<PAGE>
As filed with the Securities and Exchange Commission on January 3, 2000
File No.
===============================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------
FORM 10
GENERAL FORM FOR REGISTRATION OF SECURITIES
Pursuant to Section 12(b) or (g) of the Securities Exchange Act of 1934
----------------
ITERIS, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
Delaware 95-2954623
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1515 S. Manchester Avenue
Anaheim, CA 92802
(Address of principal executive offices) (Zip Code)
</TABLE>
Registrant's telephone number, including area code: (714) 758-0200
Securities to be registered pursuant to Section 12(b) of the Act:
<TABLE>
<CAPTION>
Name of each exchange on which
Title of each class to be so registered each class is to be registered
--------------------------------------- ------------------------------
<S> <C>
Common Stock, par value $.001 per share Nasdaq National Market
</TABLE>
Securities to be registered pursuant to Section 12(g) of the Act: None
================================================================================
<PAGE>
ITERIS, INC.
Information Included in Information Statement
And Incorporated in Form 10 by Reference
<TABLE>
<CAPTION>
Item
No. Item Caption Location in Information Statement
---- ------------ ---------------------------------
<C> <S> <C>
1 Business............................ "Summary," "Management's Discussion and Analysis
of Financial Condition and Results of
Operations" and "Business"
2 Financial Information............... "Summary Financial Data," "Selected Consolidated
Financial Data," "Management's Discussion and
Analysis of Financial Condition and Results of
Operations," and "Index to Consolidated
Financial Statements"
3 Properties.......................... "Business--Properties"
4 Security Ownership of Certain
Beneficial Owners and Management.... "Principal Stockholders"
5 Directors and Executive Officers.... "Management"
6 Executive Compensation.............. "Management"
7 Certain Relationships and Related
Transactions........................ "Arrangements with Odetics" and "Certain
Transactions"
8 Legal Proceedings................... "Business--Legal Proceedings"
9 Market Price of and Dividends on the
Registrant's Common Equity and
Related Stockholder Matters......... "The Spin-Off--Listing and Trading of our Common
Stock," "Management--1998 Stock Incentive Plan,
Options Issued Outside of the 1998 Stock
Incentive Plan and Employee Stock Purchase
Plan," "Shares Eligible for Future Sale" and
"Description of Capital Stock--Dividend Policy"
10 Recent Sales of Unregistered
Securities.......................... "Recent Sales of Unregistered Securities"
11 Description of Registrant's
Securities to be Registered......... "Description of Capital Stock"
12 Indemnification of Directors and
Officers............................ "Description of Capital Stock--Limitations of
Liability and Indemnification Matters"
13 Financial Statements and
Supplementary Data.................. "Summary Financial Data," "Selected Consolidated
Financial Data," "Management's Discussion and
Analysis of Financial Condition and Results of
Operations," and "Index to Consolidated
Financial Statements"
14 Changes in and Disagreements with
Accountants on Accounting and
Financial Disclosure................ Not Applicable
15 Financial Statements and Exhibits... "Index to Financial Statements" and "Exhibit
Index"
</TABLE>
<PAGE>
[Odetics, Inc. Letterhead]
, 2000
Dear Odetics Stockholder:
On December 17, 1999, Odetics ITS announced that it was changing its name to
Iteris Inc. On December 20, 1999, Iteris announced that it filed a registration
statement with the Securities and Exchange Commission for the initial public
offering of shares of Iteris common stock, of which will be sold by
Iteris and of which will be sold by certain selling stockholders. Also on
December 20, 1999, Odetics announced that it intended to spin-off its ownership
in Iteris to the holders of Odetics Class A and Class B common stock. I am
pleased to report that Odetics Inc. is taking the final steps to complete the
spin-off of Iteris. The spin-off is being completed through the distribution of
6,000,000 shares of Iteris common stock by Odetics as a stock dividend to the
Odetics stockholders of record as of , 2000.
The spin-off of Iteris is consistent with Odetics' incubator strategy and
will provide Iteris with greater access to capital, enabling it to expand more
quickly and efficiently than it would as a subsidiary of Odetics. The attached
Information Statement provides greater detail regarding the spin-off of Iteris.
In connection with the spin-off, there are a few items I would like to bring to
your attention:
. Odetics common stockholders will receive one share of Iteris common
stock for every shares of Odetics common stock owned by them. Class
A and Class B Odetics stockholders will be treated identically for
purposes of the dividend distribution. Odetics stockholders will
automatically receive the stock dividend and do not need to take any
action.
. At the request of the underwriters of the Iteris initial public offering
and as a condition to the spin-off and the Iteris initial public
offering, all shares of Iteris common stock that we distribute to you in
the spin-off will contain a restrictive legend and stop transfer
instructions will be placed with the Iteris transfer agent restricting
the public sale of such shares until 180 days after the date of the
prospectus delivered in connection with the Iteris initial public
offering.
. The shares of Iteris to which you are entitled will be distributed by
Equiserve L.P., our distribution agent for purposes of effecting the
dividend. If your shares of Odetics common stock are held in the name of
a stock broker or other nominee, your shares of Iteris Common Stock and
the payment for any fractional shares will be credited to such broker or
other nominee. We expect that Iteris Common Stock will be traded on the
Nasdaq National Market system under the symbol "ITER" and that the spin-
off will be completed on or around , 2000.
. We have received a ruling from the Internal Revenue Service confirming
that, for federal income tax purposes, Odetics stockholders will not
recognize a gain or a loss or any taxable income from the stock
dividend--except to the extent that cash is received instead of
fractional shares. The continuing validity of the IRS tax ruling is
subject to various factual representations and assumptions.
The enclosed Information Statement contains information about the spin-off
of Iteris and about Iteris' business, management, and financial performance. We
encourage you to review the attached materials carefully. If you have any
questions please call Gregory Miner, Chief Operating Officer and Chief
Financial Officer of Odetics, at (714) 758-0200.
Sincerely,
/s/ Joel Slutzky
Joel Slutzky
Chairman and Chief Executive Officer
<PAGE>
[Iteris Letterhead]
, 2000
To Our Future Stockholders:
On or about , 2000, you will become a stockholder of Iteris, Inc. as a
result of the spin-off of Iteris from Odetics, Inc. As an independent company,
we believe that our business will have greater access to capital and be able to
grow more quickly and efficiently. Immediately following the spin-off, we
expect to complete an initial public offering of approximately shares of
our common stock, of which will be sold by us, to raise the equity
capital desired to implement our business strategy.
Iteris designs, develops, markets and implements 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.
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. We believe that our experienced management team and board of
directors, together with our technologies and industry expertise, provide us
with the tools we need to achieve our objective.
Please read the enclosed material for more information about our company. We
look forward to your support and are pleased to have you share in this exciting
opportunity.
Sincerely,
/s/ Jack Johnson
Jack Johnson
President and Chief Executive
Officer
<PAGE>
Information Statement
----------------
Odetics, Inc.
Spin-Off
of
Iteris, Inc.
----------------
We are furnishing you with this information statement in connection with the
spin-off by Odetics, Inc. of 6,000,000 shares of Iteris, Inc. common stock held
by Odetics (representing all of the equity interests in our company owned by
Odetics and approximately 93% of our outstanding common stock prior to the
proposed initial public offering of shares to be sold by us) to
stockholders of Odetics. All shares of common stock distributed by Odetics in
the spin-off will contain a restrictive legend and be subject to stop transfer
instructions with our transfer agent, restricting the public sale of such
shares until 180 days after the date of the prospectus delivered in connection
with our initial public offering.
Odetics will accomplish the spin-off by distributing all shares of our
common stock it holds to holders of record of Odetics Class A and Class B
common stock as of 2000. Odetics will distribute one share of our common
stock for every shares of Class A and/or Class B common stock of Odetics
held as of the close of business on , 2000. We expect our common
stock to be traded on the Nasdaq National market under the symbol "ITER."
Owning shares of our common stock will entail risks. Please read "Risk
Factors" beginning on page 9.
No vote of stockholders is required in connection with the spin-off. We are
not asking you for a proxy and you are not requested to send us a proxy.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved these securities or determined if
this information statement is truthful or complete. Any representation to
the contrary is a criminal offense.
This information statement does not constitute an offer to sell or the
solicitation of an offer to buy any securities.
The date of this information statement is , 2000.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Summary................................................................... 1
Risk Factors.............................................................. 9
Forward-Looking Statements................................................ 20
The Spin-Off.............................................................. 21
Reasons for the Spin-Off................................................ 21
Manner of Effecting the Spin-Off........................................ 21
Results of the Spin-Off................................................. 22
Material Federal Income Tax Consequences of the Spin-Off................ 22
Listing and Trading of Our Common Stock................................. 23
Selected Consolidated Financial Data...................................... 25
Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................... 26
Business.................................................................. 35
Our Company............................................................. 35
Market Overview......................................................... 35
Our Solution............................................................ 36
Our Strategy............................................................ 37
Our Products and Services............................................... 38
Technology and Intellectual Property.................................... 42
Key Relationships with Vehicle Manufacturers............................ 43
Sales and Marketing..................................................... 43
Competition............................................................. 44
Production.............................................................. 45
Associates.............................................................. 45
Facilities.............................................................. 46
Legal Proceedings....................................................... 46
Arrangements with Odetics................................................. 47
Separation and Distribution Agreement................................... 47
Services Agreement...................................................... 48
Tax Allocation Agreement................................................ 48
Management................................................................ 50
Executive Officers and Directors........................................ 50
Other Key Employees..................................................... 52
Board Committees........................................................ 53
Director Compensation................................................... 53
Compensation Committee Interlocks and Insider Participation............. 53
Executive Compensation.................................................. 53
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Page
----
<S> <C>
Option Grants........................................................... 54
Option Exercises and Fiscal Year-End Values............................. 54
Employment Agreements................................................... 54
1998 Stock Incentive Plan............................................... 54
Options Issued Outside of The 1998 Stock Incentive Plan................. 56
Employee Stock Purchase Plan............................................ 56
Section 401(k) Plan..................................................... 56
Principal Stockholders.................................................... 57
Certain Transactions...................................................... 58
Recent Sales of Unregistered Securities................................... 58
Description of Capital Stock.............................................. 59
Common Stock............................................................ 59
Preferred Stock......................................................... 59
Registration Rights..................................................... 60
Anti-Takeover Effects of Provisions of Delaware Law and Our Certificate
of Incorporation and Bylaws............................................ 60
Dividend Policy......................................................... 61
Limitations of Liability and Indemnification Matters.................... 61
Distribution Agent...................................................... 62
Shares Eligible for Future Sale........................................... 62
Available Information..................................................... 64
Index to Consolidated Financial Statements................................ F-1
</TABLE>
<PAGE>
SUMMARY
This summary highlights information found in greater detail elsewhere in
this information statement. In addition to this summary, we urge you to read
the entire information statement carefully, including the risks of owning our
common stock discussed under "Risk Factors."
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
Transportation Safety Administration, more than six million motor vehicle
accidents occurred in the United States in 1997. Accidents in 1998 resulted in
more than 40,000 fatalities, approximately 39.4% of which were related to
unintended lane departures 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
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
September 1998 as a California corporation and will be reincorporated in
Delaware as Iteris, Inc. in January 2000. On December 17, we filed an initial
registration statement on Form S-1 to register shares of our common
stock that we intend to issue in an underwritten public offering. Odetics
currently owns approximately 93% of our outstanding common stock. Immediately
prior to and conditional upon the effectiveness of our registration statement
filed in connection with our initial public 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 publicly transferable until 180 days after the date of our prospectus
delivered in connection with our initial public offering. In preparation for
the spin-off, we will enter into the following agreements with Odetics:
separation and distribution agreement, services agreement, tax allocation
agreement and promissory note. Please see "Arrangements with Odetics."
Any references to "we," "our," "us" or "Iteris" refer to Iteris, Inc. 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 information statement.
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
information statement also includes the tradenames and trademarks of other
companies whose mention in this information statement is with due recognition
of and without intent to misappropriate such names or marks.
Except as otherwise noted, all information in this information statement
assumes:
. outstanding options to purchase shares of common stock are not
exercised;
. the underwriters' over-allotment option granted in connection with our
initial public offering is not exercised;
. the reincorporation of our company in Delaware; and
. that the spin-off from Odetics is consummated immediately prior to our
initial public offering.
