shares or any amendment
thereto or pursuant to Rule 424(a) of the Regulations) and when any amendment
thereof or supplement thereto was first filed with the Commission, such
preliminary prospectus and any amendments thereof and supplements thereto
complied in all material respects with the applicable provisions of the Act and
the Regulations and did not contain an untrue statement of a material fact and
did not omit to state any material fact required to be stated therein or
necessary in order to make the statements therein in light of the circumstances
under which they were made not misleading. No representation and warranty is
made in this subsection (b), however, with respect to any information contained
in or omitted from the Registration Statement or the Prospectus or any related
preliminary prospectus or any amendment thereof or supplement thereto in
reliance upon and in conformity with information furnished in writing to the
Company by or on behalf of any Underwriter through you as herein stated
expressly for use in connection with the preparation thereof. If Rule 434 is
used, the Company will comply with the requirements of Rule 434.
(c) Ernst & Young LLP, who have certified the financial statements and
supporting schedules included in the Registration Statement, are independent
public accountants as required by the Act and the Regulations.
(d) Subsequent to the respective dates as of which information is
given in the Registration Statement and the Prospectus, except as set forth in
the Registration Statement and the Prospectus, there has been no material
adverse change or any development involving a prospective material adverse
change in the business, prospects, properties, operations, condition (financial
or other) or results of operations of the Company and its subsidiary, Meyer,
Mohaddes Associates, a California corporation, (the "Subsidiary") taken as a
whole, including but not limited to relationships with customers and suppliers
of the Company, whether or not arising from transactions in the ordinary course
of business, and since the date of the latest balance sheet presented in the
Registration Statement and the Prospectus, neither the Company nor the
Subsidiary has incurred or undertaken any liabilities or obligations, direct or
contingent, which are material to the Company and the Subsidiary, taken as a
whole, except for liabilities or obligations which are reflected in the
Registration Statement and the Prospectus, and except for liabilities incurred
in the ordinary course of business consistent with past practices.
4
<PAGE>
(e) This Agreement and the transactions contemplated herein have been
duly and validly authorized by the Company and this Agreement has been duly and
validly executed and delivered by the Company and is the legal, valid and
binding agreement of the Company, enforceable against it in accordance with its
terms.
(f) The execution, delivery, and performance of this Agreement and the
consummation of the transactions contemplated hereby do not and will not (i)
conflict with or result in a breach of any of the terms and provisions of, or
constitute a default (or an event which with notice or lapse of time, or both,
would constitute a default) or Repayment Event (as hereinafter defined) under,
or result in the creation or imposition of any lien, charge or encumbrance upon
any property or assets of the Company or the Subsidiary pursuant to, any
indenture, mortgage, deed of trust, agreement, instrument, franchise, license or
permit to which the Company or the Subsidiary is a party or by which either such
corporation or their respective properties or assets may be bound, except for
conflicts, breaches, defaults or Repayment Events that would not have a Material
Adverse Effect (as hereinafter defined) or (ii) violate or conflict with any
provision of the certificate of incorporation, by-laws or other organizational
documents of the Company or the Subsidiary or any judgment, decree, order,
statute, rule or regulation of any court or any public, governmental or
regulatory agency or body having jurisdiction over the Company, the Subsidiary
or any of their respective properties, assets or businesses. For the purposes
of this Agreement, the term "Material Adverse Effect" means a material adverse
change in the business, prospects, properties, operations, condition (financial
or other) or results of operations of the Company and the Subsidiary, taken as a
whole. No consent, approval, authorization, order, registration, filing,
qualification, license or permit of or with any court or any public,
governmental or regulatory agency or body having jurisdiction over the Company
or the Subsidiary or any of their respective properties or assets is required
for the execution, delivery and performance of this Agreement or the
consummation of the transactions contemplated hereby, including the issuance,
sale and delivery of the Shares to be issued, sold and delivered by the Company
hereunder, except the registration under the Act of the Shares and such
consents, approvals, authorizations, orders, registrations, filings,
qualifications, licenses and permits as may be required under state securities
or Blue Sky laws or with the NASD in connection with the purchase and
distribution of the Shares by the Underwriters. As used herein, a "Repayment
Event" means any event or condition which gives the holder of any note,
debenture or other evidence of indebtedness of the Company (or any person acting
on such holder's behalf) the right to require the repurchase, redemption or
repayment of all or a portion of such indebtedness by the Company.
(g) All of the outstanding shares of capital stock of the Company
(including the Shares to be sold by the Selling Stockholders hereunder) are duly
and validly authorized and issued, fully paid and nonassessable, were issued in
compliance with all applicable laws (including, without limitation, federal and
state securities laws) and were not issued in violation of and are not now in
violation or subject to any preemptive or similar rights. The Shares have been
duly authorized for issuance and sale to the Underwriters pursuant to this
Agreement and, when issued, delivered and paid for in accordance with this
Agreement, will be duly and validly issued and outstanding, fully paid and
nonassessable, and
5
<PAGE>
will not have been issued in violation of or be subject to any preemptive or
similar rights. The Company has an authorized and outstanding capitalization as
set forth in the Registration Statement and the Prospectus. The authorized
capital stock of the Company, including the Firm Shares and the Additional
Shares, conforms to the description thereof contained in the Registration
Statement and the Prospectus. Except as disclosed in the Registration Statement
and the Prospectus, there are no outstanding options, warrants or other rights
calling for the issuance of, and no commitments, obligations, plans or
arrangements to issue, any shares of capital stock of the Company or any
security convertible into or exchangeable for capital stock of the Company as of
the dates set forth therein. The description of the Company's stock option and
other stock plans or arrangements, and the options or other rights granted and
exercised thereunder, set forth in the Prospectus accurately and fairly presents
in all material respects the information required to be shown with respect to
such plans, arrangements, options and rights. No further approval or authority
of the stockholders or the Board of Directors of the Company will be required
for the issuance and sale of the Shares to be sold by the Company to the
Underwriters as contemplated herein.
(h) Each of the Company and the Subsidiary has been duly organized and
is validly existing as a corporation in good standing under the laws of the
State of Delaware and California, respectively. Each of the Company and the
Subsidiary is duly qualified and in good standing as a foreign corporation in
each jurisdiction in which the character or location of its properties (owned,
leased or licensed) or the nature or conduct of its business makes such
qualification necessary, except for those failures to be so qualified or in good
standing which will not in the aggregate have a Material Adverse Effect. Each of
the Company and the Subsidiary has all requisite power and authority, and all
necessary consents, approvals, authorizations, orders, registrations,
qualifications, licenses and permits (collectively, "Governmental Licenses") of
and from all public, regulatory or governmental agencies and bodies, to own,
lease and operate its properties and conduct its business as now being conducted
and as described in the Registration Statement and the Prospectus, each such
Governmental License is valid and in full force and effect and no such
Governmental License contains a materially burdensome restriction not adequately
disclosed in the Registration Statement and the Prospectus; and, to the
knowledge of the Company, no proceeding has been instituted in any jurisdiction
revoking, limiting or curtailing, or seeking to revoke, limit or curtail, such
Governmental Licenses. Other than its ownership of all of the outstanding
capital stock of the Subsidiary, the Company does not own or control, either
directly or indirectly, any corporation, partnership, limited liability company,
association or other entity.
(i) Neither the Company nor the Subsidiary is in violation of its
charter or by-laws or in default (or would be in default with notice or lapse of
time, or both) in the performance or observance of any material obligation,
agreement, covenant or condition contained in any material bond, debenture, note
or other evidence of indebtedness or in any material contract, indenture,
mortgage, deed of trust, loan or credit agreement, lease, joint venture or other
agreement or instrument to which the Company or the Subsidiary is a party or by
which any of their respective properties may be bound, which default or defaults
would have in the aggregate a Material Adverse Effect, or in violation of any
law, order, rule,
6
<PAGE>
regulation, writ, injunction, judgment or decree of any court or governmental
agency or body, the violation of which would have in the aggregate a Material
Adverse Effect.
(j) Except as described in the Prospectus, there is no litigation or
governmental proceeding to which the Company or the Subsidiary is a party or to
which any property of the Company or the Subsidiary is subject or which is
pending or, to the knowledge of the Company, contemplated against the Company or
the Subsidiary which might result in a Material Adverse Effect or which is
required to be disclosed in the Registration Statement and the Prospectus. There
are no statutes, regulations, contracts or other documents that are required to
be described in the Registration Statement or Prospectus or to be filed as
exhibits to the Registration Statement that are not described or filed as
required. Except as otherwise disclosed in the Prospectus, the contracts so
described in the Prospectus are in full force and effect on the date hereof and
neither the Company nor the Subsidiary, nor, to the Company's knowledge, any
other party, is in breach of or default under any of such contracts except as
would not reasonably be expected to result in a Material Adverse Effect.
(k) Neither the Company nor any of its directors, officers or
affiliates (as defined in the Regulations) has taken or will take, directly or
indirectly, any action designed to cause or result in, or which constitutes or
which might reasonably be expected to constitute, the stabilization or
manipulation of the price of the shares of Common Stock to facilitate the sale
or resale of the Shares.
(l) The consolidated financial statements, including the notes
thereto, and the financial data schedules included in the Registration Statement
and the Prospectus present fairly the consolidated financial position of the
Company and the Subsidiary as of the dates indicated and the results of its
operations for the periods specified; except as otherwise stated in the
Registration Statement, said financial statements have been prepared in
conformity with generally accepted accounting principles applied on a consistent
basis; and the financial data schedules included in the Registration Statement
present fairly the information required to be stated therein; and the selected
financial data and the summary financial information included in the
Registration Statement and the Prospectus present fairly the information shown
therein and have been compiled on a basis consistent with that of the
consolidated financial statements included in the Registration Statement and the
Prospectus. In addition, the pro forma financial statements of the Company and
the Subsidiary and the related notes thereto, included in the Registration
Statement and the Prospectus present fairly the information shown therein, have
been prepared in accordance with the Commission's rules and guidelines with
respect to pro forma financial statements, have been properly compiled on the
basis described therein, and the assumptions used in the preparation thereof are
reasonable and the adjustments used therein are appropriate to give effect to
the transactions and circumstances referred to therein.
(m) The Company and the Subsidiary have filed all federal, state,
local and foreign tax returns that have been required to be filed as of the date
hereof and have paid all material taxes shown as due thereon and all assessments
received by them or any of them to the extent that such taxes have become due
and are not being contested in good faith.
7
<PAGE>
There is no material tax deficiency that has been or might reasonably be
expected to be asserted or, to the Company's knowledge, threatened against the
Company or the Subsidiary.
(n) The Company and the Subsidiary have good and marketable
title to all personal property owned by them, respectively, in each case free
and clear of all liens, encumbrances and defects except such as are described or
referred to in the Prospectus or such as do not materially affect the value of
such property and do not interfere with the use made or proposed to be made of
such property by the Company or the Subsidiary, as the case may be. Any real
property and buildings held under lease occupied by the Company are held under
valid, existing and enforceable leases with such exceptions as are not material
and do not interfere with the use made or proposed to be made of such property
and buildings by the Company or the Subsidiary.