Information in this information statement does not reflect a stock split
anticipated to be effected prior to the spin-off.
Questions and Answers About Us and the Spin-Off
Why is Iteris being spun-off by . The Board of Directors of Odetics believes
Odetics? that the spin-off will accomplish a number
of important business objectives and, by
enabling Iteris and Odetics to develop
their respective businesses separately,
should better position the companies to
produce greater stockholder value over the
long term. As a separate company, we will
be better able to focus on our own
strategic priorities and to have more
efficient access to the capital markets
than we could as part of Odetics. We
believe that the spin-off will enable our
business to grow more quickly and
efficiently in the following ways:
. Our business has different
fundamentals, growth characteristics
and strategic priorities than the
business conducted by Odetics. The
separation of our business from those
of Odetics will enable us to focus on
our own strategic priorities, which
should increase our ability to
capitalize on growth opportunities for
our business and enhance our ability
to respond more quickly to changes in
the markets that we serve.
. The spin-off will enable us to enhance
our access to the capital markets by
allowing the financial community to
focus separately on our business. For
instance, we expect to complete our
initial public offering of shares of
our common stock immediately after the
spin-off. Through both public and
private sales of our securities, we
intend to raise our own equity capital
that we will use to repay debt to
Odetics, expand our sales and
marketing activities, fund
acquisitions or
3
<PAGE>
investments in businesses, products,
services and technologies
complimentary to our business, provide
working capital and for other general
corporate purposes.
. The spin-off will enable us to
recruit, retain and motivate key
employees by providing them with
stock-based compensation incentives
directly tied to the success of our
separated business.
What will I receive in the . Odetics will distribute one share of our
spin-off? common stock for every shares of Class
A and/or Class B common stock of Odetics
you owned as of , 2000. For
example, if you own 100 shares of Odetics
Class A or Class B common stock, you will
receive shares of our common stock. You
will continue to own your Odetics common
stock. None of the shares distributed in
the spin-off will be publicly tradable
until 180 days after the date of our
prospectus delivered in connection with
our initial public offering.
What do I have to do to . Nothing. No consideration will be paid by
participate in the spin-off? you for the shares of common stock of
Iteris to be received by you in the spin-
off, nor will you be required to surrender
or exchange shares of Odetics common stock
or take any other action in order to
receive Iteris common stock. In addition,
no stockholder vote is required for the
spin-off.
How will Odetics distribute . Prior to the spin-off, Odetics will
Iteris common stock to me? deliver the outstanding shares of Iteris
common stock that it holds to the
distribution agent. As promptly as
practicable after the spin-off, the
distribution agent will mail certificates
for whole shares of Iteris common stock to
Odetics stockholders of record on the
record date established by Odetics.
What is the record date? . The record date is the close of business
on , 2000.
What if I hold my shares of . If you hold your shares of Odetics stock
Odetics stock through my through your stockbroker, bank or other
stockbroker, bank or other nominee, you are probably not a
nominee? stockholder of record and your receipt of
Iteris common stock depends on your
arrangements with the nominee that holds
your shares of Odetics stock for you. We
anticipate that stockbrokers, banks and
other nominees generally will credit their
customers' accounts with Iteris common
stock on or about , 2000,
but you should check with your
stockbroker, bank or other nominee. You
are not required to take any action to
cause the Iteris common stock to be
credited to your account. Following the
spin-off you may instruct your
stockbroker, bank or other nominee to
transfer your shares of Iteris
4
<PAGE>
common stock into your own name to be held
in book-entry form through the direct
registration system operated by the
distribution agent.
How will you treat fractional . You will be paid in cash for interests in
shares? fractional shares of Iteris common stock,
and such fractional interests will not be
distributed. Fractional shares will be
aggregated and upon receipt by the
distribution agent of an amount equal to
the aggregate fair market value of such
shares will be cancelled. Your portion of
such deposited amount will be distributed
to you promptly after the spin-off.
Although the spin-off is intended to be
tax-free, stockholders will recognize gain
or loss for tax purposes in an amount
equal to the difference between the cash
received in respect of any fractional
share and the amount of such stockholder's
tax basis allocable to such fractional
share.
What is the dividend policy . We currently anticipate that no cash
of Iteris? dividends will be paid on Iteris common
stock. However, the declaration and
payment of dividends will be at the sole
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.
How does Iteris common stock . Iteris common stock and Odetics common
differ from Odetics common stock will be different securities and
stock? will not trade or be valued alike. We will
be separate companies, with different
management, fundamentals, growth
characteristics and strategic priorities.
However, as with Odetics Class A common
stock, Iteris common stock will have the
following characteristics:
. be fully paid and nonassessable;
. have one vote per share, with no right
to cumulate votes; and
. carry no preemptive rights.
Iteris common stock will differ from
Odetics Class B common stock with respect
to voting rights only.
How will Iteris common stock . We expect Iteris common stock to be listed
trade? on the Nasdaq National Market under the
symbol "ITER." The distribution of our
common stock to the Odetics stockholders
will occur immediately prior to our
initial public offering. We expect that
"regular way" trading of our common stock,
trading after giving effect to the spin-
off, will begin on the day following the
spin-off with respect to shares issued in
our initial public offering. Shares
distributed to you in the spin-off will
not be publicly tradable until 180 days
after the date
5
<PAGE>
of our prospectus delivered in connection
with our initial public offering. After
this lock-up period, all of our shares
will trade on a regular way basis. As a
result, we do not believe that a temporary
form of interim trading called "when-
issued trading" will occur for our common
stock.
How will Odetics common stock . Odetics stock will continue to trade on a
trade? "regular way" basis and may also trade on
a when issued or ex-distribution basis,
reflecting an assumed value for Odetics
common stock after giving effect to the
spin-off and distribution of Iteris common
stock. When-issued or ex-distribution
trading in Odetics common stock, if
available, would begin on or about
, 2000 and continue through the
date of the spin-off.
Is the spin-off taxable for . Odetics has received a tax ruling from the
United States federal income Internal Revenue Service (IRS) stating
tax purposes? that the spin-off will be tax-free to
Odetics and to Odetics' stockholders. The
continuing validity of the IRS tax ruling
is subject to various factual
representations and assumptions. See "The
Spin-Off--Material Federal Income Tax
consequences of the Spin-Off."
Will we be related to Odetics . Odetics will not own any of our common
in any way after the spin- stock after the spin-off.
off?
. Two of our directors, Joel Slutzky and
Gregory A. Miner, will remain executive
officers and directors of Odetics.
. For the purpose of governing certain
relationships between Odetics and us, to
provide for an orderly transition and for
other matters, we have entered into or
will enter into the following agreements
prior to the spin-off:
. A Separation and Distribution
Agreement which provides for various
corporate transactions required to
separate our business from other
businesses of Odetics, including the
transfer to us of the assets used in
our business and the assumption of the
liabilities associated with our
business, and for terms and conditions
relating to the spin-off and the
initial public offering;
. A Tax Allocation Agreement which
allocates certain federal, state,
local and foreign tax responsibilities
and liabilities arising prior to the
spin-off or relating to any
disqualification of the tax-free
nature of the spin-off between Odetics
and us;
. A Services Agreement under which
Odetics will provide various services
to us for limited periods of time
following the spin-off; and
6
<PAGE>
. A Promissory Note under which we will
agree to pay Odetics the outstanding
balance of debt owed by us to Odetics
payable in interest only for the first
year and 16 quarterly installments of
principal and interest thereafter.
See "Arrangement with Odetics."
Are there any risks entailed . Yes. Stockholders should carefully
in owning our stock? consider the matters discussed under the
section of this information statement
entitled "Risk Factors."
Will we have a separate . Shortly after the spin-off and our initial
Credit Facility? public offering, we intend to establish a
line of credit, which will be used for
working capital and other general
corporate purposes.
Who Can Help Answer Your Questions
Stockholders of Odetics with questions relating to the spin-off should
contact:
Gregory A. Miner
Chief Operating Officer and Chief Financial Officer of Odetics, Inc.
1515 South Manchester Avenue
Anaheim, CA
(714) 758-0200
The distribution agent for our common stock in the spin-off and the transfer
agent and registrar for our common stock after the spin-off is:
EquiServe, LP
150 Royal Street
Canton, MA 02021
(781) 585-2000
7
<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 information statement.
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>
Six Months Ended
Years Ended March 31, September 30,
----------------------------------------------------- --------------------
1995 1996 1997 1998 1999 1998 1999
--------- --------- --------- --------- --------- --------- ---------
(unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
Consolidated Statement
of Operations Data:
Total revenue........... $ 200 $ 287 $ 538 $ 5,841 $ 14,580 $ 5,917 $ 11,205
Gross profit (loss)..... 85 (71) 68 471 4,256 1,329 3,615
Loss from operations.... (742) (2,455) (3,826) (5,903) (4,874) (2,443) (2,129)
Net loss................ (848) (2,759) (4,506) (7,247) (7,041) (3,431) (3,536)
Basic and diluted net
loss per share......... (0.14) (0.46) (0.75) (1.21) (1.13) (0.57) (0.55)
Shares used in
computation of net
losses per share, basic
and diluted............ 6,000,000 6,000,000 6,000,000 6,000,000 6,209,500 6,000,000 6,435,700
</TABLE>
<TABLE>
<CAPTION>
September 30, 1999
-------------------------------
Pro Forma
Actual Pro Forma As Adjusted
-------- --------- -----------
<S> <C> <C> <C>
Consolidated Balance Sheet Data:
Working capital (deficit)....................... $ 1,100 $ 1,100
Total assets.................................... 20,492 20,492
Total liabilities............................... 42,989 32,989
Total stockholders' equity (deficit)............ (22,497) (12,497)
</TABLE>
At September 30, 1999, the amount of indebtedness owed to Odetics was $34.7
million. Upon completion of our initial public offering, Odetics will
contribute to our capital approximately $10.0 million in the form of
cancellation of indebtedness, which is reflected in the pro forma column. Also
upon completion of our initial public offering, we will pay Odetics $10.0
million from the proceeds of the public 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 our initial public offering.
The pro forma as adjusted information also gives effect to the sale of
shares of common stock offered by us in an initial public offering
at an assumed offering price of $ per share and after deducting estimated
underwriting discounts and commissions and estimated expenses related to our
initial public offering.
8
<PAGE>
RISK FACTORS
Ownership of our common stock involves a high degree of risk. The risks
described below 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 the following 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.
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 $3.5 million in the six months ended
September 30, 1999, $7.0 million in fiscal 1999, $7.2 million in fiscal 1998
and $4.5 million in fiscal 1997. We had an accumulated deficit of $26.5 million
as of September 30, 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.
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.
9
<PAGE>
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 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. These vehicle manufacturers may not
purchase our systems unless we are QS 9000 certified, and there can be no
assurance that we will obtain QS 9000 certification.
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.
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.
10
<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 43% of our
systems revenue for the six month period ended September 30, 1999. If any of
these significant customers experience business difficulties or choose to no
longer purchase our systems and solutions, 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.
11
<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.
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.
12
<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.
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.
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.
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.
13
<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 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.
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.
14
<PAGE>
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 Engineer 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.
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;
15
<PAGE>
. 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 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.
After this offering we will operate as an independent company.
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.
16
<PAGE>
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 $34.7 million as of September 30,
1999. Upon completion of this offering Odetics will contribute to our capital
approximately $10.0 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.
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 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."
Risks Related to Our Initial Public 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 our initial public offering may be lower than the initial
public offering price. The initial public offering price for the shares will be
determined by negotiations
17
<PAGE>
between us and the representatives of the underwriters and may not be
indicative of prices that will prevail in the trading market. In addition,
shares of our common stock distributed in the spin-off will not be publicly
tradable until 180 days after the date of the prospectus delivered in
connection with our initial public offering. If you desire to sell your shares
of our common stock during this period, you will not be able to publicly sell
such shares and you may incur losses if the price of our stock declines.
Since we have broad discretion in how we use the proceeds from our initial
public 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 our initial
public 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 our initial public 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.
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 our initial public offering will be sufficient to meet our
anticipated working capital and capital expenditure requirements for at least
two years after the date of the effectiveness of our registration statement
filed in connection with our initial public offering. 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 shares of common stock outstanding immediately after
our initial public offering. The shares sold in our initial public offering
will be freely transferable without restriction or further registration under
the Securities Act. In connection with the offering all current stockholders
and option holders have agreed that, with certain exceptions, they will not
sell any shares of common stock or enter into similar
18
<PAGE>
transactions for 180 days after the date of the prospectus delivered in
connection with our initial public offering without the consent of Bear,
Stearns & Co. Inc. Similarly, all shares of our common stock distributed to
stockholders of Odetics will not be publicly transferable until 180 days after
the date of the prospectus delivered in connection with our initial public
offering. After the expiration of the 180 day period, all shares of common
stock will be freely transferable 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."
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."
19
<PAGE>
FORWARD-LOOKING STATEMENTS
This information statement 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," "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 information statement.
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 information statement,
including the section discussing risk factors, identifies important factors
that could cause such differences.
The cautionary statements made in this information statement are intended to
be applicable to all related forward-looking statements wherever they appear in
this information statement. 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.
20
<PAGE>
THE SPIN-OFF
Introduction
On December 16, 1999, the Board of Directors of Odetics approved the spin-
off, which will result in our separation from Odetics by means of a tax-free
spin-off. The spin-off is expected to occur immediately prior to our initial
public offering. At the time of the spin-off, Odetics will own approximately
93% of our outstanding common stock.
Reasons for the Spin-Off
The board of directors of Odetics believes that the spin-off will accomplish
a number of important business objectives and, by enabling us to develop our
respective businesses separately, should better position Odetics and us to
produce greater stockholder value over the long term. As a separate company, we
will be better able to focus on our own strategic priorities and have greater
access to capital markets than we could as a subsidiary of Odetics.
We believe that the spin-off will enable our business to grow more quickly
and efficiently in the following ways:
. Our business has different fundamentals, growth characteristics and
strategic priorities than the business conducted by Odetics. The
separation of our business from those of Odetics will enable us to focus
on our own strategic priorities, which we believe should increase our
ability to capitalize on growth opportunities for our business and
enhance our ability to respond more quickly to changes in the markets
that we serve.
. The spin-off will enable us to enhance our access to the capital markets
by allowing the financial community to focus separately on our business.
Immediately following the spin-off, we intend to raise approximately
$50.0 million in equity capital in an initial public offering that we
will use to:
. repay $10.0 million of our debt payable to Odetics;
. expand our sales and marketing activities;
. fund acquisitions or investments in businesses, products, services
or technologies complimentary to our business;
. provide working capital; and
. fund other general corporate expenses.
. The spin-off will enable us to recruit, retain and motivate key
employees by providing them with stock-based compensation incentives
directly tied to the success of our business.
Manner of Effecting the Spin-Off
Odetics will effect the spin-off by distributing the 6,000,000 shares of our
common stock that it currently holds to holders of record of Odetics Class A
and Class B common stock as of the close of business on , 2000.
The spin-off will be made on the basis of one share of our common stock for
every shares of Odetics Class A and/or Class B common stock held by Odetics
stockholders. At the request of the underwriters of our initial public offering
and as a condition to the spin-off and our initial public offering, none of the
shares distributed in the spin-off will be publicly tradable until 180 days
after the date of our prospectus delivered in connection with our initial
public offering.
Prior to the spin-off, Odetics will deliver the 6,000,000 shares of our
common stock that it currently holds to the distribution agent for
distribution. As promptly as practicable after the spin-off, the distribution
agent will mail certificates for whole shares of our common stock to Odetics
stockholders of record on , 2000.
21
<PAGE>
If a stockholder is otherwise entitled to receive a fractional share of our
common stock, that stockholder will instead receive cash. The distribution
agent will, promptly after the date of the spin-off, aggregate all fractional
share interests in our common stock with those of other similarly situated
stockholders. These fractional interests will be cancelled and Odetics will
deposit an amount with the distribution agent equal to the aggregate value of
such fractional interests based upon our initial public offering price. The
distribution agent will distribute the cash deposited to stockholders entitled
to such cash pro rata based upon their fractional interests in our common
stock. No interest will be paid on any cash distributed instead of fractional
shares. The distribution agent is not affiliated with Odetics or Iteris.
No consideration will be paid by stockholders of Odetics for the shares to
be received by them in the spin-off, and Odetics stockholders will not be
required to surrender or exchange shares of Odetics common stock or take any
other action in order to receive the distributed shares.
Results of the Spin-Off
After the spin-off, we will be a separate, independent public company. Our
management, fundamentals, growth characteristics and strategic priorities will
be different from those of Odetics. Odetics will have no ownership interest in
us after the spin-off, although two of our board members, Joel Slutzky and
Gregory A. Miner, will remain executive officers and directors of Odetics.
Immediately after the spin-off we intend to sell shares of our
common stock in an underwritten public offering. Following the spin-off and our
initial public offering, we expect to have a substantial number of holders of
record of our common stock and approximately shares of our common
stock outstanding, based on the number of shares being issued in our initial
public offering and the number of shares being distributed in the spin-off.
As with Odetics Class A common stock, the shares of our common stock will:
. be fully paid and nonassessable;
. have one vote per share, with no right to cumulate votes; and
. carry no preemptive rights.
Our common stock will differ from Odetics Class B common stock with respect
to voting rights only. Our common stock and Odetics Class A and Class B common
stock, however, will be different securities and will not trade or be valued
alike. See "Description of Capital Stock."
We expect our common stock to be listed on the Nasdaq National Market under
the trading symbol "ITER." The spin-off will not, in and of itself, affect the
number of outstanding shares of Odetics Class A and Class B common stock, or
the rights associated with those shares.
Material Federal Income Tax Consequences of the Spin-Off
The following is a summary of the material United States federal income tax
consequences of the spin-off. It is not intended to address the tax
consequences applicable to every stockholder. In particular, this summary does
not cover state, local or international income and other tax consequences.
Accordingly, stockholders are strongly encouraged to consult their individual
tax advisors for information on the tax consequences applicable to their
individual situations.
Odetics has received a tax ruling from the IRS that states that the spin-off
will qualify as a tax-free distribution under Section 355 of the Code. In
accordance with this tax ruling:
. No gain or loss will be recognized by Odetics upon the distribution of
Iteris common stock to Odetics stockholders.
22
<PAGE>
. No gain or loss will be recognized by Odetics stockholders as a result
of your receipt of our common stock in the spin-off except to the extent
that you receive cash instead of a fractional share.
. If you receive cash instead of a fractional share of our common stock in
the spin-off, you will be treated as having received the fractional
share in the spin-off and then having sold the fractional share.
Accordingly, you will recognize gain or loss equal to the difference
between the cash you receive and the amount of the tax basis allocable
(as described below) to the fractional share. The gain or loss will be
capital gain or loss if you would have held the fractional share as a
capital asset.
. Your tax basis in your Odetics common stock will be apportioned among
the Odetics common stock and the Iteris common stock you receive in the
spin-off on the basis of the relative fair market values of the shares
on the date of the spin-off.
. The holding period of Iteris common stock that you receive in the spin-
off will be the same as the holding period of the Odetics common stock
with respect to which you received our common stock so long as you hold
the Odetics common stock as a capital asset on the date of the spin-off.
The tax ruling relating to the qualification of the spin-off as a tax-free
distribution within the meaning of Section 355 of the Code generally is binding
on the IRS. However, the continuing validity of the tax ruling is subject to
certain factual representations and assumptions.
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 our common
stock distributed to Odetics' stockholders exceeds the taxable basis in our
assets. In addition, each Odetics stockholder who receives our common stock in
the spin-off would generally be treated as having received a taxable
distribution in an amount equal to the fair market value of our common stock.
If the spin-off qualified under Section 355 of the Code but was disqualified as
tax-free to Odetics because of certain post-spin-off circumstances, for
example, if any person acquired 50% or more of our common stock within two
years after the spin-off, Odetics could recognize taxable gain as described
above but the spin-off would generally be tax-free to each Odetics stockholder
as described in the preceding paragraph.
The foregoing summarizes the material United States federal income tax
consequences of the spin-off under current law. You should consult your tax
advisor as to the particular circumstances of the spin-off to you, including
application of state, local and international tax laws, and as to possible
changes in tax law that may affect the tax consequences described above.
Our Tax Allocation Agreement provides that we will indemnity Odetics for any
taxes imposed on, or 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 attributable to certain post-spin-
off actions or failures to act by or with respect to us (including
subsidiaries) or our stockholders, such as the acquisition of Iteris by a third
party during the two-year period following the spin-off. See "Arrangements
Odetics -- Tax Allocation Agreement."
Listing and Trading of Our Common Stock
Currently, there is no public market for our common stock. We have applied
to have our common stock approved for quotation on the Nasdaq National Market
under the trading symbol "ITER."
The distribution of our common stock to the Odetics stockholders will occur
immediately prior to our initial public offering. We expect that "regular way"
trading of our common stock will begin on the day following the spin-off with
respect to shares issued in our initial public offering. At the request of the
underwriters of our initial public offering and as a condition to the spin-off
and our initial public offering, shares distributed to you in the spin-off will
not be publicly tradable until 180 days after the date of our prospectus
delivered in connection with to our initial public offering.
23
<PAGE>
After this lock-up period, all of our shares will trade on a regular way basis.
As a result, we do not believe that a temporary form of interim trading called
"when-issued trading" will occur for our common stock.
Odetics stock will continue to trade on a regular way basis and may also
trade on a when-issued or ex-distribution basis, reflecting an assumed value
for Odetics common stock after giving effect to the spin-off and distribution
of Iteris common stock. When-issued or ex-distribution trading in Odetics
common stock, if available, would begin on or about , 2000 and continue
through the date of the spin-off.
The prices at which our common stock will trade following the spin-off will
be determined by the marketplace and may be influenced by many factors,
including those set forth under "Risk Factors" and:
. the depth and liquidity of the market for our common stock;
. investor perceptions of us, our business and the markets in which we
operate;
. our financial results; and
. general economic and market conditions.
Shares of our common stock distributed to Odetics stockholders will be
marked with a legend restricting the public sale of the distributed shares
until 180 days after the date of our prospectus delivered in connection with
our initial public offering. In addition, stop transfer instructions will be
placed with the transfer agent for these shares. Following this lock-up period,
the shares of our common stock that are distributed in the spin-off will be
freely transferable, except for securities received by persons deemed to be our
"affiliates" under the Securities Act of 1933, as amended. See "Shares Eligible
for Future Sale."
24
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected financial data set as of March 31, 1998 and 1999 and
for each of the years ended March 31, 1997, 1998 and 1999 has been derived from
our consolidated financial statements audited by Ernst & Young LLP, independent
auditors, included elsewhere in this information statement. 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 information statement.
The selected consolidated financial data as of and for the six months ended
September 30, 1998 and 1999 has been derived from our unaudited consolidated
financial statements for such period included elsewhere in this information
statement. 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
six month period ended September 30, 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 information statement.