(o) The Company and the Subsidiary own or possess valid and
enforceable licenses or other rights to use all inventions, patents, patent
applications, trademarks, service marks, trade names, trade dress, copyrights,
technology, know-how (including trade secrets and other unpatented and/or
unpatentable proprietary or confidential information, systems or procedures)
proprietary techniques (including processes and substances) and other
intellectual property rights necessary to conduct, in all material respects, the
business now conducted or presently contemplated to be conducted by them, as
described in the Registration Statement and the Prospectus ("Intellectual
Property"). The Company and the Subsidiary have taken all reasonable steps which
are customary in the industry to protect, maintain and safeguard the
Intellectual Property for which improper or unauthorized disclosure would impair
its value or validity, and made appropriate filings and registrations in
connection with the foregoing. Other than as described in the Registration
Statement and the Prospectus: (i) there are no third parties who have any rights
in the Intellectual Property that could preclude the Company from conducting, in
all material respects, its business as currently conducted or as presently
contemplated to be conducted as described in the Registration Statement and the
Prospectus; (ii) there are no pending or, to the Company's knowledge, threatened
actions, suits, proceedings, investigations or claims by others challenging the
rights in the Intellectual Property of the Company or the Subsidiary or (if the
Intellectual Property is licensed) the licensor thereof in any Intellectual
Property owned or licensed to the Company or the Subsidiary; (iii) neither the
Company nor the Subsidiary has, and (if the Intellectual Property is licensed)
to the Company's knowledge, nor the licensor thereof infringed, or received any
notice of infringement of or conflict with, any rights of others with respect to
the Intellectual Property except for infringements or conflicts which, if
determined adversely to the Company, the Subsidiary or the licensor, as the case
may be, would not, individually or in the aggregate, have a Material Adverse
Effect; and (iv) there is no dispute between the Company, the Subsidiary or any
licensor with respect to any Intellectual Property. True and correct copies of
all material licenses and other material agreements between the Company, the
Subsidiary and any third party relating to the Intellectual Property, and all
amendments and supplements thereto, have been provided to the Underwriters.
(p) No relationship, direct or indirect, exists between or among
the Company or any of its affiliates, on the one hand, and the directors,
officers, stockholders,
8
<PAGE>
customers or suppliers of the Company or the Subsidiary, on the other hand, that
is required by the Act to be described in the Registration Statement and the
Prospectus that is not so described.
(q) The Common Stock (including the Shares) is registered
pursuant to Section 12(g)of the Securities Act of 1934, as amended (the
"Exchange Act"), and has been approved for quotation on the Nasdaq National
Market, subject only to official notice of issuance.
(r) Except as described in the Prospectus, no person or entity
has any rights to the registration of securities of the Company because of the
filing of the Registration Statement or otherwise in connection with the sale of
the Shares contemplated hereby other than any such right that has been duly
waived.
(s) The Company is not, and upon consummation of the
transactions contemplated hereby will not be, subject to registration as an
"investment company" under the Investment Company Act of 1940.
(t) There are no existing or, to the knowledge of the Company,
threatened labor disputes with any employees of the Company or the Subsidiary
that would have a Material Adverse Effect.
(u) Each of the Company and the Subsidiary (i) is in compliance
with any and all applicable foreign, federal, state and local laws and
regulations relating to the protection of human health and safety, the
environment or hazardous or toxic substances or wastes, pollutants or
contaminants ("Environmental Laws"), except where such noncompliance would not
have a Material Adverse Effect, (ii) has received all permits, licenses or other
approvals required of it under applicable Environmental Laws to conduct its
respective business, except where such failure to obtain permits, licenses or
other approvals will not have a Material Adverse Effect and (iii) is in
compliance with all terms and conditions of any such permit, license or
approval, except where such noncompliance, failure to comply with the terms and
conditions of such permits, licenses or approvals will not have a Material
Adverse Effect.
(v) Each employee benefit plan, within the meaning of Section
3(3) of the Employee Retirement Income Securities Act of 1974, as amended
("ERISA"), that is maintained, administered or contributed to by the Company or
the Subsidiary for employees or former employees of the Company or the
Subsidiary has been maintained in compliance with its respective terms and the
requirements of any applicable statutes, order, rules and regulations, including
but not limited to ERISA and the Internal Revenue Code of 1986, as amended (the
"Code") except where any such failure would not have a Material Adverse Effect.
No prohibited transaction, within the meaning of Section 406 of ERISA or Section
4975 of the Code, that would have a Material Adverse Effect has occurred with
respect to any such plan, excluding transactions effected pursuant to a
statutory or administrative exemption. For each such plan that is subject to the
funding rules of Section 412 of the Code or Section
9
<PAGE>
302 of ERISA, no "accumulated funding deficiency", as defined in Section 412 of
the Code, has been incurred, whether or not waived, and the fair market value of
the assets of each such plan (excluding for these purposes accrued but unpaid
contributions) exceeded the present value of all benefits accrued under such
plan determined using reasonable actuarial assumptions.
(w) The Company and the Subsidiary maintain a system of internal
accounting controls that, taken as a whole, is sufficient to provide reasonable
assurance that (i) transactions are executed in accordance with management's
general or specific authorizations; (ii) transactions are recorded as necessary
to permit preparation of consolidated financial statements in conformity with
generally accepted accounting principles and to maintain asset accountability;
(iii) access to assets is permitted only in accordance with management's general
or specific authorization; and (iv) the recorded accountability for assets is
compared with the existing assets at reasonable intervals and appropriate action
is taken with respect to any differences.
(x) The Company and the Subsidiary maintain insurance or are the
beneficiaries of insurance maintained by Odetics, Inc. of the types and in the
amounts generally deemed adequate for its business, including, without
limitation, insurance coverage real and personal property owned or leased by it
against theft, damage, destruction, acts of vandalism and all other material
risks customarily insured against, all of which insurance is in full force and
effect. The Company has no reason to believe that either it or the Subsidiary
will not be able to renew existing insurance coverage as and when such coverage
expires or to obtain similar coverage from similar insurers as may be necessary
to continue its respective business.
(y) The Company and the Subsidiary have reviewed their
respective operations and any other third parties with which the Company has a
material relationship to evaluate the extent to which the business or operations
of the Company will be affected by Year 2000 issues. As a result of such review,
the Company has no reason to believe, and does not believe, that Year 2000
issues will have a Material Adverse Effect. The term "Year 2000 issues," as used
herein, means any significant risk that computer hardware or software used in
the receipt, transmission, processing, manipulation, storage, retrieval,
retransmission or other utilization of data or in the operation of mechanical or
electrical systems of any kind will not, in the case of dates or time periods
occurring after December 31, 1999, function at least as effectively as in the
case of dates or time periods occurring prior to January 1, 2000.
(z) The Company has not distributed and will not distribute
prior to the Closing Date any offering material in connection with the offering
and sale of the Shares other than the Prospectus, the Registration Statement and
the other materials permitted by the Act.
(aa) The Company has not offered, or caused the Underwriters to
offer, Shares to any person pursuant to the Directed Share Program with the
specific intent to unlawfully influence (i) a customer or supplier of the
Company or the Subsidiary to alter the
10
<PAGE>
customer's or supplier's level or type of business with the Company or the
Subsidiary, or (ii) a trade journalist or publication to write or publish
favorable information about the Company or its business.
(ab) All shares of Common Stock of the Company issued in
connection with the Spin-Off (the "Spin-Off Shares") were duly authorized for
issuance by the Company and are validly issued, fully paid and non-assessable.
The Spin-Off Shares were offered and sold in compliance with all applicable laws
(including, without limitation, federal and state securities laws). The Company
has taken all action necessary to prohibit the transfer of the Spin-Off Shares
(including restrictions in the Company's bylaws, placing legends on such shares
and placing appropriate stop orders with the Company's transfer agent) for a
period of 180 days from the Closing Date.
(ac) Each of the Separation and Distribution Agreement, Services
Agreement, Tax Allocation Agreement and License Agreement (the "Intercompany
Agreements") has been duly authorized, executed and delivered by the Company and
Parent, and constitutes the binding agreement of the Company, and Parent, as the
case may be, and is enforceable against the Company and Parent, in accordance
with its terms, except as the enforcement thereof may be limited by bankruptcy,
insolvency (including, without limitation, all laws relating to fraudulent
transfers), reorganization, moratorium or similar laws affecting enforcement of
creditors' rights generally and except as enforcement thereof is subject to
general principles of equity (regardless of whether enforcement is considered in
a proceeding in equity or at law).
B. Representations and Warranties of the Selling Stockholders. Each
----------------------------------------------------------
Selling Stockholder, severally, represents, warrants and covenants to each
Underwriter as follows:
(i) This Agreement has been duly authorized, executed and delivered
by or on behalf of such Selling Stockholder and is a valid and binding agreement
of such Selling Stockholder, enforceable against such Selling Stockholder in
accordance with its terms, except as rights to indemnification hereunder may be
limited by applicable law and except as the enforcement hereof may be limited by
bankruptcy, insolvency, reorganization, moratorium or other similar laws
relating to or affecting the rights and remedies of creditors or by general
equitable principles.
(ii) The Custody Agreement and Power of Attorney (the "Custody
Agreement and Power of Attorney") signed by (i) each Selling Stockholder, (ii)
EquiServe, LP, as custodian (in such capacity, the "Custodian") and (iii) Jack
Johnson as the Selling Stockholder's attorney-in-fact (in such capacity, the
"Attorney-in-Fact"), to the extent set forth therein relating to the
transactions contemplated hereby and by the Prospectus, has been duly
authorized, executed and delivered by such Selling Stockholder and is a valid
and binding agreement of such Selling Stockholder, enforceable against him in
accordance with its terms, except as rights to indemnification thereunder may be
limited by applicable law and except as the enforcement thereof may be limited
by bankruptcy, insolvency, reorganization, moratorium or other similar laws
relating to or affecting the rights and remedies of creditors or by general
11
<PAGE>
equitable principles. Each Selling Stockholder agrees that the Shares to be sold
by such Selling Stockholder on deposit with the Custodian are subject to the
interests of the Underwriters, that the arrangements made for such custody are
to that extent irrevocable, and that the obligations of each Selling Stockholder
hereunder shall not be terminated, except as provided in this Agreement or in
the Custody Agreement and Power of Attorney, by any act of the Selling
Stockholder, by operation of law, by death or incapacity of such Selling
Stockholder or by the occurrence of any other event. If any Selling Stockholder
should die or become incapacitated, or if any other event should occur, before
the delivery of the Shares to be sold by such Selling Stockholder hereunder, the
documents evidencing the Shares to be sold by such Selling Stockholder then on
deposit with the Custodian shall be delivered by the Custodian in accordance
with the terms and conditions of this Agreement as if such death, incapacity or
other event had not occurred, regardless of whether or not the Custodian shall
have received notice thereof.
(iii) Each Selling Stockholder is the lawful owner of the Shares to be
sold by him hereunder and, assuming the Underwriters purchase the shares for
value in good faith and without notice of any adverse claims relating thereto
within the meaning of Article VIII of the Uniform Commercial Code, upon sale and
delivery of, and payment for, such Shares, as provided herein, such Selling
Stockholder will convey to the Underwriters good and marketable title to such
Shares, free and clear of all liens, encumbrances, equities, claims and security
interests whatsoever.
(iv) Each Selling Stockholder has, and on the Closing Date and the
Additional Closing Date (as defined below) will have, good and valid title to
all of the Shares which may be sold by such Selling Stockholder pursuant to this
Agreement on such date and the legal right and power, and all authorizations and
approvals required by law and under its charter or by-laws, partnership
agreement, trust agreement or other organizational documents, if applicable, to
enter into this Agreement and the Custody Agreement and Power of Attorney, to
sell, transfer and deliver all of the Shares which may be sold by such Selling
Stockholder pursuant to this Agreement and to comply with its other obligations
hereunder and thereunder.
(v) No consent, approval, authorization or order of any court or
governmental agency or body is required for the consummation by such Selling
Stockholder of the transactions contemplated herein, except such as may have
been obtained under the Act and such as may be required under the state
securities laws or the blue sky laws or any jurisdiction in connection with the
purchase and distribution of the Shares by the Underwriters and such other
approvals as have been obtained.
(vi) Neither the sale of the Shares being sold by such Selling
Stockholder nor the consummation of any other of the transactions herein
contemplated by such Selling Stockholder or the fulfillment of the terms hereof
by such Selling Stockholder will conflict with, result in a breach or violation
of, or constitute a default under any law or the terms of any indenture or other
agreement or instrument to which such Selling Stockholder is party or bound, any
judgment, order or decree applicable to such Selling Stockholder or any court or
12
<PAGE>
regulatory body, administrative agency, governmental body or arbitrator having
jurisdiction over such Selling Stockholder.
(vii) Such Selling Stockholder does not have any registration or
other similar rights to have any equity or debt securities registered for sale
by the Company under the Registration Statement or included in the offering
contemplated by this Agreement, except for such rights as have been waived or
are described in the Prospectus under "Shares Eligible for Future Sale".
(viii) Such Selling Stockholder does not have, or has waived prior to
the date hereof, any preemptive right, co-sale right or right of first refusal
or other similar right to purchase any of the Shares that are to be sold by the
Company to the Underwriters pursuant to this Agreement; and such Selling
Stockholder does not own any warrants, options or similar rights to acquire, and
does not have any right or arrangement to acquire, any capital stock, right,
warrants, options or other securities from the Company, other than those
described in the Registration Statement and the Prospectus.
(ix) All information furnished by or on behalf of such Selling
Stockholder in writing expressly for use in the Registration Statement and
Prospectus is, and on the Closing Date and the Additional Closing Date (as
defined below) will be, true, correct, and complete in all material respects,
and does not, and on the Closing Date and the Additional Closing Date will not,
contain any untrue statement of a material fact or omit to state any material
fact necessary to make such information not misleading. To the extent such
information appears in the Prospectus, such Selling Stockholder confirms as
accurate the number of Shares set forth opposite such Selling Stockholders's
name and the related footnote in the Prospectus under the caption "Principal and
Selling Stockholders" (both prior to and after giving effect to the sale of the
Shares).
(x) Such Selling Stockholder has not taken and will not take,
directly or indirectly, any action designed to or that might be reasonably
expected to cause or result in stabilization or manipulation of the price of the
Common Stock to facilitate the sale or resale of the Shares.
(xi) Such Selling Stockholder has not distributed and will not
distribute, prior to the later of the Additional Closing Date (as defined below)
and the completion of the Underwriters' distribution of the Shares, any offering
material in connection with the offering and sale of the Shares by such Selling
Stockholder other than a preliminary prospectus, the Prospectus or the
Registration Statement.
(xii) Such Selling Stockholder is familiar with the Registration
Statement and the Prospectus and has no knowledge of any material fact,
condition or information not disclosed in the Registration Statement or the
Prospectus which has had or may result in a Material Adverse Effect on the
condition, financial or otherwise, or on the earnings, business, operation or
prospects, whether or not arising from transactions in the ordinary course of
business, of the Company and its Subsidiary, considered as one entity, and is
not prompted to
13
<PAGE>
sell the Shares to be sold by such Selling Stockholder by any information
concerning the Company which is not set forth in the Registration Statement and
the Prospectus.
(xiii) The representations and warranties of such Selling Stockholder in
the Custody Agreement and Power of Attorney are, and on the Closing Date will
be, true and correct.
Any certificate signed by or on behalf of such Selling Stockholder and
delivered to the Representatives or to counsel for the Underwriters shall be
deemed to be a representation and warranty by such Selling Stockholder to each
Underwriter as to the matters covered thereby.
2. Purchase, Sale and Delivery of the Shares.
-----------------------------------------
(a) On the basis of the representations, warranties, covenants
and agreements herein contained, but subject to the terms and conditions herein
set forth, (i) the Company agrees to sell to the Underwriters an aggregate of
_________ Firm Shares and (ii) the Selling Stockholders, severally, agree to
sell to the several Underwriters an aggregate of _______ Firm Shares. On the
basis of the representations, warranties, covenants and agreements herein
contained, but subject to the terms and conditions herein set forth, the
Underwriters, severally and not jointly, agree to purchase from the Company and
the Selling Stockholders, at a purchase price per share of [$________], the
number of Firm Shares set forth opposite the respective names of the
Underwriters in Schedule I hereto plus any additional number of Shares which
such Underwriter may become obligated to purchase pursuant to the provisions of
Section 9 hereof.
(b) Payment of the purchase price for, and delivery of
certificates for, the Shares shall be made at the offices of Stradling Yocca
Carlson & Rauth ("Company's Counsel"), 660 Newport Center Drive, Suite 1600,
Newport Beach, California 92660, or at such other place as shall be agreed upon
by you and the Company, at 9:00 A.M. on the third or fourth Business Day (as
permitted under Rule 15c6-1 under the Exchange Act) (unless postponed in
accordance with the provisions of Section 9 hereof) following the date of the
effectiveness of the Registration Statement (or, if the Company has elected to
rely upon Rule 430A of the Regulations, the third or fourth Business Day (as
permitted under Rule 15c6- 1 under the Exchange Act) after the determination of
the initial public offering price of the Shares), or such other time not later
than ten Business Days after such date as shall be agreed upon by Bear Stearns
and the Company (such time and date of payment and delivery being herein called
the "Closing Date"). As used herein, the term "Business Day" means any day other
than a day on which banks are permitted or required to be closed in New York
City. Payment shall be made to the Company with respect to Shares sold by it and
to the Custodian with respect to the Shares sold by the Selling Stockholders by
wire transfer in same day funds, against delivery to you at the offices of
Company's Counsel, or such other location as may be mutually acceptable, for the
respective accounts of the Underwriters of certificates for the Shares to be
purchased by them. Each Selling Stockholder hereby agrees that (i) it will pay
all stock transfer taxes, stamp duties and other similar taxes, if any, payable
upon the sale or delivery of the Shares to be sold by such Selling Stockholder
to the several Underwriters, or
14
<PAGE>
otherwise in connection with the performance of such Selling Stockholder's
obligations hereunder and (ii) the Custodian is authorized to deduct for such
payment any such amounts from the proceeds to the Selling Stockholder hereunder
and to hold such amounts for the account of the Selling Stockholder with the
Custodian under the Custody Agreement and Power of Attorney. Certificates for
the Shares shall be registered in such name or names and in such authorized
denominations as you may request in writing at least two full Business Days
prior to the Closing Date. The Company will permit you to examine and package
such certificates for delivery at least one full Business Day prior to the
Closing Date. If you so elect, delivery of the Firm Shares purchased from the
Company may be made by credit through full fast transfer to the accounts at The
Depository Trust Company designated by you.
(c) In addition, the Company hereby grants to the Underwriters
the option to purchase up to ______ Additional Shares at the same purchase price
per share to be paid by the Underwriters to the Company for the Firm Shares as
set forth in this Section 2, for the sole purpose of covering over-allotments in
the sale of Firm Shares by the Underwriters. This option may be exercised at any
time, or from time to time, in whole or in part, on or before the thirtieth day
following the date of the Prospectus, by written notice by you to the Company.
Such notice shall set forth the aggregate number of Additional Shares as to
which the option is being exercised and the date and time, as reasonably
determined by you, when the Additional Shares are to be delivered (such date and
time being herein sometimes referred to as the "Additional Closing Date");
provided, however, that the Additional Closing Date shall not be earlier than
- -------- -------
the Closing Date or earlier than the second full Business Day after the date on
which the option shall have been exercised nor later than the fifth full
Business Day after the date on which the option shall have been exercised
(unless such time and date are postponed in accordance with the provisions of
Section 9 hereof). Certificates for the Additional Shares shall be registered in
such name or names and in such authorized denominations as you may request in
writing at least two full Business Days prior to the Additional Closing Date.
The Company will permit you to examine and package such certificates for
delivery at least one full Business Day prior to the Additional Closing Date.
The number of Additional Shares to be sold to each Underwriter shall
be the number which bears the same ratio to the aggregate number of Additional
Shares being purchased as the number of Firm Shares set forth opposite the name
of such Underwriter in Schedule I hereto (or such number increased as set forth
in Section 9 hereof) bears to _______, subject, however, to such adjustments to
eliminate any fractional shares as you in your sole discretion shall make.
Payment of the purchase price for the Additional Shares shall be made
to the Company by wire transfer in same day funds at the offices of Company's
Counsel or such other location as may be mutually acceptable, upon delivery of
the certificates for the Additional Shares to you for the respective accounts of
the Underwriters.
15
<PAGE>
3. Offering.
--------
(a) Upon your authorization of the release of the Firm Shares, the
Underwriters propose to offer the Shares for sale to the public upon the terms
set forth in the Prospectus.
(b) The Company and the Underwriters hereby agree that up to ___
percent of the Firm Shares to be purchased by the Underwriters (the "Directed
Shares") shall be reserved for sale by the Underwriters to certain eligible
employees of and certain persons designated by the Company ("the Directed Shares
Purchasers"), as part of the distribution of the Shares by the Underwriters
subject to the terms of this Agreement, the applicable rules, regulations and
interpretations of the National Association of Securities Dealers, Inc. and all
other applicable laws, rules and regulations, provided, however, that under no
-------- -------
circumstances will Bear, Stearns & Co. Inc. ("Bear Stearns") or any other
Underwriter be liable to the Company or to any of the Directed Shares Purchasers
for any action taken or omitted in good faith in connection with transactions
effected with regard to the Directed Shares Purchasers. To the extent that such
Directed Shares are not orally confirmed for purchase by such persons by the end
of the first day after the date of this Agreement, such Directed Shares will be
offered to the public as part of the offering contemplated hereby.
4. Covenants of the Company and the Selling Stockholders.
-----------------------------------------------------
A. Covenants of the Company. The Company covenants and agrees with the
------------------------
Underwriters that:
(a) If the Registration Statement has not yet been declared effective,
the Company will use its best efforts to cause the Registration Statement and
any amendments thereto to become effective as promptly as possible, and if Rule
430A is used or the filing of the Prospectus is otherwise required under Rule
424(b) or Rule 434, the Company will file the Prospectus (properly completed if
Rule 430A has been used) pursuant to Rule 424(b) or Rule 434 within the
prescribed time period and will provide evidence satisfactory to you of such
timely filing. If the Company elects to rely on Rule 434, the Company will
prepare and file a term sheet that complies with the requirements of Rule 434.
The Company will notify you promptly (and, if requested by you, will
confirm such notice in writing) (i) when the Registration Statement and any
amendments thereto become effective, (ii) of any request by the Commission for
any amendment of or supplement to the Registration Statement or the Prospectus
or for any additional information, (iii) of the mailing or the delivery to the
Commission for filing of any amendment of or supplement to the Registration
Statement or the Prospectus, (iv) of the issuance by the Commission of any stop
order suspending the effectiveness of the Registration Statement or any post-
effective amendment thereto or of the initiation, or the threatening, of any
proceedings therefor, (v) of the receipt of any comments from the Commission,
and (vi) of the receipt by the Company of any notification with respect to the
suspension of the qualification
16
<PAGE>
of the Shares for sale in any jurisdiction or the initiation or threatening of
any proceeding for that purpose. If the Commission shall propose or enter a stop
order at any time, the Company will make every reasonable effort to prevent the
issuance of any such stop order and, if issued, to obtain the lifting of such
order as soon as possible. The Company will not file any amendment to the
Registration Statement, make any filing under Rule 462(b) of the Regulations, or
any amendment of or supplement to the Prospectus (including the prospectus
required to be filed pursuant to Rule 424(b)or Rule 434 of the Regulations) that
differs from the prospectus on file at the time of the effectiveness of the
Registration Statement before or after the effective date of the Registration
Statement to which you shall reasonably object in writing after being timely
furnished in advance a copy thereof.
(b) If at any time when a prospectus relating to the Shares is
required to be delivered under the Act any event shall have occurred as a result
of which the Prospectus as then amended or supplemented would, in the judgment
of the Underwriters or the Company, include an untrue statement of a material
fact or omit to state any material fact required to be stated therein or
necessary to make the statements therein, in the light of the circumstances
under which they were made, not misleading, or if it shall be necessary at any
time to amend or supplement the Prospectus or Registration Statement to comply
with the Act or the Regulations, the Company will notify you promptly and
prepare and file with the Commission an appropriate amendment or supplement (in
form and substance satisfactory to you) which will correct such statement or
omission and will use its best efforts to have any amendment to the Registration
Statement declared effective as soon as possible.