<TABLE>
<CAPTION>
Six Months Ended
Years Ended March 31 September 30
----------------------------------------------------- --------------------
1995 1996 1997 1998 1999 1998 1999
--------- --------- --------- --------- --------- --------- ---------
(unaudited)
(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 $ 1,552 $ 3,506
Systems................ 0 0 0 4,234 10,241 4,365 7,699
--------- --------- --------- --------- --------- --------- ---------
Total revenue........ 200 287 538 5,841 14,580 5,917 11,205
Cost of sales:
Sensors................ 115 358 470 2,555 3,129 1,471 1,829
Systems................ 0 0 0 2,815 7,195 3,117 5,761
--------- --------- --------- --------- --------- --------- ---------
Total cost of sales.. 115 358 470 5,370 10,324 4,588 7,590
Gross profit:
Sensors................ 85 (71) 68 (948) 1,210 81 1,677
Systems................ 0 0 0 1,419 3,046 1,248 1,938
--------- --------- --------- --------- --------- --------- ---------
Total gross profit... 85 (71) 68 471 4,256 1,329 3,615
Operating expenses:
Research and
development........... 652 1,269 2,378 2,037 2,152 939 1,635
Selling, general and
administrative........ 160 1,055 1,411 3,414 5,729 2,387 3,087
Charges allocated by
Odetics............... 15 60 105 458 881 310 670
Other expenses......... 0 0 0 465 368 136 352
--------- --------- --------- --------- --------- --------- ---------
Loss from operations.... (742) (2,455) (3,826) (5,903) (4,874) (2,443) (2,129)
Interest charge
allocated by Odetics... 107 304 680 1,344 2,167 988 1,407
--------- --------- --------- --------- --------- --------- ---------
Loss before income
taxes.................. (849) (2,759) (4,506) (7,247) (7,041) (3,431) (3,536)
Income taxes............ 0 0 0 0 0 0 0
--------- --------- --------- --------- --------- --------- ---------
Net loss................ $ (849) $ (2,759) $ (4,506) $ (7,247) $ (7,041) $ (3,431) $ (3,536)
========= ========= ========= ========= ========= ========= =========
Net loss per share,
basic and diluted...... $ (0.14) $ (0.46) $ (0.75) $ (1.21) $ (1.13) $ (0.57) $ (0.55)
========= ========= ========= ========= ========= ========= =========
Shares used in
computation of net loss
per share, basic and
diluted................ 6,000,000 6,000,000 6,000,000 6,000,000 6,209,500 6,000,000 6,435,700
<CAPTION>
As of March 31, As of September 30,
----------------------------------------------------- --------------------
1995 1996 1997 1998 1999 1998 1999
--------- --------- --------- --------- --------- --------- ---------
(unaudited)
(in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Consolidated Balance
Sheet Data:
Working capital
(deficit).............. $ (1,431) $ 481 $ (9,582) $ (3,315) $ (96) $ (2,791) $ 1,100
Total assets............ 0 576 1,675 11,614 17,996 10,680 20,492
Total liabilities....... 1,431 4,766 10,371 27,557 36,711 30,053 42,989
Total stockholders'
equity (deficit)....... (1,431) (4,190) (8,696) (15,943) (18,715) (19,373) (22,497)
</TABLE>
25
<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 information
statement. This information statement 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 six months ended September 30, 1998
and 1999, approximately 69% to 74% 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 September 1998. Odetics currently owns approximately
93% of our outstanding common stock. Immediately prior to our initial public
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 on cost plus fee
contracts is recognized as work is performed. Systems revenue from fixed price
contracts is recognized on the percentage of completion method of accounting as
costs are incurred, and includes costs incurred plus a portion of estimated
fees or profits based on the relationship of costs incurred to total estimated
costs. Revenue from maintenance and support services 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;
26
<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 (10.5% at September 30, 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>
Six Months
Years Ended March 31 Ended September 30
----------------------------- ------------------
1997 1998 1999 1998 1999
-------- -------- ------- ------- --------
<S> <C> <C> <C> <C> <C>
Revenue:
Sensors.................. 100.0 % 27.5 % 29.8 % 26.2 % 31.3 %
Systems.................. 0.0 72.5 70.2 73.8 68.7
-------- -------- ------- ------- -------
Total revenue.......... 100.0 100.0 100.0 100.0 100.0
Cost of sales:
Sensors.................. 87.4 159.0 72.1 94.8 52.2
Systems.................. 0.0 66.5 70.3 71.4 74.8
Total costs of sales... 87.4 91.9 70.8 77.5 67.7
Gross profit:
Sensors.................. 12.6 (59.0) 27.9 5.2 47.8
Systems.................. 0.0 33.5 29.7 28.6 25.2
Total gross profit..... 12.6 8.1 29.2 22.5 32.3
Operating expenses:
Research and
development............. 442.0 34.9 14.8 15.9 14.6
Selling, general and
administrative.......... 262.3 58.4 39.3 40.3 27.6
Charges allocated by
Odetics................. 19.5 7.8 6.0 5.2 6.0
Other expenses........... 0.0 8.0 2.5 2.3 3.1
-------- -------- ------- ------- -------
Loss from operations....... (711.2) (101.1) (33.4) (41.3) (19.0)
Interest charges
allocated by Odetics.... 126.4 23.0 14.9 16.7 12.6
-------- -------- ------- ------- -------
Loss before income taxes... (837.6) (124.1) (48.3) (58.0) (31.6)
Income tax expense....... 0.0 0.0 0.0 0.0 0.0
-------- -------- ------- ------- -------
Net loss................... (837.6)% (124.1)% (48.3)% (58.0)% (31.6)%
======== ======== ======= ======= =======
</TABLE>
27
<PAGE>
Six Months Ended September 30, 1999 Compared with Six Months Ended September
30, 1998
Total Revenue. Total revenue increased by 89.4% to $11.2 million for the six
months ended September 30, 1999 from $5.9 million for the six months ended
September 30, 1998.
Sensors revenue increased by 125.9% to $3.5 million for the six months ended
September 30, 1999 from $1.6 million for the six months ended September 30,
1998. Vantage sales comprised approximately 97% of sensors revenues in the six-
months ended September 30, 1999. The increase primarily represented increased
sales as a result of growth in our installed user base.
Systems revenue increased by 76.4% to $7.7 million for the six months ended
September 30, 1999 from $4.4 million for the six months ended September 30,
1998. Included in the 1999 period was $3.8 million from the acquisition of
systems revenue from Meyer Mohaddes and assets of Viggen and included in the
1998 period was $1.3 million of revenue derived from a contract with the City
of Jinan, China. Excluding these items, systems revenue resulted in an increase
of $800,000, due to a general increase in systems activity. Approximately 59%
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 $3.6 million, or 32.3% of
total revenue, for the six months ended September 30, 1999 from $1.3 million,
or 22.5% of total revenue, for the six months ended September 30, 1998.
Gross profit from sensors revenue increased to $1.7 million, or 47.8% of
sensors revenue, for the six months ended September 30, 1999 from $81,000 or
5.2% of sensors revenue, for the six months ended September 30, 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 $1.9 million, or 25.2% of
systems revenue, for the six months ended September 30, 1999 from $1.2 million,
or 28.6% of systems revenue, for the six months ended September 30, 1998. The
dollar increase in gross profits of systems revenue reflected the 76.4%
increase in systems revenue in the six months ended September 30, 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 the assets of Viggen as well as lower gross profit from
certain fixed priced contracts during the six months ended September 30, 1999.
Research and Development Expenses. Research and development expenses
increased by 74.1% to $1.6 million, or 14.6% of total revenue, for the six
months ended September 30, 1999 from $939,000, or 15.9% of total revenue, for
the six months ended September 30, 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 six months ended September 30, 1998. The increase
in research and development expenses in the six months ended September 30, 1999
primarily reflected increased development activity to support AutoVue as we
continued to enhance performance, add features and functionality and improve
packaging. Research and development expenses for Vantage did not increase
significantly.
Selling, General and Administrative Expenses. Selling, general, and
administrative expenses increased by 29.3% to $3.1 million, or 27.6% of total
revenue, for the six months ended September 30, 1999 from $2.4 million, or
40.3% of total revenue, for the six months ended September 30, 1998. The
acquisition of Meyer Mohaddes and the assets of Viggen constituted
approximately $609,000 of the increase, which was partially offset by a
$500,000 cost reduction as a result of our completion and withdrawal of
activities to support market activity in China. The remaining $600,000 of the
increase primarily reflected the addition of personnel and infrastructure to
support Vantage and AutoVue sales.
28
<PAGE>
Charges Allocated by Odetics. Charges allocated by Odetics increased by
116.1% to $670,000, or 6.0% of total revenue, for the six months ended
September 30, 1999 from $310,000, or 5.2% of total revenue, for the six months
ended September 30, 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 158.8% to $352,000, or 3.1% of
total revenue, for the six months ended September 30, 1999 from $136,000, or
2.3% of total revenue, for the six months ended September 30, 1998. The
increase primarily represented the amortization of goodwill arising from the
acquisition of Meyer Mohaddes in October 1998.
Interest Charges Allocated by Odetics. Interest charges allocated by Odetics
increased by 42.4% to $1.4 million, or 12.6% of total revenue, in the six
months ended September 30, 1999 from $1.0 million, or 16.7% of total revenue,
in the six months ended September 30, 1998. The increase reflected increased
intercompany borrowings necessary to support our working capital requirements
and fund our operating losses.
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.
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.
29
<PAGE>
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 decreased by 20.9% to $368,000, or 2.5% of
total revenue, in fiscal 1999 from $465,000, or 8.0% 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. 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 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.
30
<PAGE>
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.
31
<PAGE>
Selected Quarterly Results of Operations
The following tables present selected quarterly financial information for
each of the six quarters through September 30, 1999. This information has been
prepared by us on a basis consistent with our audited financial statements
appearing elsewhere in this information statement. 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,
1998 1998 1998 1999 1999 1999
--------- --------- --------- --------- --------- ---------
(unaudited, in thousands except per share data)
<S> <C> <C> <C> <C> <C> <C>
Revenue:
Sensors................ $ 793 $ 759 $ 1,499 $ 1,288 $ 1,487 $ 2,019
Systems................ 2,721 1,644 2,984 2,892 3,610 4,089
--------- --------- --------- --------- --------- ---------
Total revenue........ 3,514 2,403 4,483 4,180 5,097 6,108
Cost of sales:
Sensors................ 659 812 871 787 699 1,130
Systems................ 2,108 1,009 1,974 2,104 2,565 3,196
--------- --------- --------- --------- --------- ---------
Total cost of sales.. 2,767 1,821 2,845 2,891 3,264 4,326
Gross profit:
Sensors................ 134 (53) 628 501 788 889
Systems................ 613 635 1,010 788 1,045 893
--------- --------- --------- --------- --------- ---------
Total gross profit... 747 582 1,638 1,289 1,833 1,782
Operating expenses:
Research and
development........... 453 486 502 711 743 892
Selling, general and
administrative........ 1,244 1,143 1,457 1,885 1,604 1,483
Charges allocated by
Odetics............... 121 189 252 319 303 367
Other expenses......... 100 36 89 143 178 174
--------- --------- --------- --------- --------- ---------
Loss from operations.... (1,171) (1,272) (662) (1,769) (995) (1,134)
Interest charges
allocated by Odetics... 471 517 562 617 679 728
--------- --------- --------- --------- --------- ---------
Loss before income
taxes.................. (1,642) (1,789) (1,224) (2,386) (1,674) (1,862)
Income tax expense...... 0 0 0 0 0 0
--------- --------- --------- --------- --------- ---------
Net loss................ $ (1,642) $ (1,789) $ (1,224) $ (2,386) $ (1,674) $ (1,862)
========= ========= ========= ========= ========= =========
Net loss per share,
basic and diluted...... $ (0.27) $ (0.30) $ (0.19) $ (0.37) $ (0.26) $ (0.29)
========= ========= ========= ========= ========= =========
Shares used in computing
net loss per share,
basic and diluted...... 6,000,000 6,000,000 6,381,000 6,457,000 6,457,000 6,435,000
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 %
Systems................ 77.4 68.4 66.6 69.2 70.8 66.9
--------- --------- --------- --------- --------- ---------
Total revenue........ 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
Systems................ 77.5 61.4 66.2 72.8 71.1 78.2
Total cost of sales.. 78.7 75.8 63.5 69.2 64.0 70.8
Gross profit:
Sensors................ 16.9 (7.0) 41.9 38.9 53.0 44.0
Systems................ 22.5 38.6 33.8 27.2 28.9 21.8
Total gross profit... 21.3 24.2 36.5 30.8 36.0 29.2
Operating expenses:
Research and
development........... 12.9 20.2 11.2 17.0 14.6 14.6
Selling, general and
administrative........ 35.4 47.6 32.5 45.1 31.5 24.3
Charges allocated by
Odetics............... 3.4 7.9 5.6 7.6 5.9 6.0
Other expenses......... 2.8 1.5 2.0 3.4 3.5 2.8
--------- --------- --------- --------- --------- ---------
Loss from operations.... (33.3) (52.9) (14.8) (42.3) (19.5) (18.6)
Interest charges
allocated by Odetics... 13.4 21.5 12.5 14.8 13.3 11.9
--------- --------- --------- --------- --------- ---------
Loss before income
taxes.................. (46.7) (74.4) (27.3) (57.1) (32.8) (30.5)
Income tax expense...... 0.0 0.0 0.0 0.0 0.0 0.0
--------- --------- --------- --------- --------- ---------
Net loss................ (46.7)% (74.4)% (27.3)% (57.1)% (32.8)% (30.5)%
========= ========= ========= ========= ========= =========
</TABLE>
32
<PAGE>
Quarterly Results of Operations
Total Revenue. Sensors revenue in all quarters presented reflected sales of
Vantage. 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 six quarters ended September 30, 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 September 30, 1999, we have incurred cumulative
losses of $22.3 million. Our cumulative negative cash flow from operating
activities, primarily as a result of those losses for such period was $24.8
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. At September 30, 1999, we owed Odetics
approximately $34.7 million as a result of the net advances made to us since
our inception including accrued interest. Approximately $10.0 million of the
net proceeds received from our initial public offering will be paid by us to
Odetics as a reduction of principal on this obligation. An additional principal
amount of approximately $10.0 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 that 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 October 31, 1999. This facility provides for borrowings at a prime rate as
defined in the agreement (8.5% at September 30, 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 our initial public offering, we intend to establish our own 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 September 30, 1999, we had a net capital deficiency of $22.5 million as a
result of accumulated losses since our inception. Upon completion of our
initial public 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.
33
<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.
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 September
30, 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 our initial public 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
our initial public offering with interest payable at variable rates. As a
result, we expect to continue to have exposure to interest rate risk.
34
<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 1997 National Highway Transportation 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
35
<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
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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
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to efficiently monitor 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
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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:
[GRAPHIC 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
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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:
[GRAPHIC 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.
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. 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 (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.
They 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:
[GRAPHIC APPEARS HERE]
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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
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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.
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 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
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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 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
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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., Image Sensing Systems, 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 November 30, 1999, we had 149
associates, including 97 in engineering, 17 in sales and marketing, nine in
production and 26 in other business and administrative services. Our associates
are not subject to any collective bargaining agreements, and we generally have
good relations with them.
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Facilities
As of November 30, 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.
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ARRANGEMENTS WITH ODETICS
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 $670,000 for the six month period
ended September 30, 1999, $881,000 in fiscal 1999, $458,000 in fiscal 1998 and
$105,000 in fiscal 1997. The costs of these services have been directly charged
and/or allocated using methods that we believe are reasonable. 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 will 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 filed in connection with our initial public offering.
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.
Separation and Distribution Agreement
We will enter into a Separation and Distribution Agreement with Odetics that
will provide 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 will
transfer to us those assets used in our business that are currently held by
Odetics without representation or warranty on an "as is" basis. We will assume
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 will be 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, which will not include any of the patents.
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.
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 will set the record date for the distribution and the date on which
shares will be distributed. 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 filed in connection with our
initial public offering;
. any material governmental approvals and consents or consents required
under material contracts necessary to consummate the distribution shall
have been obtained and be in full force and effect;
47
<PAGE>
. 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 until 180 days
after the date of our prospectus delivered in connection with our initial
public offering 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 such offering to repay $10.0 million of debt
payable to Odetics.
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 have already obtained
prior to our initial public 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 principal 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.
The Tax Allocation Agreement provides that we will indemnify Odetics for any
taxes imposed on, or other amounts paid by Odetics, its agents and
representatives or its stockholders, if we take actions or fail to take
actions, that result in the spin-off not qualifying as a tax-free distribution.
For example, pursuant to the Tax Allocation Agreement, we will agree that for a
two-year period following the date of the spin-off: (i) we will continue to
engage in the Iteris business; (ii) we will continue to own and manage at least
50% of the assets which we own directly or indirectly immediately after the
spin-off; and (iii) we will not, unless we obtain the written consent of
Odetics, engage in a number of specified transactions such as certain
redemptions and other acquisitions of capital stock or equity securities of
Iteris or the merger, dissolution or liquidation of Iteris.
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<PAGE>
If our obligations under the Tax Allocation Agreement were breached and the
spin-off were to fail to continue to qualify as tax-free for U.S. federal
income tax purposes as a result of such breach, we would be required to satisfy
the indemnification obligations described above. This indemnification
obligation could exceed our net worth at that time.
Though valid between the parties thereto, the Tax Allocation Agreement is
not binding on the IRS and does not affect the several liability of Odetics,
Iteris and their respective subsidiaries to the IRS for all U.S. federal taxes
of the consolidated group relating to periods prior to the spin-off.
49
<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 joining us, 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
Institute of Transportation Engineers. Mr. Rowe is also a recipient of the
prestigious ITE Matson award for
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<PAGE>
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 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.
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<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 term expires in 2001), Mr.
Hernandez, Mr. Slutzky and Mr. Wright serve as Class II directors (whose term
expires in 2002), and Mr. Johnson, Mr. Card and Mr. Spreitzer serve as Class
III directors (whose term expires in 2003). 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.
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<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. Slutzky and Mr. Spreitzer. 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 10,000 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 our initial
public 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. Wright, a director is also a director of
Odetics. 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 information statement.
Summary Compensation Table
<TABLE>
<CAPTION>
Annual Long Term
Compensation(1) Compensation
--------------- Awards
------------
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>
53
<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 $2.00 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 $ 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................ 30,000 90,000
Gregory A. Miner............ -- -- -- --
Stephen W. Rowe............. 25,000 75,000
Donald W. Sinnar............ 12,500 37,500
</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 1,500,000 shares
of common stock for issuance under our 1998 Stock Incentive Plan.
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<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 administration 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 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 administration 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, each individual who first becomes
a non-employee member of our board of directors at any time thereafter receives
a 10,000 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 5,000 shares of common
stock, provided such individual has served on our board of
55
<PAGE>
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.
Option Issued Outside of the 1998 Stock Incentive Plan
Prior to the adoption of our 1998 Stock Incentive Plan, we issued
nonqualified options to purchase 480,000 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 our initial public offering. A total
of 750,000 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
our initial public 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.
56
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth specified information with respect to the
beneficial ownership of our common stock as of November 30, 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 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 6,432,100 shares of common stock outstanding as of November 30, 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 November 30, 1999 are deemed to be
outstanding and beneficially owned;
. the spin-off from Odetics has been consummated; and
. executive officers, directors and selling stockholders who hold options
to purchase Odetics common stock have fully exercised their options.
<TABLE>
<CAPTION>
Shares Beneficially Shares Beneficially
Owned Prior to Our Owned After Our
Initial Public Offering Initial Public Offering
Name and Address of --------------------------- ---------------------------
Beneficial Owners Number Percentage Number Percentage
------------------- -------------- ------------ ------------ -------------
<S> <C> <C> <C> <C>
Jack Johnson(1)......... 95,144 1.5
Stephen E. Rowe(2)...... 56,052 *
Donald W. Sinnar(3)..... 31,262 *
Andrew Card(4).......... 3,333 *
Gary Hernandez(4)....... 3,333 *
Gregory A. Miner(5)..... 80,342 1.2
Samuel K. Skinner....... 0 *
Joel Slutzky(6)......... 590,795 9.2
William M.
Spreitzer(4)........... 3,333 *
Paul E. Wright(7)....... 36,279 *
Abbas Mohaddes(8)....... 216,538 3.4
All executive officers
and directors as a
group (11 persons)..... 1,116,411 17.0
</TABLE>
- - --------
* Less than 1%
(1) Consists of options to purchase 60,000 shares of common stock exercisable
within 60 days of November 30, 1999 and 35,144 shares distributed in the
spin-off.
(2) Consists of options to purchase 50,000 shares of common stock exercisable
within 60 days of November 30, 1999 and 6,052 shares distributed in the
spin-off.
(3) Consists of options to purchase 25,000 shares of common stock exercisable
within 60 days of November 30, 1999 and 6,262 shares distributed in the
spin-off.
(4) Consists of options to purchase 3,333 shares of common stock exercisable
within 60 days of November 30, 1999.
57
<PAGE>
(5) Consists of 80,342 shares distributed in the spin-off.
(6) Consists of 590,795 shares distributed in the spin-off.
(7) Consists of options to purchase 3,333 shares of common stock exercisable
within 60 days of November 30, 1999 and 32,946 shares distributed in the
spin-off.
(8) Includes 16,492 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 $670,000 for the six months
ended September 30, 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 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 35,144 shares, Mr.
Miner will receive 80,342 shares, Mr. Mohaddes will receive 16,492 shares, Mr.
Rowe will receive 6,052 shares, Mr. Sinnar will receive 6,262 shares, Mr.
Slutzky will receive 590,795 shares and Mr. Wright will receive 32,946 shares
of our common stock.
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.
On October 16, 1998, we issued 457,000 shares of our common stock in
connection with our acquisition of Meyer, Mohaddes Associates, Inc. In July
1999, 24,900 of these shares were cancelled due to a purchase price adjustment.
From September 30, 1997 through November 30, 1999, we have granted options
to purchase an aggregate of 1,400,000 shares of common stock to employees and
directors.
We did not employ any underwriters, brokers or finders in connection with
these transactions.
The sales of the securities described 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; or, with respect to
options, 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. 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 the securities issued in such
transactions. All recipients had adequate access, through their relationships
with us, to information about us.
58
<PAGE>
DESCRIPTION OF CAPITAL STOCK
Upon the closing of our initial public 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 November 30, 1999, there were 6,432,100 shares of common stock
outstanding, held by five stockholders of record. All outstanding shares of our
common stock are, and the common stock to be issued in our initial public
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 until 180 days following the
date of the prospectus delivered in connection with our initial public
offering.
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.
59
<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
The holders of 432,100 shares of our common stock, which are referred to as
the "investors," have the right to cause us to register their shares under the
Securities Act 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.
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.
. 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
60
<PAGE>
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.
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.
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;
61
<PAGE>
. arising under Section 174 of the Delaware corporate law; or
. for any transaction from which the director derived an improper personal
benefit.
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 (including attorneys' fees), 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.
Distribution and Transfer Agent
The distribution and transfer agent for our common stock will be EquiServe,
LLP.
SHARES ELIGIBLE FOR FUTURE SALE
Prior to our initial public 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 our initial public offering, we will have shares of
common stock outstanding based on 6,342,100 shares outstanding at November 30,
1999. The shares of common stock being sold in our initial public 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 6,342,100 shares includes 342,100 shares issued and sold by
us in private transactions and 6,000,000 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 the prospectus
delivered in connection with our initial public offering.
In general, under Rule 144 as currently in effect, beginning 90 days after
the date of the prospectus filed in connection with our initial public
offering, a person 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.
62
<PAGE>
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 our initial public offering, all current stockholders and
optionholders 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 without the prior written consent
of Bear, Stearns & Co. Inc. for a period of 180 days from the date of the
prospectus delivered in connection with our initial public offering.
The following table indicates approximately when the shares of our common
stock that are not being sold in our initial public offering, but which will be
outstanding after such offering is completed, will be eligible for sale into
the public market.
Eligibility for Resale into Public Market of Restricted Shares
<TABLE>
<CAPTION>
Time Number of Shares
---- ----------------
<S> <C>
Effective Date..............................................
180 days after Effective Date...............................
</TABLE>
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 affiliates of Iteris or have held their shares for less than two
years.
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 advisors prior to the closing of our initial public 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 our initial public 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 the prospectus
filed in connection with our initial public offering, 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 the 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 our initial public offering. As of November 30, 1999, options to
purchase 1,400,000 shares of common stock will be outstanding, all of which are
subject to lock-up agreements described above.
63
<PAGE>
AVAILABLE INFORMATION
We have filed a registration statement on Form 10 with the SEC with respect
to our common stock. The registration statement and the exhibits to it contain
some information not appearing in this information statement. This information
statement provides a summary of some of the agreements and contracts appearing
as exhibits to the registration statement. You are encouraged to see the
exhibits to the registration statement for a more complete description of the
contracts and agreements summarized in this information statement.
You may access and read the registration statement and all of the exhibits
to it through the SEC's website at www.sec.gov. This site contains reports,
proxy and information statements and other information regarding issuers that
file electronically with the SEC. You may also read and copy any document we
file at the SEC's public reference room located at 450 Fifth Street, N.W.,
Washington, D.C. 20549. Please call the SEC at 1-800-SEC-0330 for further
information on the public reference room.