(c) The Company will promptly deliver to you four signed copies of the
Registration Statement, including exhibits and all amendments thereto, and the
Company will promptly deliver to each of the Underwriters such number of copies
of any preliminary prospectus, the Prospectus, the Registration Statement, and
all amendments of and supplements to such documents, if any, as you may
reasonably request.
(d) The Company will endeavor in good faith, in cooperation with you,
at or prior to the time of effectiveness of the Registration Statement, to
qualify the Shares for offering and sale under the securities laws relating to
the offering or sale of the Shares of such jurisdictions as you may designate
and to maintain such qualification in effect for so long as required for the
distribution thereof; except that in no event shall the Company be obligated in
connection therewith to qualify as a foreign corporation or to execute a general
consent to service of process.
(e) The Company will make generally available (within the meaning of
Section 11(a) of the Act) to its security holders and to you as soon as
practicable, but not later than 45 days after the end of its fiscal quarter in
which the first anniversary date of the effective date of the Registration
Statement occurs, an earnings statement (in form complying with the provisions
of Rule 158 of the Regulations) covering a period of at least twelve consecutive
months beginning after the effective date of the Registration Statement.
17
<PAGE>
(f) During the period of 180 days from the date of the Prospectus, the
Company will not directly or indirectly, without the prior written consent of
Bear Stearns, issue, sell, offer or agree to sell, grant any option for the sale
of, pledge, or otherwise dispose of or encumber or otherwise create or maintain
a "put equivalent position" (within the meaning of Rule 16a-1(h) of the Rules
and Regulations of the Commission under the Exchange Act) in, any Common Stock
(or any securities convertible into, exercisable for or exchangeable for Common
Stock) other than (A) the Company's sale of Shares hereunder, (B) the Company's
issuance of Common Stock upon the exercise of presenting outstanding stock
options, (C) the grant of options or share purchase rights by the Company
pursuant to the option and employee stock purchase plans described in the
Registration Statement and Prospectus, provided that such options are not
exercisable for 180 days after the date of the Prospectus, or if such options
are exercisable during such period, such options are subject to lockup
provisions substantially as set forth in this Section 4(f), or (D) the issuance
of shares of Common Stock in acquisitions provided that the recipients of such
shares execute lockup agreements similar to those set forth in this Section
4(f). All of the certificates representing Spin-Off Shares will be issued with
a restrictive legend thereon preventing the transfer of such shares for a period
of 180 days from the date of the Prospectus. The Company will obtain the
undertaking of each person holding an option to purchase Common Stock and the
Selling Stockholders not to engage in any of the aforementioned transactions on
their own behalf. The Company agrees not to waive any undertaking obtained
pursuant to this paragraph without the prior written consent of Bear Stearns.
During the period of 180 days from the date of the Prospectus, the Company shall
enforce all, and shall not materially amend any, provisions of all outstanding
option agreements (and any new option agreement entered into during such period)
in order to ensure that no holder of options to purchase capital stock of the
Company may sell or otherwise dispose of the stock acquired upon exercise of any
such option without the prior written consent of Bear Stearns. The Company
acknowledges that the intent of the foregoing sentence is to restrict, pursuant
to the terms of such option agreements, the ability of option holders to dispose
of shares of stock acquired upon exercise of such options in the same manner as
if such persons had executed written undertakings provided for in the first
sentence of this paragraph.
(g) During a period of three years from the effective date of the
Registration Statement, the Company will furnish to you copies of (i) all
reports to its stockholders; and (ii) all reports, financial statements and
proxy or information statements filed by the Company with the Commission or any
national securities exchange.
(h) The Company will apply the proceeds from the sale of the Shares as
set forth under "Use of Proceeds" in the Prospectus and report such use of
proceeds as may be required pursuant to Rule 463 of the Regulations.
(i) The Company will use its best efforts to cause the Shares to
quoted on the Nasdaq National Market and to maintain such quotation so long as
any of the Shares are outstanding.
18
<PAGE>
(j) The Company shall cause to be prepared and delivered, at its
expense, within one business day from the effective date of this Agreement, to
the Underwriters an "electronic Prospectus" to be used by the Underwriters in
connection with the offering and sale of the Shares. As used herein, the term
"electronic Prospectus" means a form of Prospectus, and any amendment or
supplement thereto, that meets each of the following conditions: (i) it shall be
encoded in an electronic format, reasonably satisfactory to Bear Stearns, that
may be transmitted electronically by Bear Stearns and the other Underwriters to
offerees and purchasers of the Shares for at least during the period when the
Prospectus is required to be delivered under the Act or the Exchange Act (the
"Prospectus Delivery Period ); (ii) it shall disclose the same information as
the paper Prospectus and Prospectus filed pursuant to EDGAR, except to the
extent that graphic and image material cannot be disseminated electronically, in
which case such graphic and image material shall be replaced in the electronic
Prospectus with a fair and accurate narrative description or tabular
representation of such material, as appropriate; and (iii) it shall be in or
convertible into a paper format or an electronic format, reasonably satisfactory
to Bear Stearns, that will allow investors to store and have continuously ready
access to the Prospectus at any future time, without charge to investors (other
than any fee charged for subscription to the system as a whole and for on-line
time). Such electronic Prospectus may consist of a Rule 434 preliminary
prospectus, together with the applicable term sheet, provided that it otherwise
satisfies the format and conditions described in the immediately preceding
sentence. The Company hereby confirms that it has included or will include in
the Prospectus filed pursuant to EDGAR or otherwise with the Commission and in
the Registration Statement at the time it was declared effective an undertaking
that, upon receipt of a request by an investor or his or her representative
within the Prospectus Delivery Period, the Company shall transmit or cause to be
transmitted promptly, without charge, a paper copy of the Prospectus.
(k) The Company hereby agrees that it will ensure that the Directed
Shares are restricted as may be required by the National Association of
Securities Dealers, Inc. or the National Association of Securities Dealers, Inc.
rules from sale, transfer, assignment, pledge or hypothecation for a period of
three (3) months following the Closing Date. The Underwriters will notify the
Company as to which persons will need to be so restricted. At the request of
the Underwriters, the Company will direct the transfer agent to place a stop
transfer restriction upon such securities for such a period of time. Should the
Company release, or seek to release, from such restrictions any of the Directed
Shares, the Company agrees to reimburse the Underwriters for any reasonable
expenses (including, without limitation, legal expenses) they incur in
connection with such release.
(l) The Company will use its best efforts to do and perform all things
required or necessary to be done and performed under this Agreement by the
Company prior to or after the Closing Date or any Additional Closing Date, as
the case may be, and to satisfy all conditions precedent to the delivery of the
Shares.
B. Covenants of the Selling Stockholders. Each Selling Stockholder
-------------------------------------
covenants and agrees with each Underwriter:
19
<PAGE>
(i) to deliver to Bear Stearns prior to the Closing Date a properly
completed and executed United States Treasury Department Form W-8 (if the
Selling Stockholder is a non-United States Person) or Form W-9 (if the Selling
Stockholder is a United States Person).
(ii) to cooperate to the extent necessary to cause the Registration
Statement or any post-effective amendment thereto to become effective at the
earliest possible time and to do and perform all things to be done and performed
under this Agreement prior to the Closing Date and to satisfy all conditions
precedent to the delivery of the Shares pursuant to this Agreement.
(iii) pay or to cause to be paid all transfer taxes with respect to
the Shares to be sold by such Selling Stockholder.
(iv) to promptly notify the Company and Bear Stearns if, at any time
prior to the date on which the distribution of the Shares as contemplated herein
and in the Prospectus has been completed, as determined by Bear Stearns, the
Selling Stockholder has knowledge of the occurrence of any event as a result of
which the Prospectus or the Registration Statement, in each case as then amended
or supplemented, would include an untrue statement of a material fact or omit to
state any material fact necessary to make the statements therein, in light of
the circumstances under which they were made, not misleading.
5. Payment of Expenses. Whether or not the transactions
-------------------
contemplated in this Agreement are consummated or this Agreement is terminated,
the Company hereby agrees to pay all costs and expenses incident to the
performance of the obligations of the Company hereunder, including those in
connection with (i) preparing, printing, duplicating, filing and distributing
the Registration Statement, as originally filed and all amendments thereof
(including all exhibits thereto), any preliminary prospectus, the Prospectus and
any amendments or supplements thereto (including, without limitation, fees and
expenses of the Company's accountants and counsel), duplicating, filing and
distributing the underwriting documents (including this Agreement, the Agreement
Among Underwriters and the Master Selling Agreement) and all other documents
related to the public offering of the Shares (including those supplied to the
Underwriters in quantities as hereinabove stated), (ii) the issuance, transfer
and delivery of the Shares to the Underwriters, including any transfer or other
taxes payable thereon, (iii) the qualification of the Shares under state or
foreign securities or Blue Sky laws, including the costs of printing and mailing
a preliminary and final "Blue Sky Survey" and the fees of counsel for the
Underwriters and such counsel's disbursements in relation thereto, (iv)
quotation of the Shares on the Nasdaq National Market, (v) filing fees of the
Commission and the National Association of Securities Dealers, Inc., (vi) the
cost of printing certificates representing the Shares, (vii) the cost and
charges of any transfer agent or registrar, (viii) all reasonable costs and
expenses of the Underwriters, including the fees and disbursements of counsel
for the Underwriters, stamp duties and taxes, in connection with matters related
to the Directed Share Program not to exceed $10,000, and (ix) the fees of the
Custodian and other fees and expenses related to the offering of the Shares by
the Selling Stockholders, other than any taxes payable by or on behalf of the
Selling Stockholders in connection with the sale of Shares hereunder.
20
<PAGE>
6. Conditions of Underwriters' Obligations. The obligations of the
---------------------------------------
Underwriters to purchase and pay for the Firm Shares and the Additional Shares,
as provided herein, shall be subject to the accuracy of the representations and
warranties of the Company and the Selling Stockholders herein contained, as of
the date hereof and as of the Closing Date (for purposes of this Section 6
"Closing Date" shall refer to the Closing Date for the Firm Shares and any
Additional Closing Date, if different, for the Additional Shares), to the
absence from any certificates, opinions, written statements or letters furnished
to you or to Underwriters' Counsel pursuant to this Section 6 of any
misstatement or omission, to the performance by the Company of its obligations
hereunder, and to the following additional conditions:
(a) The Registration Statement, including any Rule 462(b)
Registration Statement, shall have become effective and all necessary approvals
of the Nasdaq National Market shall have been received not later than 5:30 P.M.,
New York time, on the date of this Agreement, or at such later time and date as
shall have been consented to in writing by you; if the Company shall have
elected to rely upon Rule 430A or Rule 434 of the Regulations, the Prospectus
shall have been filed with the Commission in a timely fashion in accordance with
Section 4(a) hereof; and at or prior to the Closing Date, no stop order
suspending the effectiveness of the Registration Statement or any post-effective
amendment thereof shall have been issued and no proceedings therefor shall have
been initiated or threatened by the Commission.
(b) All the representations and warranties of the Company and the
Selling Stockholders contained in this Agreement shall be true and correct on
the Closing Date with the same force and effect as if made on and as of the
Closing Date.
(c) At the Closing Date you shall have received a letter from
Stradling Yocca Carlson & Rauth, a professional corporation, counsel for the
Company dated the Closing Date, addressed to the Underwriters and in form and
substance reasonably satisfactory to Underwriters' Counsel, that contains the
following opinions:
(i) Each of the Company and the Subsidiary has been duly
organized and is validly existing as a corporation in good standing
under the laws of the State of Delaware and California, respectively.
The Company is qualified to do business and is in good standing under
the laws of the State of California. To our knowledge, there are no
other jurisdictions where the ownership or leasing of properties or
the conduct of the Company's or the Subsidiary's respective businesses
requires such qualification, except for jurisdictions in which the
failure to so qualify would not have a material adverse effect on the
business, results and operations or the financial condition of the
Company or the Subsidiary.