After the spin-off, we will be required to file annual, quarterly and
special reports and other information with the SEC. We will also be subject to
proxy solicitation requirements. Such periodic reports, proxy statements and
other information will be available for inspection of the SEC's public
reference rooms and the website of the SEC referred to above.
64
<PAGE>
INDEX TO CONSOLIDATED 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-18
Balance Sheet.............................................................. F-19
Statement of Income........................................................ F-20
Statement of Shareholders' Equity.......................................... F-21
Statement of Cash Flows.................................................... F-22
Notes to Financial Statements.............................................. F-23
ITERIS, INC.
Unaudited Pro Forma Statement of Operations................................ F-26
Notes to Unaudited Pro Forma Statement of Operations....................... F-27
Report of Independent Auditors on Financial Statement Schedule............. F-28
Schedule II--Valuation and Qualifying Accounts............................. 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.
(the Company), a subsidiary of Odetics, Inc. (Parent), as of March 31, 1999 and
1998, 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. 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 generally accepted auditing
standards. 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, 1999 and 1998, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
March 31, 1999, in conformity with generally accepted accounting principles.
Ernst & Young LLP
Orange County, California
December 3, 1999, except
for Note 7 as to which the
date is
The foregoing report is in the form that will be signed upon the
reincorporation of the Company in Delaware and the transfer of net assets of
the ITS division of Odetics, Inc. to Iteris, Inc. that is expected to occur
prior to the effectiveness of the Company's initial registration statement on
Form S-1 as described in Note 7 to the consolidated financial statements.
/s/ Ernst & Young LLP
Orange County, California
December 17, 1999
F-2
<PAGE>
ITERIS, INC.
(a subsidiary of Odetics, Inc.)
CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)
<TABLE>
<CAPTION>
March 31
------------------ September 30,
1998 1999 1999
-------- -------- -------------
(Unaudited)
<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 $252 at
September 1999............................. 800 4,471 6,645
Costs and estimated earnings in excess of
billings on uncompleted contracts (Note 5).. 790 1,159 963
Inventories:
Finished goods............................. 66 139 139
Work in process............................ 1,140 139 235
Materials and supplies..................... 912 585 1,208
Prepaid expenses and other.................. 284 149 233
-------- -------- --------
Total current assets...................... 4,058 6,643 9,424
Equipment, furniture and fixtures:
Equipment................................... 1,551 1,915 2,222
Furniture and fixtures...................... 195 224 231
Building and improvements................... -- 23 23
Allowances for depreciation................. (325) (697) (948)
-------- -------- --------
1,421 1,465 1,528
Goodwill, net of accumulated amortization of
$266 at March 1998,
$706 at March 1999 and $1,055 at September
1999........................................ 5,713 9,888 9,540
Other assets................................. 422 -- --
-------- -------- --------
Total assets................................. $ 11,614 $ 17,996 $ 20,492
======== ======== ========
LIABILITIES AND NET CAPITAL DEFICIENCY
Current liabilities:
Trade accounts payable...................... $ 1,006 $ 1,213 $ 3,562
Accrued payroll and related................. 226 588 777
Accrued expenses............................ 517 686 205
Contract reserve (Note 3)................... 4,541 3,892 3,569
Billings in excess of costs and estimated
earnings on uncompleted contracts
(Note 5)................................... 1,083 333 183
Current portion of long-term debt........... -- 27 28
-------- -------- --------
Total current liabilities.................... 7,373 6,739 8,324
Long-term debt:
Payable to Parent (Note 2).................. 20,184 29,950 34,661
Long-term debt, less current portion........ -- 22 4
-------- -------- --------
Total long-term debt......................... 20,184 29,972 34,665
Commitments and contingencies (Note 10)
Net capital deficiency
Preferred stock $.0001 par value:
Authorized shares 5,000,000
Issued and outstanding shares none......... -- -- --
Common stock, $.0001 par value:
Authorized shares 25,000,000 issued and
outstanding shares 6,000,000 at March 31,
1998, 6,457,000 at March 31, 1999 and
6,432,100 at September 30, 1999........... -- -- --
Additional paid in capital.................. -- 4,269 4,023
Accumulated deficit......................... (15,943) (22,984) (26,520)
-------- -------- --------
Net capital deficiency....................... (15,943) (18,715) (22,497)
-------- -------- --------
Total liabilities and net capital
deficiency.................................. $ 11,614 $ 17,996 $ 20,492
======== ======== ========
</TABLE>
See accompanying notes.
F-3
<PAGE>
ITERIS, INC.
(a subsidiary of Odetics, Inc.)
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except shares and per share information)
<TABLE>
<CAPTION>
Six months ended
Years ended March 31 September 30
------------------------------- --------------------
1997 1998 1999 1998 1999
--------- --------- --------- --------- ---------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Revenue:
Sensors............... $ 538 $ 1,607 $ 4,339 $ 1,552 $ 3,506
Systems............... -- 4,234 10,241 4,365 7,699
--------- --------- --------- --------- ---------
Total revenue....... 538 5,841 14,580 5,917 11,205
Costs of sales:
Sensors............... 470 2,555 3,129 1,471 1,829
Systems............... -- 2,815 7,195 3,117 5,761
--------- --------- --------- --------- ---------
Total cost of
sales.............. 470 5,370 10,324 4,588 7,590
--------- --------- --------- --------- ---------
Gross profit........ 68 471 4,256 1,329 3,615
Operating expenses:
Research and
development.......... 2,378 2,037 2,152 939 1,635
Selling, general and
administrative....... 1,411 3,414 5,729 2,387 3,087
Charges allocated by
Parent (Note 2)...... 105 458 881 310 670
Other expense......... -- 465 368 136 352
--------- --------- --------- --------- ---------
Total operating
expenses........... 3,894 6,374 9,130 3,772 5,744
--------- --------- --------- --------- ---------
Loss from
operations......... (3,826) (5,903) (4,874) (2,443) (2,129)
Interest charge
allocated by Parent.... 680 1,344 2,167 988 1,407
--------- --------- --------- --------- ---------
Loss before income
taxes.................. (4,506) (7,247) (7,041) (3,431) (3,536)
Income taxes (Note 6)... -- -- -- -- --
--------- --------- --------- --------- ---------
Net loss............ $ (4,506) $ (7,247) $ (7,041) $ (3,431) $ (3,536)
--------- --------- --------- --------- ---------
Net loss per share of
common stock--basic and
diluted................ $ (.75) $ (1.21) $ (1.13) $ (.57) $ (.55)
========= ========= ========= ========= =========
Shares used in
computation of net loss
per share.............. 6,000,000 6,000,000 6,209,500 6,000,000 6,435,700
========= ========= ========= ========= =========
</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...... 6,000 $ -- $ -- $ (4,190) $ (4,190)
Net loss..................... -- -- -- (4,506) (4,506)
------ ---- ------ -------- --------
Balance at March 31, 1997...... 6,000 -- -- (8,696) (8,696)
Net loss..................... -- -- -- (7,247) (7,247)
------ ---- ------ -------- --------
Balance at March 31, 1998...... 6,000 -- -- (15,943) (15,943)
Acquisition of MMA (Note 4).. 457 -- 4,269 -- 4,269
Net loss..................... -- -- -- (7,041) (7,041)
------ ---- ------ -------- --------
Balance at March 31, 1999...... 6,457 -- 4,269 (22,984) (18,715)
Purchase price adjustment
(unaudited) (Note 4)........ (25) -- (249) -- (249)
Issuance of stock options
(unaudited)................. -- -- 3 -- 3
Net loss (unaudited)......... -- -- -- (3,536) (3,536)
------ ---- ------ -------- --------
Balance at September 30, 1999
(unaudited)................... 6,432 $ -- $4,023 $(26,520) $(22,497)
====== ==== ====== ======== ========
</TABLE>
See accompanying notes.
F-5
<PAGE>
ITERIS, INC.
(a subsidiary of Odetics, Inc.)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Six months ended
Years ended March 31 September 30
------------------------- ------------------
1997 1998 1999 1998 1999
------- ------- ------- -------- --------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Operating activities:
Net loss....................... $(4,506) $(7,247) $(7,041) $ (3,431) $ (3,536)
Adjustments to reconcile net
loss to net cash used in
operating activities:
Depreciation and
amortization................ 64 514 812 371 600
Stock option expense......... -- -- -- -- 3
Changes in operating assets
and liabilities (Note 13)... (811) (379) (2,114) (172) (1,197)
------- ------- ------- -------- --------
Net cash used in operating
activities................. (5,253) (7,112) (8,343) (3,232) (4,130)
Investing activities:
Purchases of equipment,
furniture and fixtures........ (233) (576) (239) (159) (314)
Purchase of net assets of
acquired business............. -- (2,183) -- -- --
------- ------- ------- -------- --------
Net cash used in investing
activities................. (233) (2,759) (239) (159) (314)
Financing activities:
Net cash received from Parent.. 5,488 9,930 8,517 3,326 4,461
Payments on long-term debt..... -- -- -- -- (17)
------- ------- ------- -------- --------
Net cash provided by
financing activities....... 5,488 9,930 8,517 3,326 4,444
------- ------- ------- -------- --------
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
March 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
Revenue from the sale of sensors and the related cost of sales are
recognized on the date of shipment, or if required, upon acceptance by the
customer.
Systems revenue is derived primarily from long-term contracts with
governmental agencies. Contract revenue and earnings on cost reimbursable
contracts are recognized as work is performed. Systems revenue and earnings on
fixed-price contracts are recognized on the percentage-of-completion method of
accounting as costs are incurred (cost-to-cost basis). Contract revenues
include costs incurred plus a portion of estimated fees or profits based on the
relationship of costs incurred to total estimated costs. Any anticipated losses
on contracts are charged to earnings when identified. Certain contracts contain
incentive and/or penalty provisions which provide for increased or decreased
revenues based upon performance in relation to established targets. Incentive
fees are recorded when earned and penalty provisions are recorded when
incurred, as long as the amounts can reasonably be determined.
Revenues from follow-on service and support, for which the Company typically
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
allowance for doubtful accounts. At March 31, 1998 and 1999 accounts receivable
from governmental agencies and prime government contractors were approximately
$586,000 and $2,996,000, 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 15 years.
Warranty
The Company provides a one year warranty on all products and records a
related provision for estimated warranty costs at the date of sale. The
estimated warranty liability was $698,000 and $95,000 at March 31, 1998 and
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>
Six months ended
Years ended March 31 September 30
------------------------------- --------------------
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) $ (7,247) $ (7,041) $ (3,431) $ (3,536)
========= ========= ========= ========= =========
Denominator: Weighted-
average shares
outstanding............ 6,000,000 6,000,000 6,209,500 6,000,000 6,435,700
========= ========= ========= ========= =========
Basic and diluted loss
per share.............. $ (.75) $ (1.21) $ (1.13) $ (.57) $ (.55)
========= ========= ========= ========= =========
</TABLE>
Research and Development Expenditures
Research and development expenditures are charged to expense in the period
incurred.
Advertising Expenses
The Company expenses advertising costs as incurred. Advertising expenses
totaled $16,000, $79,000 and $261,000 in the years ended March 31, 1997, 1998
and 1999, respectively.
Interim Financial Information
The financial statements for the six months ended September 30, 1998 and
1999 are unaudited, but include all adjustments (consisting of only normal
recurring adjustments) which the Company considers necessary for a fair
statement of the financial position and the operating results and cash flows
for the interim periods. Results for the interim periods are not necessarily
indicative of results to be expected for the entire year.
(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, sales and marketing
and other support services. Charges are allocated to the Company based on
actual amounts incurred on behalf of the Company or agreed upon amounts or
percentages that management of the Company believes are reasonable.
F-9
<PAGE>
ITERIS, INC.
(a subsidiary of Odetics, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 (10.5% at March 31, 1999). The amounts due under the
payable are not due until after March 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.
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 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. Additionally, a total of $1.3 million of assets were acquired, $5.0
million of liabilities were assumed, and Rockwell agreed to reimburse the
Company for losses incurred on certain phases of a major contract with the
Michigan Department of Transportation (MDOT). Liabilities assumed include a
$3.8 million provision for anticipated losses on other phases of the MDOT
contract, which the Company expects to incur over the next five years.
(4) Business Combinations
On October 16, 1998 the Company acquired MMA. Pursuant to the terms of the
merger agreement, the Company purchased all of the issued and outstanding
shares of common stock of MMA for $4.6 million by issuing 432,100 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. A total of $2.0 million of assets were acquired and
$1.2 million of liabilities were assumed. The acquisition was accounted for as
a purchase and, accordingly, the excess of cost over the fair value of net
assets of $3.8 million has been recorded as goodwill and is being amortized
over its expected benefit period of 15 years.
In April 1999, the Parent issued an additional 25,740 shares of the Parent's
Class A common stock valued at $250,000 to the MMA shareholders upon resolution
of a contingency specified in the merger agreement. Additional shares from the
Parent with a value of $1 million may be issued at various dates through April
2001 in the event an initial public offering of the Company's common stock is
not consummated by those dates. 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. Any amounts paid by the Parent either in the form of its class A Common
Stock, or cash, under the merger agreement is repayable by the Company and will
be included in Payable to Parent.
At any time prior to the Company's initial public offering, the Parent has
the right to require these shareholders to sell all of their shares of the
Company's common stock at a purchase price of $10 per share.
F-10
<PAGE>
ITERIS, INC.
(a subsidiary of Odetics, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The Parent has the option to pay the purchase price for these shares in cash or
in Odetics' Class A common stock valued as of five business days prior to the
date of the event triggering the payment.
On November 11, 1998 the Company acquired certain assets and assumed certain
liabilities of Viggen Corporation, a Virginia corporation, pursuant to the
terms of an Agreement of Purchase and Sale of Assets 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 has been accounted for as a purchase and the purchase
price, including direct costs of the acquisition, has been allocated to the
fair value of the net assets acquired with the excess, approximating $746,000,
allocated to goodwill. The recorded goodwill is being amortized over its
expected benefit period of 15 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.......................................... (6,814) (7,449)
Net loss per share of common stock--basic and
diluted.......................................... $ (1.14) $ (1.16)
</TABLE>
Pro forma information for the Viggen acquisition is not material.
(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
---------------
1998 1999
------- ------
(In thousands)
<S> <C> <C>
Costs incurred on uncompleted contracts.................... $ 3,214 $6,410
Estimated earnings......................................... 1,021 2,051
------- ------
4,235 8,461
Less billings to date...................................... 4,528 7,635
------- ------
$ (293) $ 826
======= ======
Included in accompanying balance sheets:
Costs and estimated earnings in excess of billings on
uncompleted contracts................................... $ 790 $1,159
Billings in excess of costs and estimated earnings on
uncompleted contracts................................... (1,083) (333)
------- ------
$ (293) $ 826
======= ======
</TABLE>
Costs and estimated earnings in excess of billings at March 31, 1998 and
1999 include $388,000 and $182,000, 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 March
31, 1999 are expected to be billed and collected during the year ending March
31, 2000.
F-11
<PAGE>
ITERIS, INC.
(a subsidiary of Odetics, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(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 through
March 31, 1998 and 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.
The components of the Company's deferred taxes are as follows:
<TABLE>
<CAPTION>
March 31
----------------
1998 1999
------- -------
(In thousands)
<S> <C> <C>
Deferred tax assets
Goodwill amortization.................................... $ 89 $ 161
Vacation pay/sick pay accrual............................ 87 188
Inventory reserve........................................ 93 28
Warranty reserve......................................... 206 38
Other.................................................... 4 69
------- -------
Total deferred tax assets.............................. 479 484
------- -------
Deferred tax liability
Cash to accrual adjustment............................... -- (484)
------- -------
Total deferred tax liability........................... -- (484)
------- -------
Valuation allowance...................................... (479) --
------- -------
Net deferred tax asset (liability)......................... $ -- $ --
======= =======
</TABLE>
The decrease in the valuation allowance from March 31, 1998 to March 31,
1999 of $479,000 is due to the increase in the deferred tax liability related
to the cash to accrual adjustment for the MMA acquisition.
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 May 1998, the Company effected a recapitalization in which 25,000,000
shares of common stock were authorized with a par value of $.0001 per share.
All share and per share information in the accompanying financial statements
has been restated to reflect the recapitalization.
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. Also in December 1999, 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.
(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
F-12
<PAGE>
ITERIS, INC.
(a subsidiary of Odetics, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
ended March 31, 1998 or 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 and $120,000 in the
years ended March 31, 1997, 1998 and 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 and $69,000 in the years ended March 31, 1997, 1998 and 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 and $12,000 for the years ended March 31, 1997, 1998
and 1999, respectively.
(9) Stock Options
In September 1997, the Company granted options to purchase up to 480,000
shares of common stock to certain members of senior management at an exercise
price of $2.00 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"), authorized 1,500,000
shares of the Company's common stock for issuance under the Plan, and granted
thereunder options to purchase 899,500 shares of common stock at exercise
prices of $3.00 to $5.00 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-13
<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>
Six months ended
Year ended March 31 September 30
-------------------------------------------------- ----------------
1997 1998 1999 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) (Unaudited)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Options outstanding at
beginning of period -- $ -- -- $ -- 480 $2.00 1,278 $3.10
Granted............... -- -- 480 2.00 798 4.22 101 4.83
Exercised............. -- -- -- -- -- -- -- --
Canceled.............. -- -- -- -- -- -- -- --
------- ------ --- ----- ----- ----- ----- -----
Options outstanding at
end of period.......... -- $ -- 480 $2.00 1,278 $3.10 1,379 $3.56
======= ====== === ===== ===== ===== ===== =====
Exercisable at end of
period................. -- -- 120 341
======= === ===== =====
Available for grant at
end of period.......... -- -- 702 601
======= === ===== =====
</TABLE>
During the six month period ended September 30, 1999, the Company issued
34,500 options to employees for which the exercise price of the option 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 $115,000 which will be
charged to operations over the four year vesting period of the options. In the
six months ended September 30, 1999 the Company recorded $3,000 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.
Stock-based awards to employees under the Plan during the years ended March
31, 1999 and 1998, and for the six months ended September 30, 1999 and 1998,
were valued using the minimum value method, assuming no expected dividends and
the following weighted-averages:
<TABLE>
<CAPTION>
Six months
Years ended ended
March 31 September 30
------------ ------------
1998 1999 1999
----- ----- ------------
<S> <C> <C> <C>
Weighted Average:
Remaining contractual life--years.................. 9.50 8.87 8.62
Expected life--years............................... 5.50 4.87 4.62
Risk-free interest rate............................ 5.88% 5.45% 5.23%
Fair value of options granted...................... $0.59 $0.74 $0.89
</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
F-14
<PAGE>
ITERIS, INC.
(a subsidiary of Odetics, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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>
Six months ended
Years ended March 31 September 30
------------------------- ----------------
1997 1998 1999 1999
------- ------- ------- ----------------
(Unaudited)
<S> <C> <C> <C> <C>
Pro forma:
Net loss................ $(4,506) $(7,257) $(7,103) $(3,577)
Basic and diluted loss
per share.............. $ (.75) $ (1.21) $ (1.14) $ (.56)
</TABLE>
(10) Commitments and Contingencies
The Company and the Parent are co-borrowers and cross-guarantors 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 $16.7 million (unaudited)
was outstanding at March 31, 1999 and September 30, 1999, respectively. The
loan agreement expires December 31, 2000.
The Company has lease commitments for facilities in various locations
throughout the United States. The annual commitment under these noncancelable
operating leases at March 31, 1999 is as follows (in thousands):
<TABLE>
<CAPTION>
Fiscal Year
-----------
<S> <C>
2000............................................................ $354,000
2001............................................................ 307,000
2002............................................................ 194,000
2003............................................................ 17,000
2004............................................................ --
--------
$872,000
========
</TABLE>
Rent expense under operating leases totaled $42,000, $319,000, and $424,000,
respectively for the years ended March 31, 1997, 1998 and 1999.
(11) Significant Customer Information
Sales to major customers in the years ended March 31, 1997, 1998 and 1999,
and the related accounts receivable balances at March 31, 1999 are as follows:
<TABLE>
<CAPTION>
Sales
------------------------------ Receivable Balance at
Customer 1997 1998 1999 March 31, 1999
- - -------- -------- ---------- ---------- ---------------------
<S> <C> <C> <C> <C>
A......................... $ -- $1,946,000 $1,903,000 $ --
B......................... -- -- 1,579,000 --
C......................... -- 995,000 -- --
D......................... -- 656,000 2,497,000 404,000
E......................... 294,000 -- -- --
F......................... 111,000 -- -- --
</TABLE>
No other customer represented more than 10% of the Company's annual sales.
F-15
<PAGE>
ITERIS, INC.
(a subsidiary of Odetics, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(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 sement information.
The Company operates in two reportable segments: sensors 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.
Selected financial information for the Company's reportable segments for the
years ended March 31, 1997, 1998 and 1999 follows:
<TABLE>
<CAPTION>
(In thousands) Sensors Systems Total
- - -------------- ------- ------- -------
<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......................... 103 411 514
Segment income (loss)................................. (5,750) 305 (5,445)
Year ended March 31, 1999
Revenue from external customers....................... $ 4,339 $10,241 $14,580
Depreciation and amortization......................... 173 639 812
Segment income (loss)................................. (4,514) 521 (3,993)
Six months ended September 30, 1998 (unaudited)
Revenue from external customers....................... $ 2,902 $ 3,015 $ 5,917
Depreciation and amortization......................... 73 298 371
Segment income (loss)................................. (2,513) 380 (2,133)
Six months ended September 30, 1999 (unaudited)
Revenue from external customers....................... $ 3,506 $ 7,699 $11,205
Depreciation and amortization......................... 129 471 600
Segment income (loss)................................. (1,657) 198 (1,459)
</TABLE>
F-16
<PAGE>
ITERIS, INC.
(a subsidiary of Odetics, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following reconciles segment income to consolidated income before income
taxes:
<TABLE>
<CAPTION>
Six months ended
Year ended March 31 September 30
------------------------- ----------------
(In thousands) 1997 1998 1999 1998 1999
- - -------------- ------- ------- ------- ------- -------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Total profit or loss for
reportable segments............. $(3,721) $(5,445) $(3,993) $(2,133) $(1,459)
Unallocated amounts:
Corporate and other expenses... (105) (458) (881) (310) (670)
Interest expense............... (680) (1,344) (2,167) (988) (1,407)
------- ------- ------- ------- -------
Income before income taxes....... $(4,506) $(7,247) $(7,041) $(3,431) $(3,536)
======= ======= ======= ======= =======
</TABLE>
Segment assets are not presented because the Company does not segregate its
assets by segment.
Selected financial information for the Company's operations by geographic
segment is as follows:
<TABLE>
<CAPTION>
Six months ended
Years ended March 31 September 30
----------------------- ----------------
(In thousands) 1997 1998 1999 1998 1999
- - -------------- ----- ------- ------- ------ --------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Geographic Area Revenue
United States.................... $ 538 $ 5,841 $13,002 $4,567 $11,205
Asia Pacific Rim................. -- -- 1,578 1,350 --
----- ------- ------- ------ -------
Total net revenue................ $ 538 $ 5,841 $14,580 $5,917 $11,205
Geographic Area Long-Lived Assets
United States.................... $ 264 $ 7,134 $11,353 $6,758 $11,068
Asia Pacific Rim................. 622 422 -- -- --
----- ------- ------- ------ -------
Total long-lived assets.......... $ 886 $ 7,556 $11,353 $6,758 $11,068
===== ======= ======= ====== =======
(13) Supplemental Cash Flow Information
<CAPTION>
Six months ended
Years ended March 31 September 30
----------------------- ----------------
(In thousands) 1997 1998 1999 1998 1999
- - -------------- ----- ------- ------- ------ --------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Net cash used in changes in
operating assets and
liabilities:
Increase in accounts
receivable.................... $ (26) $ (499) $(1,242) $ (498) $(2,174)
(Increase) decrease in net
costs and estimated earnings
in excess of billings......... 62 293 (653) (610) 46
(Increase) decrease in
inventories................... (248) (1,290) 1,255 1,050 (719)
(Increase) decrease in prepaid
expenses and other assets..... (716) (56) 570 551 (84)
Increase (decrease) in accounts
payable and accrued expenses.. 117 1,173 (2,044) (665) 1,734
----- ------- ------- ------ -------
Net cash used in changes in
operating assets and
liabilities..................... $(811) $ (379) $(2,114) $ (172) $(1,197)
===== ======= ======= ====== =======
Non-cash transaction during the
year:...........................