(ii) The Company has the authorized, issued and outstanding
capital stock as set forth under the caption "Capitalization" in the
Prospectus and
21
<PAGE>
the authorized, issued and outstanding capital stock of the Company,
including the Shares, conforms in all material respects as to legal
matters to the description thereof set forth under that caption. All
of the shares of capital stock of the Company issued and outstanding
immediately prior to the sale of the Firm Shares have been duly
authorized and validly issued, and nonassessable, and to such
counsel's knowledge are fully paid, have been issued in compliance in
all material respects with the registration and qualification
requirements of federal and state securities laws and have not been
issued in violation of any preemptive right granted under the Delaware
General Corporation Law (the "DGCL"), or the Company's certificate of
incorporation or by-laws or, to such counsel's knowledge, based upon
such counsel's review of the Company's minute books, its certificate
of incorporation and by-laws and the agreements and instruments filed
as exhibits to the Registration Statement, any contractual preemptive
or other contractual right to subscribe for or purchase such shares
from the Company.
(iii) The Firm Shares have been duly authorized and, when
issued, delivered and paid for in accordance with the terms of this
Agreement, will be validly issued, fully paid and nonassessable and
the issuance of such Firm Shares will not be subject to any preemptive
right granted under the DGCL or the Company's certificate of
incorporation or by-laws or, to such counsel's knowledge, based upon
such counsel's review of the Company's minute books and its
certificate of incorporation and by-laws and the agreements and
instruments filed as exhibits to the Registration Statement, any
contractual preemptive or other contractual right to subscribe for or
purchase shares of capital stock from the Company.
(iv) Such counsel has been orally advised by staff for the
Commission that the Registration Statement has become effective under
the Act and, to such counsel's knowledge, no stop order suspending the
effectiveness of the Registration Statement under the Act has been
issued and no proceedings for that purpose have been instituted or are
pending or threatened by the Commission. Such counsel has been advised
by the staff of The Nasdaq Stock Market, Inc. that the Shares are
approved for quotation on the Nasdaq National Market.
(v) This Agreement has been duly authorized by all
necessary corporate action by the Company and has been duly executed
and delivered by the Company.
(vi) The execution, delivery and performance of this
Agreement by the Company and the consummation of the transactions
contemplated hereby will not (A) result in the violation by the
Company of any statute or any rule, order or regulation having the
force of law or of any court or governmental agency or body having
jurisdiction over the Company or the Subsidiary or any of their
respective properties or assets, in each case known to such counsel,
(B) conflict with or result in a default by the Company or the
22
<PAGE>
Subsidiary under their respective organizational documents, or (C)
constitute a violation of or default under the terms of any agreement
or instrument filed as an exhibit to the Registration Statement; and
except for the registration of the Shares under the Act and such
consents, approvals, authorizations, registration or qualifications as
may be required under the Exchange Act and applicable state, NASD,
securities or Blue Sky laws governing the purchase and distribution of
the Shares by the Underwriters, and clearance of the offering by the
NASD, no consent, approval, authorization or order of, or filing or
registration with, any court or governmental agency or body is
required for the execution, delivery and performance of this Agreement
by the Company and the consummation by the Company of the transactions
contemplated hereby.
(vii) The Company is not, and upon consummation of the
transactions contemplated by this Agreement, will not be, an
"investment company" within the meaning of that term under the
Investment Company Act of 1940, as amended, and the rules and
regulations of the Commission thereunder.
(viii) The statements in the Prospectus under the caption
"Description of Capital Stock," and in Items 14 and 15 of Part II of
the Registration Statement insofar as they purport to summarize the
provisions of documents or matters of law referred to therein are
accurate in all material respects.
(ix) The form of certificate evidencing the Common Stock
has been approved by all necessary corporate action of the Company and
complies as to form with the requirements of the DGCL.
(x) Each of the Intercompany Agreements have been duly
authorized executed and delivered by the Company and each of the
Intercompany Agreements is a valid and binding obligation of the
Company enforceable against it in accordance with its terms except to
the extent that enforcement thereof may be limited by (i) bankruptcy,
insolvency, reorganization, moratorium or other similar laws now or
hereafter in effect relating to creditors' rights generally and (ii)
general principles of equity (regardless of whether enforceability is
considered in a proceeding at law or in equity.)
(xi) Such counsel has no knowledge of any material
infringement by the Company of trademark, trade name rights, patent
rights, copyrights, licenses, trade secret or other similar rights of
others.
23
<PAGE>
(xii) To such counsel's knowledge and limited to the United
States, other than as described in the Registration Statement and the
Prospectus (A) there are no pending or threatened actions, suits,
proceedings, investigations or claims by others challenging the rights
of the Company or the Subsidiary or, if the Intellectual Property is
licensed to the Company or the Subsidiary, in respect of any third
party licensor, and (B) there is no dispute between the Company or the
Subsidiary or any third party licensor with respect to any
Intellectual Property.
In rendering such opinion, such counsel may rely as to matters of
fact, to the extent they deem proper, on certificates of responsible officers of
the Company and certificates or other written statements of officers of
departments of various jurisdictions having custody of documents respecting the
corporate existence or good standing of the Company and the Subsidiary, provided
that copies of any such statements or certificates shall be delivered to
Underwriters' Counsel.
In addition, such letter shall also contain a statement that such
counsel has participated in the preparation of the Registration Statement and
the Prospectus. From time to time, in connection therewith, such counsel has had
discussions with certain officers, directors and employees of the Company,
representatives of Ernst & Young LLP, the independent accountants who examined
certain of the financial statements of the Company included in the Registration
Statement, the Representatives and counsel to the Underwriters concerning the
information contained in the Registration Statement and the Prospectus and the
proposed responses to various items in Form S-1. Based thereupon, such counsel
is of the view that the Registration Statement (other than the financial
statements, schedules and other financial data included therein, and except for
the information referred to under the caption "Experts" as having been included
in the Registration Statement and the Prospectus on the authority of Ernst &
Young LLP as experts, as to which such counsel is not called upon to express a
view) at the time the Registration Statement became effective under the Act
complied, and the Prospectus (with the foregoing exceptions) as of its date
complied, as to form in all material respects with the requirements of the Act
and the Regulations.
In addition, such letter shall also contain a statement that such
counsel has not independently verified and is not passing upon, and does not
assume any responsibility for, the accuracy, completeness or fairness of the
information contained in the Registration Statement or the Prospectus except to
the extent of the opinion expressed above in the first sentence of clause (ii)
and in clause (viii). Based solely on the participation and discussions
described above in the immediately preceding paragraph, however, no facts have
come to such counsel's attention that cause such counsel to believe that the
Registration Statement (except for the financial statements, schedules and other
financial data included therein, and except for the information referred to
under the caption "Experts" as having been included in the Registration
Statement and the Prospectus on the authority of Ernst & Young LLP as experts,
as to which such counsel is not called upon to express a view), at the time it
became effective contained any untrue statement of material fact or omitted to
state a material fact required to be stated therein or necessary in order to
make the statements therein not misleading, or that the
24
<PAGE>
Prospectus (with the foregoing exceptions) as of its date contained, or on the
date hereof contains, any untrue statement of a material fact or as of its date
omitted, or on the date hereof omits, to state a material fact required to be
stated therein or necessary in order to make the statements therein, in the
light of the circumstances under which they were made, not misleading.
(d) At the Closing Date you shall have received the opinion of
Stradling Yocca Carlson & Rauth, a professional corporation, counsel for the
Selling Stockholders, dated the Closing Date addressed to the Underwriters and
in form and substance satisfactory to Underwriters' Counsel, to the effect that:
(i) To such counsel's knowledge, each Selling Stockholder
has full legal right, power and authority, and any approval required
by law (other than any approval imposed by the applicable state
securities and Blue Sky laws), to sell, assign, transfer and deliver
the Shares to be sold by such Selling Stockholder in the manner
provided in this Agreement.
(ii) To the knowledge of such counsel, each Selling
Stockholder has good and clear title to the certificates for the
Shares to be sold by such Selling Stockholder, and, assuming the
Underwriters purchase the shares to be sold by each Selling
Shareholder for value in good faith and without notice of any adverse
claim within the meaning of Article VIII of the Uniform Commercial
Code, upon delivery thereof pursuant hereto and payment therefor, good
and clear title will pass to the Underwriters, severally, free of all
restrictions on transfer, liens, encumbrances, security interests and
claims whatsoever.
(iii) This Agreement has been duly and validly authorized,
executed and delivered by each Selling Stockholder.
(iv) The Custody Agreement and Power of Attorney appointing
EquiServe, LP as the Custodian and Jack Johnson as each Selling
Stockholder's Attorney-in-Fact, to the extent set forth therein with
regard to the transactions contemplated hereby and by the Registration
Statement, has been duly authorized, executed and delivered by or on
behalf of such Selling Stockholder and is the valid and binding
instrument of such Selling Stockholder enforceable in accordance with
its terms, except to the extent that enforcement thereof may be
limited by (i) bankruptcy, insolvency, reorganization, moratorium or
other similar laws now or hereafter in effect relating to creditors'
rights generally and (ii) general principles of equity (regardless of
whether enforceability is considered in a proceeding at law or in
equity) and pursuant to such power of attorney, each Selling
Stockholder has authorized such attorney-in-fact, to execute and
deliver on such Selling Stockholder's behalf this Agreement and any
other document necessary or desirable in connection with
25
<PAGE>
the transactions contemplated hereby and to deliver the Shares to be
sold by such Selling Stockholder pursuant to this Agreement.
(v) To the knowledge of such counsel, the execution,
delivery and performance of this Agreement by each Selling
Stockholder, compliance by each Selling Stockholder with all the
provisions hereof and the consummation of the transactions
contemplated hereby will not require any consent, approval,
authorization or other order of any court, regulatory body,
administrative agency or other governmental body (except as such may
be required under the Act, state securities laws or Blue Sky laws or
except as such may have been obtained) and will not conflict with or
constitute a breach of any of the terms or provisions of, or a default
under, or any material agreement, indenture or other instrument to
which any Selling Stockholder is a party or by which a Selling
Stockholder or property of a Selling Stockholder is bound, or violate
or conflict with any laws, administrative regulation or ruling or
court decree applicable to a Selling Stockholder or property of a
Selling Stockholder.
In rendering such opinion, such counsel may rely (x) as to
matters involving the application of laws other than the laws of the United
States and jurisdictions in which they are admitted, to the extent such
counsel deems proper and to the extent specified in such opinion, if at
all, upon an opinion or opinions (in form and substance reasonably
satisfactory to Underwriters' Counsel) of other counsel reasonably
acceptable to Underwriters' Counsel, familiar with the applicable laws; (y)
as to matters of fact, to the extent they deem proper and is applicable, on
certificates of officers of the Selling Stockholder and certificates or
other written statements of officers of departments of various
jurisdictions having custody of documents respecting the corporate
existence or good standing of the Selling Stockholder, if applicable,
provided that copies of any such statements or certificates shall be
delivered to Underwriters' Counsel. The opinion of such counsel for the
Company shall state that the opinion of any such other counsel is in form
satisfactory to such counsel and, in their opinion, you and they are
justified in relying thereon.
(e) All proceedings taken in connection with the sale of the Firm
Shares and the Additional Shares as herein contemplated shall be reasonably
satisfactory in form and substance to you and to Underwriters' Counsel, and the
Underwriters shall have received from said Underwriters' Counsel a favorable
opinion, dated as of the Closing Date with respect to the issuance and sale of
the Shares, the Registration Statement and the Prospectus and such other related
matters as you may reasonably require, and the Company shall have furnished to
Underwriters' Counsel such documents as they reasonably request for the purpose
of enabling them to pass upon such matters.