Purchase of MMA for stock and
payable to Parent............. $ -- $ -- $ 4,638 $ -- $ 250
===== ======= ======= ====== =======
Purchase of Viggen for payable
to Parent..................... $ -- $ -- $ 275 $ -- $ --
===== ======= ======= ====== =======
MMA purchase price adjustment.. $ -- $ -- $ -- $ -- $ 249
===== ======= ======= ====== =======
</TABLE>
F-17
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Shareholders and Board of Directors
Meyer, Mohaddes Associates, Inc.:
We have audited the accompanying balance sheet of Meyer, Mohaddes
Associates, Inc. (the Company), as of December 31, 1997 and statement of
income, shareholders' equity, and cash flows for the year ended December 31,
1997. 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 audit in accordance with generally accepted auditing
standards. 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 the results of its operations and cash flows for
the year ended December 31, 1997, in conformity with generally accepted
accounting principles.
/s/ Ernst & Young LLP
Orange County, California
July 2, 1998
F-18
<PAGE>
MEYER, MOHADDES ASSOCIATES, INC.
BALANCE SHEET
December 31, 1997
<TABLE>
<S> <C>
ASSETS
Current assets:
Cash.............................................................. $ --
Trade accounts receivable, net of allowance for
doubtful accounts of $22,000..................................... 960,000
Costs and estimated earnings in excess of billings
on uncompleted contracts (Note 2)................................ 580,000
----------
Total current assets............................................ 1,540,000
Equipment, furniture and fixtures:
Equipment......................................................... 154,000
Furniture and fixtures............................................ 28,000
Allowances for depreciation....................................... (147,000)
----------
35,000
Other assets........................................................ 28,000
----------
Total assets........................................................ $1,603,000
==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Line of credit.................................................... $ 100,000
Trade accounts payable............................................ 301,000
Income taxes payable.............................................. --
Deferred tax liabilities.......................................... 470,000
Accrued payroll and related....................................... 82,000
Accrued expenses.................................................. 24,000
----------
Total current liabilities....................................... 977,000
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........ 22,000
Retained earnings................................................. 604,000
----------
Total shareholder's equity.......................................... 626,000
----------
Total liabilities and shareholders' equity.......................... $1,603,000
==========
</TABLE>
See accompanying notes.
F-19
<PAGE>
MEYER, MOHADDES ASSOCIATES, INC.
STATEMENT OF INCOME
Year ended December 31, 1997
<TABLE>
<S> <C>
Contract revenue.................................................... $3,625,000
Cost of contract revenue............................................ 1,910,000
----------
Gross profit........................................................ 1,715,000
Selling, general and administrative expenses........................ 1,457,000
----------
Income from operations.............................................. 258,000
Interest expense.................................................... (10,000)
Other income........................................................ 19,000
----------
Income before income taxes.......................................... 267,000
Income taxes........................................................ 119,000
----------
Net income.......................................................... $ 148,000
==========
</TABLE>
See accompanying notes.
F-20
<PAGE>
MEYER, MOHADDES ASSOCIATES, INC.
STATEMENT OF SHAREHOLDERS' EQUITY
Year ended December 31, 1997
<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
===== ======= ======== ========
</TABLE>
See accompanying notes.
F-21
<PAGE>
MEYER, MOHADDES ASSOCIATES, INC.
STATEMENT OF CASH FLOWS
Year ended December 31, 1997
<TABLE>
<S> <C>
Operating activities:
Net income......................................................... $ 148,000
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization.................................... 25,000
Provision for losses on accounts receivable...................... 22,000
Provision for deferred income taxes.............................. 118,000
Changes in operating assets and liabilities (Note 8)............. (280,000)
---------
Net cash provided by operating activities.......................... 33,000
Investing activities:
Purchases of equipment, furniture and fixtures..................... (2)
Financing activities:
Net payments on line of credit and note payable.................... (110,000)
---------
Decrease in cash................................................... (79,000)
Cash at beginning of year.......................................... 79,000
---------
Cash at end of year................................................ $ --
=========
</TABLE>
See accompanying notes.
F-22
<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 revenues are recognized based on hours incurred at contractually
agreed upon billing rates. Any anticipated losses on contracts are charged to
earnings when identified. Certain contracts contain incentive and/or penalty
provisions which provide for increased or decreased revenues based upon
performance in relation to established targets. Incentive fees are recorded
when earned and penalty provisions are recorded when incurred, as long as the
amounts can reasonably be determined.
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, accounts receivable
from governmental agencies and prime government contractors were approximately
$764,000.
Recent Accounting Pronouncements
In June 1997, the FASB issued Statement No. 130, Reporting Comprehensive
Income, which establishes standards for the reporting and display of
comprehensive income and its components in financial statements. Comprehensive
income generally represents all changes in shareholders' equity except those
resulting from investments by distributions to shareholders. Statement No. 130
is effective for fiscal years beginning after December 15, 1997 and requires
restatement of earlier periods presented.
Also in June 1997, the FASB issued Statement No. 131, Disclosures about
Segments of an Enterprise and Related Information, which requires publicly-held
companies to report financial and descriptive information about its operating
segments in financial statements issued to shareholders for interim and annual
periods. The statement also requires additional disclosures with respect to
products and services, geographical areas of operations, and major customers.
Statement No. 131 is effective for fiscal years beginning after December 15,
1997 and requires restatement of earlier periods presented.
F-23
<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
include $127,000, 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, 1997 are expected to
be billed and collected during the year ending December 31, 1998.
(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). At
December 31, 1997, $100,000 was outstanding. The agreement expired on March 1,
1998. The Company has subsequently extended this line of credit agreement to
terminate 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). No
borrowings were outstanding under this agreement at December 31, 1997.
(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:
<TABLE>
<S> <C>
Current:
Federal........................................................... $ --
State............................................................. 1,000
--------
1,000
Deferred:
Federal........................................................... 92,000
State............................................................. 26,000
--------
118,000
--------
Provision for income taxes......................................... $119,000
========
</TABLE>
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:
<TABLE>
<S> <C>
Income tax at statutory rates..................................... $ 93,000
State income taxes, net of federal tax benefit.................... 17,000
Other............................................................. 9,000
--------
$119,000
========
</TABLE>
F-24
<PAGE>
MEYER, MOHADDES ASSOCIATES, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
The Company's deferred tax liabilities consists of an accrual to cash
conversion of $470,000.
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 in the year ended December 31, 1997.
Employees also participate in the Company's bonus program. The Company paid
approximately $134,000 in the year ended December 31, 1997.
(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: $184,000 in 1998; $76,000 in 1999 and $48,000 in 2001.
Rent expense for the year ended December 31, 1997 aggregated $164,000.
(7) Supplemental Cash Flow Information
<TABLE>
<CAPTION>
Year ended
December 31,
1997
------------
<S> <C>
Changes in operating assets and liabilities:
(Increase) decrease in accounts receivable................... $ 35,000
Increase in net costs and estimated earnings in excess of
billings.................................................... (297,000)
(Increase) decrease in prepaid expenses and other assets..... 8,000
Increase (decrease) in accounts payable and accrued
expenses.................................................... (26,000)
---------
Net cash used by changes in operating assets and liabilities.. $(280,000)
=========
Cash paid during the year:
Interest..................................................... $ 10,000
Income taxes paid............................................ 1,000
</TABLE>
F-25
<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 California corporation ("MMA"). Pursuant to the terms of the merger
agreement, the Company purchased all of the issued and outstanding shares of
common stock of MMA for $4.6 million by issuing 432,100 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 excess of cost over the fair value of net assets of $3.8
million has been recorded as goodwill and is being amortized over its expected
benefit period of 15 years. 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....... 5,729 1,099 6,828
Charges allocated by
Parent (Note 2)...... 881 881
Other expenses........ 368 140 (a) 508
--------- ------- ------ ---------
Total operating
expenses............... 9,130 1,099 140 10,369
--------- ------- ------ ---------
Loss from operations.... (4,874) (254) (140) (5,268)
Interest charge
allocated by Parent.... 2,167 14 (b) 2,181
--------- ------- ------ ---------
Loss before income
taxes.................. (7,041) (254) (154) (7,449)
Income taxes (Note 6)... -- (113) 113 (c) --
--------- ------- ------ ---------
Net loss................ $ (7,041) $ (141) $ (267) $ (7,449)
========= ======= ====== =========
Net loss per share of
common stock--basic and
diluted................ $ (1.13) $ (1.16)
========= =========
Shares used in
computation of net loss
per share.............. 6,209,500 22,600 (d) 6,432,100
========= ====== =========
</TABLE>
F-26
<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 15 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 432,100 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) In April 1999, the Parent issued an additional 25,740 shares of the
Parent's Class A common stock valued at $250,000 to the MMA shareholders
upon resolution of a contingency specified in the merger agreement.
Additional shares from the Parent with a value of $1 million may be issued
at various dates through April 2001 in the event an initial public offering
of the Company's common stock is not consummated by those dates. 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. Any amounts
paid by the Parent either in the form of its class A Common Stock, or cash,
under the merger agreement is repayable by the Company and will be included
in Payable to Parent.
F-27
<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 for each of the three years in the period ended March 31,
1999, and have issued our report thereon dated December 3, 1999, except for
Note 7, as to which the date is December , 1999 (included elsewhere in this
Information Statement). Our audits also included the financial statement
schedule listed in the Index to Consolidated Financial Statements of this
Information 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.
Ernst & Young LLP
Orange County, California
December 3, 1999 except for Note 7
as to which the date is
The foregoing report is in the form that will be signed upon the
reincorporation of the Company in Delaware and the transfer of net assets of
the ITS division of Odetics, Inc. to Iteris, Inc. that is expected to occur
prior to the effectiveness of the Company's initial registration statement on
Form S-1 as described in Note 7 to the consolidated financial statements.
/s/ Ernst & Young LLP
Orange County, California
December 17, 1999
F-28
<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
</TABLE>
F-29
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 12 of the Securities Exchange Act of
1934, the registrant has duly caused this registration statement to be signed
on its behalf by the undersigned, thereunto duly authorized, in the City of
Anaheim, State of California, on the 30th day of December 1999.
ITERIS, INC.
/s/ Jack Johnson
By: _________________________________
Jack Johnson
President and Chief Executive
Officer
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
No. Description
------- -----------
<C> <S>
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 the Registrant.
3.2* Bylaws of the 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.
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* Form of Separation and Distribution Agreement between Registrant and
Odetics.
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** Employment Agreement between Abbas Mohaddes, Meyer, Mohaddes
Associates, Inc., and Registrant, dated October 16, 1998.
10.10* Cooperative Development Agreement between the Registrant and Daimler-
Benz Aktlengesellschaft, dated July 22, 1998.
10.11+** Agreement between Freightliner Corporation and the Registrant, dated
January 1, 1999.
10.12** Federal Highway Administration Agreement between the U.S. Department
of Transportation and Registrant, dated September 30, 1996.
10.13** Contract for Maintenance Services between the Michigan Department of
Transportation and the Registrant, dated June 17, 1999.
10.14+** 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.
10.15** Contract for ITS On-Call Technical Services Consultant Contract
Number 699-WB between the Virginia Department of Transit and the
Registrant, dated December 15, 1998.
21.1** List of Subsidiaries
27.1** Financial Data Schedule.
</TABLE>
- - --------
* To be filed by amendment.
+ Portions of this exhibit are omitted and were filed separately with the
Securities and Exchange Commission pursuant to Registrant's application
requesting confidential treatment under Rule 406 of the Securities Act of
1933.
** Incorporated herein by reference to the referenced exhibit number to
Registrant's Registration Statement on Form S-1, Registration No. 333-93035.