(f) At the Closing Date you shall have received a certificate of
the Company executed on its behalf by its Chief Executive Officer and Chief
Financial Officer, dated the Closing Date, to the effect that (i) the condition
set forth in subsection (a) of this Section 6 has been satisfied, (ii) as of the
date hereof and as of the Closing Date the
26
<PAGE>
representations and warranties of the Company set forth in Section 1 hereof are
accurate, (iii) as of the Closing Date the obligations of the Company to be
performed hereunder on or prior thereto have been duly performed and (iv)
subsequent to the respective dates as of which information is given in the
Registration Statement and the Prospectus, neither the Company nor the
Subsidiary has sustained any material loss or interference with their businesses
or properties from fire, flood, hurricane, accident or other calamity, whether
or not covered by insurance, or from any labor dispute or any legal or
governmental proceeding, and there has not been any material adverse change, or
any development involving a material adverse change, in the business prospects,
properties, operations, condition (financial or otherwise), or results of
operations of the Company or the Subsidiary, taken as a whole, except in each
case as described in or contemplated by the Prospectus.
(g) At the time this Agreement is executed and at the Closing
Date, you shall have received a letter from Ernst & Young LLP, independent
public accountants for the Company, dated, respectively, as of the date of this
Agreement and as of the Closing Date, addressed to the Underwriters and in form
and substance reasonably satisfactory to you, stating that: (i) they are
independent certified public accountants with respect to the Company within the
meaning of the Act and the Regulations and stating that the answer to Item 10 of
the Registration Statement is correct insofar as it relates to them; (ii) in
their opinion, the consolidated financial statements of the Company and the
Subsidiary included in the Registration Statement and the Prospectus and covered
by their opinion therein comply as to form in all material respects with the
applicable accounting requirements of the Act and the applicable published rules
and regulations of the Commission thereunder; (iii) on the basis of procedures
consisting of a reading of the latest available unaudited interim consolidated
financial statements of the Company, a reading of the minutes of meetings and
consents of the stockholders and the board of directors of the Company and the
Subsidiary and the committees of such boards subsequent to December 31, 1999,
inquiries of officers and other employees of the Company and the Subsidiary who
have responsibility for financial and accounting matters of the Company and the
Subsidiary with respect to transactions and events subsequent to December 31,
1999, and other specified procedures and inquiries to a date not more than five
days prior to the date of such letter, nothing has come to their attention that
would cause them to believe that: (A) the unaudited consolidated financial
statements and schedules of the Company and the Subsidiary presented in the
Registration Statement and the Prospectus do not comply as to form in all
material respects with the applicable accounting requirements of the Act and, if
applicable, the Exchange Act and the applicable published rules and regulations
of the Commission thereunder or that such unaudited consolidated financial
statements are not fairly presented in conformity with generally accepted
accounting principles applied on a basis substantially consistent with that of
the audited consolidated financial statements included in the Registration
Statement and the Prospectus; (B) with respect to the period subsequent to
December 31, 1999, there were, as of the date of the most recent available
monthly consolidated financial statements of the Company, if any, and as of a
specified date not more than five days prior to the date of such letter, any
changes in the capital stock or long-term indebtedness of the Company or the
Subsidiary or any decrease in the net current assets or stockholders' equity of
the Company or the Subsidiary, in each case as compared with the amounts shown
in the most recent balance sheet presented in the Registration Statement and the
27
<PAGE>
Prospectus, except for changes or decreases which the Registration Statement and
the Prospectus disclose have occurred or may occur or which are set forth in
such letter or (C) that during the period from January 1, 2000 to the date of
the most recent available monthly consolidated financial statements of the
Company, if any, and to a specified date not more than five days prior to the
date of such letter, there was any decrease, as compared with the corresponding
period in the prior fiscal year, in total revenues, or total or per share net
income, except for decreases which the Registration Statement and the Prospectus
disclose have occurred or may occur or which are set forth in such letter;(iv)
they have compared specific dollar amounts, numbers of shares, percentages of
revenues and earnings, and other financial information pertaining to the Company
and the Subsidiary set forth in the Registration Statement and the Prospectus,
which have been specified by you prior to the date of this Agreement, to the
extent that such amounts, numbers, percentages, and information may be derived
from the general accounting and financial records of the Company or the
Subsidiary or from schedules furnished by the Company or the Subsidiary, and
excluding any questions requiring an interpretation by legal counsel, with the
results obtained from the application of specified readings, inquiries, and
other appropriate procedures specified by you set forth in such letter, and
found them to be in agreement; and (v) in their opinion, the pro forma financial
statements of the Company and the Subsidiary included in the Registration
Statement and the Prospectus comply as to form in all material respects with the
applicable accounting requirements of the Act and the applicable published rules
and regulations of the Commission thereunder and all pro form adjustments have
been properly applied to the historical accounts in the compilation of those
statements.
(h) Prior to the Closing Date, the Company shall have furnished
to you such further information, certificates and documents as you may
reasonably request.
(i) You shall have received from each person who holds an option
to purchase shares of Common Stock and the Selling Stockholders an agreement to
the effect that such person will not, directly or indirectly, without your prior
written consent, issue, sell, offer or agree to sell, grant any option for the
sale of, pledge, make any short sale or maintain any short position, establish
or maintain a "put equivalent position" (within the meaning of Rule 16a-1(h)
under the Securities Exchange Act of 1934, as amended), enter into any swap,
derivative transaction or other arrangement that transfers to another, in whole
or in part, any of the economic consequences of ownership of the Common Stock
(whether any such transaction is to be settled by delivery of Common Stock,
other securities, cash or other consideration) or otherwise dispose of, any
Common Stock (or any securities convertible into, exercisable for or
exchangeable for Common Stock) or interest therein of the Company for a period
of 180 days after the date of the Prospectus, except as may otherwise be
explicitly permitted by the terms of such agreement.
(j) At the Closing Date, the Shares shall have been approved for
quotation on Nasdaq National Market.
(k) At the Closing Date you shall have received a written
certificate executed by Jack Johnson in his capacity as Attorney-in-Fact on
behalf of the Selling
28
<PAGE>
Stockholders, dated as of the Closing Date, to the effect that (i) the
representations, warranties and covenants of the Selling Stockholders set forth
in Section 1 of this Agreement are true and correct with the same force and
effect as though expressly made by the Selling Stockholders on and as of the
Closing Date and (ii) each Selling Stockholder has complied with all the
agreements and satisfied all the conditions on its part to be performed or
satisfied at or prior to the Closing Date.
(l) At the Closing Date you shall have received a certificate of
Parent, executed on its behalf by its Chief Executive Officer, dated the Closing
Date to the effect that as of the date hereof, the date of the Spin-Off and as
of the Closing Date the representations of Parent set forth in the letter ruling
of the Internal Revenue Service regarding the Spin-Off dated September 30, 1999
are true, complete and correct.
If any of the conditions specified in this Section 6 shall not have
been fulfilled when and as required by this Agreement, or if any of the
certificates, opinions, written statements or letters furnished to you or to
Underwriters' Counsel pursuant to this Section 6 shall not be in all material
respects reasonably satisfactory in form and substance to you and to
Underwriters' Counsel, all obligations of the Underwriters hereunder may be
canceled by you at, or at any time prior to, the Closing Date, and the
obligations of the Underwriters to purchase the Additional Shares may be
canceled by you at, or at any time prior to, the Additional Closing Date. Notice
of such cancellation shall be given to the Company in writing, or by telephone,
facsimile, telex or telegraph, confirmed in writing.
7. Indemnification.
---------------
(a) The Company and the Subsidiary, jointly and severally, agree
to indemnify and hold harmless each Underwriter and each person, if any, who
controls any Underwriter within the meaning of Section 15 of the Act or Section
20(a) of the Exchange Act against any and all losses, liabilities, claims,
damages and expenses whatsoever as incurred (including but not limited to
attorneys' fees and any and all expenses whatsoever incurred in investigating,
preparing or defending against any litigation, commenced or threatened, or any
claim whatsoever, and subject to subsection (d) of this Section 7, any and all
amounts paid in settlement of any claim or litigation), joint or several, to
which they or any of them may become subject under the Act, the Exchange Act or
otherwise, insofar as such losses, liabilities, claims, damages or expenses (or
actions in respect thereof) arise out of or are based upon (i) any untrue
statement or alleged untrue statement of a material fact contained in the
Registration Statement or any amendment thereof, or any related preliminary
prospectus or the Prospectus, or in any supplement thereto or amendment thereof,
or arise out of or are based upon the omission or alleged omission to state
therein a material fact required to be stated therein or necessary to make
the statements therein not misleading; or (ii) (A) the violation of any
applicable laws or regulations of foreign jurisdictions where directed shares
have been offered and (B) any untrue statement or alleged untrue statement of a
material fact included in the supplement or prospectus wrapper material
distributed in connection with the reservation and sale of the Directed Shares
to eligible employees and certain persons designated by the Company or the
omission or alleged omission therefrom of a material fact necessary to make
29
<PAGE>
the statements therein, when considered in conjunction with the Prospectus or
preliminary prospectus, not misleading; provided, however, that neither the
-------- -------
Company nor the Subsidiary will be liable in any such case to the extent, but
only to the extent, that any such loss, liability, claim, damage or expense
arises out of or is based upon any such untrue statement or alleged untrue
statement or omission or alleged omission made therein in reliance upon and in
conformity with written information furnished to the Company by or on behalf of
any Underwriter through you expressly for use therein. This indemnity agreement
will be in addition to any liability which the Company and the Subsidiary may
otherwise have including under this Agreement.
(b) Each Underwriter severally, and not jointly, agrees to
indemnify and hold harmless the Company, the Subsidiary, each of the directors
of the Company, each of the officers of the Company who shall have signed the
Registration Statement, and each other person, if any, who controls the Company
or the Subsidiary within the meaning of Section 15 of the Act or Section 20(a)
of the Exchange Act, against any losses, liabilities, claims, damages and
expenses whatsoever as incurred (including but not limited to reasonable
attorneys' fees and any and all reasonable expenses whatsoever incurred in
investigating, preparing or defending against any litigation, commenced or
threatened, or any claim whatsoever, and, subject to subsection (d) of this
Section 7, any and all amounts paid in settlement of any claim or litigation),
joint or several, to which they or any of them may become subject under the Act,
the Exchange Act or otherwise, insofar as such losses, liabilities, claims,
damages or expenses (or actions in respect thereof) arise out of or are based
upon any untrue statement or alleged untrue statement of a material fact
contained in the Registration Statement or any amendment thereof, or any related
preliminary prospectus or the Prospectus, or in any amendment thereof or
supplement thereto, or arise out of or are based upon the omission or alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading, in each case to the
extent, but only to the extent, that any such loss, liability, claim, damage or
expense arises out of or is based upon any such untrue statement or alleged
untrue statement or omission or alleged omission made therein in reliance upon
and in conformity with written information furnished to the Company by or on
behalf of any Underwriter through you expressly for use therein; provided,
--------
however, that in no case shall any Underwriter be liable or responsible for any
- -------
amount in excess of the underwriting discount applicable to the Shares purchased
by such Underwriter hereunder. This indemnity will be in addition to any
liability which any Underwriter may otherwise have including under this
Agreement. The Company and the Subsidiary acknowledge that the statements set
forth in the fourth paragraph under the caption "Underwriting" in the Prospectus
constitute the only information furnished in writing by or on behalf of any
Underwriter expressly for use in the Registration Statement or in any amendment
thereof, any related preliminary prospectus or the Prospectus or in any
amendment thereof or supplement thereto, as the case may be.
(c) In connection with the offer and sale of the Directed Shares,
the Company agrees, promptly upon a request in writing, to indemnify and hold
harmless the Underwriters from and against any and all losses, liabilities,
claims, damages and reasonable expenses incurred by them as a result of (i) the
failure of the Participants to pay for and accept
30
<PAGE>
delivery of the Directed Shares which, by the end of the day following the date
of this Agreement, were subject to a properly confirmed agreement to purchase
such Directed Shares or (ii) the refusal by any Participants that are also
employees of the Company to properly confirm their respective agreements to
purchase the Directed Shares that they had agreed to purchase by the end of the
first day after the date of this Agreement.
(d) Promptly after receipt by an indemnified party under
subsection (a) or (b) above of notice of the commencement of any action, such
indemnified party shall, if a claim in respect thereof is to be made against the
indemnifying party under such subsection, notify each party against whom
indemnification is to be sought in writing of the commencement of such action
(but the failure so to notify an indemnifying party shall not relieve it from
any liability which it may have under this Section 7). In case any such action
is brought against any indemnified party, and it notifies an indemnifying party
of the commencement thereof, the indemnifying party will be entitled to
participate therein, and to the extent it may elect by written notice delivered
to the indemnified party promptly after receiving the aforesaid notice from such
indemnified party, to assume the defense thereof with counsel reasonably
satisfactory to such indemnified party. Notwithstanding the foregoing, the
indemnified party or parties shall have the right to employ its or their own
counsel in any such case, but the fees and expenses of such counsel shall be at
the expense of such indemnified party or parties unless (i) the employment of
such counsel shall have been authorized in writing by the indemnifying parties
in connection with the defense of such action, (ii) the indemnifying parties
shall not have employed counsel to have charge of the defense of such action
within a reasonable time after notice of commencement of the action, or (iii)
such indemnified party or parties shall have reasonably concluded that there are
conflicts of interests in the representation of both the indemnified and
indemnifying party by the same counsel (in which case the indemnifying parties
shall not have the right to direct the defense of such action on behalf of the
indemnified party or parties), in any of which events such fees and expenses
shall be borne by the indemnifying parties. In no event shall the indemnifying
party or parties be liable for fees and expenses of more than one counsel (in
addition to any local counsel) separate from their own counsel for all
indemnified parties in connection with any one action or separate but similar or
related actions in the same jurisdiction arising out of the same general
allegations or circumstances. The indemnifying party shall indemnify and hold
harmless the indemnified party from and against any and all losses, claims,
damages, liabilities and judgments by reason of any settlement of any action
effected with its written consent.
(e) Each Selling Stockholder agrees to indemnify and hold
harmless each Underwriter and each person, if any, who controls any Underwriter
within the meaning of Section 15 of the Act or Section 20(a) of the Exchange
Act, against any and all losses, liabilities, claims, damages and expenses
whatsoever as incurred (including but not limited to attorneys' fees and any and
all expenses whatsoever incurred in investigating, preparing or defending
against any litigation, commenced or threatened, or any claim whatsoever, and
any and all amounts paid in settlement of any claim or litigation), joint or
several, to which they or any of them may become subject under the Act, the
Exchange Act or otherwise, insofar as such losses, liabilities, claims, damages
or expenses (or actions in respect thereof) arise out of or are based upon (i) a
breach of any of the representations or warranties of such Selling
31
<PAGE>
Stockholder set forth in Section 1.B hereof and (ii) any untrue statement or
alleged untrue statement or omission or alleged omission made in the
Registration Statement or any amendment thereof, or any related preliminary
prospectus or the Prospectus, or in any amendment thereof or supplement thereto
made in reliance upon and in conformity with written information provided to the
Company by the Selling Stockholders expressly for use therein.
8. Contribution. In order to provide for contribution in
------------
circumstances in which the indemnification provided for in Section 7 hereof is
for any reason held to be unavailable from any indemnifying party or is
insufficient to hold harmless a party indemnified thereunder, the Company, the
Subsidiary, the Selling Stockholders and the Underwriters shall contribute to
the aggregate losses, claims, damages, liabilities and expenses of the nature
contemplated by such indemnification provision (including any investigation,
legal and other expenses incurred in connection with, and any amount paid in
settlement of, any action, suit or proceeding or any claims asserted, but after
deducting in the case of losses, claims, damages, liabilities and expenses
suffered by the Company and the Subsidiary any contribution received by the
Company or the Subsidiary from persons, other than the Underwriters, who may
also be liable for contribution, including persons who control the Company
within the meaning of Section 15 of the Act or Section 20(a) of the Exchange
Act, officers of the Company who signed the Registration Statement and directors
of the Company) as incurred to which the Company, the Subsidiary and one or more
of the Underwriters may be subject, in such proportions as is appropriate to
reflect the relative benefits received by the Company, the Subsidiary, and the
Selling Stockholders, on the one hand, and the Underwriters, on the other hand,
from the offering of the Shares or, if such allocation is not permitted by
applicable law or indemnification is not available as a result of the
indemnifying party not having received notice as provided in Section 7 hereof,
in such proportion as is appropriate to reflect not only the relative benefits
referred to above but also the relative fault of the Company, the Subsidiary,
and the Selling Stockholders, on the one hand, and the Underwriters, on the
other hand, in connection with the statements or omissions which resulted in
such losses, claims, damages, liabilities or expenses, as well as any other
relevant equitable considerations. The relative benefits received by the
Company, the Subsidiary, and the Selling Stockholders, on the one hand, and the
Underwriters, on the other hand, shall be deemed to be in the same proportion as
(x) the total proceeds from the offering (net of underwriting discounts and
commissions but before deducting expenses) received by the Company and the
Selling Stockholders and (y) the underwriting discounts and commissions received
by the Underwriters, respectively, in each case as set forth in the table on the
cover page of the Prospectus. The relative fault of the Company, the Subsidiary
and, the Selling Stockholders, on the one hand, and of the Underwriters, on the
other hand, shall be determined by reference to, among other things, whether the
untrue or alleged untrue statement of a material fact or the omission or alleged
omission to state a material fact relates to information supplied by the
Company, the Subsidiary, the Selling Stockholders or the Underwriters and the
parties' relative intent, knowledge, access to information and opportunity to
correct or prevent such statement or omission. The Company, the Selling
Stockholders and the Underwriters agree that it would not be just and equitable
if contribution pursuant to this Section 8 were determined by pro rata
allocation (even if the Underwriters were treated as one entity for such
32
<PAGE>
purpose) or by any other method of allocation which does not take account of the
equitable considerations referred to above. Notwithstanding the provisions of
this Section 8, (i) in no case shall any Underwriter be liable or responsible
for any amount in excess of the underwriting discount applicable to the Shares
purchased by such Underwriter hereunder, and (ii) no person guilty of fraudulent
misrepresentation (within the meaning of Section 11(f) of the Act) shall be
entitled to contribution from any person who was not guilty of such fraudulent
misrepresentation. Notwithstanding the provisions of this Section 8 and the
preceding sentence, no Underwriter shall be required to contribute any amount in
excess of the amount by which the total price at which the Shares underwritten
by it and distributed to the public were offered to the public exceeds the
amount of any damages that such Underwriter has otherwise been required to pay
by reason of such untrue or alleged untrue statement or omission or alleged
omission. For purposes of this Section 8, each person, if any, who controls an
Underwriter within the meaning of Section 15 of the Act or Section 20(a) of the
Exchange Act shall have the same rights to contribution as such Underwriter, and
each person, if any, who controls the Company within the meaning of Section 15
of the Act or Section 20(a) of the Exchange Act, each officer of the Company who
shall have signed the Registration Statement and each director of the Company
shall have the same rights to contribution as the Company, subject in each case
to clauses (i) and (ii) of this Section 8.
The liability of each Selling Stockholder under this Agreement, including
without limitation, the indemnity and reimbursement agreements contained in the
provisions of Sections 7 and 8 hereof shall be limited to an amount equal to (i)
the gross proceeds of the Shares sold by such Selling Stockholder to the
Underwriters, less (ii) the underwriting discounts and commissions with respect
to such Shares sold by such Selling Stockholder.
Any party entitled to contribution will, promptly after receipt of notice
of commencement of any action, suit or proceeding against such party in respect
of which a claim for contribution may be made against another party or parties,
notify each party or parties from whom contribution may be sought, but the
omission to so notify such party or parties shall not relieve the party or
parties from whom contribution may be sought from any obligation it or they may
have under this Section 8 or otherwise. No party shall be liable for
contribution with respect to any action or claim settled without its written
consent; provided, however, that such consent was not unreasonably withheld.
-------- -------
9. Default by an Underwriter.
-------------------------
(a) If any Underwriter or Underwriters shall default in its or
their obligation to purchase Firm Shares or Additional Shares hereunder, and if
the Firm Shares or Additional Shares with respect to which such default relates
do not (after giving effect to arrangements, if any, made by you pursuant to
subsection (b) below) exceed in the aggregate 10% of the number of Firm Shares
or Additional Shares, as the case may be, the Firm Shares or Additional Shares
to which the default relates shall be purchased by the non-defaulting
Underwriters in proportion to the respective proportions which the numbers of
Firm Shares set forth opposite their respective names in Schedule I hereto bear
to the aggregate number of Firm Shares set forth opposite the names of the non-
defaulting Underwriters.
33
<PAGE>
(b) In the event that such default relates to more than 10% of
the total number of Firm Shares or Additional Shares, as the case may be, you
may in your discretion arrange for yourself or for another party or parties
(including any non-defaulting Underwriter or Underwriters who so agree) to
purchase such Firm Shares or Additional Shares, as the case may be, to which
such default relates on the terms contained herein. In the event that within 5
calendar days after such a default you do not arrange for the purchase of the
Firm Shares or Additional Shares, as the case may be, to which such default
relates as provided in this Section 9, this Agreement or, in the case of a
default with respect to the Additional Shares, the obligations of the
Underwriters to purchase and of the Company to sell the Additional Shares shall
thereupon terminate, without liability on the part of the Company or the Selling
Stockholders with respect thereto (except in each case as provided in Section 5,
7(a) and 8 hereof) or the Underwriters, but nothing in this Agreement shall
relieve a defaulting Underwriter or Underwriters of its or their liability, if
any, to the other Underwriters and the Company for damages occasioned by its or
their default hereunder.
(c) In the event that the Firm Shares or Additional Shares to
which such default relates are to be purchased by the non-defaulting
Underwriters, or are to be purchased by another party or parties as aforesaid,
you or the Company shall have the right to postpone the Closing Date or
Additional Closing Date, as the case may be for a period, not exceeding five
Business Days, in order to effect whatever changes may thereby be made necessary
in the Registration Statement or the Prospectus or in any other documents and
arrangements, and the Company agrees to file promptly any amendment or
supplement to the Registration Statement or the Prospectus which, in the opinion
of Underwriters' Counsel, may thereby be made necessary or advisable. The term
"Underwriter" as used in this Agreement shall include any party substituted
under this Section 9 with like effect as if it had originally been a party to
this Agreement with respect to such Firm Shares and Additional Shares, as the
case may be.
10. Survival of Representations and Agreements. All representations
------------------------------------------
and warranties, covenants and agreements of the Underwriters, the Company and
the Selling Stockholders contained in this Agreement, including the agreements
contained in Section 5 hereof, the indemnity agreements contained in Section 7
hereof and the contribution agreements contained in Section 8 hereof, shall
remain operative and in full force and effect regardless of any investigation
made by or on behalf of any Underwriter or any controlling person thereof or by
or on behalf of the Company, any of its officers and directors or any
controlling person thereof or by or on behalf of a Selling Stockholder, and
shall survive delivery of and payment for the Shares to and by the Underwriters.
The representations contained in Section 1 and the agreements contained in
Sections 5, 7, 8 and 11(d) hereof shall survive the termination of this
Agreement, including termination pursuant to Section 9 or 11 hereof.
34
<PAGE>
11. Effective Date of Agreement; Termination.
----------------------------------------
(a) This Agreement shall become effective, upon the later of (i)
such time as you and the Company shall have received notification of the
effectiveness of the Registration Statement and (ii) the execution of this
Agreement. If either the initial public offering price or the purchase price per
Share has not been agreed upon prior to 5:00 P.M., New York time, on the fifth
full Business Day after the Registration Statement shall have become effective,
this Agreement shall thereupon terminate without liability to the Company or the
Underwriters except as herein expressly provided. Until this Agreement becomes
effective as aforesaid, it may be terminated by the Company by notifying you or
by you notifying the Company. Notwithstanding the foregoing, the provisions of
this Section 11 and of Sections 1, 5, 7 and 8 hereof shall at all times be in
full force and effect.
(b) You shall have the right to terminate this Agreement at any
time prior to the Closing Date or the obligations of the Underwriters to
purchase the Additional Shares at any time prior to the Additional Closing Date,
as the case may be, if (i) any domestic or international event or act or
occurrence has materially disrupted, or in your opinion will in the immediate
future materially disrupt, the market for the Company's securities or securities
in general; (ii) if trading on the New York or American Stock Exchanges or the
Nasdaq National Market shall have been suspended, or minimum or maximum prices
for trading shall have been fixed, or maximum ranges for prices for securities
shall have been required, on the New York or American Stock Exchanges or the
Nasdaq National Market by the New York or American Stock Exchanges or the Nasdaq
National Market or by order of the Commission or any other governmental
authority having jurisdiction; or (iii) if a banking moratorium has been
declared by a state or federal authority or if any new restriction materially
adversely affecting the distribution of the Firm Shares or the Additional
Shares, as the case may be, shall have become effective; or (iv) (A) if the
United States becomes engaged in hostilities or there is an escalation of
hostilities involving the United States or there is a declaration of a national
emergency or war by the United States or (B) if there shall have been such
change in political, financial or economic conditions if the effect of any such
event in (A) or (B) as in your judgment makes it impracticable or inadvisable to
proceed with the offering, sale and delivery of the Firm Shares or the
Additional Shares, as the case may be, on the terms contemplated by the
Prospectus.
(c) Any notice of termination pursuant to this Section 11 shall
be by telephone, facsimile, telex, or telegraph, confirmed in writing by letter.
(d) If this Agreement shall be terminated pursuant to any of the
provisions hereof (otherwise than pursuant to (i) notification by you as
provided in Section 11(a) hereof or (ii) Section 9(b) or 11(b) hereof), or if
the sale of the Shares provided for herein is not consummated because any
condition to the obligations of the Underwriters set forth herein is not
satisfied or because of any refusal, inability or failure on the part of the
Company to perform any agreement herein or comply with any provision hereof, the
Company will, subject to demand by you, reimburse the Underwriters for all out-
of-pocket expenses
35
<PAGE>
(including the fees and expenses of their counsel), incurred by the Underwriters
in connection herewith.
12. Notices. All communications hereunder, except as may be
-------
otherwise specifically provided herein, shall be in writing and, if sent to any
Underwriter, shall be mailed, delivered, sent by facsimile, telex or telegraph
and confirmed in writing, to such Underwriter c/o Bear, Stearns & Co. Inc.,245
Park Avenue, New York, NY 10167, Attention: Syndicate Department, with a copy to
Katten Muchin Zavis, 525 West Monroe Street, Suite 1600, Chicago, Illinois
60661, Attention: Lawrence D. Levin; if sent to the Company, shall be mailed,
delivered, or telegraphed and confirmed in writing to the Company, shall be
mailed, delivered, or sent by facsimile, telex or telegraph and confirmed in a
letter to 1515 South Manchester Avenue, Anaheim, California 92802, Attention:
Jack E. Johnson, Chief Executive Officer and President with a copy to Stradling
Yocca Carlson & Rauth, Attention: K.C. Schaaf, 660 Newport Center Drive, Suite
1600, Newport Beach, CA 92660; and if sent to the Selling Stockholders, shall be
mailed, delivered, or faxed and confirmed in writing to Stradling Yocca Carlson
& Rauth, Attention: K.C. Schaaf, 660 Newport Center Drive, Suite 1600, Newport
Beach, CA 92660.
13. Parties. This Agreement shall insure solely to the benefit of,
-------
and shall be binding upon, the Underwriters, the Selling Stockholders and the
Company and the controlling persons, directors, officers, employees and agents
referred to in Sections 7 and 8, and their respective successors and assigns,
and no other person shall have or be construed to have any legal or equitable
right, remedy or claim under or in respect of or by virtue of this Agreement or
any provision contained herein. The term "successors and assigns" shall not
include a purchaser, in its capacity as such, of Shares from any of the
Underwriters.
14. Failure of the Selling Stockholders to Sell and Deliver Shares.
--------------------------------------------------------------
If any Selling Stockholder shall fail to sell and deliver to the Underwriters
the Shares to be sold and delivered by such Selling Stockholder at the Closing
Date pursuant to this Agreement, the Company hereby agrees to sell and deliver
to the Underwriters that number of Shares equal to the number of Shares not sold
and delivered by such Selling Stockholder, in which case the Underwriters shall
have the right, by written notice from Bear Stearns to the Company and such
Selling Stockholder, to postpone the Closing Date for a period of not more than
seven (7) days in order that the required changes, if any, to the Registration
Statement and the Prospectus or any other documents or arrangements may be
effected.
15. Governing Law. This Agreement shall be governed by and construed
-------------
in accordance with the laws of the State of New York, but without regard to
principles of conflicts of law.
16. Counterparts. This Agreement may be executed in counterparts,
------------
each of which shall be an original and all of which together shall constitute
one and the same instrument.
36
<PAGE>
If the foregoing correctly sets forth the understanding between you,
the Company and the Selling Stockholders, please so indicate in the space
provided below for that purpose, whereupon this letter shall constitute a
binding agreement among us.
Very truly yours,
Iteris, Inc.
By:
---------------------------------------------
Name: Jack E. Johnson
Title: Chief Executive Officer and President
Selling Stockholders
By:
---------------------------------------------
Name: Jack Johnson, Attorney-in-Fact
Accepted as of the date first above written
Bear, Stearns & Co. Inc.
SG Cowen Securities Corporation
Cruttenden Roth Incorporated
By: BEAR, STEARNS & CO. INC.
By:
-------------------------------------
Name:
Title:
On behalf of themselves and the other
Underwriters named in Schedule I hereto.
37
<PAGE>
SCHEDULE I
Number of Firm Shares
Name of Underwriter to be Purchased
- -------------------------------------------------------------------
Bear, Stearns & Co. Inc.................
SG Cowen Securities Corporation.........
Cruttenden Roth Incorporated............
------------------
Total ------------------
38
<PAGE>
EXHIBIT 5.1
STRADLING YOCCA CARLSON & RAUTH
A PROFESSIONAL CORPORATION
ATTORNEYS AT LAW
660 NEWPORT CENTER DRIVE, SUITE 1600
NEWPORT BEACH, CALIFORNIA 92660-6441
TELEPHONE (949) 725-4000
FACSIMILE (949) 725-4100
SAN FRANCISCO OFFICE
44 MONTGOMERY STREET, SUITE 2950
SAN FRANCISCO, CALIFORNIA 94104
TELEPHONE (415) 283-2240
FACSIMILE (415) 283-2255
February 17, 2000
Iteris, Inc.
1515 S. Manchester Avenue
Anaheim, California 92802
Re: Registration Statement on Form S-1; Registration No. 333-84533
Ladies and Gentlemen::
We have examined the Registration Statement on Form S-1, Registration No.
333-93035, filed by you with the Securities and Exchange Commission (the
"Commission") on December 17, 1999 (as amended by Amendment Nos. 1 and 2
thereto, respectively, as such may be further amended or supplemented, the
"Registration Statement"), in connection with the registration under the
Securities Act of 1933, as amended, of 4,300,000 shares of your common stock,
which includes 126,384 shares to be sold by selling stockholders (the
"Shares"). The Shares, which include up to 645,000 shares of common stock
issuable pursuant to an over-allotment option granted to the underwriters (the
"Underwriters"), are to be sold to the Underwriters as described in such
Registration Statement for sale to the public. As your counsel in connection
with this transaction, we have examined the proceedings taken and are familiar
with the proceedings proposed to be taken by you in connection with the sale
and issuance of the Shares.
Based on the foregoing, it is our opinion that, upon conclusion of the
proceedings being taken or contemplated by us, as your counsel, to be taken
prior to the issuance of the Shares and upon completion of the proceedings taken
in order to permit such transactions to be carried out in accordance with the
securities laws of various states where required, the Shares, when issued and
sold in the manner described in the Registration Statement, will be legally and
validly issued, fully paid and nonassessable.
We consent to the use of this opinion as an exhibit to the Registration
Statement and to the use of our name under the caption "Legal Matters" in the
Registration Statement, including the Prospectus constituting a part thereof
and any amendment thereto.
Please contact me if you have any questions.
Very truly yours,
STRADLING YOCCA CARLSON & RAUTH
/s/ Stradling Yocca Carlson & Rauth
<PAGE>
Exhibit 23.2
Consent of Independent Auditors
We consent to the reference to our firm under the captions "Experts" and
"Selected Consolidated Financial Data" and to the use of our reports dated
January 25, 2000, except for the last paragraph of Note 7, as to which the date
is February 10, 2000, with regard to the financial statements and schedule of
Iteris, Inc. as of March 31, 1998 and 1999 and for each of the three years in
the period ended March 31, 1999 and as of and for the nine month period ended
December 31, 1999, and our report dated November 11, 1998 with regard to the
financial statements of Meyer, Mohaddes Associates, Inc. as of and for the year
ended December 31, 1997 and as of October 16, 1998 and for the period from
January 1, 1998 to October 16, 1998, in Amendment No. 2 to the Registration
Statement (Form S-1, No. 333-93035) and related Prospectus of Iteris, Inc. for
the registration of 4,300,000 shares of its common stock.
/s/ Ernst & Young LLP
Orange County, California
February 16, 2000
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S CONSOLIDATED FINANCIAL STATEMENTS INCLUDED ELSEWHERE IN THIS
REGISTRATION STATEMENT.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C> <C> <C> <C>
<PERIOD-TYPE> YEAR YEAR 12-MOS 9-MOS
<FISCAL-YEAR-END> MAR-31-1997 MAR-31-1998 MAR-31-1999 DEC-31-1999
<PERIOD-START> APR-01-1996 APR-01-1997 APR-01-1998 APR-01-1999
<PERIOD-END> MAR-31-1997 MAR-31-1998 MAR-31-1999 DEC-31-1999
<CASH> 7 66 1 1
<SECURITIES> 0 0 0 0
<RECEIVABLES> 53 800 4,723 5,268
<ALLOWANCES> 0 0 252 327
<INVENTORY> 635 2,118 863 1,294
<CURRENT-ASSETS> 789 4,058 6,643 8,128
<PP&E> 340 1,746 2,162 2,584
<DEPRECIATION> 76 325 697 1,095
<TOTAL-ASSETS> 1,675 11,433 17,482 18,676
<CURRENT-LIABILITIES> 10,371 7,373 6,739 6,059
<BONDS> 0 0 0 0
0 0 0 0
0 0 0 0
<COMMON> 0 0 1 1
<OTHER-SE> 0 0 (19,229) (25,040)
<TOTAL-LIABILITY-AND-EQUITY> 1,675 11,433 17,482 18,676
<SALES> 538 5,841 14,580 17,447
<TOTAL-REVENUES> 538 5,841 14,580 17,447
<CGS> 470 5,370 10,324 11,747
<TOTAL-COSTS> 470 5,370 9,462 9,091
<OTHER-EXPENSES> 3,894 6,556 0 0
<LOSS-PROVISION> 0 0 0 0
<INTEREST-EXPENSE> 680 1,344 2,167 2,191
<INCOME-PRETAX> (4,506) (7,429) (7,373) (5,582)
<INCOME-TAX> 0 0 0 0
<INCOME-CONTINUING> (4,506) (7,429) (7,373) (7,373)
<DISCONTINUED> 0 0 0 0
<EXTRAORDINARY> 0 0 0 0
<CHANGES> 0 0 0 0
<NET-INCOME> (4,506) (7,429) (7,373) (5,582)
<EPS-BASIC> (0.40) (.66) (.63) (.46)
<EPS-DILUTED> (0.40) (.66) (.63) (.46)
</TABLE>
